8. Financial Instruments
The following tables show the carrying amounts and fair values of the individual financial assets and liabilities in accordance with IFRS 9 (Financial Instruments):
| Carrying amounts of financial instruments and their fair values as of June 30, 2024 | ||||||
|---|---|---|---|---|---|---|
| Measurement according to IFRS 9 | ||||||
| Carrying amount | Carried at amortized cost | Fair value recognized in other comprehen-sive income | Fair value recognized in profit or loss | Measure-ment according to IFRS 16 | Fair value | |
| € million | € million | € million | € million | € million | € million | |
| Financial assets | ||||||
| Trade accounts receivable | 2,070 | 2,070 | – | – | 2,070 | |
| Other financial assets | 371 | |||||
| Loans and bank deposits | 298 | 222 | – | 76 | 298 | |
| Other investments | 22 | 22 | – | 22 | ||
| Derivatives that do not qualify for hedge accounting | 17 | 17 | 17 | |||
| Receivables under lease agreements | 12 | 12 | 23 | |||
| Miscellaneous financial assets | 22 | 22 | 22 | |||
| Cash and cash equivalents | 569 | 569 | – | – | 569 | |
| Financial liabilities | ||||||
| Financial debt | 3,732 | |||||
| Bonds | 1,991 | 1,991 | – | 1,972 | ||
| Liabilities to banks | 965 | 965 | – | 975 | ||
| Lease liabilities | 769 | 769 | ||||
| Derivatives that do not qualify for hedge accounting | 5 | 5 | 5 | |||
| Other financial debt | 2 | 2 | – | 2 | ||
| Trade accounts payable | 1,958 | 1,958 | – | 1,958 | ||
| Other financial liabilities | 131 | |||||
| Refund liabilities | 65 | 65 | – | 65 | ||
| Accrued interest on liabilities | 33 | 33 | – | 33 | ||
| Miscellaneous financial liabilities | 33 | 33 | – | 33 | ||
| Carrying amounts of financial instruments and their fair values as of December 31, 2023 | ||||||
|---|---|---|---|---|---|---|
| Measurement according to IFRS 9 | ||||||
| Carrying amount | Carried at amortized cost | Fair value recognized in other comprehen-sive income | Fair value recognized in profit or loss | Measure-ment according to IFRS 16 | Fair value | |
| € million | € million | € million | € million | € million | € million | |
| Financial assets | ||||||
| Trade accounts receivable | 1,898 | 1,898 | – | – | 1,898 | |
| Other financial assets | 420 | |||||
| Loans and bank deposits | 352 | 277 | – | 75 | 352 | |
| Other investments | 22 | 22 | – | 22 | ||
| Derivatives that do not qualify for hedge accounting | 21 | 21 | 21 | |||
| Receivables under lease agreements | 10 | 10 | 30 | |||
| Miscellaneous financial assets | 15 | 15 | 15 | |||
| Cash and cash equivalents | 625 | 625 | – | – | 625 | |
| Financial liabilities | ||||||
| Financial debt | 3,407 | |||||
| Bonds | 1,990 | 1,990 | – | 1,971 | ||
| Liabilities to banks | 657 | 657 | – | 664 | ||
| Lease liabilities | 743 | 743 | ||||
| Derivatives that do not qualify for hedge accounting | 15 | 15 | 15 | |||
| Other financial debt | 2 | 2 | – | 2 | ||
| Trade accounts payable | 1,895 | 1,895 | – | 1,895 | ||
| Other financial liabilities | 144 | |||||
| Refund liabilities | 97 | 97 | – | 97 | ||
| Accrued interest on liabilities | 19 | 19 | – | 19 | ||
| Miscellaneous financial liabilities | 28 | 28 | – | 28 | ||
The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below:
Level 1 covers fair values determined on the basis of quoted, unadjusted prices which exist in active markets.
Level 2 comprises fair values determined on the basis of parameters which are observable in an active market.
Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data.
Because of the generally short maturities of cash and cash equivalents, loans and bank deposits, trade accounts receivable and payable, and other financial assets and liabilities, their carrying amounts do not significantly differ from the fair values. The fair values of noncurrent receivables under lease agreements are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor.
The following table shows the assignment of the financial instruments to the three-level fair value hierarchy:
| Fair value hierarchy of financial instruments | ||||||||
|---|---|---|---|---|---|---|---|---|
| Fair value | Level 1 | Level 2 | Level 3 | Fair value | Level 1 | Level 2 | Level 3 | |
| Dec. 31, 2023 | June 30, 2024 | |||||||
| € million | € million | € million | € million | € million | € million | € million | € million | |
| Financial assets carried at fair value | ||||||||
| Loans and bank deposits | 75 | – | 66 | 9 | 76 | – | 66 | 10 |
| Other investments | 22 | – | – | 22 | 22 | – | – | 22 |
| Derivatives that do not qualify for hedge accounting | 21 | – | 19 | 2 | 17 | – | 15 | 2 |
| Financial liabilities carried at fair value | ||||||||
| Derivatives that do not qualify for hedge accounting | 15 | – | 15 | – | 5 | – | 5 | – |
| Financial liabilities not carried at fair value | ||||||||
| Bonds | 1,971 | 1,971 | – | – | 1,972 | 1,972 | – | – |
| Liabilities to banks | 664 | – | 664 | – | 975 | – | 975 | – |
| Other financial debt | 2 | – | 2 | – | 2 | – | 2 | – |
Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. In the first half of 2024, no financial instruments were reallocated to a different level of the fair value hierarchy.
The valuation techniques and input factors of fair value hierarchy Level 1 and Level 2 that are used to determine the fair value of financial instruments are shown in the following table:
| Fair-Value-Level | Balance sheet item | Included financial instruments | Valuation technique | Significant input factors for determination of fair values |
|---|---|---|---|---|
| Level 1 | Other financial assets | Other investments | Derivation from active market | Quoted, unadjusted prices |
| Level 1 | Financial debt | Bonds | Derivation from active market | Quoted, unadjusted prices |
| Level 2 | Other financial assets | Loans and bank deposits | Present value of future cash inflows | Current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the respective contractual partner |
| Level 2 | Financial debt | Liabilities to banks, other financial debt | Present value of future cash outflows | Current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the respective contractual partner |
| Level 2 | Other financial assets and financial debt | Derivatives that do not qualify for hedge accounting | Case-by-case basis with valuation techniques based on observable market data | Forward rate respective price on the reporting date derived from spot rates and prices, taking into account forward premiums and discounts, credit value adjustments and debt value adjustments for both the contracting party’s credit risk and Covestro’s own credit risk |
Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy.
The valuation techniques and input factors of fair value hierarchy Level 3 are shown in the following table:
| Balance sheet item | Included financial instruments | Valuation technique | Significant input factors for determination of fair values | Effects of changes in key input factors |
|---|---|---|---|---|
| Other financial assets | Other investments and loans, respectively including COVeC investments | The results of market-price-based valuation methods and the results of financing rounds | Non-observable market data or performance indicators available for certain financial assets and market multiples | Increasing (decreasing) fair value with decreasing (increasing) interest rates or larger (smaller) market multiples |
| Other financial assets / other financial liabilities | Embedded derivatives | In particular, the discounted cash flow method | Prices or price indices derived from market data | Increasing (decreasing) fair value with higher (lower) cash flows due to exchange rate or price fluctuations |
The table below shows the changes in Level 3 financial instruments:
| Changes in the net amount of financial assets and liabilities allocated to Level 3 | ||
|---|---|---|
| 2023 | 2024 | |
| € million | € million | |
| Net carrying amounts, Jan. 1 | 33 | 33 |
| Gains (losses) recognized in profit or loss | (1) | 1 |
| of which related to assets / liabilities recognized in the statement of financial position | (1) | 1 |
| Gains (losses) recognized outside profit or loss | – | – |
| Net carrying amounts, June 30 | 32 | 34 |
The gains and losses from Level 3 financial assets and liabilities are reported as follows:
- gains and losses from embedded derivatives recognized in profit or loss are reported in other operating expenses or income;
- gains and losses from debt instruments recognized in profit or loss are reported in other financial result;
- gains and losses from other financial investments are reported in other comprehensive income from equity instruments.