BASF Report 2021 Consoli dated Financial Statements – Notes 265 The following measurement categories are used for financial In cash flow hedges, future cash flows and the related income and liabilities: expenses are hedged against the risk of changes in fair value. To this – Financial liabilities measured at amortized cost generally end, future underlying transactions and the corresponding hedging include all financial liabilities, provided these do not represent instruments are designated in a cash flow hedge accounting derivatives. They are generally measured at fair value at the time relationship for accounting purposes. The effective portion of the of initial recognition, which usually corresponds to the value of the change in fair value of the hedging instrument, which often meets consideration received. Subsequent measurement is recognized the definition of a derivative, and the cost of hedging are recognized in profit or loss at amortized cost using the effective interest directly in equity under other comprehensive income over the term method. At BASF, for example, bonds and liabilities to banks of the hedge, taking deferred taxes into account. The ineffective reported under financial indebtedness are measured at amortized portion is recognized immediately in the income statement. In the cost. case of future transactions that lead to recognition of a nonfinancial – Financial liabilities at fair value through profit or loss contain asset or a nonfinancial liability, the cumulative fair value changes of derivative financial liabilities. These are likewise measured at the the hedge in equity are generally charged against the cost of the value of the consideration received as the fair value of the liability hedged item on its initial recognition. For hedges based on financial on the date of initial recognition. Fair value is also applied as a assets, financial liabilities or future transactions, cumulative fair value measurement basis for these liabilities in subsequent changes of the hedges are transferred from equity to the income measurement. The option to subsequently measure non- derivative statement in the reporting period in which the hedged item is financial liabilities at fair value is not exercised. recognized in the income statement. The maturity of the hedging Derivative financial instruments can be embedded within other instrument is aligned with the effective date of the future transaction. contracts, creating a hybrid financial instrument. If IFRS policies require separation, the embedded derivative is accounted for When fair value hedge accounting is used, the asset or liability separately from its host contract and measured at fair value. If recognized is hedged against the risk of a change in fair value. The IFRS 9 does not provide for separation, the hybrid instrument is hedging instruments used, which often take the form of a derivative, accounted for at fair value in its entirety. are measured at fair value and changes in fair value are recognized in the statement of income. The carrying amounts of the assets or Financial guarantees of the BASF Group are contracts that require liabilities designated as the underlying transaction are also measured compensation payments to be made to the guarantee holder if a at fair value through the statement of income. debtor fails to make payment when due under the terms of a transaction entered into with the holder of the guarantee. Financial guarantees issued by BASF are measured at fair value upon initial recognition. In subsequent periods, these financial guarantees are carried at the higher of amortized cost or the best estimate of the present obligation as of the reporting date.