37 Leases

Deutsche Telekom as lessee

Finance leases. When a lease transfers substantially all risks and rewards to Deutsche Telekom as lessee, Deutsche Telekom initially recognizes the leased assets in the statement of financial position at the lower of fair value or present value of the future minimum lease payments. Most of the leased assets carried in the statement of financial position as part of finance leases relate to long-term rental and lease agreements for office buildings and technical fixed-network or mobile facilities. The average lease term is 13 years. The agreements include extension and purchase options. The following table shows the net carrying amounts of leased assets capitalized in connection with a finance lease as of the reporting date:

The increase of EUR 0.2 billion in technical equipment and machinery is primarily a result of new finance leases for network upgrades at T-Mobile US.

At the inception of the lease term, Deutsche Telekom recognizes a lease liability equal to the carrying amount of the leased asset. In subsequent periods, the liability decreases by the amount of lease payments made to the lessors using the effective interest method. The interest component of the lease payments is recognized in the income statement.

The following table provides a breakdown of these amounts:

Operating leases. Beneficial ownership of a lease is attributed to the lessor if this is the party to which all the substantial risks and rewards incidental to ownership of the asset are transferred. The lessor recognizes the leased asset in its statement of financial position. Deutsche Telekom recognizes the lease payments made during the term of the operating lease in profit or loss. Deutsche Telekom’s obligations arising from operating leases are mainly related to long-term rental or lease agreements for cell sites, network infrastructure, and real estate.

Some leases include extension options and provide for stepped rents. Most of these leases relate to cell sites in the United States.

The operating lease expenses recognized in profit or loss amounted to EUR 3.9 billion in the 2018 financial year (2017: EUR 3.9 billion, 2016: EUR 3.9 billion). The following table provides a breakdown of future obligations arising from operating leases that are deemed to be reasonably certain:

The increase in expected future minimum lease payments from operating leases as of December 31, 2018 is mainly a result of newly leased cell sites and currency translation effects in the United States operating segment.

A need to adjust the disclosures on obligations arising from operating leases as of December 31, 2017 was identified at T-Mobile US in 2018. Certain automatic contract extensions for real estate (mainly cell sites) were not fully recorded. As a result, the lease liabilities disclosed were EUR 0.2 billion too low. The disclosures on obligations arising from operating leases for the prior period were therefore adjusted retrospectively as of December 31, 2018.

Deutsche Telekom as lessor

Finance leases. Deutsche Telekom is a lessor in connection with finance leases. Essentially, these relate to the leasing of routers and other hardware, which Deutsche Telekom provides to its customers for data and telephone network solutions. Deutsche Telekom recognizes a receivable in the amount of the net investment in the lease. The lease payments made by the lessees are split into an interest component and a principal component using the effective interest method. The lease receivable is reduced by the principal received.

The interest component of the payments is recognized as finance income in the income statement. The following table shows how the amount of the net investment in a finance lease is determined:

The following table presents the gross investment amounts and the present value of payable minimum lease payments:

Operating leases. If Deutsche Telekom is a lessor in connection with operating leases, it continues to recognize the leased assets in its statement of financial position. The lease payments received are recognized in profit or loss. The leases mainly relate to the rental of cell sites, building space, and terminal equipment, and have an average term of 10 years. The future minimum lease payments arising from non-cancelable operating leases are as follows:

The reduction in future minimum lease payments is mainly the result of a decline in the expected lease payments from the lease of mobile terminal equipment at T-Mobile US. In 2018, sales of mobile terminal equipment under installment plans increased.