2. Effects of New Financial Reporting Standards

2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period

With the exception of IFRS 16 (Leases), initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations.

Initial Application of IFRS 16

On January 13, 2016, the IASB published IFRS 16 (Leases), a new standard for recognizing leases, which has been applied since January 1, 2019, and replaces the previous accounting provisions for leases.

While IFRS 16 basically retains the previous accounting rules for lessors, there is now only one accounting model for use by lessees. This requires a lessee to recognize a right-of-use asset and a corresponding lease liability for each lease. The right-of-use asset reflects a lessee’s right to use the asset being leased. The lease liability recognizes the lessee’s obligation to make contractual lease payments. Exemptions are available for leases with a term of less than 12 months or those with a low-value underlying asset.

IFRS 16 was applied using the modified retrospective approach. For this reason, the reference figures were not adjusted. These continue to be presented in accordance with the previous accounting rules (for further details, see the 2018 Annual Report, Note 3 “Accounting Policies and Valuation Principles”).

The IFRS 16 transition rules stipulate that no new assessment must be made at the date of initial application as to whether an existing agreement meets the definition of a lease according to IFRS 16. Instead, existing assessments of leases can continue to be applied. Covestro made use of this exemption when applying IFRS 16 for the first time.

With regard to lessees, right-of-use assets required upon initial application of IFRS 16 were generally recognized by Covestro in the amount of the corresponding lease liabilities. In specific cases, the right-of-use asset was adjusted by the amount of the deferred advance payments or liabilities recognized in the financial statements as of the end of fiscal year 2018. The initial application did not affect equity. The corresponding lease liability was measured using the incremental borrowing rate at the date of initial application. In addition, Covestro took advantage of the optional exemptions regarding the carrying amount of short-term leases and leases on low-value assets.

The following reconciliations of the carrying amounts of the right-of-use assets and lease liabilities as of January 1, 2019, to the carrying amounts as of June 30, 2019, are broken down into the former finance leases already recognized in the statement of financial position under IAS 17 in conjunction with IFRIC 4 and the former operating leases recognized for the first time as a result of the adoption of IFRS 16.

As of January 1, 2019, property, plant and equipment and financial liabilities increased by €660 million and €656 million, respectively, due to the initial application of IFRS 16. The underlying leases relate mainly to real estate leases and leases for production and logistics infrastructure. The principal additions in the first half of 2019 comprise new leases for transport vessels, rail cars and electric buses, and the leases acquired through the increase in the stake held in DIC Covestro Polymer Ltd., Tokyo (Japan).

2.2 Published Financial Reporting Standards that Have Not Yet Been Applied

Compared with the disclosure presented in the 2018 consolidated financial statements regarding the effects of those published reporting standards that are not yet effective to be applied but whose application could affect the presentation of the net assets, financial position, and results of operations, no new determinations could be made concerning potential effects.