4.Scope of Consolidation

Changes in the Scope of Consolidation

As of June 30, 2021, the scope of consolidation comprised Covestro AG and 74 (December 31, 2020: 47) consolidated companies.

The increase in the number of consolidated companies in the first half of 2021 is attributable to the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). A total of 27 RFM companies were fully consolidated effective April 1, 2021, for the first time.

Acquisitions and Divestitures

Acquisitions

On April 1, 2021, Covestro successfully completed the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), which was included in the consolidated financial statements for the first time as of that date. The responsible authorities approved the transaction after Covestro and Koninklijke DSM N.V. reached an agreement on the purchase at the end of September 2020. The acquisition of RFM makes the Coatings, Adhesives, Specialties segment a leading supplier of sustainable coating resins. A due to the acquisition even more comprehensive and highly innovative product portfolio will offer customers clear added value. The transaction covers innovative projects such as Additive Manufacturing, Advanced Solar Coatings and Niaga.

The acquisition was accounted for as a business combination in accordance with IFRS 3 (Business Combinations). For purposes of the purchase price allocation, the acquired company’s identifiable assets, the assumed liabilities and contingent liabilities, and any noncontrolling interest in the acquiree were recognized at fair value. According to IFRS 3, the purchase price allocation can be adjusted within one year of the acquisition date based on new information and findings. This can affect especially items that are based on assumptions and estimates, which mainly include provisions, contingent liabilities and deferred taxes. No assurance can be given that other items may not change.

The acquisition also includes the following shares and voting rights in four companies with noncontrolling interests that are nonetheless fully consolidated: the 50% interest (57% voting rights) in DSM Eternal Resins Kunshan Co. Ltd., Kunshan, (China); the 60% interest (60% voting rights) in Covestro Eternal Resins (Far East) Ltd., Pingtung (Taiwan); the 72% (72% voting rights) interest in Covestro Amulix V.O.F., Zwolle (Netherlands); and the 70% interest (100% voting rights) in Japan Fine Coatings Co., Ltd., Tsukuba (Japan).

Covestro and Koninklijke DSM N.V. agreed on a preliminary consideration transferred of €1,544 million, which was paid in cash. The purchase price allocation resulted in a goodwill of €481 million. This goodwill includes expected synergies arising from administrative processes and infrastructure, including cost savings in procurement, sales and general administration, and from unlocking future business opportunities with new customers. Goodwill is not tax deductible in the countries involved in the acquisition, except the United States. The share of tax deductible goodwill attributable to the United States amounts to €68 million.

The following overview shows the acquired assets and liabilities at fair value as of the acquisition date:

The other intangible assets mainly include customer relationships in the amount of € 411 million as well as technologies relating to water-based hybrid technologies, powder coating resins and radiation curing resins in the amount of € 176 million.

The fair value of acquired receivables totaling €223 million relates mainly to trade accounts receivable. At the acquisition date, gross contractual receivables amounted to €225 million, with €2 million of this amount estimated to be unrecoverable.

Noncontrolling interests were measured according to the partial goodwill method in the course of initial consolidation. Based on the partial goodwill method, the value of the noncontrolling interests totals €39 million.

Acquisition related costs associated with the business combination of €41 million were recognized in the income statement in the amount of €37 million and in equity in the amount of €4 million. Of this amount, €38 million had already been recognized in the previous year.

The sales generated by the acquired RFM business since the acquisition date amounted to €294 million, with income after taxes amounting to €–7 million. The income after taxes comprised expenses resulting from one-time effects and the purchase price allocation. If the aforementioned acquisition had been completed by January 1, 2021, Covestro would have reported net sales of €7,626 million. Income after taxes would have amounted to €861 million, including expenses from one-time effects and the purchase price allocation. Intercompany profits between Covestro and RFM companies were eliminated in this case.

The purchase price allocation for RFM has not yet been completed, because the preparation and audit of the underlying financial information will still take some time. Allocations of the purchase price to the individual assets and liabilities could therefore still change.

Divestitures

On January 29, 2021, RFM signed an agreement on the sale of assets (disposal group) in Taoyuan (Taiwan), which were also part of the RFM acquisition, to Evermore Chemical Industry Co. Ltd., Nantou (Taiwan). In connection with the sale, production-related assets of €12 million were classified as “held for sale” in accordance with IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations). Inventories, which are measured separately, are also being transferred. The transaction is scheduled to be closed up in the third quarter of 2021 at the latest.

On February 25, 2021, Covestro signed an agreement to sell the assets and liabilities (disposal group) of the systems house business in the Middle East to the current co-shareholder Pearl Industries Overseas Ltd., Dubai (United Arab Emirates). The sale of this systems house business is part of Covestro’s portfolio optimization process, during the course of which Covestro sold the only North American systems house in April 2017 and the European systems house business in November 2019. The systems house business is part of the company’s Polyurethanes segment and offers customer-specific polyurethane systems to the construction sector in particular. The transaction is structured as a share deal. The expected selling price was lower than the value of the net assets to be sold, which were written down accordingly. Impairment charges led to a loss totaling €16 million reported in manufacturing costs, selling expenses and general administration expenses in fiscal year 2020. In connection with this sale, current assets amounting to €30 million and liabilities of €14 million were classified as “held for sale” in accordance with IFRS 5. This transaction was expected to be closed in the third quarter of 2021 and was subject to approval by regulators. The transaction was completed on July 26, 2021.
See note 11 “Events after the End of the Reporting Period” in the Consolidated Interim Financial Statements.