5 Intangible assets

millions of €
  Internally generated
intangible assets
Acquired intangible assets Acquired intangible assets Goodwill Advance
payments and
intangible assets
under development
 
    Total Acquired concessions,
industrial and similar rights and assets
LTE
licenses
UMTS
licenses
GSM
licenses
FCC
licenses
(T-Mobile US)
Other acquired intangible assets     Total
Cost                      
At December 31, 2015 5,416 66,139 1,177 5,101 9,933 1,548 32,013 16,367 30,290 2,037 103,882
Currency translation 102 1,306 5 3 (7) (6) 1,194 117 396 40 1,844
Changes in the composition of the Group (14) (20) (10) 16 0 0 0 (26) 1 (1) (34)
Additions 130 4,918 103 964 0 0 3,108 743 0 2,491 7,539
Disposals 493 1,592 27 0 0 0 21 1,544 0 26 2,111
Change from non-current assets and disposal groups held for sale (20) (640) (24) 0 0 0 (522) (94) 0 (4) (664)
Reclassifications 813 1,233 (153) 19 24 2 0 1,341 0 (2,009) 37
At December 31, 2016 5,934 71,344 1,071 6,103 9,950 1,544 35,772 16,904 30,687 2,528 110,493
Currency translation (450) (5,441) (36) 60 19 13 (4,931) (566) (1,466) (111) (7,468)
Changes in the composition of the Group 0 (32) 3 0 0 0 0 (35) 21 0 (11)
Additions 236 8,841 245 0 0 0 7,819 777 0 2,543 11,620
Disposals 560 1,242 3 5 0 163 0 1,071 0 57 1,859
Change from non-current assets and disposal groups held for sale 0 (393) 0 0 0 0 (392) (1) 0 (5) (398)
Reclassifications 1,554 1,304 2 9 0 0 0 1,293 0 (2,812) 46
At December 31, 2017 6,714 74,381 1,282 6,167 9,969 1,394 38,268 17,301 29,242 2,086 112,423
Accumulated amortization and impairment losses                      
At December 31, 2015 3,727 27,613 717 792 6,925 692 6,343 12,144 15,517 0 46,857
Currency translation 79 285 1 1 (4) (4) 205 86 389 0 753
Changes in the composition of the Group (8) (38) (11) 1 0 0 0 (28) 0 0 (46)
Additions (amortization) 955 3,175 120 318 585 46 0 2,106 0 0 4,130
Additions (impairment) 0 1 0 0 0 0 0 1 471 0 472
Disposals 491 1,572 21 0 0 0 10 1,541 0 0 2,063
Change from non-current assets and disposal groups held for sale (11) (198) (10) 0 0 0 (95) (93) 0 0 (209)
Reclassifications (36) 36 (157) 0 0 0 0 193 0 0 0
Reversal of impairment losses 0 0 0 0 0 0 0 0 0 0 0
At December 31, 2016 4,215 29,302 639 1,112 7,506 734 6,443 12,868 16,377 0 49,894
Currency translation (345) (1,172) (21) 5 12 9 (755) (422) (1,456) 0 (2,973)
Changes in the composition of the Group 0 (46) 0 0 0 0 0 (46) 0 0 (46)
Additions (amortization) 938 3,178 150 384 584 70 0 1,990 0 0 4,116
Additions (impairment) 0 6 2 0 0 0 4 0 2,071 0 2,077
Disposals 554 1,235 2 5 0 163 0 1,065 0 0 1,789
Change from non-current assets and disposal groups held for sale 0 (82) 0 0 0 0 (81) (1) 0 0 (82)
Reclassifications 9 3 (1) 0 1 0 0 3 0 0 12
Reversal of impairment losses 0 (1,651) 0 0 0 0 (1,651) 0 0 0 (1,651)
At December 31, 2017 4,263 28,303 767 1,496 8,103 650 3,960 13,327 16,992 0 49,558
Net carrying amounts                      
At December 31, 2016 1,719 42,042 432 4,991 2,444 810 29,329 4,036 14,310 2,528 60,599
At December 31, 2017 2,451 46,078 515 4,671 1,866 744 34,308 3,974 12,250 2,086 62,865

Deutsche Telekom had commitments for the acquisition of intangible assets in the amount of EUR 0.5 billion (December 31, 2016: EUR 0.5 billion) as of the reporting date. The majority of this related to commitments entered into by T-Mobile US.

The partial reversal of impairment losses on FCC licenses previously ­acquired by T-Mobile US increased the carrying amount of intangible assets by EUR 1.7 billion before deferred taxes. These FCC licenses were impaired as of September 30, 2012 following ad hoc impairment testing of the United States cash-generating unit. Because all of the FCC license impairment was allocated to the portfolio of PCS licenses, based on a determination that AWS licenses were carried at less than fair value, the PCS license portfolio is the only FCC license asset subject to an impairment reversal. This made it necessary to perform regular tests in subsequent periods to determine whether the reasons for impairment still existed – in full or in part. The value of the United States cash-generating unit, which has been listed on the stock exchange since May 2013, increased substantially in recent years on the back of the increase in the share price of T-Mobile US, Inc. and exceeded its carrying amount. However, the maximum possible reversal is limited to the lower of the recoverable amount of the impaired spectrum licenses determined from the fair value less costs of disposal on the one hand and the cost of these licenses on the other. As the recoverable amount of the impaired FCC licenses in the past financial years was lower than their carrying amount, the requirements for a reversal were not met.

In the third quarter of 2017, the results of the 600 MHz spectrum auction by the Federal Communications Commission (FCC), which was completed in 2017, indicated an increase in value of the previously impaired licenses. A remeasurement was then performed using a discounted cash flow method (greenfield method). The value was calculated in accordance with Level 3 of the fair value hierarchy pursuant to IFRS 13. The greenfield method uses a hypothetical cash flow scenario of developing an operating ­business for an entity that owns a single asset, in this case FCC licenses, at inception. The greenfield method requires an understanding of how much time and investment it would take to grow the business considering the current market conditions. Cash flows are forecasted to reflect required resources and eventual returns from the build-out of the operations and the acquisition of customers. The underlying theory of that approach is that by incurring theoretical start-up costs and capital expenditures that reflect the creation of all other assets, the value of the FCC licenses becomes isolated. The expenses and capital expenditures required to recreate the business would be higher than the expense and capital expenditure level of an established business. In addition, the time to recreate (ramp-up period) also determines the required level of investments (e.g., to shorten the ramp-up period more investment would be required). In summary, the key inputs of the greenfield method are:

  • The time and required expenses of the ramp-up period. The build-out was staged over a period of time to reflect a plan to migrate from a start-up to a fully capable national wireless network. The estimated timeline to build the existing network that most closely meets the current business plan’s long-term projected level of subscribers is approximately eight years.
  • Long-term projected revenues and operating cash flows are based on a market-participant or normalized level of operation of the business. Given the long-term nature of the investment, the initial planning period of ten years was extended by an additional ten years to allow for profit margins, capital expenditures and related depreciation to reach normalized levels.
  • A long-term growth rate was applied for the ten additional years to the forecasted revenues that matches the selected long-term growth rate of 2 percent for the derivation of the terminal value. The long-term growth rate was determined by considering industry and economic research.
  • The rate of return required by a market participant for investing in such a business (discount rate). A discount rate of 7.5 percent was used.

The total value of the license portfolio calculated in this way of USD 53 billion was then allocated to the spectrum types (PCS, AWS, 700 MHz and 600 MHz) according to a relative market price model based on auction data. A recoverable amount of EUR 13.6 billion was calculated for the FCC licenses previously impaired. Taking the carrying amount of EUR 11.9 billion into account, a partial reversal of EUR 1.7 billion arose for the United States operating segment that was recorded under other operating income.

In the 2017 financial year, the main changes in the carrying amounts of goodwill at cash-generating units were as follows:

United States. The decrease of EUR 144 million in goodwill compared with December 31, 2016 was the result of exchange rate effects.

Europe, Germany, Systems Solutions, and Group Development. Since January 1, 2017, the Netherlands cash-generating unit, which was ­previously allocated to the Europe operating segment, has been reported in the Group Development operating segment. The same applies for the Deutsche ­Funkturm ­­cash-generating unit, which was previously allocated to the ­Germany cash-generating unit in the Germany operating segment. The Deutsche Telekom IT (DT IT) cash-generating unit – the internal IT service provider – which was previously allocated to the Systems Solutions cash-­generating unit in the Systems Solutions operating segment, has been ­allocated to the Group Headquarters & Group Services segment. The allocation of goodwill to the corresponding segments was adjusted, reducing goodwill in the Europe operating segment by EUR 897 million year-on-year, goodwill in the Germany operating segment by EUR 259 million, and goodwill in the Systems Solutions operating segment by EUR 590 million. Goodwill in the receiving segments increased accordingly. In addition, exchange rate effects contributed to the year-on-year increase in goodwill.

Following the withdrawal of the goodwill attributable to Deutsche Telekom IT from the Systems Solutions cash-generating unit, the remaining goodwill following a change in the control logic was allocated proportionately among the two cash-generating units Market Unit, the external IT service provider, and T-Sec, Deutsche Telekom’s IT security service provider, based on the units’ fair values.

Following a change in the Group’s control logic for Greece and Romania, the relevant cash-generating units (Mobile communications and Fixed ­network) and the related goodwill were combined in a single cash-generating unit in each case for the first time in 2017.

Disclosures on annual impairment tests. Deutsche Telekom performed its annual impairment tests for the goodwill assigned to the cash-generating units as of December 31, 2017. A need for impairment of goodwill totaling EUR 829 million on a pro rata basis was identified in the Europe operating segment at the cash-generating units Poland, Romania, and Albania as of December 31, 2017 on the basis of information available at the ­reporting date and expectations with respect to the future development of the market and competitive environment. The impairment of goodwill at these cash-­generating units was attributable in particular to intensified competition and a difficult overall market situation, as well as a rising interest rate level. In addition, an impairment test was performed as of September 30, 2017 for the Market Unit cash-generating unit in the Systems Solutions operating segment; this was triggered by an unexpected decrease in order entry and resulted in the recognition of impairment losses of EUR 1,242 million. The impairment test as of December 31, 2016 resulted in a need for impairment totaling EUR 471 million at the Netherlands, Romania – Mobile communications, and Montenegro cash-generating units in the Europe operating segment.

The recoverable amounts to be identified for the impairment test were largely determined on the basis of the fair values less costs of disposal. With the exception of the United States cash-generating unit, these figures were calculated using a net present value approach. The main parameters are shown in the table below.

The recoverable amounts (prior to the deduction of net debt) for the cash-generating units were EUR 2,447 million (EUR 2,246 million as of the date of the impairment test on September 30, 2017) for the Market Unit, EUR 2,932 million for Poland, EUR 701 million for Romania, and EUR 47 million for Albania as of December 31, 2017. The values were calculated according to IFRS 13 using Level 3 input parameters (i.e., unobservable input parameters). As of December 31, 2016, the recoverable amounts (prior to the deduction of net debt) for Romania – Mobile communications and Montenegro were EUR 422 million and EUR 169 million, respectively. The values were calculated according to IFRS 13 using Level 3 input parameters (i.e., unobservable input parameters). The recoverable amount (prior to the deduction of net debt) for the Netherlands was EUR 2,402 million as of December 31, 2016. It was calculated on the basis of the value in use.

The recoverable amounts at the Croatia, Montenegro, and F.Y.R.O. ­Macedonia cash-generating units were determined using the value in use. For the ­Netherlands cash-generating unit, the recoverable amount was again ­determined using Deutsche Telekom’s usual approach based on fair value less costs of disposal. The market price of an active and liquid market (share price) of 
T-Mobile US was used to determine the fair value less costs of disposal in the case of the United States cash-generating unit. The measurements of all other cash-generating units are founded on ­projections for a ten-year projection period that are based on financial plans that have been approved by management and are also used for internal purposes. The planning horizon selected reflects the assumptions for short- to ­medium-term market developments and is selected to achieve a steady state in the business outlook that is necessary for calculating the perpetual annuity. This steady state can only be established based on this planning horizon, in particular due to the sometimes long investment cycles in the telecommunications industry and the investments planned and expected in the long run to acquire and extend the rights of spectrum use. Cash flows beyond the internal medium-term planning are extrapolated using appropriate growth rates defined separately for each cash-generating unit. These growth rates are based on real growth and inflation expected in the long term for the countries in which the respective unit operates. To achieve the sustainable growth rates set for the period of the ­perpetual annuity, additional sustainable investments derived specifically for each cash-generating unit are taken into account. The key assumptions on which management has based its determination of the recoverable amount include the following assumptions that were primarily derived from internal sources and are based on past experience and extended to include ­internal expectations, and that are underscored by external market data and ­estimates: development of revenue, customer acquisition and retention costs, churn rates, capital expenditure, market share, and growth rates. Discount rates are determined on the basis of external figures derived from the market, taking account of the market and country risks ­associated with the cash-generating unit. Any significant future changes in the aforementioned assumptions would have an impact on the fair values of the cash-generating units. Changes in the assumptions may have a negative impact, as a result of future macroeconomic trends, continued intense competition, further possible legislation changes (e.g., as part of national austerity programs), and regulatory intervention.

The following tables provide an overview of the main factors affecting the measurement, the classification of the input parameters (levels) used to determine the recoverable amounts in accordance with IFRS 13, as well as the sensitivity calculations for the need for impairment resulting from a change in the main parameters discount rate, net cash flow, and growth rate. They show the most significant cash-generating units to which goodwill has been allocated.

 
               
    Goodwill carrying amount
millions of €
Impairment
millions of €
Detailed
planning period
Discount rates a
 %
Sustainable growth rate p.a.
Ø in %
Level allocation
of input
parameters b
Germany 2017 3,719   10 4.93 0.0 Level 3
  2016 3,978   10 4.89 0.0 Level 3
United States 2017 1,041   n. a. n. a. n. a. Level 1
  2016 1,185   n. a. n. a. n. a. Level 1
Europe              
Poland 2017 835 787 10 6.85 2.0 Level 3
  2016 1,530   10 6.45 2.0 Level 3
Hungary 2017 1,070   10 7.47 2.0 Level 3
  2016 1,069   10 7.83 2.0 Level 3
Czech Republic 2017 781   10 6.37 2.0 Level 3
  2016 739   10 5.33 2.0 Level 3
Croatia 2017 519   10 7.13 2.0 Value in use
  2016 500   10 6.74 2.0 Value in use
Slovakia 2017 428   10 5.79 2.0 Level 3
  2016 428   10 5.61 2.0 Level 3
Greece c 2017 422   10 7.93 2.0 Level 3
  2016 422   10 7.91 2.0 Level 3
Austria 2017 324   10 5.47 2.0 Level 3
  2016 324   10 5.24 2.0 Level 3
Romania c 2017 41 34 10 7.67 2.0 Level 3
  2016 76 44 10 7.96 2.0 Level 3
International Carrier Sales & Solutions 2017 102   10 5.05 2.0 Level 3
  2016 101   10 4.64 2.0 Level 3
Other d 2017 79 8 10 8.39 ‒ 10.29 2.0 Level 3 and values in use
  2016 87 12 10 8.06 ‒ 9.93 2.0 Level 3 and values in use
Systems Solutions              
Market Unit 2017 1,063 1,242 10 6.60 1.5 Level 3
  2016            
Telekom Security 2017 80   10 6.50 1.5 Level 3
  2016            
System Solutions 2017            
  2016 2,974   10 6.15 1.5 Level 3
Group Development              
Netherlands 2017 897   10 5.29 0.5 Level 3
  2016 897 415 10 4.99 0.5 Value in use
Deutsche Funkturm 2017 259   10 5.35 1.0 Level 3
  2016            
Group Headquarters & Group Services              
Deutsche Telekom IT 2017 590   10 8.00 1.5 Level 3
  2016            
Deutsche Telekom in total 2017 12,250 2,071        
  2016 14,310 471        
               
a Discount rate consistently after taxes. The discount rate before taxes for the calculation of the value in use amounts to 8.59 percent (2016: 8.31 percent) for Croatia, and 9.27 to 9.34 percent (2016: 8.73 to 8.99 percent) for “Other.”
b Level of input parameters in the case of fair value less costs of disposal.
c In 2016, there were still two cash-generating units, Fixed network and Mobile communications, with all of the goodwill being allocated to the Mobile communications cash-generating unit.
d In 2017, the impairments under “Other” exclusively relate to the Albania cash-generating unit. The underlying discount rate amounts to 10.29 percent (2016: 9.93 percent). In 2016, they related exclusivelyto the Montenegro cash-generating unit, with an underlying discount rate of 8.07 percent (2017: 8.42 percent).
e Following the removal of Deutsche Telekom IT, the remaining goodwill of the Systems Solutions cash-generating unit was allocated proportionately among the two cash-generating units Market Unit and Telekom Security based on the units’ fair values. As a result, the Systems Solutions cash-generating unit ceased to exist.
Sensitivity analysis of the impairment losses
millions of €  a
  Increase (decrease) in impairment losses in 2017
             
  Decrease of
discount rate by 50
 basis points
Decrease of
net cash flows by
5.0 %
Decrease of
sustainable growth rate
by 50 basis points
Increase of
discount rate
by 50 basis points
Increase of net cash flows by 5.0 % Increase of sustainable growth rate by 50 basis points
Europe            
Poland ‒334 (‒787 / 6.85 % / 5.81 %) 147 (‒787 / 100 % / 126.84 %) 172 (‒787/2.0 % / 3.47 %) 273 (‒787 /6.85 % / 5.81 %) ‒147 (‒787 /100 % / 126.84 %) ‒211 (‒787 /2.0 % / 3.47 %)
Romania ‒34 (‒93 / 7.67 % / 7.21 %) 12 (‒93 /100 % / 113.23 %) 19 (‒93 /2.0 % / 2.69 %) 29 (‒93 /7.67 % / 7.21 %) ‒12 (‒93 /100 % / 113.23 %) ‒22 (‒93 /2.0 % / 2.69 %)
Croatia       33 (122 / 7.13 % / 7.45 %)    
F.Y.R.O. Macedonia   2 (10/100 % / 97.05 %) 1 (10/2.0 % / 1.65 %) 5 (10 /8.39 % / 8.58 %)    
Albaniab ‒2 (‒57 / 10.29 % / 6.45 %) 1 (‒57 /100 % / 217.17 %) 1 (‒57 /2.0 % / 7.21 %) 1 (‒57 /10.29 % / 6.45 %) ‒1 (‒57 /100 % / 217.17 %) ‒1 (‒57 /2.0 % / 7.21 %)
Systems Solutions            
Market Unit   55 (67 /100 % / 97.25 %) 125 (67/1.50 % / 1.34 %) 238 (67 /6.60 % / 6.70 %)    
Group Development            
Netherlands   120 (5 / 100 % / 99.82 %) 118 (5 /0.50 % / 0.48 %) 203 (5 /5.29 % / 5.30 %)    
             
a Where a change in the parameters results in an impairment loss, the following information is indicated in parentheses: the current amount by which the unit’s recoverable amount exceeds its carrying amount, the current value of the parameter, and the value of the parameter that makes the recoverable amount of the cash-generating unit equal to the unit’s carrying amount.
b For more information on the impairment losses recognized for assets in the Albania cash-generating unit, please refer to Note 6 “Property, plant and equipment”.

The sensitivity analysis of the impairment losses lists all those cash-­generating units where the sensitivity analysis resulted in an impairment loss or a change in the impairment loss. The sensitivity analysis was performed separately for each parameter, i.e., a change in the impairment charge on a cash-generating unit is only determined by reducing or increasing the parameter under consideration.