33 Leases

Deutsche Telekom as lessee

Finance leases. When a lease transfers substantially all risks and rewards to Deutsche Telekom as lessee, Deutsche Telekom initially recognizes the leased assets in the statement of financial position at the lower of fair value or present value of the future minimum lease payments. Most of the leased assets carried in the statement of financial position as part of finance leases relate to long-term rental and lease agreements for office buildings and technical fixed-network or mobile facilities. The average lease term is 16 years. The agreements include extension and purchase options. The following table shows the net carrying amounts of leased assets capitalized in connection with a finance lease as of the reporting date:

millions of €
  Dec. 31, 2017 Of which:
 sale and leaseback transactions
Dec. 31, 2016 Of which:
sale and leaseback transactions
Land and buildings 430 199 490 246
Technical equipment and machinery 2,012 0 1,631 0
Other 6 0 14 0
Net carrying amounts of leased assets capitalized 2,448 199 2,135 246

The increase in technical equipment and machinery is primarily a result of new finance leases for network upgrades at T-Mobile US totaling EUR 0.3 billion.

At the inception of the lease term, Deutsche Telekom recognizes a lease liability equal to the carrying amount of the leased asset. In subsequent periods, the liability decreases by the amount of lease payments made to the lessors using the effective interest method. The interest component of the lease payments is recognized in the income statement.

The following table provides a breakdown of these amounts:

millions of €
  Minimum lease payments Interest component Present values
  Total Of which: sale and leaseback transactions Total Of which: sale and leaseback transactions Total Of which: sale and leaseback transactions
Dec. 31, 2017            
Maturity            
Within 1 year 868 100 117 32 751 68
In 1 to 3 years 1,211 128 162 50 1,049 78
In 3 to 5 years 345 61 110 40 235 21
After 5 years 814 278 214 98 600 180
  3,238 567 603 220 2,635 347
Dec. 31, 2016            
Maturity            
Within 1 year 711 102 126 38 585 64
In 1 to 3 years 1,067 183 190 58 877 125
In 3 to 5 years 528 73 130 43 398 30
After 5 years 948 304 261 116 687 188
  3,254 662 707 255 2,547 407

Operating leases. Beneficial ownership of a lease is attributed to the lessor if this is the party to which all the substantial risks and rewards incidental to ownership of the asset are transferred. The lessor recognizes the leased asset in its statement of financial position. Deutsche Telekom recognizes the lease payments made during the term of the operating lease in profit or loss. Deutsche Telekom’s obligations arising from operating leases are mainly related to long-term rental or lease agreements for cell sites, network infrastructure, and real estate.

Some leases include extension options and provide for stepped rents. Most of these leases relate to cell sites in the United States.

The operating lease expenses recognized in profit or loss amounted to EUR 3.9 billion in the 2017 financial year (2016: EUR 3.9 billion; 2015: EUR 3.2 billion). The following table provides a breakdown of future obligations arising from operating leases that are deemed to be reasonably certain:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
Maturity    
Within 1 year 3,209 3,388
In 1 to 3 years 5,159 5,304
In 3 to 5 years 3,457 3,641
After 5 years 3,307 3,686
  15,132 16,019

The decline in expected future minimum lease payments from operating leases as of December 31, 2017 is mainly a result of exchange rate effects in the United States operating segment.

A need to adjust the disclosures on obligations arising from operating leases as of December 31, 2016 was identified at
T-Mobile US in 2017. Certain network capacity agreements had been recognized both as purchasing obligation and as lease liability. As a result, the lease liabilities disclosed were EUR 0.5 billion too high, because the agreements concerned were service agreements and the resulting obligations are only to be regarded as future purchasing obligations please also refer to Note 34 (“Other ­financial obligations”.) The disclosures on obligations arising from operating leases for the prior period were therefore adjusted retrospectively as of December 31, 2017.

DEUTSCHE TELEKOM As lessor

Finance leases. Deutsche Telekom is a lessor in connection with finance leases. Essentially, these relate to the leasing of routers and other hardware, which Deutsche Telekom provides to its customers for data and telephone network solutions. Deutsche Telekom recognizes a receivable in the amount of the net investment in the lease. The lease payments made by the lessees are split into an interest component and a principal component using the effective interest method. The lease receivable is reduced by the principal received. The interest component of the payments is recognized as finance income in the income statement. The following table shows how the amount of the net investment in a finance lease is determined:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
Minimum lease payments 157 190
Unguaranteed residual value 2 3
Gross investment 159 193
Unearned finance income (6) (11)
Net investment (present value of the minimum lease payments) 153 182

The following table presents the gross investment amounts and the present value of payable minimum lease payments:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
  Gross investment Present value of minimum
lease
payments
Gross investment Present value of minimum
lease
payments
Maturity        
Within 1 year 84 81 91 87
In 1 to 3 years 62 58 86 80
In 3 to 5 years 13 12 14 13
After 5 years 1 2 2 2
  160 153 193 182

Operating leases. If Deutsche Telekom is a lessor in connection with ­operating leases, it continues to recognize the leased assets in its statement of financial position. The lease payments received are recognized in profit or loss. The leases mainly relate to the rental of cell sites, building space, and terminal equipment, and have an average term of 12 years. The future minimum lease payments arising from non-cancelable operating leases are as follows:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
Maturity    
Within 1 year 748 1,006
In 1 to 3 years 496 477
In 3 to 5 years 336 321
After 5 years 536 496
  2,116 2,300

The reduction in future minimum lease payments is mainly the result of a decline in the expected lease payments from the lease of mobile terminal equipment at T-Mobile US. In 2017, sales of mobile terminal equipment under installment plans increased.