Other disclosures

NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS

Net cash from operating activities

Net cash from operating activities increased by EUR 0.1 billion year-on-year to EUR 8.7 billion. Exchange rate effects weighed on the continuing positive business trend in the United States operating segment. Factoring agreements – especially in the Systems Solutions and Germany operating segments – resulted in positive effects of EUR 0.3 billion on net cash from operating activities in the reporting period. The effect from factoring agreements in the prior-year period totaled EUR 0.5 billion. In addition to a dividend payment of EUR 0.1 billion from BT – which was also included in the prior-year period – the profit distribution of EUR 0.1 billion from Toll Collect GmbH had a positive effect on net cash from operating activities. A EUR 0.6 billion decrease in net interest payments enhanced net cash from operating activities.

Net cash used in investing activities

millions of €
  H1 2018 H1 2017
Cash capex    
Germany operating segment (2,108) (2,057)
United States operating segment (2,495) (9,905)
Europe operating segment (836) (878)
Systems Solutions operating segment (265) (177)
Group Development operating segment (141) (138)
Group Headquarters & Group Services (495) (481)
Reconciliation 106 116
  (6,234) (13,520)
Net cash flows for collateral deposited and hedging transactions (81) 1,799
Cash inflows from the sale of the shares in Scout24 AG 319
Cash outflows for the acquisition of shares in Layer3 TV a (258)
Proceeds from the disposal of property, plant and equipment, and intangible assets 304 209
Cash flows from the loss of control of subsidiaries and associates b (61) 500
Reverse allocation under contractual trust agreement (CTA) on pension commitments 225
Other (128) (10)
  (6.233) (10.703)
a Includes, in addition to the purchase price of EUR 260 million, inflows of cash and cash equivalents in the amount of EUR 2 million.
b Relates to outflows of cash and cash equivalents in connection with the transfer of the stake in BT as plan assets to Deutsche Telekom Trust e.V. in March 2018.

Cash capex decreased by EUR 7.3 billion to EUR 6.2 billion. The prior-year figure included a total of EUR 7.3 billion for the acquisition of mobile spectrum licenses, predominantly for the United States operating segment. In the reporting period, on the other hand, mobile spectrum licenses were acquired for total cash of EUR 0.1 billion, primarily in the United States operating segment. Whereas cash capex in the Germany operating segment was up EUR 0.1 billion year-on-year due to the broadband/fiber-optic network build-out, cash capex in the United States operating segment – not including investments in mobile spectrum licenses – was EUR 0.3 billion lower, primarily due to exchange rate effects. Adjusted for exchange rate effects, cash capex was higher than in the prior-year period.

Net cash used in financing activities

millions of €
  H1 2018 H1 2017
Repayment of bonds (3,813) (10,952)
Dividends (including to non-controlling interests) (3,148) (1,503)
Repayment of financial liabilities from financed capex and opex (260)
Repayment of EIB loans (80) (79)
Net cash flows for collateral deposited and hedging transactions 147 30
Repayment of lease liabilities (402) (361)
Repayment of financial liabilities for media broadcasting rights (262) (143)
Cash flows from continuing involvement factoring, net 35 (14)
Loans taken out with the EIB 150 675
Promissory notes, net 24
Secured loans (1,863)
Issuance of bonds 6,708 9,338
Commercial paper, net (412) 2,358
Overnight borrowings from banks (61)
Cash inflows from transactions with non-controlling entities    
T-Mobile US stock options 2 18
  2 18
Cash outflows from transactions with non-controlling entities    
T-Mobile US share buy-backs (942) (92)
Acquisition of T-Mobile US shares (164)
Acquisition of OTE shares (284)
Other (26) (1)
  (1,416) (93)
Other (266) (121)
  (2,794) (2,970)

Non-cash transactions in the consolidated statement of cash flows

In the first half of 2018, Deutsche Telekom chose financing options totaling EUR 0.2 billion under which the payments for trade payables from operating and investing activities primarily become due at a later point in time by involving banks in the process (H1 2017: EUR 0.3 billion). These payables will subsequently be recognized under financial liabilities in the statement of financial position. As soon as the payments have been made, they are disclosed under net cash used in/from financing activities.

In the first half of 2018, Deutsche Telekom leased network equipment (classified as a finance lease) for a total of EUR 0.4 billion (H1 2017: EUR 0.6 billion). The finance lease is subsequently also shown under financial liabilities in the statement of financial position. Future repayments of the liabilities will be recognized in net cash used in/from financing activities.

Consideration for the acquisition of broadcasting rights will be paid by Deutsche Telekom in accordance with the terms of the contract on the date of its conclusion or spread over the term of the contract. Financial liabilities of EUR 0.1 billion were recognized in the first half of 2018 for future consideration for acquired broadcasting rights (H1 2017: EUR 0.1 billion). As soon as the payments have been made, they are disclosed under net cash used in/from financing activities.

In the United States operating segment, EUR 0.5 billion was recognized for mobile devices under property, plant and equipment in the reporting period (H1 2017: EUR 0.5 billion). These relate to the JUMP! On Demand business model at T-Mobile US, under which customers do not purchase the device but lease it. The payments are presented under net cash from operating activities.

Following the transfer of the financial stake in the BT Group to Deutsche Telekom Trust e.V. in the first quarter of 2018, a non-cash transfer of EUR 3.0 billion to plan assets was made in order to increase external capital funding; this reduced the provisions for pensions recognized in the statement of financial position.

SEGMENT REPORTING

The following table provides an overview of Deutsche Telekom’s operating segments and the Group Headquarters & Group Services segment for the first half of 2018 and the first half of 2017.

Vivento Customer Services GmbH, a provider of call center services, has been assigned to the Germany operating segment since January 1, 2018; previously it was part of the Group Headquarters & Group Services segment. Comparative figures have been adjusted retrospectively.

In accordance with the Company’s own principles of segment management, when loans with embedded derivatives are granted internally to Group entities, the derivative component is recognized separately in the creditor company’s financial statements and measured at fair value through profit or loss.

For details on the development of operations in the operating segments and the Group Headquarters & Group Services segment, please refer to the section “Development of business in the operating segments” in the interim Group management report.

Segment information in the first quarter
millions of €                    
  Comparative period Reporting date
    Net
revenue
Intersegment revenue Total
revenue
Profit (loss)
from
operations
(EBIT)
Depreciation and
amortization
Impairment
losses
Segment
assets
Segment
liabilities
Investments
accounted
for using
the equity
method
Germany H1 2018 9,976 672 10,648 1,889 (1,968) 35,337 26,594 12
  H1 2017 10,105 663 10,768 2,099 (1,882) (6) 33,739 26,641 12
United States H1 2018 17,276 1 17,277 2,338 (2,544) 65,777 41,494 155
  H1 2017 18,218 18,218 2,331 (2,690) (5) 64,931 42,003 189
Europe H1 2018 5,538 169 5,707 702 (1,109) (1) 24,953 9,475 59
  H1 2017 5,467 174 5,641 681 (1,109) (1) 25,746 10,206 62
Systems Solutions H1 2018 2,651 688 3,339 (104) (194) 5,730 5,146 22
  H1 2017 2,717 675 3,392 (37) (195) 6,408 5,061 31
Group Development H1 2018 760 303 1,063 297 (158) 6,572 5,829 310
  H1 2017 858 299 1,157 1,074 (143) 9,997 5,549 346
Group Headquarters & Group Services H1 2018 91 1,327 1,418 (605) (427) (4) 48,824 57,339 11
  H1 2017 171 1,350 1,521 (544) (319) (22) 46,957 55,863 11
TOTAL H1 2018 36,291 3,161 39,452 4,517 (6,400) (5) 187,193 145,877 569
  H1 2017 37,537 3,161 40,697 5,604 (6,338) (34) 187,778 145,323 651
Reconciliation H1 2018 (3,161) (3,161) 6 103 1 (47,444) (47,531) (1)
  H1 2017 (3,161) (3,161) (3) 22 3 (46,444) (46,459)
GROUP H1 2018 36,291 36,291 4,523 (6,297) (4) 139,749 98,346 568
  H1 2017 37,537 37,537 5,601 (6,316) (31) 141,334 98,864 651

CONTINGENT LIABILITIES

This section provides additional information and explains recent changes in the contingent liabilities as described in the consolidated financial statements for the 2017 financial year.

Toll Collect arbitration proceedings. On May 16, 2018, Daimler Financial Services AG, Deutsche Telekom AG, and the Federal Republic of Germany reached an agreement to end the Toll Collect arbitration proceedings. The settlement was notarized in early July 2018 and confirmed by the arbitral tribunal, bringing the arbitration proceedings to an end. The agreed settlement amount of around EUR 3.2 billion includes services previously provided to the Federal Republic of Germany. Daimler Financial Services AG and Deutsche Telekom AG have both agreed to make final payments of EUR 550 million each. For more information, please refer to the section “Other transactions that had no effect on the composition of the Group".

Claims relating to charges for the shared use of cable ducts. In connection with legal proceedings brought by Unitymedia Hessen GmbH & Co. KG, Unitymedia NRW GmbH, and Kabel BW GmbH, an appeal filed by the plaintiffs was rejected by the Düsseldorf Higher Regional Court in its ruling of March 14, 2018. An appeal was not permitted. The plaintiffs filed a complaint against the non-allowance of appeal with the Federal Court of Justice.

Consent Fee Sprint. In connection with the agreed business combination of T-Mobile US and Sprint, T-Mobile US may be required to reimburse Sprint for 67 percent of the upfront consent and related bank fees it paid to lending banks, or USD 161 million, if the business combination agreement is terminated.

FUTURE OBLIGATIONS FROM OPERATING LEASES AND OTHER FINANCIAL OBLIGATIONS

The following table provides an overview of Deutsche Telekom’s obligations from operating leases and other financial obligations as of June 30, 2018:

millions of €
  June 30, 2018
Future obligations from operating leases 16,165
Purchase commitments regarding property, plant and equipment 4,173
Purchase commitments regarding intangible assets 437
Firm purchase commitments for inventories 4,310
Other purchase commitments and similar obligations 14,004
Payment obligations to the Civil Service Pension Fund 2,648
Purchase commitments for interests in other companies 24,832
Miscellaneous other obligations
  66,569

Obligations from the acquisition of interests in other companies include the following items: The agreed business combination of T-Mobile US and Sprint results in obligations amounting to USD 26.5 billion (around EUR 22.7 billion), while the agreed acquisition of UPC Austria GmbH results in obligations of EUR 1.9 billion. Furthermore, the agreed acquisition of Tele2 Netherlands Holding N.V. results in a commitment of EUR 190 million for the cash component to be paid. For additional information on the agreed corporate transactions, please refer to the section “Changes in the composition of the Group, transactions with owners and other transactions” of this Interim Report, and to the section “Summary of accounting policies – Changes in the composition of the Group and other transactions” of the 2017 Annual Report.

DISCLOSURES ON FINANCIAL INSTRUMENTS

Carrying amounts, amounts recognized, and fair values by class and measurement category      
millions of €                
      Amounts recognized in the statement of financial
position in accordance with IFRS 9
     
                 
  Category
in accor-
dance
with
IFRS 9
Carrying
amount
June 30,
2018
Amortized
cost
Fair value
through
other com-
prehensive
income
without
recycling
to profit or
loss
Fair value
through
other com-
prehensive
income
with
recycling
to profit or
loss
Fair value
through
profit or
loss
Amounts
recognized
in the
statement
of financial
position in
accor-
dance with
IAS 17
Fair value
June 30,
2018 a
ASSETS                
Cash and cash equivalents AC 2,943 2,943        
Trade receivables                
At amortized cost AC 3,943 3,943        
At fair value through other comprehensive income FVOCI 4,968     4,968     4,968
At fair value through profit or loss FVTPL 11       11   11
Other financial assets                
Originated loans and other receivables                
At amortized cost AC 2,681 2,681         2,712
Of which: collateral paid AC 509 509        
At fair value through other comprehensive income FVOCI -          
At fair value through profit or loss FVTPL 104       104   104
Equity instruments                
At fair value through other comprehensive income FVOCI 284   284       284
Derivative financial assets                
Derivatives without a hedging relationship FVTPL 997       997   997
Of which: termination rights embedded in bonds issued FVTPL 189       189   189
Of which: energy forward agreements embedded in contracts FVTPL              
Derivatives with a hedging relationship n. a. 175     14 161   175
Lease assets n. a. 148         148
Equity instruments within non-current assets and disposal groups held for sale FVOCI 103   103       103
LIABILITIES                
Trade payables AC 8,924 8,924        
Bonds and other securitized liabilities AC 48,286 48,286         51,774
Liabilities to banks AC 5,082 5,082         5,139
Liabilities to non-banks from promissory notes AC 514 514         604
Other interest-bearing liabilities AC 2,234 2,234         2,285
Of which: collateral received AC 546 546        
Other non-interest-bearing liabilities AC 1,551 1,551        
Finance lease liabilities n. a. 2,646         2,646 2,904
Derivative financial liabilities                
Derivatives without a hedging relationship FVTPL 314       314   314
Of which: options granted to third parties for the purchase of shares in subsidiaries and associates FVTPL 10       10   10
Of which: energy forward agreements embedded in contracts FVTPL 65       65   65
Derivatives with a hedging relationship n. a. 636     101 535   636
Of which: aggregated by category in accordance with IFRS 9                
ASSETS                
Financial assets at amortized cost AC 9,567 9,567         2,712
Financial assets at fair value through other comprehensive income with recycling to profit or loss FVOCI 4,968     4,968     4,968
Financial assets at fair value through other comprehensive income without recycling to profit or loss FVOCI 387   387       387
Financial assets at fair value through profit or loss FVTPL 1,112       1,112   1,112
LIABILITIES                
Financial liabilities at amortized cost AC 66,591 66,591         59,802
Financial liabilities at fair value through profit or loss FVTPL 314       314   314
a The exemption provisions under IFRS 7.29a were applied for information on specific fair values.      

Trade receivables include receivables amounting to EUR 1.5 billion (December 31, 2017: EUR 1.6 billion) due in more than one year. The fair value generally equals the carrying amount.

Carrying amounts, amounts recognized, and fair values by class and measurement category      
millions of €                
      Amounts recognized in the statement of financial position in accordance with IAS 39      
                 
  Category in
accordance
with IAS 39
Carrying
amount
Dec. 31,
2017
Amortized
cost
Cost Fair value
recognized
directly in
equity
Fair value
through
profit or
loss
Amounts
recognized
in the
statement
of financial
position in
accordance
with IAS 17
Fair value
Dec. 31,
2017 a
ASSETS                
Cash and cash equivalents LaR 3,312 3,312        
Trade receivables LaR 9,553 9,553        
Originated loans and receivables LaR/n. a. 3,507 3,354       153 3,539
Of which: collateral paid LaR 504 504        
Other non-derivative financial assets                
Held-to-maturity investments HtM 5 5        
Available-for-sale financial assets AfS 4,216   187 4,029     4,029
Derivative financial assets                
Derivatives without a hedging relationship FAHfT 1,103       1,103   1,103
Of which: termination rights embedded in bonds issued FAHfT 351       351   351
Of which: energy forward agreements embedded in contracts FAHfT          
Derivatives with a hedging relationship n. a. 214     42 172   214
Non-current assets and disposal groups held for sale AfS              
LIABILITIES                
Trade payables FLAC 10,934 10,934          
Bonds and other securitized liabilities FLAC 45,453 45,453         50,472
Liabilities to banks FLAC 4,974 4,974         5,062
Liabilities to non-banks from promissory notes FLAC 480 480         582
Liabilities with the right of creditors to priority repayment in the event of default FLAC        
Other interest-bearing liabilities FLAC 1,598 1,598         1,629
Of which: collateral received FLAC 569 569        
Other non-interest-bearing liabilities FLAC 1,443 1,443        
Finance lease liabilities n. a. 2,635 2,635       2,635 2,893
Derivative financial liabilities                
Derivatives without a hedging relationship FLHfT 337       337   337
Of which: conversion rights embedded in Mandatory Convertible Preferred Stock FLHfT        
Of which: options granted to third parties for the purchase of shares in subsidiaries FLHfT 10       10   10
Of which: energy forward agreements embedded in contracts FLHfT 46       46   46
Derivatives with a hedging relationship n. a. 609     168 441   609
Derivative financial liabilities directly associated with non-current assets and disposal groups held for sale FLHfT        
Of which: aggregated by category in accordance with IAS 39                
Loans and receivables LaR 16,219 16,219         3,386
Held-to-maturity investments HtM 5 5        
Available-for-sale financial assets AfS 4,216   187 4,029     4,029
Financial assets held for trading FAHfT 1,103       1,103   1,103
Financial liabilities measured at amortized cost FLAC 64,882 64,882         57,745
Financial liabilities held for trading FLHfT 337       337   337
a The exemption provisions under IFRS 7.29a were applied for information on specific fair values.

The portfolio of financial assets by measurement category in accordance with IAS 39 is reconciled to the IFRS 9 measurement categories as follows:

Reconciliation of financial assets from IAS 39 to IFRS 9  
millions of €            
  Carrying
amount
Dec. 31,
2017
(IAS 39)
Reclassifi-
cation a
Reclassifi-
cation
to other
compre-
hensive
income
Remeasure-
ments b
Carrying
amount
Jan. 1, 2018
(IFRS 9) c
Effect to be
recognized
in retained
earnings
Jan. 1,
2018 c
AT FAIR VALUE THROUGH PROFIT OR LOSS            
Ending balance in accordance with IAS 39 1,103       1,103  
Additions to IFRS 9 – At fair value through profit or loss from            
IAS 39 – Loans and receivables or held-to-maturity investments   8     8  
IAS 39 – Available-for-sale financial assets   12     12  
  1,103 20     1,123  
AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME            
Ending balance in accordance with IAS 39 4,216       4,216  
Additions to IFRS 9 – At fair value through other comprehensive income with recycling to profit or loss from            
IAS 39 – Loans and receivables or held-to-maturity investments   5,035 (101) (2) 4,931 (97)
Disposals from IAS 39 – Available-for-sale financial assets to            
IFRS 9 – At amortized cost   (185)     (185)  
IFRS 9 – At fair value through other comprehensive income with recycling to profit or loss       (1) (1) (1)
IFRS 9 – At fair value through profit or loss   (12)     (12)  
  4,216 4,838 (101) (3) 8,950 (99)
AT AMORTIZED COST            
Ending balance in accordance with IAS 39 16,226       16,226  
Additions to IFRS 9 – At amortized cost from            
IAS 39 – Available-for-sale financial assets   185     185  
Disposals from IAS 39 – Loans and receivables or held-to-maturity investments to            
IFRS 9 – At amortized cost   (312)   (38) (350) (38)
IFRS 9 – At fair value through other comprehensive income with recycling to profit or loss   (5,035)     (5,035)  
IFRS 9 – At fair value through profit or loss   (8)     (8)  
  16,226 (5,170)   (38) 11,017 (38)
TOTAL CHANGE 21,544 (312) (101) (41) 21,090 (137)
a Carrying amount under IAS 39 that must be reclassified from an IAS 39 category to a new IFRS 9 category.
 b Resulting difference from the revaluation of an IAS 39 instrument under the new IFRS 9 category.
 c The allowances posted under trade receivables recognized at fair value through other comprehensive income were offset with the receivables. On initial presentation of the transition to IFRS 9 in the Interim Group Report for the period January 1 to March 31, 2018, these allowances were presented gross in other comprehensive income.
 d Effects include shares attributable to non-controlling interests.

The main reclassifications from the old IAS 39 measurement categories to the new IFRS 9 measurement categories relate to portfolios of trade receivables that are to be sold under a factoring agreement. Previously assigned to the category “Loans and receivables” and measured at amortized cost, these receivables are now measured – depending on the underlying business model – either at fair value through other comprehensive income with recycling to profit or loss, or at fair value through profit or loss. Trade receivables with a carrying amount of EUR 135 million were reclassified as contract assets in accordance with IFRS 15.

In addition, Deutsche Telekom reclassified all equity instruments previously recognized as available-for-sale financial assets to the IFRS 9 category “At fair value through other comprehensive income without recycling to profit or loss.”

Under IFRS 9, debt instruments previously assigned to the categories “Available-for-sale financial assets,” “Held-to-maturity investments,” and “Loans and receivables” are reclassified – depending on the underlying business model and the cash flow characteristics of each instrument – to the new categories “At amortized cost,” “At fair value through other comprehensive income with recycling to profit or loss,” or “At fair value through profit or loss.”

The allocation of financial liabilities to IFRS 9 measurement categories does not result in any changes. The names of the measurement categories were updated to reflect the wording of the new standard.

Subsidiaries that are not included in the consolidated financial statements due to their subordinate significance, and which were previously recognized under IAS 39 at amortized cost as available-for-sale financial assets, are recognized under other assets as of the 2018 financial year and were reclassified as of January 1, 2018 with a carrying amount of EUR 177 million.

The following table shows the classes of financial assets and liabilities under IFRS 9 along with their previous and current measurement categories and carrying amounts:

Classes of financial instruments in accordance with IFRS 9
           
           
  Measurement categories Carrying amounts Dec. 31, 2017/Jan. 1, 2018
  IAS 39 IFRS 9 IAS 39 IFRS 9 Differenz
ASSETS          
Cash and cash equivalents Loans and receivables (LaR) Amortized cost (AC) 3,312 3,312 0
Trade receivables          
At amortized cost Loans and receivables (LaR) Amortized cost (AC) 9,400 4,344 (5,056)
At fair value through other comprehensive income Fair value through other comprehensive income (FVOCI) 4,919 4,919
At fair value through profit or loss Fair value through profit or loss (FVTPL) 6 6
Other financial assets          
Originated loans and other receivables          
At amortized cost Loans and receivables (LaR) or
held-to-maturity investments (HtM) or available-for-sale financial assets (AfS)
Amortized cost (AC) 3,512 3,361 (151)
Of which: collateral paid Loans and receivables (LaR) Amortized cost (AC) 504 504
At fair value through profit or loss Available-for-sale financial assets (AfS) Fair value through profit or loss (FVTPL) 14 14
Equity instruments          
At fair value through other comprehensive income Available-for-sale financial assets (AfS) Fair value through other comprehensive income (FVOCI) 4,202 4,029 (173)
At fair value through profit or loss Available-for-sale financial assets (AfS) Fair value through profit or loss (FVTPL)
Derivative financial assets          
Derivatives without a hedging relationship Financial assets held for trading (FAHfT) Fair value through profit or loss (FVTPL) 1,103 1,103
Of which: termination rights embedded in bonds issued Financial assets held for trading (FAHfT) Fair value through profit or loss (FVTPL) 351 351
Derivatives with a hedging relationship n. a. n. a. 214 214
Lease assets a n. a. n. a. 153 153
LIABILITIES          
Trade payables Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 10,934 10,934
Bonds and other securitized liabilities Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 45,453 45,453
Liabilities to banks Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 4,974 4,974
Liabilities to non-banks from promissory notes Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 480 480
Other interest-bearing liabilities Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 1,598 1,598
Of which: collateral received Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 569 569
Other non-interest-bearing liabilities Financial liabilities measured at amortized cost (FLAC) Amortized cost (AC) 1,443 1,443
Finance lease liabilities n. a. n. a. 2,635 2,635
Derivative financial liabilities a Financial liabilities held for trading (FLHfT) Fair value through profit or loss (FVTPL) 337 337
Derivatives without a hedging relationship          
Of which: options granted to third parties for the purchase of shares in subsidiaries and associates Financial liabilities held for trading (FLHfT) Fair value through profit or loss (FVTPL) 10 10
Of which: energy forward agreements embedded in contracts Financial liabilities held for trading (FLHfT) Fair value through profit or loss (FVTPL) 46 46
Derivatives with a hedging relationship n. a. n. a. 609 609
a Carrying amount in accordance with IAS 17.

The allowances on financial assets in accordance with IAS 39 are being reconciled to the IFRS 9 requirements as follows:

Allowances on financial assets
millions of €          
  Trade receivables Contract
assets
Originated loans and
other receivables
Total
Measurement categories          
in accordance with IAS 39 LaR LaR n. a. LaR  
in accordance with IFRS 9 AC FVOCI n. a. AC  
Allowances          
Amount in accordance with IAS 39 (Dec. 31, 2017) 1,303 334 0 19 1,657
Additions resulting from change in measurement category 24 99 27   150
Disposals resulting from change in measurement category       (13) (13)
Amount in accordance with IFRS 9 (Jan. 1, 2018) 1,327 433 27 6 1,794
DIFFERENCE IN RETAINED EARNINGS (DEBIT (CREDIT)) 24 99 27 (13) 137

Financial instruments measured at fair value

When determining the fair value, it is important to maximize the use of current inputs observable in liquid markets for the financial instrument in question and minimize the use of other inputs (e.g., historical prices, prices for similar instruments, prices on illiquid markets). A three-level measurement hierarchy is defined for these purposes. If prices quoted in liquid markets are available at the reporting date for the respective financial instrument, these will be used unadjusted for the measurement (Level 1 measurement). Other input parameters are then irrelevant for the measurement. One such example is shares and bonds that are actively traded on a stock exchange. Even if quoted prices on liquid markets are not available at the reporting date for the respective financial instrument, the instrument can be measured using other inputs that are observable on the market at the reporting date (Level 2 measurement). The conditions for this are that no major adjustments have been made to the observable inputs and no unobservable inputs are used. Examples of Level 2 measurements are collateralized interest rate swaps, currency forwards, and cross-currency swaps that can be measured using current interest rates or exchange rates. If the conditions for a Level 1 or Level 2 measurement are not met, a Level 3 measurement is applied. In such cases, major adjustments must be made to observable inputs or unobservable inputs must be used.

Financial instruments measured at fair value
millions of €        
  June 30, 2018
         
  Level 1 Level 2 Level 3 Total
ASSETS        
Trade receivables        
At fair value through other comprehensive income     4,968 4,968
At fair value through profit or loss     11 11
Other financial assets – originated loans and other receivables        
At fair value through other comprehensive income      
At fair value through profit or loss 94   10 104
Equity instruments        
At fair value through other comprehensive income 10   377 387
Derivative financial assets        
Derivatives without a hedging relationship   808 189 997
Derivatives with a hedging relationship   175   175
LIABILITIES        
Derivative financial liabilities        
Derivatives without a hedging relationship   239 75 314
Derivatives with a hedging relationship   636   636
Financial instruments measured at fair value
millions of €        
  Dec. 31, 2017
         
  Level 1 Level 2 Level 3 Total
ASSETS        
Available-for-sale financial assets (AfS) 3,752   277 4,029
Financial assets held for trading (FAHfT)   752 351 1,103
Derivative financial assets with a hedging relationship   214   214
LIABILITIES        
Financial liabilities held for trading (FLHfT)   281 56 337
Derivative financial liabilities with a hedging relationship   609   609

Of the equity instruments measured at fair value through other comprehensive income and recognized under other financial assets, the instruments presented in the different levels constitute separate classes of financial instruments. In each case, the fair values of the total volume of equity instruments recognized as Level 1 are the price quotations at the reporting date. The total volume of instruments recognized as Level 1 amounted to EUR 10 million (December 31, 2017: EUR 3,752 million). The figure for the prior-year period included a strategic financial stake of 12 percent in BT with a carrying amount equivalent to around EUR 3.7 billion. In the reporting period, this stake was transferred to plan assets.

The listed bonds and other securitized liabilities are assigned to Level 1 or Level 2 depending on the market liquidity of the relevant instrument. As a rule, issues denominated in euros or U.S. dollars with relatively large nominal amounts are to be classified as Level 1, the rest as Level 2. The fair values of the instruments assigned to Level 1 equal the nominal amounts multiplied by the price quotations at the reporting date. The fair values of the instruments assigned to Level 2 are calculated as the present values of the payments associated with the debts, based on the applicable yield curve and Deutsche Telekom’s credit spread curve for specific currencies.

The fair values of liabilities to banks, liabilities to non-banks from promissory notes, other interest-bearing liabilities, and finance lease liabilities are calculated as the present values of the payments associated with the debts, based on the applicable yield curve and Deutsche Telekom’s credit spread curve for specific currencies.

Since there are no market prices available for the derivative financial instruments in the portfolio assigned to Level 2 due to the fact that they are not listed on the market, the fair values are calculated using standard financial valuation models, based entirely on observable inputs. The fair value of derivatives is the value that Deutsche Telekom would receive or have to pay if the financial instrument were transferred at the reporting date. Interest rates of contractual partners relevant as of the reporting date are used in this respect. The middle rates applicable as of the reporting date are used as exchange rates. In the case of interest-bearing derivatives, a distinction is made between the clean price and the dirty price. In contrast to the clean price, the dirty price also includes the interest accrued. The fair values carried correspond to the full fair value or the dirty price.

Development of the carrying amounts of the financial assets and financial liabilities assigned to Level 3
millions of €      
  Equity instruments at fair value through other comprehensive income Derivative financial assets at fair value through profit or loss: termination rights embedded in bonds issued Derivative financial liabilities at fair value through profit or loss: energy forward agreements embedded in contracts
Carrying amount as of January 1, 2018 277 351 (46)
Additions (including first-time categorization as Level 3) 111 11 0
Value decreases recognized in profit/loss (including losses on disposal) (119) (19)
Value increases recognized in profit/loss (including gains on disposal) 60 2
Value decreases recognized directly in equity (25)
Value increases recognized directly in equity 31
Disposals (17) (118)
Currency translation effects recognized directly in equity 4 (2)
CARRYING AMOUNT AS OF June 30, 2018 377 189 (65)

The equity instruments assigned to Level 3 that are measured at fair value through other comprehensive income and carried under other financial assets are equity investments with a carrying amount of EUR 368 million measured using the best information available at the reporting date. As a rule, Deutsche Telekom considers executed transactions involving shares in those companies to have the greatest relevance. Transactions involving shares in comparable companies are also considered. The closeness of the transaction in question to the reporting date and the question of whether the transaction was at arm’s length are relevant for the decision on which information will ultimately be used for the measurement. Furthermore, the degree of similarity between the object being measured and comparable companies must be taken into consideration. Based on Deutsche Telekom’s own assessment, the fair values of the equity investments at the reporting date could be determined with sufficient reliability. Please refer to the table on the previous page for the development of the carrying amounts in the reporting period. No plans existed as of the reporting date to sell these investments. In the case of investments with a carrying amount of EUR 283 million, transactions involving shares in these companies took place at arm’s length sufficiently close to the reporting date, which is why the share prices agreed in the transactions were to be used without adjustment for the measurement as of June 30, 2018. In the case of investments with a carrying amount of EUR 85 million, although the last at arm’s length transactions relating to shares in these companies took place some time ago, based on the analysis of operational development (in particular revenue, EBIT, and liquidity), the previous carrying amount nevertheless corresponds to the fair value and, due to limited comparability, is preferable to measurement on the basis of transactions executed more recently relating to shares in comparable companies. As of the reporting date, there were no investments for which the latest at arm’s length transactions relating to shares in these companies took place some time ago and where a measurement executed more recently via shares in comparable companies provides a better representation of the fair values. In addition, non-material individual items with a carrying amount of EUR 9 million are included with differences in value of minor relevance.

The derivatives without a hedging relationship assigned to Level 3 and carried under derivative financial assets relate to options embedded in bonds issued by T-Mobile US with a carrying amount of EUR 189 million when translated into euros. The options, which can be exercised by T-Mobile US at any time, allow early redemption of the bonds at fixed exercise prices. Observable market prices are available routinely and also at the reporting date for the bonds as entire instruments, but not for the options embedded therein. The termination rights are measured using an option pricing model. Historical interest rate volatilities of bonds issued by T-Mobile US and comparable issuers are used for the measurement because these provide a more reliable estimate at the reporting date than current market interest rate volatilities. The absolute figure used for the interest rate volatility at the current reporting date was between 1.2 and 2.3 percent. The significant decline in this value compared with the prior year is mainly attributable to the improvement in the rating of T-Mobile US in the reporting period. The spread curve, which is also unobservable, was derived on the basis of current market prices of bonds issued by T-Mobile US and debt instruments of comparable issuers. The spreads used at the current reporting date were between 2.5 and 3.4 percent for the remaining maturities of the bonds and between 1.5 and 2.3 percent for shorter terms. For the mean reversion input, which is likewise unobservable, 10 percent was used. In our opinion, the values used constitute the best estimate in each case. If other values had been used for interest rate volatility, spread curve or mean reversion, the fair values calculated would have been different. These hypothetical deviations (sensitivities) are shown in the table below. In the reporting period, a net expense of EUR 15 million when translated into euros was recognized under the Level 3 measurement in other financial income/expense for unrealized losses for the options in the portfolio at the reporting date. In the reporting period, several options were exercised and the relevant bonds canceled prematurely. At the time of termination, the options and their total carrying amount of EUR 118 million when translated into euros were expensed and derecognized. For the development of the carrying amounts in the reporting period, please refer to the corresponding table. The changes in value recognized in profit or loss in the reporting period were mainly attributable to fluctuations in the interest rates and historical interest rate volatilities in absolute terms that are relevant for measurement. Due to their distinctiveness, these instruments constitute a separate class of financial instruments.

Sensitivities a of the carrying amounts of the financial assets and financial liabilities assigned to Level 3 depending on unobservable inputs
millions of €    
  Derivative financial assets at fair value through profit or loss: termination rights embedded in bonds issued Derivative financial liabilities at fair value through profit or loss: energy forward agreements embedded in contracts
Interest rate volatility b +1% 24
Interest rate volatility b ‒1% (23)
Spread curve c +1% (84)
Spread curve c ‒1% 129
Mean reversion d +1% (4)
Mean reversion d ‒1% 6
Future energy prices +10% 35
Future energy prices ‒10% (35)
Future energy output +5% 7
Future energy output ‒5% (7)
Future prices for renewable energy credits e +100% 14
Future prices for renewable energy credits e from zero (13)
a Change in the relevant input parameter assuming all other input parameters are unchanged.
 b Interest rate volatility shows the magnitude of fluctuations in interest rates over time. The larger the fluctuations, the higher the interest rate volatility.
 c The spread curve shows, for the respective maturities, the difference between the interest rates payable by T-Mobile US and the interest rates on U.S. government bonds.
 d Mean reversion describes the assumption that, after a change, an interest rate will revert to its average over time. The higher the selected value (mean reversion speed), the faster the interest rate will revert to its average in the measurement model.
 e Renewable energy credits is the term used for U.S. emission certificates.

With a carrying amount of EUR 65 million when translated into euros, the derivatives without a hedging relationship assigned to Level 3 and carried under derivative financial liabilities relate to energy forward agreements embedded in contracts entered into by T-Mobile US. These agreements consist of two components: the energy forward agreement and the acquisition of renewable energy credits by T-Mobile US. The agreements were entered into with energy producers in 2017 and 2018, and will run for terms of between 12 and 15 years from the commencement of commercial operations. In the case of one energy forward agreement, commercial operations began at the end of 2017; with the others, commercial operations are set to begin in 2019. The respective settlement period of the energy forward agreement, which is accounted for separately as a derivative, also starts when the facility begins commercial operation. Under the energy forward agreements, T-Mobile US receives variable amounts based on the facility’s actual energy output and the then current energy prices, and pays fixed amounts per unit of energy generated throughout the term of the contract. The energy forward agreements are measured using valuation models because no observable market prices are available. The value of the derivative is materially influenced by the facility’s future energy output, for which T-Mobile US estimated a value of 1,781 gigawatt hours per year at the reporting date. The value of the derivatives is also materially influenced by future energy prices, which are not observable for the period beyond five years. Further, the value of the derivatives is materially influenced by the future prices for renewable energy credits, which are also not observable. For the unobservable portion of the term, T-Mobile US used on-peak energy prices of between EUR 22.49/MWh and EUR 39.57/MWh when translated into euros and off-peak prices of between EUR 15.09/MWh and EUR 28.80/MWh when translated into euros. An average on-peak/off-peak ratio of 56 percent was used. In our opinion, the values used constitute the best estimate in each case. If other values had been used for future energy prices, future energy output or future prices of renewable energy credits, the fair values calculated would have been different. These hypothetical deviations (sensitivities) are shown in the table above. In the reporting period, a net expense of EUR 19 million (when translated into euros) was recognized under the Level 3 measurement in other operating income/expense for unrealized losses for the derivatives. For the development of the carrying amounts in the reporting period, please refer to the corresponding table, page 55. The market-price changes in the reporting period were largely attributable to changes in observable and unobservable energy prices and to interest rate effects. Due to their distinctiveness, these instruments constitute a separate class of financial instruments. Measurement of the derivatives on initial recognition resulted in a positive value from T-Mobile US’ perspective of EUR 135 million when translated into euros. In the view of T-Mobile US, the contracts were entered into at current market conditions, and the most appropriate parameters for the unobservable inputs were used for measurement purposes. The transaction price at inception was zero in each case. Since the unobservable inputs have a material influence on the measurement of the derivatives, the respective amount resulting from initial measurement was not carried on initial recognition. Instead, these amounts are amortized in profit or loss on a straight-line basis over the period of commercial energy generation (for a total amount of EUR 10 million per year when translated into euros). This amortization adjusts the effects from measuring the derivatives in each accounting period using the respective valuation models and updated parameters. All amounts from the measurement of the derivatives are presented in net terms in the statement of financial position (derivative financial assets/liabilities) and in the income statement (other operating income/expenses). The difference yet to be amortized in the income statement developed as follows during the reporting period:

Energy forward agreements: development of the not-yet-amortized measurement amounts on initial recognition
millions of €  
   
Measurement amount on initial recognition (carrying amount as of January 1, 2018) 112
Measurement amount on initial recognition (additions during the reporting period) 23
Measurement amounts amortized in profit or loss in prior periods -
Measurement amounts amortized in profit or loss in the current reporting period (2)
Currency translation adjustments (1)
MEASUREMENT AMOUNTS NOT AMORTIZED AS OF JUNE 30, 2018 132

For the trade receivables, loans issued and other receivables assigned to Level 3, which are measured either at fair value through other comprehensive income or at fair value through profit or loss, the main factor in determining fair value is the credit risk of the relevant counterparties. If the default rates applied as of the reporting date had been 1 percent higher (lower) with no change in the reference variables, the fair values of the instruments would have been 1 percent lower (higher).

The financial liabilities measured at fair value through profit or loss and assigned to Level 3 include derivative financial liabilities with a carrying amount of EUR 10 million resulting from an option granted to third parties in the prior-year period for the purchase of shares in an associate of Deutsche Telekom. The option was granted in connection with a sale of shares in this associate, and no notable fluctuations in value are expected. Due to its distinctiveness, this instrument constitutes a separate class of financial instruments.

Disclosures on credit risk

In line with the contractual provisions, in the event of insolvency all derivatives with a positive or negative fair value that exist with the respective counterparty are offset against each other, leaving a net receivable or liability. The net amounts are normally recalculated every bank working day and offset against each other. When the netting of the positive and negative fair values of all derivatives was positive from Deutsche Telekom’s perspective, Deutsche Telekom received unrestricted cash collateral from counterparties pursuant to collateral contracts in the amount of EUR 546 million (December 31, 2017: EUR 569 million). The credit risk was thus reduced by EUR 546 million (December 31, 2017: EUR 566 million) because, on the reporting date, the collateral received was offset by corresponding net derivative positions in the same amount. On the basis of these contracts, derivatives with a positive fair value and a total carrying amount of EUR 983 million as of the reporting date (December 31, 2017: EUR 966 million) had a maximum credit risk of EUR 67 million as of June 30, 2018 (December 31, 2017: EUR 28 million). There is no default risk on embedded derivatives held. For information on the amount not yet amortized from initial measurement of the energy forward agreement, please refer to the explanation above. When the netting of the positive and negative fair values of all derivatives was negative from Deutsche Telekom’s perspective, Deutsche Telekom provided cash collateral in the amount of EUR 509 million (December 31, 2017: EUR 504 million) to counterparties pursuant to collateral contracts. The net amounts are normally recalculated every bank working day and offset against each other. The cash collateral paid is offset by corresponding net derivative positions of EUR 487 million at the reporting date (December 31, 2017: EUR 889 million), which is why it was not exposed to any credit risks in this amount. The collateral paid is reported under originated loans and receivables within other financial assets. On account of its close connection to the corresponding derivatives, the collateral paid constitutes a separate class of financial assets. Likewise, the collateral received, which is reported under financial liabilities, constitutes a separate class of financial liabilities on account of its connection to the corresponding derivatives. No other significant agreements reducing the maximum exposure to the credit risks of financial assets existed. The maximum exposure to credit risk of the other financial assets thus corresponds to their carrying amounts.

RELATED-PARTY DISCLOSURES

With the exception of the matters described in the following, there were no significant changes as of June 30, 2018 to the related-party disclosures reported in the consolidated financial statements as of December 31, 2017.

Joint ventures. In March 2018, the shareholders of the equity-accounted joint venture Toll Collect GmbH resolved to distribute a dividend, Deutsche Telekom’s share of which is EUR 0.1 billion. On May 16, 2018, Daimler Financial Services AG, Deutsche Telekom AG, and the Federal Republic of Germany reached an agreement to end the Toll Collect arbitration proceedings. For more information, please refer to the section “Other transactions that had no effect on the composition of the Group".

Deutsche Telekom Trust e.V. On March 23, 2018, the 12 percent stake in BT, which was worth EUR 3.1 billion at the time, was transferred to the Group’s own trust, Deutsche Telekom Trust e.V., where it will serve as plan assets to cover pension entitlements.

EXECUTIVE BODIES

Changes in the composition of the Board of Management

At its meeting on February 21, 2018, the Supervisory Board of Deutsche Telekom AG resolved to extend Timotheus Höttges’ contract as Chairman of our Board of Management by five years. Timotheus Höttges will be reappointed as Chairman of the Board of Management effective January 1, 2019. Also at its meeting on February 21, 2018, the Supervisory Board of Deutsche Telekom AG resolved to appoint Dr. Christian P. Illek as Chief Financial Officer (CFO) effective January 1, 2019. The current CFO, Thomas Dannenfeldt, will leave Deutsche Telekom AG for personal reasons when his contract expires at the end of 2018. At its meeting on July 13, 2018, the Supervisory Board of Deutsche Telekom AG resolved to appoint Birgit Bohle as the new Board of Management member responsible for Human Resources and as Labor Director effective January 1, 2019. Birgit Bohle will succeed Dr. Christian P. Illek in this position.

Changes in the composition of the Supervisory Board

Shareholder representatives. Dr. Ulrich Schröder resigned from his position as a member of the Supervisory Board of Deutsche Telekom AG effective February 6, 2018. Dr. Günther Bräunig was initially court-appointed to the Supervisory Board of Deutsche Telekom AG on March 15, 2018 and subsequently elected to this position by resolution of the shareholders’ meeting on May 17, 2018.

Sari Baldauf’s term of office expired at the end of the shareholders’ meeting of May 17, 2018. Harald Krüger was elected to the Supervisory Board of Deutsche Telekom AG by the shareholders’ meeting of May 17, 2018.

Prof. Ulrich Lehner was elected for a further term of office on the Supervisory Board of Deutsche Telekom AG by the shareholders’ meeting of May 17, 2018. The members of the Supervisory Board once again elected Prof. Lehner to the position of chairman.

Johannes Geismann resigned from his position on the Supervisory Board of Deutsche Telekom AG as of the end of the shareholders’ meeting of May 17, 2018. Dr. Rolf Bösinger was court-appointed to the Supervisory Board of Deutsche Telekom AG effective June 1, 2018.

Employee representatives. Hans-Jürgen Kallmeier resigned from his position as a member of the Supervisory Board of Deutsche Telekom AG effective midnight, December 31, 2017. Odysseus Chatzidis was court-appointed to the Supervisory Board of Deutsche Telekom AG effective January 3, 2018.

Monika Brandl resigned from her position on the Supervisory Board of Deutsche Telekom AG effective July 1, 2018. Nicole Seelemann-Wandtke was court-appointed to the Supervisory Board of Deutsche Telekom AG effective July 5, 2018.