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Estimation uncertainties and exercise of discretion

The preparation of consolidated financial statements in accordance with IFRS entails the selection of accounting policies and valuation principles and the use of forward-looking assumptions and estimates that may affect the valuation of assets and liabilities, income and expenses and contingent liabilities.

All assumptions and estimates used in the consolidated financial statements are based on management’s expectations. Information that could alter these estimates is reviewed continually and may result in adjustments to the carrying amounts of the respective assets and liabilities.

Assumptions and estimates that could materially impact the valuation of the LANXESS Group’s assets and liabilities are explained below.

The LANXESS Group tests its cash-generating units for impairment at least once a year by determining the respective recoverable amount (for further information see the section headed “Global impairment testing procedure and impact”). The test is based on forecasts of future cash flows, derived from reasonable assumptions representing the management’s best assessment of the economic circumstances at the time of the impairment test. Management’s expectations of future cash flows therefore indirectly affect the valuation of assets and goodwill.

The assumptions and estimates used for the impairment test conducted on assets in fiscal 2012 could differ from the actual values in subsequent periods, necessitating subsequent valuation adjustments. The impairment test was based on a discount rate after taxes of 7.9% (2011: 7.4%), without using growth rates to extrapolate the last year of the forecasting period.

The testing of the cash-generating units did not reveal any indication of possible asset impairment.

The principal goodwill items were tested for impairment on the basis of fair value less costs to sell. As of the annual impairment testing date, the goodwill from previous years was tested for impairment after adjusting for currency translation effects. This included, in particular, the goodwill of €95 million (2011: €105 million), which is recognized in Brazilian real by the Performance Butadiene Rubbers business unit in connection with the acquisition of Petroflex in 2008.

The goodwill of €18 million relating to the acquisition in 2012 of Bond-Laminates GmbH, Brilon, Germany, was allocated to the High Performance Materials business unit in the Performance Polymers segment and tested for impairment as of the reporting date.

Neither a one percentage point increase in the discount rate nor a 10% reduction in expected future cash flows would have led to the recognition of an impairment loss on these goodwill items.

The recognition and measurement of provisions are also affected by assumptions as to the probability of utilization, timing, the underlying discount rate and the absolute level of risk. The LANXESS Group performed sensitivity analyses on all provisions existing as of December 31, 2012 as required by the IFRS. These involved calculating the impact of variations in the parameters used, especially the probability of occurrence, discount rate and absolute level of risk. The outcome of these sensitivity analyses shows that variations in the assumptions described above would not have a material impact on the level of other provisions reported in the consolidated financial statements of the LANXESS Group. For further information on the sensitivity analyses relating to provisions for pensions and other post-employment benefits, see Note [13].

Defined-benefit pension plans also necessitate actuarial computations and valuations. The derivation of the discount rate used for pensions in Germany was reviewed in fiscal 2012. The section on provisions for pensions and other post-employment benefits contains information on the assumptions on which the actuarial calculations and estimates were based (see Note [13]).

Further the LANXESS Group is affected by a number of legal disputes. As an international chemicals group, LANXESS is exposed to administrative or court proceedings in the normal course of business and may be again in the future. Administrative and court proceedings generally involve complex technical and/or legal issues and are therefore subject to a number of imponderables. The outcomes of any current or future proceedings cannot be predicted with certainty. It is therefore possible that legal judgments could give rise to expenses that are not covered, or not fully covered, by insurance and that could materially affect the business operations, revenues, earnings and cash flows of the LANXESS Group.

There is also a degree of uncertainty surrounding the assessment of certain tax situations by the tax authorities. Although the LANXESS Group believes it has presented all tax-relevant information correctly and in compliance with the law, it is possible that the tax authorities may occasionally reach different conclusions.

Other significant estimates are used to assess the useful lives of intangible assets and property, plant and equipment, the probability of collecting receivables and other assets, the valuation of inventories and the ability to realize tax claims and deferred tax assets recognized for temporary differences and tax loss carryforwards. The first-time consolidation of business operations also involves estimation uncertainties and the exercise of discretion in determining the fair values of the acquired assets and assumed liabilities.

Up to the time these consolidated financial statements were prepared, no circumstances had become known that would necessitate a major change in such estimates.

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