Initial application of standards, interpretations, and amendments in the financial year

In the 2019 financial year, Deutsche Telekom applied the following IASB pronouncements and/or amendments to such pronouncements for the first time:

In January 2016, the IASB issued IFRS 16 “Leases.” This standard is mandatory for reporting periods 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, net cash from/used for financing activities, 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 on cell towers, or rooftop surface areas), network infrastructure, and buildings used for administrative or technical purposes.

Deutsche Telekom has not applied the new lease standard retrospectively to each prior reporting period presented, but elected to apply the practical expedients for lessees, also known as the modified retrospective method. Upon transitioning to IFRS 16, the lease liability is measured and recognized at the present value of the remaining lease payments from existing operating leases, discounted using the relevant incremental borrowing rate. The right-of-use assets were measured and recognized as of January 1, 2019 at an amount equal to the lease liability, adjusted by the amount of any 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 were measured and recognized at a significantly lower amount than the corresponding lease liability. This liability primarily relates to leases for T‑Mobile US’ cell sites. As of the transition date of January 1, 2019, in a first step, the lease terms underlying the liabilities were adjusted to the lease terms determined in accordance with IFRS 16. This adjustment increased shareholders’ equity. The remaining accrued lease liability was deducted from the right-of-use asset as described above. For leases that were previously classified as finance leases, their carrying amounts as of December 31, 2018 were carried over and recognized as right-of-use assets and lease liabilities as of January 1, 2019.

Significant policy elections and practical expedients were exercised as follows:

• Right-of-use assets and lease liabilities are presented 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.
• Non-lease components are generally not separated from lease components; instead, each lease component and any associated non-lease components is accounted for as a single lease component. This practical expedient does not include contracts relating to data centers, which due to their special requirements in terms of equipment and premises form their own separate class of underlying asset. For this class of assets, the non-lease payments are recognized as an expense.
• IAS 38 is applied for leases of intangible assets rather than IFRS 16.

In addition, on the date of first-time adoption of IFRS 16, use was made of the main policy elections and practical expedients as follows:

• Provisions for onerous contracts recognized in connection with leases were adjusted against the right-of-use asset as of January 1, 2019.
• In determining the lease term, hindsight may have been used by individual business units where economic considerations and penalties indicate that it is reasonably certain that options to extend or terminate the lease will be exercised.
• Existing contracts will not be grandfathered. On January 1, 2019, IFRS 16 was therefore applied to all existing leases falling within its scope. This applies to contracts in which Deutsche Telekom is a lessee and to contracts in which the Group is a lessor.

Overall, the new definition of a lease does not have a material impact for Deutsche Telekom as a lessor. However, the number of identified leases changes. 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 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 – where modem and router functions are installed in one device – is decreasing. In relation to services provided in data centers, the leasing of space, for example, separate rooms for setting up the customer’s own hardware, are 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) is also classified as a lease.

The adjustments made to the consolidated statement of financial position as of January 1, 2019 and attributable to the first-time application of IFRS 16 are as follows ^a:

After deferred tax liabilities totaling EUR 0.1 billion (net) were taken into account, the transition to the new standard as of January 1, 2019 resulted in a cumulative effect that increased retained earnings by EUR 0.3 billion and included the effect of shares attributable to non-controlling interests. This largely results from the derecognition of accrued lease payments (liabilities from straight-line leases) described above.

Reclassifications relate in particular to reclassifications of carrying amounts from previous finance leases to right-of-use assets and lease liabilities and the adjustments for prepaid or accrued lease payments from operating leases under the previous accounting method, provisions for onerous contracts, or liabilities from straight-line leases against right-of-use assets, as described above.

The obligations arising from operating leases as of December 31, 2018 (2018 Annual Report, Note 37 “Leases”) gave rise to the following reconciliation to the opening balance of lease liabilities as of January 1, 2019:

If the interest rate implicit in the lease cannot be readily determined, the interest rate used for the measurement of right-of-use assets and lease liabilities is the incremental borrowing rate. The incremental borrowing rate is determined by deriving benchmark interest rates for a period of up to 30 years from maturity-related risk-free interest rates which are increased by a credit-risk premium and adjusted for a liquidity and country-risk premium.

For measuring the lease liabilities recognized in the statement of financial position as of January 1, 2019, weighted average incremental borrowing rates of 1.7 percent to 5.0 percent were used for discounting in the euro currency area and a rate of 5.2 percent was applied in the U.S. dollar currency area.

The increase in lease liabilities leads to a corresponding increase in net debt.

For further information on changes in the right-of-use assets and lease liabilities reported as of December 31, 2019, please refer to Note 8 “Right-of-use assets – lessee relationships” and Note 13 “Financial liabilities and lease liabilities.”

For the presentation in the income statement in the 2019 financial year, please refer to the section “Notes to the consolidated income statement.”