The financial statements of Wacker Chemie AG and the German and international subsidiaries are prepared in accordance with uniform accounting principles.
The preparation of the consolidated financial statements in compliance with IFRS necessitates assumptions and estimates affecting the amounts and the reporting of the recognized assets and debts, income and expenses, and contingencies. The assumptions on which the estimates are based relate primarily to the uniform determination of useful lives throughout the Group, the ascertainment of fair values of financial instruments, the recognition and measurement of provisions, the probability of future tax relief being realized, and the assumptions in connection with impairment tests.
In individual cases, the actual values may differ from the assumptions and estimates that were made. Changes in value are recognized as soon as they become apparent and affect the net results for the period when the change occurred and, if applicable, in future reporting periods.
Significant risks inherent in the environmental protection provisions that may affect the levels of assets and liabilities reported in the statement of financial position are possible changes in the cost estimates, changes in the likelihood of their utilization, and enhanced statutory provisions concerning the elimination and prevention of environmental damage. In principle, there is also the risk of future cash inflows from property, plant, and equipment not being high enough to justify the carrying amounts stated. In this case, there would be impairments.
Except for the circumstances described in the explanatory notes under changes in valuation methods, the accounting methods correspond to those used for the last consolidated financial statements as of the end of the previous fiscal year. There may be limits to comparability in the case of significant acquisitions of fully consolidated companies. This topic is dealt with in the explanation of the scope of consolidation. Insofar as amounts from the previous year are adjusted, these are explained in the relevant Notes.
Sales encompass the counterperformance or claim received for the fair values for the sale of goods and services within the scope of ordinary activities. These are reported without VAT and other taxes incurred in connection with sales and without discounts and price reductions. The sales are deemed to be recognized when the deliveries and services owed have been rendered and the ownership and risks have passed to the purchaser. Information on the development of sales by division and region is provided in the section on segment reporting.
Cost of goods sold show the costs of the products, merchandise, and services sold. In addition to directly attributable costs, such as material costs, personnel expenses, and energy costs, they encompass overheads including depreciation and inventory write-downs. This item also includes the cost of outward freight.
Selling expenses include costs incurred by the sales organization, advertising, market research, and application support on customers’ premises. This item also includes commission expenses.
Research and development expenses include costs incurred in the development of products and processes. Research costs in the narrower sense are recognized as expenses when they are incurred. They are not capitalized. Development costs are capitalized only when all the prescribed recognition criteria have been met cumulatively, the research phase can be separated clearly from the development phase, and the costs incurred can be allocated to the individual projects without any overlaps. Due to the many interdependencies within the development projects and the uncertainty about which products will ultimately become marketable, not all of the capitalization criteria in IAS 38 are currently satisfied.
General administrative expenses include the pro rata personnel and material expenses incurred by the Group’s central management and in the personnel, accounting, and information technology areas, insofar as they have not been offset as an internal service against other cost centers and, therefore, possibly against other functional areas.
Operating expenses are reported as expenses when the performance is utilized, i.e. when the expense is incurred. Interest income is valued pro rata temporis taking account of the outstanding loan amount and the effective interest rate to be applied. Dividend income from financial investments is reported when the legal claim to payment arises.
Intangible assets acquired against payment are measured at cost and, if their useful lives can be determined, are amortized regularly on a straight-line basis. The useful life is taken to be between four and eight years unless otherwise indicated, e.g. by the life of a patent. Amortization of intangible assets (apart from goodwill) is allocated to the functional areas that use them. Intangible assets with indefinite useful lives undergo an annual impairment test. At present, no intangible assets with indefinite useful lives have been capitalized.
Self-constructed intangible assets are capitalized if it is probable that a future economic benefit can be associated with the use of the asset and the costs of the asset can be determined reliably. They are recognized at cost and amortized regularly using the straight-line method. Their stated useful lives correspond to those of the intangible assets acquired against payment. If development costs are capitalized, they consist of the costs directly attributable to the development process. Capitalized development costs are amortized regularly over the useful life of the corresponding production facilities as from the start of production.
Goodwill is not amortized regularly. Existing goodwill undergoes an annual impairment test. If the impairment test indicates a recoverable amount that is lower than the carrying amount, the goodwill is reduced to its recoverable amount and an impairment loss is recognized. Furthermore, the intrinsic value is examined when events or circumstances indicate possible impairment. The impairments of goodwill are presented under other operating expenses.
Property, plant, and equipment is capitalized at cost and depreciated regularly using the straight-line method over its expected economic useful life. In addition to the purchase price, acquisition costs include incidental acquisition costs as well as any costs incurred in the demolition, dismantling, and/or removal of the asset in question from its site and in the restoration of that site. Any reductions in the price of acquisition reduce the acquisition costs. There was no revaluation of property, plant, and equipment on the basis of the provisions in IAS 16.
Grants from third parties reduce acquisition and production costs. Unless otherwise indicated, these grants (investment subsidies) are provided by government bodies. Income grants that are not offset by future expenses are recognized as income.
Financing costs which were incurred in connection with particular qualified assets and can be attributed directly to them are recognized as part of acquisition or production cost until the assets are used for the first time. In addition, financing costs are not reported as part of acquisition or production cost.
The production cost of self-constructed assets includes all the costs directly attributable to the production process, as well as appropriate parts of the production-related overheads.
If property, plant, and equipment are shut down, sold, or abandoned, the gain or loss from the difference between the sale proceeds and the residual carrying amount is recognized under other operating income or expenses.
Property, plant, and equipment also includes assets relating to leases. Property, plant, and equipment hired by means of finance leases is recognized at fair value at their time of addition, unless the present values of the minimum lease payments are lower. The assets are depreciated regularly using the straight-line method over the expected useful life or the shorter contractual term. The obligations resulting from future lease payments are recognized under financial liabilities. The lease installments to be paid are split up into a redemption component and an interest component in accordance with the effective interest method.
The scheduled depreciation of property, plant, and equipment is generally carried out in accordance with the following useful lives:
20 to 40
10 to 30
Plant and machinery
6 to 12
4 to 6
Factory and office equipment
6 to 10
If the carrying amounts of intangible assets or items of property, plant, and equipment that were amortized or depreciated regularly are higher than their recoverable amounts as of the reporting date, corresponding impairment losses are recognized as an expense.
The impairment is tested when relevant events or changes in circumstances indicate that it might no longer be possible to realize the net carrying amount. An impairment loss is then reported in the amount of the net carrying amount that exceeds the recoverable amount. The recoverable amount is the higher amount of the fair value of the asset less selling expenses, and the value in use. This value in use results from the present value of the estimated future cash flows from the use of the asset. In determining this value, risk-adjusted pre-tax interest rates are used in a segment-specific manner. For the Group as a whole, an average rate of 12% (previous year: 10%) was applied. In order to determine the cash flow, assets are, if required, combined at the lowest level for which cash flows can be identified separately (cash-generating units). If the impairment loss no longer exists or has decreased, impairment losses are fully or partially reversed. Impairments are reported under other operating expenses, reversal of impairment losses under other operating income.
The estimate of the discounted future cash flows contains significant assumptions such as, in particular, those regarding future selling prices and sales volumes, costs, and discount rates. Although WACKER is assuming that the estimates of the relevant expected useful lives and of discounted future cash flows, as well as the assumptions regarding the general economic conditions and the development of the economic sectors are reasonable, a change in the assumptions or circumstances might necessitate a change in the analysis. This could result in additional impairments or appreciations in value in the future. It is not being assumed that this will lead to any significant changes in the carrying amounts of the fixed assets.
Investment property is measured in accordance with the acquisition cost model.
Shares in non-consolidated affiliated companies and investments are measured at cost, unless divergent market values are available. Changes in market values are posted to the statement of income upon realization by disposal or if the market value falls below the acquisition cost. Loans are valued at amortized cost, except for non-interest-bearing and low-interest loans, which are measured at their present value.
Investments in joint ventures and associates are accounted for using the equity method, with the carrying amount generally reflecting the Group’s pro rata share of equity. In the process, pro rata net results are posted to the consolidated income statement and increase or decrease the carrying amount. Any changes in equity recognized directly in the investee’s equity are also recognized directly under equity in the consolidated financial statements. Dividends paid by joint ventures and associates reduce their equity and, therefore, reduce the carrying amount without affecting profit. If a joint venture or associate faces losses that have exhausted its equity, the carrying amount of the investment is written off in full in the consolidated statement of financial position. Further losses are taken into account only if there are noncurrent unsecured receivables against the associated company or the Group has entered into additional obligations or made payments for the associated company. The carrying amount is not increased until the loss carryforward has been set off and the equity is positive again.
A financial instrument is a contract that gives rise to a financial asset at one company and a financial liability or equity instrument at another company. Financial instruments are recognized in the consolidated financial statements at the time when WACKER becomes a contracting party to the financial instrument.
Financial assets at WACKER encompass, in particular, cash and cash equivalents, trade receivables and loans and receivables issued, held-to-maturity financial investments, and original and derivative financial assets held for trading. WACKER makes no use of its optional right to value financial assets at fair value through profit and loss when being reported for the first time.
Financial liabilities regularly substantiate claims for repayment in cash or another financial asset. This includes, in particular, bonds and other securitized liabilities, trade payables, amounts owed to banks, finance lease payables, promissory note bonds (Schuldscheine), and derivative financial liabilities. In the case of purchase or sale on usual market terms (purchase or sale within the framework of a contract of which the terms require delivery within the timeframe generally established by regulations or conventions prevailing on the market in question), the settlement date is relevant to the initial recognition or derecognition. This is the date on which the asset is delivered to or by WACKER. In general, financial assets and financial liabilities are not netted out. A net amount is presented in the statement of financial position when, and only when, the entity currently has a right to set off the recognized amounts and intends to settle on a net basis. Where financial instruments are combined, borrowed capital and equity components are separated and shown separately by the issuer.
Financial instruments are measured at fair value on initial recognition. In the process, the transaction costs directly attributable to the acquisition must be taken into account for all financial assets and liabilities not subsequently measured at fair value through profit and loss. The fair values recognized in the statement of financial position generally correspond to the market prices of the financial assets. If these are not immediately available, they must be calculated using standard valuation models on the basis of current market parameters.
The manner in which financial assets and liabilities are subsequently valued depends on whether a financial instrument is held for trading purposes or until it matures, whether it is available for sale or whether it concerns loans and receivables granted by the company. Financial instruments held for trading are measured at fair value through profit and loss. If it is both intended and economically to be expected with sufficient certainty that a financial instrument will be held to maturity, the instrument in question is valued at amortized cost using the effective interest method. The other original financial assets, if they are not loans and receivables, must be classified as available for sale and are reported at fair value if this can be determined reliably. To do this, observable market prices are used. Unrealized gains and losses are recorded taking account of deferred taxes and are recognized in other equity items with no effect on income. If equity instruments have no price quoted on an active market and if their fair value cannot be determined reliably, they are measured at cost. If the fair values of available-for-sale financial assets fall below the acquisition costs and there are objective signs that an asset’s value has been impaired, the cumulative loss recorded directly in equity is reversed and shown in the statement of income. The company bases its assessment of possible impairments on all available information, such as market conditions and prices, investment-specific factors, and the duration and extent of the drop in value below acquisition costs. Impairments affecting a debt instrument are reversed in subsequent periods, provided that the reasons for the impairment no longer apply. When the financial instruments are disposed of, the cumulative gains and losses recorded in equity are included in the statement of income.
Derivative financial instruments are used for hedging purposes with the sole aim of reducing the Group’s exposure to exchange rate, interest rate, and raw material price risks arising from operating activities and the resultant financing requirements. Derivative financial instruments are recorded as of the trading date. Derivative financial instruments are always measured at fair value, irrespective of the purpose or intention for which they were concluded. Positive market values are recognized as a receivable and negative current values as a liability. Changes in the market values of financial instruments used to limit the risk of lower future cash inflows or higher cash outflows (cash flow hedges) are recognized under other equity items in consideration of any related tax effects when their efficiency is adequate and documented as such. Steps taken to hedge the risk of changes in the market values of recognized assets or liabilities lead to fair value hedges. Changes in fair values are recorded for both the hedged underlying transaction and the derivative financial instruments used for hedging, and these changes are presented in the statement of income under “Other financial result.”
Inventories are measured at cost using the average cost method. Lower net disposal values or net realizable prices as of the statement of financial position date are taken into account by means of write-downs to their fair value less selling costs. Production costs include directly attributable costs, appropriate parts of the indirect materials and indirect labor costs, and straight-line depreciation. Due to the relatively short-term production processes, financing costs are not included as part of acquisition or production costs. The overhead cost markups are determined on the basis of average capacity utilization. Write-downs are recognized for inventory risks resulting from extended periods of storage and reduced usability and to reflect other reductions in the recoverable amount. In the statement of income, the cost of unused production capacity is also included in the production costs. For production-related reasons, work in process and finished goods are reported combined under products.
Trade receivables and other assets including tax receivables, with the exception of financial derivatives, are basically stated at amortized cost. Risks are taken into account through appropriate depreciation posted as valuation allowances. Allowances for uninsured receivables – or for the deductible in the case of insured receivables – are made whenever legal action is taken. If an incoming receivable is no longer expected, even though an appeal has been lodged, the gross receivable is derecognized and any valuation allowances made are reversed. Noncurrent receivables which are non-interest-bearing or low-interest-bearing are discounted. WACKER is not a contractor for long-term construction contracts.
Receivables from finance lease agreements where WACKER acts as the lessor are reported under other assets. In the process, the gross value of the outstanding lease payments, less the still unrealized borrowed amounts, is capitalized as a receivable. The lease installments received are apportioned into the respective interest amount and the repayment of the outstanding receivable in such a way that the interest amount reflects the constant interest-bearing of the still unsettled receivable. The interest amount is reported in the statement of income under other financial results.
Cash and cash equivalents encompass cash in hand, demand deposits, and financial assets that can be converted into cash at any time. They have a residual period of up to three months upon their addition and are measured at amortized cost, which is equivalent to their nominal value.
Deferred tax assets and liabilities are formed for temporary differences between tax bases and carrying amounts, and for consolidation measures recognized in the statement of income. The deferred tax assets include tax relief entitlements resulting from the anticipated use of existing loss carryforwards in future years, the realization of which is assured with sufficient probability. The deferred taxes are determined on the basis of the tax rates which, under current law, are applicable or anticipated as of the time of realization in the individual countries. The deferred tax assets and liabilities are netted out only to the extent possible under the same tax authority.
Pension provisions are set up in accordance with the projected unit credit method. This method takes account not only of pensions and entitlements to future pensions known as of the statement of financial position date, but also of estimated increases in salaries and pensions. The calculation is based on actuarial valuations, taking account of biometric calculation principles. Except for the effects from adjusted likely mortality rates, actuarial gains and losses are recognized as income or expenses only once they move outside a margin of 10% of the present value of the defined benefit obligation. If this happens, the excess amounts are distributed over the average future residual working lives of the employees. Actuarial gains and losses arising from the changed or adjusted mortality tables are posted immediately to the statement of income as a reduction or increase in the provision for pensions. The expense incurred in funding the pension provisions (service costs) is allocated to the costs of the functional areas concerned. The interest costs are reported under “Other financial result.” If assets are funded externally (plan assets) to finance pension obligations, the fair values of these assets are set off against the present value of the obligations. The expected income from plan assets is likewise reported under “Other financial result.”
In the statement of financial position, provisions are formed for current legal or constructive obligations if an outflow of resources to cover these obligations is probable and its amount can be estimated reliably. The assigned value of the provisions is based on the amounts that will be required to cover future payment obligations, identifiable risks, and Group contingencies. All cost components which are also capitalized under inventories are basically included in the measurement of other provisions. Noncurrent provisions are measured at the discounted present value as of the reporting date. Expected refunds, provided that they are sufficiently secure or legally enforceable, are not balanced against provisions.
Emission certificates allotted free of charge are measured at a nominal value of zero. Provisions are formed if the available portfolio of emission certificates does not cover the anticipated obligations. Proceeds from the sale of emission certificates allotted free of charge are included under other operating income.
Financial liabilities are measured at fair value on initial recognition. For all financial liabilities not subsequently measured at fair value through profit or loss, the transaction costs directly attributable to the acquisition are likewise taken into account. Liabilities from finance lease agreements are shown as financial liabilities at the present value of the future lease installments.
Trade payables and other liabilities (including tax liabilities) are basically recognized at amortized cost using the effective interest method.
Contingencies are potential obligations based on past events of which the existence depends on uncertain future events which are beyond the Group’s influence, and existing obligations which cannot be carried as liabilities as either an outflow of resources is unlikely or the amount of the obligation cannot be estimated with sufficient reliability. The values assigned to contingencies correspond to the degree of liability that exists on the statement of financial position date.
Changes to the Valuation Methods
In the past, the process for determining pension provisions took account of effects arising from changed assumptions in likely mortality rates and other valuation parameters using the corridor method. Only when a 10% corridor was exceeded were minimum partial amounts of these divergences recorded in the statement of income to smooth out fluctuations in pension expenses. WACKER estimates that with regard to likely mortality rates, a continuous increase in life expectancy can be expected in the future. For this reason, it does not make sense to smooth out the expenses for the period on the basis of changed or adjusted mortality tables. In order to supply more reliable and relevant information regarding its pension obligations, WACKER has decided that instead of recording losses from changes in life expectancy in the corridor with no impact on results, it will henceforth post these effects immediately to the statement of income as an increase in pension obligations. Deviations in the other valuation parameters will continue to be included as actuarial losses or gains using the corridor method. A change in the method used following an adjustment in the mortality table in the 2009 fiscal year led to additional expenses of €47.9 million. The change of method had no material effects on the previous years and no adjustment was made to the previous years’ values.
In addition, the layout of both the statement of comprehensive income and the development of other equity items with regard to the presentation of deferred taxes was adjusted for the year under review and the previous year.
IFRS 1: “First-Time Adoption of the International Financial Reporting Standards” and IAS 27: “Consolidated and Separate Financial Statements: Acquisition Cost of Shares in Subsidiaries, Joint Ventures, or Associated Companies”
In May 2008, the IASB adopted an amendment in both of the above standards which must be applied for the first time in the fiscal year which begins on or after January 1, 2009. The amendment was endorsed by the EU on January 23, 2009. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRS 2: “Share-Based Payment”
In January 2008, the IASB made amendments to IFRS 2. The amendments to this standard concern the definition of exercise conditions and annulments of share-based payments. The first mandatory application of this amended standard is for fiscal years beginning on or after January 1, 2009. The amended standard was endorsed by the EU on December 16, 2008. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRS 7: “Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments”
In March 2009, the IASB made amendments to IFRS 7. The amendments provide for broader disclosures on the financial instruments measured at fair value and the qualitative and quantitative liquidity risks. The revised standard must be applied for the first time for fiscal years which begin on or after January 1, 2009. It was endorsed by the EU on November 27, 2009. Apart from the increase in disclosures required by the Notes, the amendments have no impact on Wacker Chemie AG’s consolidated financial statements.
IFRS 8: “Operating Segments”
This new standard must be used for the first time in the fiscal year beginning on or after January 1, 2009. IFRS 8 replaces IAS 14 “Segment Reporting” which previously applied. The new standard demands a “management approach” in which the disclosures in segment reporting can be determined in accordance with internal accounting and valuation regulations. The standard was endorsed by the EU on November 21, 2007. Its first-time application had a relatively minor, insignificant impact on Wacker Chemie AG’s consolidated financial statements.
IAS 23: “Borrowing Costs”
The first mandatory application of this amended standard is for fiscal years beginning on or after January 1, 2009. The amendment was endorsed by the EU on December 10, 2008. As a result of the revised standard, borrowing costs related to certain qualified assets are no longer expensed as incurred. Instead, they are capitalized as part of acquisition and production costs. The first-time application led to further asset additions and a reduction of €12.9 million in interest paid.
IAS 32: “Financial Instruments: Presentation” and IAS 1: “Presentation of Financial Statements: Puttable Financial Instruments and Obligations Arising on Liquidation”
The IASB adopted amendments to IAS 1 and IAS 32 in February 2008. The amendments concern the reporting of puttable financial instruments and must be applied for the first time for fiscal years beginning on or after January 1, 2009. The amendment was endorsed by the EU on January 21, 2009. Due to the absence of relevant circumstances in the Group, the changed standards will have no impact on Wacker Chemie AG’s consolidated financial statements.
IAS 39: “Financial Instruments: Recognition and Measurement” and IFRS 7: “Financial Instruments: Disclosures”
In October 2008, the IASB adopted alterations to the two aforementioned standards which must be applied for fiscal years beginning on or after July 1, 2008. Then, in November 2008, there followed the publication of an additional alteration to these two standards which affects the application and transition guidelines. The amendment was endorsed by the EU on September 9, 2009. Due to the absence of relevant circumstances in the Group, the application of the revised standard had no impact on Wacker Chemie AG’s consolidated financial statements.
“Improvements to IFRS”
In May 2008, the IASB adopted a series of amendments to existing standards which were all published together. Most of the changes must be applied for fiscal years beginning on or after January 1, 2009; some are for fiscal years beginning on or after July 1, 2009. The amendment was endorsed by the EU on January 23, 2009. The amendments’ first-time application had no material impact on Wacker Chemie AG’s consolidated financial statements.
IFRIC 9: “Reassessment of Embedded Derivatives” and IAS 39 “Financial Instruments: Recognition and Measurement – Embedded Derivatives”
The IASB revised IFRIC 8 and IAS 39 in March 2009. The amendments were made to provisions concerning the classification of hybrid financial instruments. The amendments must be applied for fiscal years ending on or after June 30, 2009. It was endorsed by the EU on November 30, 2009. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRIC 12: “Service Concession Arrangements”
The interpretation must be used for the first time in the fiscal year beginning on or after January 1, 2008. It was endorsed by the EU on March 25, 2009. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRIC 13: “Customer Loyalty Programs”
The interpretation must be used for the first time in the fiscal year beginning on or after July 1, 2008. The amendment was endorsed by the EU on December 16, 2008. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRIC 15: “Agreements for the Construction of Real Estate”
The interpretation must be used for the first time in the fiscal year beginning on or after January 1, 2009. It was endorsed by the EU on July 22, 2009. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.
IFRIC 16: “Hedges of a Net Investment in a Foreign Operation”
The interpretation must be used for the first time in the fiscal year beginning on or after October 1, 2008. It was endorsed by the EU on June 4, 2009. Due to the lack of relevant circumstances in the Group, there will be no impact on the consolidated financial statements of Wacker Chemie AG.