Standards, interpretations, and amendments issued, but not yet to be applied

In January 2016, the IASB issued IFRS 16 “Leases.” The standard will be effective for the first time for financial years beginning on or after January 1, 2019. IFRS 16 has a material effect on Deutsche Telekom’s consolidated financial statements, particularly on total assets, the results of operations, cash generated from operations, and the presentation of the financial position.

The new regulations affect Deutsche Telekom as a lessee especially in relation to leases of cell sites (land, space in cell towers or rooftop surface areas), network infrastructure, and buildings used for administrative or technical purposes.

Deutsche Telekom will not apply the new lease standard retrospectively in full, but will make use of the exemption provisions for lessees, also known as the modified retrospective method. On the transition to IFRS 16, payment obligations from existing operating leases will be discounted using the relevant incremental borrowing rate and recognized as a lease liability. The right-of-use assets will be carried as of January 1, 2019 in the amount of the lease liability, adjusted by the amount of the prepaid or accrued lease payments. Due to the significant amount of liabilities from straight-line leases in accordance with IAS 17, which in accordance with IFRS 16 must be deducted from the right-of-use assets, the right-of-use assets as of January 1, 2019 under IFRS 16 will be carried at a significantly lower amount than the corresponding lease liability (see Note 16 “Other liabilities”). This liability primarily relates to leases for T-Mobile US’ cell sites. As of the transition date of January 1, 2019, first of all, the lease terms underlying the liabilities will be adjusted to the terms determined in accordance with IFRS 16, increasing shareholders’ equity. The remaining prepaid expense will be offset against the right-of-use asset as described above.

In the statement of cash flows, the repayment portion of the lease payments from existing operating leases will reduce net cash from/used in financing activities and no longer affect net cash from operating activities. Only the interest payments will remain in net cash from operating activities, the total of which will rise.

The full effects of IFRS 16 were determined as part of a Group-wide project for implementing the new standard. On the basis of management’s current estimate, Deutsche Telekom expects the transition to the new standard to have the following material effects as of January 1, 2019. It should be noted that the expectations stated regarding the items of the statement of financial position may be subject to deviations of +/-5 percentage points:

• The increase in total assets/total liabilities and shareholders’ equity as of January 1, 2019 as a consequence of the recognition of right-of-use assets in the amount of EUR 13,8 billion, the recognition of lease liabilities in the amount of EUR 15.4 billion, and a reduction in retained earnings, due in particular to the reversal of accrued lease payments (liabilities from straight-line leases) of EUR 0.5 billion (before deferred taxes). The increase in lease liabilities will lead to a corresponding increase in net debt.
• Depreciation charges that are around EUR 2.8 billion higher and interest expense that is around EUR 0.7 billion higher will be reported in the income statement in place of lease expense; this is expected to give rise to a significant improvement in EBITDA of around EUR 3.4 billion. The expected effects will be exclusively attributable to the balance as of January 1, 2019.

Significant options and expedients will be exercised as follows:

• Right-of-use assets and lease liabilities will be reported separately in the statement of financial position.
• The recognition, measurement, and disclosure requirements of IFRS 16 also apply to short-term leases and leases of low-value assets.
• A distinction will not be made in leases that contain both lease components and non-lease components. Each lease component will be accounted for together with other related performance components as a single lease component.
• Leases for intangible assets fall under IAS 38 rather than under IFRS 16.

In addition, on the date of first-time adoption of IFRS 16, use will be made of the main options and expedients as follows:

• Provisions for onerous contracts recognized in connection with leases will be derecognized on January 1, 2019 against the right-of-use asset.
• In determining the lease term, hindsight may be used where this provides a better estimate for the exercise of options to extend or terminate the lease.
• Use will not be made of grandfathering. On January 1, 2019, the lease standard will therefore be applied to all existing leases falling within its scope. It will apply to leases in which Deutsche Telekom is a lessee and to leases in which the Group is a lessor

Overall, the new definition of a lease will not have a material impact for Deutsche Telekom as a lessor. However, the number of identified leases will change. The new definition does not affect the contracts for servers or similar hardware provided to customers as part of data and network solutions or contracts for terminal equipment and SmartHome network solutions provided to customers. These will continue to be defined as leases. However, the number of leases for contracts involving modems/routers for the latest generation of devices provided to consumers as part of fixed-network mass-market contracts is expected to decrease. In relation to services provided in data centers, the leasing of space, for example separate rooms for setting up the customer’s own hardware, will be identified as a component of a lease. Furthermore, the leasing of local loop lines and space to wholesale fixed-network customers (e.g., co-location space) will also be classified as a lease.

Readers are also referred to the Disclaimer at the end of this report as regards the forward-looking statements contained in this section; the latter reflect the current views of the management of Deutsche Telekom with regard to future events.