Selected notes to the consolidated statement of financial position

Sprint has been included in Deutsche Telekom’s consolidated financial statements as a fully consolidated subsidiary since April 1, 2020. As a result of the change in the composition of the Group during the course of the year, the remeasured assets and liabilities were recognized as of this date, and all income and expenses generated from the date of first-time consolidation are included in Deutsche Telekom’s consolidated income statement. This affects the comparability of the figures for the current period with the prior-year figures.

For further information on the business combination of T‑Mobile US and Sprint, please refer to the section “Changes in the composition of the Group.”

Trade receivables

At EUR 13.0 billion, trade receivables increased by EUR 2.1 billion against the 2019 year-end level. EUR 2.8 billion of this increase is attributable to the inclusion of Sprint. Excluding this effect, receivables in the United States operating segment declined, mainly due to the marketing of lower-priced terminal equipment in connection with new contracts under the Equipment Installment Plan (EIP) and coronavirus-induced higher bad debt allowances. In the Germany operating segment, receivables increased as a result of the contractual termination of a revolving factoring agreement for receivables from consumers and business customers. In the other operating segments, receivables declined slightly overall. Exchange rate effects, primarily from the translation from U.S. dollars into euros, also reduced the carrying amounts.

Contract assets

At EUR 1.9 billion as of the reporting date, the carrying amount of contract assets remained unchanged against December 31, 2019. The Sprint assets recognized in connection with the business combination resulted in an increase of EUR 0.1 billion. Exchange rate effects, mainly from the translation from U.S. dollars into euros, had an offsetting effect. Contract assets relate to receivables that have not yet legally come into existence, which arise from the earlier – as compared to billing – recognition of revenue, in particular from the sale of goods and merchandise. Furthermore, receivables from long-term construction contracts are recognized under contract assets.

Inventories

The carrying amount of inventories increased by EUR 0.8 billion compared to December 31, 2019 to EUR 2.3 billion, mainly on account of the inventories of Sprint transferred in connection with the business combination.

Intangible assets

The carrying amount of intangible assets increased by EUR 52.7 billion to EUR 120.9 billion, primarily due to the following effects: Effects from changes in the composition of the Group of EUR 59.7 billion in connection with the acquisition of Sprint contributed to this increase, which also includes preliminary goodwill arising from the transaction of EUR 8.4 billion. Additions of EUR 4.6 billion also increased the carrying amount. They mainly related to investments in the United States, Europe, and Germany operating segments, primarily for the development of network software. This also includes, in the United States operating segment, FCC spectrum licenses of EUR 1.0 billion – primarily acquired at a spectrum auction that ended in March 2020 – and in the Group Development and Europe operating segments, spectrum licenses totaling EUR 0.5 billion – mainly in the Netherlands and Hungary. Amortization of EUR 4.7 billion, negative exchange rate effects of EUR 6.1 billion, mainly from the translation of U.S. dollars into euros, and disposals of EUR 0.2 billion, primarily from the derecognition of billing software for postpaid customers in the United States, which was still in development, reduced the carrying amount. Due to the migration of Sprint contract customers to the T‑Mobile US billing software, it was decided that this software was not suitable for the joint customer base and would not be put into operation. In addition, the following impairment losses reduced the carrying amount of intangible assets by a total of EUR 0.5 million:

As part of the realignment of the B2B telecommunications business, the assets and liabilities assigned to the relevant business areas were transferred to the Germany operating segment, primarily from the Systems Solutions and Europe operating segments. In the process, the goodwill allocated to the Systems Solutions cash-generating unit was re-allocated in full to the telecommunications business being transferred. The realignment of the B2B telecommunications business in combination with the effects of the coronavirus pandemic triggered ad hoc impairment testing of the assets assigned to the Systems Solutions cash-generating unit, which identified a reduction in the business outlook for IT operations. The result was the recognition of an impairment loss of EUR 470 million on non-current assets of the Systems Solutions cash-generating unit. The recoverable amount – determined as fair value less costs of disposal – was calculated at EUR -976 million, which is EUR 1,428 million lower than the carrying amount of the Systems Solutions cash-generating unit. The fair values of the individual assets were set as the lower limit for the amount of the impairment loss. EUR 299 million of the impairment loss recognized in the Systems Solutions operating segment related to intangible assets, and EUR 127 million to property, plant and equipment. Another EUR 44 million related to intangible assets in the Group Headquarters & Group Services segment that are subject to use by the Systems Solutions operating segment and are allocated to the Systems Solutions cash-generating unit for the purposes of impairment testing. An external expert opinion was obtained to determine the fair values of the individual assets. The value was calculated using Level 3 input parameters. A discount rate of 4.32 percent was used.

For further information on the realignment of the B2B telecommunications business, please refer to the section “Segment reporting.”

An ad hoc impairment test was also conducted at the Romania cash-generating unit, which is assigned to the Europe operating segment. The unit comprises the asset-carrying entities Telekom Romania Communications S.A. (TKR), which operates the Romanian fixed-network business, and Telekom Romania Mobile Communications S.A. (TKRM), which operates the Romanian mobile business. Even though these two entities are essentially independent companies, each with their own commercial focus, the planned sale of the fixed-network business has economic and strategic implications for the mobile business in Romania, which will remain in the Deutsche Telekom Group. For example, in the future, there will be no MVNO agreement between the two entities allowing TKR to offer FMC products to its own fixed-network customers. Furthermore, terminal equipment revenues that TKRM currently generates from sales to TKR as well as synergies arising from current joint procurement and sales activities will no longer be realized; at present, the two entities share shops, for example. Consequently, an ad hoc impairment test was conducted on TKRM’s assets, which resulted in the recognition of an impairment loss of EUR 160 million on TKRM’s non-current assets. The recoverable amount – determined as fair value less costs of disposal – was calculated at EUR 171 million, which is EUR 160 million lower than the carrying amount of TKRM. EUR 128 million of the impairment loss related to intangible assets and EUR 32 million to property, plant and equipment. An expert opinion was obtained to determine the fair values of the individual assets. The value was calculated using Level 3 input parameters. A discount rate of 7.78 percent was used. No goodwill remained at the Romania cash-generating unit.

In the Romanian fixed-network business, the sale of TKR, planned since October 2020, resulted in a reversal of impairment losses recognized in the past on property, plant and equipment of EUR 50 million. The recoverable amount was calculated at EUR 242 million, which is EUR 50 million higher than the carrying amount of TKR. The observable market price (Level 1 input parameter) was used to determine the recoverable amount. The reversal of impairment losses was recognized as other operating income.

Property, plant and equipment

The carrying amount of property, plant and equipment increased by EUR 12.0 billion to EUR 61.6 billion compared with December 31, 2019, primarily due to the following effects: Effects from changes in the composition of the Group in connection with the acquisition of Sprint contributed EUR 14.1 billion to this increase. Additions of EUR 10.3 billion to upgrade and build out the network in our United States operating segment and in connection with the broadband/fiber-optic build-out, the IP transformation, and mobile infrastructure in the Germany and Europe operating segments also increased the carrying amount. Depreciation and amortization of EUR 9.8 billion and negative exchange rate effects of EUR 1.7 billion, especially from the translation of U.S. dollars into euros, lowered the carrying amount. Disposals of EUR 1.1 billion and impairment losses EUR 0.2 billion also reduced the carrying amount. The impairment losses were recognized in connection with the aforementioned ad hoc impairment tests.

Right-of-use assets

The carrying amount of right-of-use assets increased by EUR 13.8 billion compared to December 31, 2019 to EUR 31.8 billion, mainly due to the following effects. The change in the composition of the Group in connection with the business combination of T‑Mobile US and Sprint contributed EUR 6.3 billion to this increase. Additions of EUR 12.8 billion, mainly in the United States operating segment, also increased the carrying amount. On September 14, 2020, T‑Mobile US and American Tower signed an agreement on the lease and use of cell sites. The agreement updates the existing agreements with American Tower. The agreement gives T‑Mobile US greater flexibility in the course of merging the mobile networks of T‑Mobile US and Sprint and building out the 5G network. The agreement primarily provides for a contract extension until April 30, 2035 and modifies the lease payments for approximately 20,729 existing cell sites. Ultimately, the lease modification results in an increase in the carrying amount of the right-of-use assets and the lease liabilities by EUR 9.4 billion in each case. By contrast, depreciation of EUR 3.7 billion, negative exchange rate effects of EUR 0.9 billion, and disposals of EUR 0.3 billion decreased the carrying amount.

Capitalized contract costs

As of September 30, 2020, the carrying amount of capitalized contract costs was up by EUR 0.1 billion against the level of December 31, 2019, to EUR 2.1 billion. These assets mainly relate to the Germany, United States, and Europe operating segments.

Investments accounted for using the equity method

The carrying amount of investments accounted for using the equity method remained unchanged against December 31, 2019 at EUR 0.5 billion.

Other financial assets

The carrying amount of current and non-current other financial assets increased by EUR 2.0 billion compared with December 31, 2019 to EUR 9.3 billion. The acquisition of Sprint resulted in an increase of EUR 0.4 billion as of the date of first-time consolidation. Under derivative financial assets, the carrying amount of derivatives without a hedging relationship increased by EUR 0.7 billion to EUR 1.6 billion, mainly in connection with new additions of embedded derivatives and embedded derivatives assumed in connection with the acquisition of Sprint at T‑Mobile US, including their subsequent measurement and the subsequent measurement of the stock options to buy shares in T‑Mobile US received from SoftBank in June 2020. The carrying amount of derivatives with a hedging relationship increased by EUR 1.3 billion to EUR 2.7 billion, mainly due to the increase in positive fair values from interest rate swaps in fair value hedges, which is primarily the result of a significant decline in the interest rate level. In addition, other financial assets increased by EUR 0.4 billion in connection with grants receivable from funding projects for the broadband build-out in Germany. In connection with cash collateral, in particular in connection with forward-payer swaps concluded for borrowings at T‑Mobile US, which were terminated prematurely in April 2020, the carrying amount of other financial assets decreased by EUR 0.5 billion.

Financial liabilities and lease liabilities

The following table shows the composition and maturity structure of financial liabilities as of September 30, 2020:

The carrying amount of current and non-current financial liabilities increased by EUR 41.5 billion to EUR 107.9 billion compared with the end of 2019. This increase is mainly attributable to the first-time consolidation of Sprint following the consummation of the business combination with T‑Mobile US. Exchange rate effects, in particular from the translation of U.S. dollars into euros, lowered the carrying amount by EUR 4.1 billion.

The first-time consolidation of Sprint as of April 1, 2020 increased the carrying amount of financial liabilities by a total of EUR 39.8 billion. The financing structure was also reorganized in the course of the business combination. Immediately after the transaction, liabilities of the former Sprint totaling USD 9.8 billion (EUR 8.9 billion) were repaid, of which USD 7.4 billion (EUR 6.8 billion) fell due pursuant to a binding change-in-control clause.

In connection with the business combination with Sprint, on April 1, 2020, the “new” T‑Mobile US drew down on a bridge loan facility agreed with a total of 16 banks with a total volume of USD 19 billion (EUR 17.3 billion). In connection with the financing provided with this bridge loan facility, fees of USD 0.4 billion (EUR 0.3 billion) were paid to the banks. Additionally, T‑Mobile US raised a new term loan of USD 4 billion (EUR 3.7 billion) on April 1, 2020. The loan facilities were used, among other things, for the early repayment of intragroup loan liabilities to Deutsche Telekom AG and to refinance debt of the former Sprint. Senior secured notes, issued on April 9, 2020 for a total of USD 19 billion (EUR 17.3 billion), with terms of between 5 and 30 years and bearing interest of between 3.500 and 4.500 percent, were used to repay the bridge loan facility. On June 24, 2020, T‑Mobile US issued senior secured notes with a total volume of USD 4 billion (EUR 3.6 billion) with terms of between 6 and 11 years and bearing interest of between 1.500 and 2.550 percent. These notes were used to repay intragroup loans and refinance high-yield bonds issued by the former Sprint. On July 4, 2020, T‑Mobile US prematurely redeemed the USD 1.0 billion (EUR 0.9 billion) aggregate principal amount of a 6.500 percent senior note originally due in 2024. On August 15, 2020, T‑Mobile US repaid a senior note on schedule with a nominal volume of USD 1.5 billion (EUR 1.3 billion) with a term of 8 years and bearing interest of 7.000 percent. On September 1, 2020, the USD 1.7 billion (EUR 1.4 billion) aggregate principal amount of another 6.375 percent senior note, originally due in 2025, was prematurely redeemed.

The carrying amount was also increased by bonds issued by Deutsche Telekom AG in the first quarter of 2020: a U.S. dollar bond of USD 1.3 billion (EUR 1.1 billion), a euro bond of EUR 0.2 billion, and a bond in Swiss francs of CHF 0.3 billion (EUR 0.3 billion).

Scheduled repayments in the Group of U.S. dollar bonds totaling USD 1.3 billion (EUR 1.2 billion), euro bonds totaling EUR 2.6 billion, and a zero-coupon bond of EUR 0.4 billion, had an offsetting effect in the reporting period. In addition, as part of the liabilities management in the Group, early repayments were made on euro bonds and U.S. dollar bonds of Deutsche Telekom International Finance B.V. which fall due in 2021 and 2022. These repayments took the form of partial buybacks totaling EUR 0.8 billion and USD 1.4 billion (EUR 1.3 billion) respectively.

The carrying amount of liabilities to banks decreased by EUR 1.6 billion compared with December 31, 2019 to EUR 4.9 billion. This decline is mainly due to the net reduction of EUR 1.4 billion in the balance of short-term borrowings. This includes a Deutsche Bundespost treasury note (zero-coupon bond) issued in the past with a carrying amount of EUR 1.4 billion, which fell due on December 31, 2019 and was repaid on that date by a bank using its own funds. The payment by Deutsche Telekom AG to this bank was made on the following bank working day of January 2, 2020.

For further information, please refer to the section “Notes to the consolidated statement of cash flows.”

The liabilities with right of creditors to priority repayment in the event of default of EUR 4.3 billion (December 31, 2019: EUR 0.0 billion) relate primarily to bonds issued by Sprint for which spectrum licenses and cash and cash equivalents were provided as collateral.

The carrying amount of other interest-bearing liabilities increased by EUR 4.5 billion compared with December 31, 2019 to EUR 8.9 billion. The acquisition of Sprint resulted in an increase of EUR 3.6 billion in the carrying amount of non-current other interest-bearing liabilities as of the date of first-time consolidation. The carrying amount of other interest-bearing liabilities increased by a total of EUR 1.2 billion in connection with collateral received for derivative financial instruments.

For further information on collateral, please refer to the section “Disclosures on financial instruments.”

The carrying amount of derivative financial liabilities decreased by EUR 0.9 billion in total to EUR 0.7 billion, mainly due to the decline of EUR 1.0 billion from the premature termination of forward-payer swaps by T‑Mobile US at the start of April 2020. These forward-payer swaps with a nominal value of EUR 8.8 billion when translated into euros were concluded for borrowings at T‑Mobile US and designated as cash flow hedges in effective hedging relationships. By the date of termination, they gave rise to a remeasurement loss recognized directly in equity in the reporting period of EUR 0.9 billion. The secured term loan was raised on April 1, 2020.

For further information on derivative financial liabilities, please refer to the section “Disclosures on financial instruments.”

The carrying amount of current and non-current lease liabilities increased by EUR 14.0 billion to EUR 33.9 billion compared with December 31, 2019, primarily due to the following effects. EUR 6.8 billion of the increase resulted from the inclusion of Sprint in the United States operating segment, to which the majority of the lease liabilities relate. The carrying amount also increased by EUR 9.4 billion as a result of the lease modification to existing leases that T‑Mobile US concluded with American Tower. Exchange rate effects, in particular from the translation of U.S. dollars into euros, lowered the carrying amount by EUR 1.0 billion. Overall, lease liabilities in the amount of EUR 5.1 billion are due within one year.

For more information on the agreement between T‑Mobile US and American Towers, please refer to the section “Right-of-use assets.”

Trade and other payables

The carrying amount of trade and other payables decreased by EUR 1.1 billion to EUR 8.3 billion, due in particular to lower liabilities to terminal equipment vendors and declines in liabilities for purchased services in the United States operating segment. Liabilities also decreased in the other operating segments. Exchange rate effects, especially from the translation from U.S. dollars into euros, also decreased the carrying amount. The inclusion of Sprint increased the carrying amount by EUR 2.9 billion.

Provisions for pensions and other employee benefits

The carrying amount of provisions for pensions and other employee benefits increased from EUR 5.8 billion as of December 31, 2019 to EUR 8.5 billion, mainly due to a decline in the prices of plan assets and interest rate adjustments. All this resulted in an actuarial loss of EUR 1.9 billion to be recognized directly in equity. In addition, the carrying amount increased by EUR 0.8 billion due to the change in the composition of the Group in connection with the business combination of T‑Mobile US and Sprint.

For further information on the Global Pension Policy and a description of the plan, please refer to the 2019 Annual Report, Note 15 “Provisions for pensions and other employee benefits.”

Current and non-current other provisions

The carrying amount of current and non-current other provisions increased by EUR 1.8 billion compared with the end of 2019 to EUR 8.5 billion. EUR 1.9 billion of this related to the business combination of T‑Mobile US and Sprint alone.

Other liabilities

The carrying amount of current and non-current other liabilities increased by EUR 1.1 billion to EUR 5.9 billion. The inclusion of Sprint resulted in an increase of EUR 0.7 billion. In addition, other liabilities increased by EUR 0.3 billion due to existing build-out obligations in connection with grants receivable from funding projects for the broadband build-out in the Germany operating segment.

Contract liabilities

The carrying amount of current and non-current contract liabilities was at the same level as at December 31, 2019 of EUR 2.1 billion. These mainly comprise deferred revenues. The inclusion of Sprint resulted in an increase in the carrying amount of EUR 0.2 billion.

Shareholders’ equity

The carrying amount of shareholders’ equity increased from EUR 46.2 billion as of December 31, 2019 to EUR 72.0 billion. The business combination of T‑Mobile US and Sprint, consummated on April 1, 2020, resulted in changes in the composition of the Group that increased shareholders’ equity by EUR 17.3 billion, and transactions with owners that increased shareholders’ equity by EUR 13.4 billion as of the date of first-time consolidation (including a payment received in relation to a cost allocation from SoftBank in connection with CPUC). Profit of EUR 4.0 billion and capital increases from share-based payments of EUR 0.4 billion also increased the carrying amount. Shareholders’ equity was reduced in connection with dividend payments for the 2019 financial year to Deutsche Telekom AG shareholders in the amount of EUR 2.8 billion and to other shareholders of subsidiaries in the amount of EUR 0.2 billion. Other comprehensive income also reduced shareholders’ equity by EUR 6.2 billion. The main factors in this negative other comprehensive income were the currency translation effects recognized directly in equity (EUR 3.9 billion), the remeasurement of defined benefit plans (EUR 1.9 billion), and losses from hedging instruments, mainly from forward-payer swaps concluded for borrowings at T‑Mobile US, which were terminated prematurely in April 2020 and for which the cumulative changes in value must be reversed over the terms of the loans (EUR 1.0 billion). By contrast, income taxes relating to components of other comprehensive income of EUR 0.4 billion had a positive impact on other comprehensive income.

Primarily as a result of the business combination of T‑Mobile US and Sprint, the share of consolidated shareholders’ equity attributable to non-controlling interests increased from EUR 14.5 billion to EUR 37.1 billion. The following table shows the development of transactions with owners and the change in the composition of the Group in the statement of changes in equity: