K+S Group, Kassel, said its financial statements as of Dec. 31, 2019, together with the related interim group management report and the abbreviated financial statements as of June 30, 2020, are to be examined at the occasion-related request of the German Federal Financial Supervisory Authority (BaFin)
BaFin informed the German Audit Office for Accounting (DPR) about the reason for the examination, saying that assets reported in K+S’ consolidated financial statements as of December 31, 2019, and the abbreviated financial statements as of June 30, 2020 – in particular non-current assets – may be overstated.
The probe relates to a K+S statement on Nov. 4, 2020, that it had adjusted its long-term assumptions for the potash business (GM Nov. 6 & Nov. 13, 2020).
Essentially, this related to assumptions regarding that long-term potash price development are now lower. Furthermore, an upward adjustment of the weighted average cost of capital (WACC) became mandatory, K+S reminded in its Feb. 17 statement.
“Overall, this resulted in a non-cash, one-off impairment loss of around €2 billion on assets in the Europe+ operating unit,” the company reminded. The Europe+ operating unit comprises Potash and Magnesium Products (including Bethune) and Salt Europe.
The impairment loss was recognized in the financial statements for the third quarter of 2020 and had a correspondingly negative impact on adjusted consolidated earnings after tax and ROCE, but did not result in a cash outflow, said K+S.
At the occasion-related request of BaFin, the DPR has announced that it will examine the accuracy of the impairment losses recognized.
For this purpose, DPR has requested the company’s cooperation and the submission of documents, and K+S said it is “comprehensively” complying with this request and has already provided the documents requested by DPR.
K+S’s Board of Executive Directors is convinced that the impairment loss has been recognized appropriately and in compliance with all relevant accounting standards, the company said, adding that its Supervisory Board also does not anticipate any indications to the contrary at present.
The company’s stock dropped as much as 14 percent in early trading in Frankfurt on Feb 18, the lowest since March 2020, and as of 17.35 CET was 14 percent down on the day.
Bloomberg cited Baader analyst Markus Meyer as saying he could only speculate on the potential “worst-case” consequences – if there are any. The analyst said these could include delayed fiscal-year reporting, additional impairments, or equity measures to strengthen balance sheets. While a further impairment “would strain K+S’ relatively weak balance sheet further, it could result in equity measures to strengthen it in the medium term,” said Meyer.
Commerzbank downgraded the stock to hold from buy in a note to investors, Bloomberg reported. Commerzbank analysts, including Michael Schaefer, said they await further clarification from K+S’ 2020 annual report, due on March 11. Separately, Independent Research also cut K+S to sell from a hold rating.