6 Intangible assets

Intangible assets increased by EUR 2.1 billion in the 2018 financial year to EUR 65.0 billion. Additions totaling EUR 4.0 billion increased the carrying amount. They mainly comprised capital expenditures in the United States, Europe, and Germany operating segments, and in the Group Headquarters & Group Services segment. Changes in the composition of the Group increased the carrying amount by a further EUR 1.5 billion. As of the date of acquisition of UPC Austria, an identifiable intangible asset of EUR 0.5 billion was recognized in connection with the latter’s customer base, along with goodwill of EUR 0.6 billion. Further, as of the acquisition date of Layer3 TV, an identifiable intangible asset of EUR 0.1 billion was recognized in connection with technology developed by the latter as well as goodwill of EUR 0.2 billion. For further information on transactions, please refer to the section “Changes in the composition of the Group and other transactions”. Positive exchange rate effects of EUR 1.7 billion, particularly from the translation of U.S. dollars into euros, increased the carrying amount. Depreciation and amortization of EUR 4.3 billion and impairment losses of EUR 0.7 billion reduced the carrying amount.

In the 2017 financial year, the partial reversal of impairment losses on FCC licenses previously acquired by T-Mobile US increased the carrying amount by EUR 1.7 billion before deferred taxes. These FCC licenses were impaired as of September 30, 2012 following ad hoc impairment testing of the United States cash-generating unit. Because all of the FCC license impairment was allocated to the portfolio of PCS licenses, based on a determination that AWS licenses were carried at less than fair value, the PCS license portfolio is the only FCC license asset subject to an impairment reversal. Regular tests had to be performed in subsequent periods to determine whether the reasons for impairment still existed – in full or in part. The value of the United States cash-generating unit, which has been listed on the stock exchange since May 2013, increased substantially in recent years on the back of the increase in the share price of T-Mobile US, Inc. and exceeded its carrying amount. However, the maximum possible reversal is limited to the lower of the recoverable amount of the impaired spectrum licenses determined from the fair value less costs of disposal on the one hand and the cost of these licenses on the other. As the recoverable amount of the impaired FCC licenses in the past financial years was lower than their carrying amount, the requirements for a reversal were not met.

In the third quarter of 2017, the results of the 600 MHz spectrum auction by the Federal Communications Commission (FCC), which was completed in 2017, indicated an increase in value of the previously impaired licenses. A remeasurement was then performed using a discounted cash flow method (greenfield method). The value was calculated in accordance with Level 3 of the fair value hierarchy pursuant to IFRS 13. The greenfield method uses a hypothetical cash flow scenario of developing an operating business for an entity that owns a single asset, in this case FCC licenses, at inception. The greenfield method requires an understanding of how much time and investment it would take to grow the business considering the current market conditions. Cash flows are forecasted to reflect required resources and eventual returns from the build-out of the operations and the acquisition of customers. The underlying theory of that approach is that by incurring theoretical start-up costs and capital expenditures that reflect the creation of all other assets, the value of the FCC licenses becomes isolated. The expenses and capital expenditures required to recreate the business would be higher than the expense and capital expenditure level of an established business. In addition, the time to recreate (ramp-up period) also determines the required level of investments (e.g., to shorten the ramp-up period more investment would be required). In summary, the key inputs of the greenfield method are:

• The time and required expenses of the ramp-up period. The build-out was staged over a period of time to reflect a plan to migrate from a start-up to a fully capable national wireless network. The estimated timeline to build the existing network that most closely meets the current business plan’s long-term projected level of subscribers is approximately eight years.
• Long-term projected revenue and operating cash flows are based on a market participant or normalized level of operation of the business. Given the long-term nature of the investment, the initial planning period of ten years was extended by an additional ten years to allow for profit margins, capital expenditures and related depreciation to reach normalized levels.
• A long-term growth rate was applied for the ten additional years to the forecasted revenues that matches the selected long-term growth rate of 2 percent for the derivation of the terminal value. The long-term growth rate was determined by considering industry and economic research.
• The rate of return required by a market participant for investing in such a business (discount rate). A discount rate of 7.5 percent was used.

The total value of the license portfolio calculated in this way of USD 53 billion was then allocated to the spectrum types (PCS, AWS, 700 MHz and 600 MHz) according to a relative market price model based on auction data. In 2017, a recoverable amount of EUR 13.6 billion was calculated for the FCC licenses previously impaired. Taking the carrying amount at that time of EUR 11.9 billion into account, a partial reversal of EUR 1.7 billion arose for the United States operating segment in the third quarter of 2017 that was recorded under other operating income. There were no indications for a further reversal of impairment losses on the licenses in the 2018 financial year.

In the 2018 financial year, there were a number of factors affecting changes in the carrying amounts of goodwill at cash-generating units:

First-time application of IFRS 15 “Revenue from Contracts with Customers.” The first-time application of IFRS 15 as of January 1, 2018 reduced the carrying amount of goodwill recognized under intangible assets by EUR 0.1 billion. Under the new accounting standard, contract assets must be capitalized for the first time. For further information on the requirements and effects of the first-time application, please refer to the section “Initial application of standards, interpretations, and amendments in the financial year”. An initial consequence was that the carrying amounts of the cash-generating units that must be tested for impairment in accordance with IAS 36 increased when IFRS 15 was applied for the first time. As a result, the carrying amounts of the Romania cash-generating unit in the Europe operating segment and of the Netherlands cash-generating unit in the Group Development operating segment exceeded in each case the recoverable amounts for these units. Consequently, the goodwill recognized for these units then had to be impaired as of January 1, 2018. The recoverable amounts for the Romania cash-generating unit stood at EUR 701 million and for the Netherlands cash-generating unit at EUR 2,482 million. Hence the recoverable amounts for the Romania cash-generating unit were EUR 10 million, and for the Netherlands, EUR 68 million below the carrying amount. The corresponding goodwill impairments for these units were recognized directly in equity by reducing retained earnings as of January 1, 2018.

Corporate transactions UPC Austria and Layer3 TV. Goodwill of EUR 0.6 billion was recognized from the acquisition of UPC Austria and of EUR 0.2 billion from the acquisition of Layer3 TV as of the respective acquisition date. For further information, please refer to the section “Summary of accounting policies” under “Changes in the composition of the Group and other transactions”.

United States. The increase in goodwill of EUR 240 million compared with December 31, 2017 primarily relates to the goodwill recognized in connection with the acquisition of Layer3 TV and to exchange rate effects from the translation of U.S. dollars into euros.

Systems Solutions. In the Systems Solutions operating segment, since January 1, 2018, the two cash-generating units Market Unit and Telekom Security and their respective goodwill have been combined in a single cash-generating unit following a change in the control logic in the Systems Solutions cash-generating unit.

Europe. Under the agreement concluded on January 15, 2019 by OTE concerning the sale of its stake in Telekom Albania to the Bulgarian company Albania Telecom Invest AD for a purchase price of EUR 50 million, the carrying amounts of the assets and liabilities assigned to the Albania cash-generating unit were reclassified to non-current assets and disposal groups held for sale and liabilities directly associated with non-current assets and disposal groups held for sale, respectively. This process required a remeasurement of these assets at the lower of carrying amount and fair value less costs of disposal, which resulted in an impairment loss of EUR 35 million in the 2018 financial year as of the date of the reclassification on some of the intangible assets and property, plant and equipment assigned to the Albania cash-generating unit.

Disclosures on annual impairment tests. As of December 31, 2018, Deutsche Telekom carried out its annual impairment tests on the goodwill and intangible assets with an indefinite useful life (in particular, FCC licenses in the United States) assigned to the cash-generating units. A need for impairment of goodwill totaling EUR 639 million on a pro rata basis was identified in the Europe operating segment at the cash-generating units Poland and Romania as of December 31, 2018 on the basis of information available at the reporting date and expectations with respect to the future development of the market and competitive environment. The impairment of goodwill at these cash-generating units was attributable in particular to intensified competition and a difficult overall market situation. For Poland, this results in the expectation of reduced revenue and earnings, in particular from the sale of terminal equipment and in the fixed-network business, and a need for increased capital expenditure due to technological development and requirements. In Romania, the measures taken to restructure the company and adapt the business to changing customer needs have not yet had the desired effect, as reflected by lower-than-expected revenue and reduced earnings, especially in the fixed-network business. The impairment test as of December 31, 2017 resulted in a need for impairment totaling EUR 829 million at the cash-generating units Poland, Romania, and Albania in the Europe operating segment. In addition, an impairment test was performed as of September 30, 2017 for the Market Unit cash-generating unit in the Systems Solutions operating segment; this was triggered by an unexpected decrease in order entry and resulted in the recognition of impairment losses of EUR 1,242 million.

The recoverable amounts to be identified for the impairment test were largely determined on the basis of the fair values less costs of disposal. With the exception of the United States cash-generating unit, these figures were calculated using a net present value approach. The main parameters are shown in the table below.

The recoverable amounts (prior to the deduction of net debt) for the cash-generating units were EUR 2,294 million (December 31, 2017: EUR 2,932) for Poland, and EUR 744 million (December 31, 2017: EUR 701 million) for Romania as of December 31, 2018. The values were calculated in accordance with IFRS 13 using Level 3 input parameters (i.e., unobservable input parameters).

The recoverable amounts at the cash-generating units Netherlands, Croatia, Montenegro, and Macedonia were determined using the value in use. The market price of an active and liquid market (share price) of T-Mobile US was used to determine the fair value less costs of disposal in the case of the United States cash-generating unit. The measurements of all other cash-generating units are founded on projections for a ten-year projection period that are based on financial plans that have been approved by management and are also used for internal purposes. The planning horizon selected reflects the assumptions for short- to medium-term market developments and is selected to achieve a steady state in the business outlook that is necessary for calculating the perpetual annuity. This steady state can only be established based on this planning horizon, in particular due to the sometimes long investment cycles in the telecommunications industry and the investments planned and expected in the long run to acquire and extend the rights of spectrum use. Cash flows beyond the internal mid-term planning are extrapolated using appropriate growth rates defined separately for each cash-generating unit. These growth rates are based on real growth and inflation expected in the long term for the countries in which the respective unit operates. To achieve the sustainable growth rates set for the period of the perpetual annuity, additional sustainable investments derived specifically for each cash-generating unit are taken into account. The key assumptions on which management has based its determination of the recoverable amount include the following assumptions that were primarily derived from internal sources and are based on past experience and extended to include internal expectations, and that are underscored by external market data and estimates: development of revenue, customer acquisition and retention costs, churn rates, capital expenditure, market share, and growth rates. Discount rates are determined on the basis of external figures derived from the market, taking account of the market and country risks associated with the cash-generating unit. Any significant future changes in the aforementioned assumptions would have an impact on the fair values of the cash-generating units. Changes in the assumptions may have a negative impact, as a result of future macroeconomic trends, continued intense competition, further possible legislation changes (e.g., as part of national austerity programs), and regulatory intervention.

The following tables provide an overview of the main factors affecting the measurement, the classification of the input parameters (levels) used to determine the recoverable amounts in accordance with IFRS 13, as well as the sensitivity calculations for the need for impairment resulting from a change in the main parameters discount rate, net cash flow, and growth rate. They show the most significant cash-generating units to which goodwill has been allocated.

The sensitivity analysis of the impairment losses lists all those cash-generating units where the sensitivity analysis resulted in an impairment loss or a change in the impairment loss. The sensitivity analysis was performed separately for each parameter, i.e., a change in the impairment charge on a cash-generating unit is only determined by reducing or increasing the parameter under consideration.

Deutsche Telekom had commitments for the acquisition of intangible assets in the amount of EUR 0.5 billion (December 31, 2017: EUR 0.5 billion) as of the reporting date. The majority of this related to commitments entered into by T-Mobile US.