New Accounting Standards

IFRS 15, “Revenue from Contracts with Customers”

IFRS 15, “Revenue from Contracts with Customers,” replaces the existing revenue-recognition standards IAS 18 (“Revenue”) and IAS 11 (“Construction Contracts”) and related interpretations, and is applicable for reporting periods beginning on or after January 1, 2018. The new standard introduces a five-step model for the recognition of revenue from contracts with customers. IFRS 15 sets out that an entity shall recognize the revenue expected as consideration for transferring goods or services to the customer. Revenue recognition occurs when (or as) the entity satisfies its performance obligation and the customer has obtained control of the good or service either at a point in time or over a period of time. Moreover, IFRS 15 specifies the allocation of individual items to new balance-sheet items and to individual functional costs in the income statement and their presentation in gross or net form.

WACKER has introduced IFRS 15 on the basis of the modified retrospective approach, such that any transition effects as of January 1, 2018, are recognized cumulatively in retained earnings and the comparative period is presented according to previous accounting standards. All business models commonly used by the Group were reviewed in an implementation project for the new standard. These reviews did not result in any material adjustment effects that would have to be recognized in retained earnings. The low impact of IFRS 15 is due to the fact that WACKER’s customer contracts usually result in one performance obligation that is satisfied at a point in time. The transition effects are described below.

At WACKER SILICONES, there are transition effects from transactions as defined in IFRS 15.5 (d), such as non-monetary exchanges, e.g. of raw materials or products, between companies in the same line of business to facilitate sales to customers or to reduce transport costs. The transactions in question must be settled in the same period. Whereas WACKER used to report these transactions as revenue, they are no longer recognized as sales. As a consequence, sales were reduced by around €50 million in 2018. These exchanges did not result in any margin effects.

At WACKER POLYMERS, minor transition effects arose from the supply of raw materials for toll manufacturing. These transactions were no longer recognized as revenue in 2018.

One business model at WACKER BIOSOLUTIONS consists in providing development services to the pharmaceutical industry under service contracts that are satisfied over time. These customer-specific services are rendered and documented based on contractual milestones. The recognition of revenue pursuant to IFRS 15 did not result in any changes here since the right to payment arises upon achievement of the milestones. WACKER BIOSOLUTIONS also manufactures customer-specific products in connection with product supply contracts for drug-related intermediates. The right to payment in this case arises on acceptance by the customer. As of the reporting date, there were no material contract assets representing services not charged. WACKER continues to report these under inventories and explains them in the Notes.

Certain transport clauses give rise to a separate performance obligation since the freight / transport performance is not concluded until control has been transferred to the customer. The effect of postponing the share of revenue attributable to freight / transport performance to a later date amounted to €3.1 million in 2017. Since WACKER reduced the corresponding transport costs at the same time, there was no effect on EBITDA.

As soon as a contracting party (customer or supplier) has satisfied its contractual obligations, the entity must recognize the contract as a contract asset or contract liability depending on whether the entity has completed performance or the customer has made payment. The entity must show every unconditional right to receive consideration separately as a receivable. WACKER currently recognizes only contract liabilities in the statement of financial position. These liabilities include advance payments made by customers for polysilicon deliveries and advance payments by WACKER BIOSOLUTIONS customers. In 2017, advance payments received from customers were posted under non-financial liabilities. Furthermore, discount accruals that had been reported under other provisions in 2017 are now reported as contract liabilities.

IFRS 9, “Financial Instruments”

IFRS 9, “Financial Instruments,” replaces IAS 39, “Financial Instruments: Recognition and Measurement,” and is effective for reporting periods beginning on or after January 1, 2018. IFRS 9 introduces new requirements specifying how an entity should classify and measure financial assets. It also requires changes to the accounting of ‘own credit risk’ with respect to financial liabilities classified as measured at fair value, and it replaces the existing rules for impairment of financial assets and changes the requirements for hedge accounting.

The first-time application of IFRS 9 at WACKER led to minor impairment adjustments. The higher risk provisions for trade receivables and securities are partially offset by tax effects and reversals of existing valuation allowances, leading to a slight increase in equity. The effects are shown in a separate line item in equity. As the amounts concerned are minor, WACKER will not apply the resulting changes from IFRS 9 to IAS 1 (classification of impairment losses and reversals as a separate item in the income statement). As in the past, the changes are shown under other operating expenses for trade receivables and under other financial result for other financial assets, and are described in the Notes.

Classification and Measurement of Financial Instruments

IFRS 9 stipulates that each financial asset must be classified and measured on the basis of the entity’s business model and the asset’s contractual cash flow characteristics. On initial recognition, each financial asset is classified as measured either at fair value through profit or loss (FVPL), at amortized cost or at fair value through other comprehensive income (FVOCI). Since the new requirements under IFRS 9 diverge from the existing assessments under IAS 39, there are slight differences in the classification and measurement of financial assets. This includes the option of recognizing certain assets at fair value. The classification and measurement of financial liabilities remain largely unchanged under IFRS 9.

WACKER has assessed its financial assets using the underlying business model and the contractual cash flow characteristics of the assets and classified them as follows:

The reclassifications did not result in any change in carrying amounts. The classification of financial liabilities remained unchanged year over year.

To determine possible classification and measurement changes from the implementation of IFRS 9, WACKER carried out an analysis of the business models and assessed the contractual cash flow characteristics of the financial assets within these business models. As a result of this analysis, the Group identified financial assets that are measured either at amortized cost or at fair value through other comprehensive income, and that are therefore subject to the IFRS 9 impairment rules.

On initial recognition of an equity investment not held for trading, WACKER shall, in certain cases, exercise its irrevocable option to report the following changes in fair value in equity under “Other equity items.” WACKER did not make use of this option as of the transition date.

Impairment of Financial Assets

The policies of IFRS 9 regarding impairments apply to debt instruments measured at amortized cost or at fair value through other comprehensive income (referred to collectively in the following as “financial assets”). The model for determining impairments and risk provisions has changed from one based on actual losses of receivables (IAS 39) – under which these are recognized on occurrence of a defined loss event – to one based on expected losses of receivables (IFRS 9). Under the latter, impairments for losses of receivables are recognized on initial recognition of the financial asset on the basis of the potential losses expected at that point in time. WACKER is exposed to an insignificant transition effect from the change in the model for losses of receivables because the majority of receivables are insured. A detailed description of the model can be found in the accounting and valuation principles for financial assets.

Hedge Accounting

IFRS 9 also includes new rules for hedge accounting with the objective to bring it into line with risk management. In principle, some of the restrictions contained in the existing rules have been eliminated, meaning that a wider range of hedging instruments and hedged items qualifies for hedge accounting. IFRS 9 offers the option of postponing application of its accounting rules for hedging relationships and, instead, continuing to apply the corresponding IAS 39 rules. WACKER decided to exercise this accounting option and therefore did not apply the IFRS 9 hedge accounting rules as of January 1, 2018, the effective date of IFRS 9.

Other accounting standards and interpretations applied for the first time in these consolidated financial statements are:

Other standards and interpretations to be applied for the first time are not applicable due to the absence of relevant circumstances.

Accounting Standards / Interpretations Not Applied Prematurely

The International Accounting Standards Board (IASB) has published the following standards, interpretations, and amendments to existing standards, the application of which is not yet mandatory and which WACKER is not applying earlier than required. Only those standards that are relevant to WACKER are mentioned. WACKER evaluates every new standard to determine its impact on the consolidated financial statements.