Independent auditor’s report

To Deutsche Telekom Aktiengesellschaft, Bonn

REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS AND OF THE GROUP MANAGEMENT REPORT

Audit Opinions

We have audited the consolidated financial statements of Deutsche Telekom Aktiengesellschaft, Bonn, and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2019, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the group management report of Deutsche Telekom Aktiengesellschaft, which is combined with the Company’s management report, for the financial year from January 1 to December 31, 2019. We have not audited the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report in accordance with the German legal requirements.

In our opinion, on the basis of the knowledge obtained in the audit,

• the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to § [Article] 315e Abs. [paragraph] 1 HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at December 31, 2019, and of its financial performance for the financial year from January 1 to December 31, 2019, and
• the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our audit opinion on the group management report does not cover the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report.

Pursuant to § 322 Abs. 3 Satz [sentence] 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the group management report.

Basis for the Audit Opinions

We conducted our audit of the consolidated financial statements and of the group management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to subsequently as “EU Audit Regulation”) in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). We performed the audit of the consolidated financial statements in supplementary compliance with the International Standards on Auditing (ISAs). Our responsibilities under those requirements, principles and standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and on the group management report.

Key Audit Matters in the Audit of the Consolidated Financial Statements

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the financial year from January 1 to December 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon; we do not provide a separate audit opinion on these matters.

In our view, the matters of most significance in our audit were as follows:

1| Recoverability of goodwill and other non-current assets

2| Appropriateness of revenue recognition

3| Effects of the first-time application of IFRS 16 on the accounting of leases for Deutsche Telekom as lessee

Our presentation of these key audit matters has been structured in each case as follows:

1| Matter and issue

2| Audit approach and findings

3| Reference to further information

Hereinafter we present the key audit matters:

1| Recoverability of goodwill and other non-current assets

1| Non-current assets totaling EUR 146.0 billion are reported in the consolidated financial statements of Deutsche Telekom Aktiengesellschaft. Goodwill amounting to EUR 12.4 billion (7.3% of consolidated total assets) is reported under the line item "Intangible assets" in the consolidated statement of financial position.

The Company tests goodwill for impairment (impairment test) once a year or if there are indications that goodwill may be impaired. The carrying amount of the relevant cash-generating unit or group of cash-generating units (hereinafter "unit" or "units"), in each case including the allocated goodwill, is compared with the corresponding recoverable amount in the context of the impairment test. These measurements are generally based on the present value of future cash flows of the unit to which the respective goodwill is allocated. The recoverability of the unit "USA" is determined on the basis of the listed share price of T‑Mobile US, Inc. The other measurements are based on budget projections of the individual units, which in turn are based on the financial budgets approved by the executive directors. The discount rate used is the weighted average cost of capital for the respective unit. Furthermore, the carrying amount of the respective unit was impacted by the first-time application of the new International Financial Reporting Standard 16 – Leases (IFRS 16) in the financial year, and corresponding adjustments had to be made to the budget projections and discount rate used for that unit. The impairment tests conducted on goodwill determined that no impairments were necessary in financial year 2019.

With respect to other non-current assets and units to which no goodwill is allocated, a regular review is carried out to determine whether there are indications that the non-current assets need to be tested for impairment. As of December 31, 2019, impairment tests were carried out on the units Romania – Fixed network and Romania – Mobile communications due to business development that was worse than expected on the back of intense competition. The budget projections prepared by the executive directors of the units and the discount rates applied for the units were used to calculate the recoverable amounts of the units on the basis of fair value less costs to sell. The impairment loss calculated on this basis was allocated to the tested assets of the units pro rata based on the carrying amounts, with their respective fair values serving as a floor. This resulted in the recognition of EUR 298 million in impairment of property, plant and equipment, and EUR 22 million in impairment of intangible assets.

The result of the measurements depends in particular on the executive directors’ assumptions of future cash inflows and the discount rate used. The measurements are therefore subject to uncertainty. Against this background and due to the complex nature of the valuation, this matter was of particular significance in the context of our audit.

2| We assessed whether the future cash inflows underlying the measurements and the discount rates used on the whole provide a proper basis for the impairment tests of the individual units. As part of our assessment, we relied, among other things, on a comparison with general and sector-specific market expectations as well as the executive directors’ detailed explanations regarding key planning value drivers. In this context, we also assessed whether the costs of Group functions were properly included in the impairment tests of the respective units. With the knowledge that even relatively small changes in the discount rate applied can in some cases have material effects on values, we also focused our testing on the parameters used to determine the discount rate applied, and evaluated the measurement model. In assessing the measurements, we also evaluated the adjustments to the budget projections and the discount rate for the respective unit due to the first-time application of IFRS 16. We also conducted our own sensitivity analyses for the units with a low carrying amount to present value ratio in order to estimate any potential impairment risk related to any potential changes in key assumptions of the measurement. In our view, the measurement inputs and assumptions used by the executive directors were properly derived for the conduction of the impairment tests.

3| The Company’s disclosures relating to impairment tests of goodwill and other non-current assets are contained in the notes on the accounting policies found in the "Accounting policies" section of the "Summary of accounting policies" chapter and in sections "6 – Intangible assets" and "7 – Property, plant and equipment" of the notes to the consolidated financial statements.

2| Appropriateness of revenue recognition

1| In the consolidated financial statements of Deutsche Telekom Aktiengesellschaft, revenue of EUR 80.5 billion is recognized in the consolidated income statement. This significant item in terms of its amount is subject to particular risk due to the complexity of the processes and controls necessary for accurate recognition and deferral, the impact of ever-changing business, price and tariff models (including tariff structures, customer discounts, incentives), and the existence of multiple-element arrangements.

In addition, the accounting standard applicable to revenue recognition, International Financial Reporting Standard 15 – Revenue from contracts with customers (IFRS 15), requires for certain areas estimates and judgments – such as determining the transaction price and allocating it to the performance obligations identified in multiple-element arrangements based on the relative stand-alone selling prices – that had to be assessed for appropriateness in the context of our audit.

Against this background, the accounting treatment of revenue was of particular significance in the context of our audit.

2| In the knowledge that the complexity and the need to make estimates and assumptions give rise to an increased risk of accounting misstatements, as part of our audit we initially assessed the processes and controls put in place by the Group, including the IT systems used for the purposes of revenue recognition. In particular, we assessed the IT system environment for invoicing and measurement as well as other relevant systems supporting the accounting treatment of revenue, as well as the invoicing and measurement systems up to entries in the general ledger.

Furthermore, we inspected contracts with customers, assessed the determination of the transaction price and its allocation to the performance obligations identified in multiple-element arrangements based on the relative stand-alone selling prices, and evaluated whether these obligations were satisfied over time or at a point in time. In this context, we also assessed the appropriateness of the procedure used to allocate revenue to the correct period, and the estimates and judgments made by the executive directors with respect to revenue recognition and deferral. Furthermore, we assessed the accounting consequences of new business and price models and, on a sample basis, examined customer invoices and the related contracts, as well as payments received. We applied consistent audit procedures for the audit of the operating subsidiaries to ensure that we responded appropriately throughout the Group to the inherent audit risk in the audit field.

We were able to satisfy ourselves that the systems, processes and controls in place are appropriate and that the estimates and assumptions made by the executive directors are sufficiently documented and substantiated to ensure that revenue is properly accounted for.

3| The Company’s disclosures relating to revenue in the consolidated financial statements of Deutsche Telekom Aktiengesellschaft are contained in the notes on the accounting policies found in the "Accounting policies" and "Judgments and estimates" sections of the "Summary of accounting policies" chapter and in section "20 – Net revenue" in the "Notes to the consolidated income statement" chapter of the notes to the consolidated financial statements.

3| Effects of the first-time application of IFRS 16 on the accounting of leases for Deutsche Telekom as lessee

1| In the Company’s consolidated financial statements right-of-use assets of EUR 18.0 billion and lease liabilities of EUR 19.8 billion are reported as of the balance sheet date. Thus, lease liabilities represent 11.6% of total assets. In the financial year, the first-time application of the new accounting standard relating to leases, International Financial Reporting Standard 16 – Leases (IFRS 16), resulted in material effects on the opening balance sheet figures and their updating throughout the financial year, in particular for Deutsche Telekom as lessee. The modified retrospective approach was applied for the initial application of IFRS 16. The comparable figures from the prior year’s periods were not adjusted. Due to the large volume of leases and transactions resulting from them, the Company has established group-wide processes and controls for the complete and accurate recording of the leases. Furthermore, the first-time application required the implementation of IT systems to account for these leases. The new IFRS 16 accounting standard necessitates that executive directors make estimates and judgmental decisions for certain areas which have been assessed in the context of our audit. In particular, this relates to estimates and judgmental decisions regarding exercising options with implications for the term of the leasing arrangement and in determining the payments to be taken into consideration in measuring the lease liability. Against this background and due to the complexity of the new requirements set forth in IFRS 16, the accounting of leases for Deutsche Telekom as lessee was of particular significance within the course of our audit.

2| As part of our audit, we assessed, among other things, the appropriateness and operating effectiveness of the processes and controls established by the Group to record its leases. This also applies to the implementation of the IT systems to account for the leases and to the required adjustments made to existing systems in order to process the relevant transactions.

In addition, as part of our audit we assessed the impact of the first-time application of IFRS 16. We assessed the implementation work and evaluated the design of the processes set up to account for the transactions in accordance with IFRS 16 and of the IT systems in place to support the implementation of the new requirements. We inspected the lease agreements on a sample basis, verified the identification of lease and non-lease components and the determination of payments to be taken into consideration in measuring the lease liability, and assessed whether these were completely and accurately entered into the newly implemented systems to record leases. In particular, we interviewed Company employees and inspected the appropriate evidence to assess the estimates regarding the exercise of options impacting the lease term. Applying consistent audit procedures during the audit of subsidiaries ensured that we reacted appropriately to the complexity of implementing IFRS 16.

We were able to satisfy ourselves that the systems and processes established for subsequent measurement and adjusted to IFRS 16 as well as the implemented controls are appropriate. Furthermore, we were able to assess that the estimates and assumptions made by the executive directors are sufficiently documented and substantiated to ensure that leases are properly accounted for under the first-time application of IFRS 16.

3| The Company’s disclosures relating to the accounting treatment of leases are contained in the notes on the accounting policies found in the "Accounting policies" and "Judgments and estimates" sections of the "Summary of accounting policies" chapter and in sections "8 – Right-of-use assets – lessee relationships" and "13 – Financial liabilities and lease liabilities" of the "Notes to the consolidated statement of financial position" chapter, as well as "27 – Depreciation, amortization and impairment losses" and "28 – Finance costs" of the "Notes to the consolidated income statement" chapter of the notes to the consolidated financial statements. The disclosures on the initial impact of the first-time application of IFRS 16 are presented in the section entitled "Initial application of standards, interpretations and amendments in the financial year" in the "Accounting policies" chapter of the notes to the consolidated financial statements.

Other Information

The executive directors are responsible for the other information. The other information comprises the following non-audited parts of the group management report:

• the statement on corporate governance pursuant to § 289f HGB and § 315d HGB included in section “Other Disclosures – Corporate Governance Statement in accordance with §§ 289f, 315d HGB” of the group management report
• the non-financial statement pursuant to § 289b Abs. 1 HGB and § 315b Abs. 1 HGB included in section “Corporate Responsibility and Non-Financial Statement” of the group management report

The other information comprises further the remaining parts of the annual report – excluding cross-references to external information – with the exception of the audited consolidated financial statements, the audited group management report and our auditor’s report.

Our audit opinions on the consolidated financial statements and on the group management report do not cover the other information, and consequently we do not express an audit opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information

• is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or
• otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Executive Directors and the Supervisory Board for the Consolidated Financial Statements and the Group Management Report

The executive directors are responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the executive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, the executive directors are responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the executive directors are responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report.

The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our audit opinions on the consolidated financial statements and on the group management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) and supplementary compliance with the ISAs will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this group management report.

We exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements and of the group management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these systems.
• Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures.
• Conclude on the appropriateness of the executive directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express audit opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions.
• Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with German law, and the view of the Group’s position it provides.
• Perform audit procedures on the prospective information presented by the executive directors in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

OTHER LEGAL AND REGULATORY REQUIREMENTS

Further Information pursuant to Article 10 of the EU Audit Regulation

We were elected as group auditor by the annual general meeting on March 28, 2019. We were engaged by the supervisory board on August 6, 2019. We have been the group auditor of Deutsche Telekom Aktiengesellschaft, Bonn, without interruption since the Company first met the requirements as a Public Interest Entity in accordance with § 319a Abs. 1 Satz 1 HGB in the financial year 1996.

We declare that the audit opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

GERMAN PUBLIC AUDITOR RESPONSIBLE FOR THE ENGAGEMENT

The German Public Auditor responsible for the engagement is Thomas Tandetzki.

 

Frankfurt am Main, February 10, 2020

PricewaterhouseCoopers GmbH
Wirtschaftsprüfungsgesellschaft