Standards, interpretations, and amendments issued, but not yet to be applied
|Pronouncement||Title||To be applied by
Deutsche Telekom from
|Changes||Expected impact on the presentation of
Deutsche Telekom’s results of operations and financial position
|IFRSs endorsed by the EU|
|Amendments to IFRS 4||Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts||January 1, 2018||Entities falling within the scope of IFRS 4 and whose predominant activity is issuing insurance contracts may, by way of temporary exemption, defer application of IFRS 9 until such time as the new standard for insurance contracts has come into force. In the inter¬im, such entities are thus subject to the provisions of IAS 39. In the case of designated financial assets, other entities falling within the scope of IFRS 4 may incur differences in values depending on whether these assets are to be accounted for in accordance with IFRS 9 or IAS 39; these differences must be presented in other comprehensive income instead of in profit and loss.||No material impact.|
|IFRS 9||Financial Instruments||January 1, 2018||IFRS 9 introduces new classification and measurement requirements for financial instruments and replaces IAS 39.||The effects of IFRS 9 are detailed in the explanations following this table.|
|IFRS 15||Revenue from Contracts with Customers||January 1, 2018||This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces in particular IAS 18 “Revenue” and IAS 11 “Construction Contracts.” When applying IFRS 15 for the first time, an entity shall apply the standard in full for the current period. In respect of prior periods, the transition guidance grants entities an option to either apply IFRS 15 in full to prior periods (with certain limited practical expedients being available) or to retain prior-period figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 to all contracts that had not yet been completed at the beginning of the reporting period as an adjustment to the opening balance of equity at the date of first-time adoption (beginning of current reporting period).||The standard has a material effect on the presentation of Deutsche Telekom’s results of operations and financial position. The effects are detailed in the explanations following this table.|
|Amendments to IFRS 15||Effective Date of IFRS 15||January 1, 2018||Mandatory adoption of IFRS 15 for reporting periods beginning on or after January 1, 2018.||The effects of IFRS 15 are detailed in the explanations following this table.|
|Amendments to IFRS 15||Clarifications to IFRS 15||January 1, 2018||The clarifications address the following topics relating to IFRS 15: Identification of performance obligations (when a promised good or service is distinct from other promises in the contract); Differentiation of principal-agent relationships, application guidance on the concept of the transfer of control in case of services provided by third parties; Clarification of the conditions for the timing of the recognition of revenue arising from the licensing of the intellectual property. Further simplifications for the transition to IFRS 15 were also added.||The effects of IFRS 15 are detailed in the explanations following this table.|
|Annual Improvements Project||Annual Improvements to IFRSs
|January 1, 2018
(IFRS 1 and IAS 28)
|Clarification of many published standards.||No material impact.|
|IFRS 16||Leases||January 1, 2019||IFRS 16 principally requires lessees to recognize assets and liabilities for all leases and the rights and obligations associated with these leases in the statement of financial position. Going forward, lessees will therefore no longer be required to make the distinction between finance and operating leases that was required in the past in accordance with IAS 17. For all leases, the lessee will recognize a lease liability in its statement of financial position for the obligation to make future lease payments. At the same time, the lessee will capitalize a right of use to the underlying asset which is equivalent to the present value of the future lease payments plus initial direct costs, directly attributable expenditure, advance payments and restoration costs, as well as less incentive payments received. Similar to the guidance on finance leases in IAS 17, the lease liability will be adjusted over the lease term for any remeasurement, while the right-of-use asset will be depreciated, which in contrast to the current lease expense normally leads to higher expenses at the inception date of a lease. For the lessor, on the other hand, the provisions of the new standard are similar to the existing guidance in IAS 17. IFRS 16 also includes new provisions on the definition of a lease and its presentation, on disclosures in the notes, and on sale and leaseback transactions.||The standard has a material effect on the presentation of Deutsche Telekom’s results of operations and financial position. The effects are detailed in the explanations following this table.|
|IFRSs not yet endorsed by the EU a|
|Amendments to IFRS 10 and IAS 28||Sale or Contribution of Assets between an Investor and its Associate or Joint Venture||Postponed indefinitely||The amendments affect transactions between an investor and its associate or joint venture and provide for full gain or loss recognition on the loss of control of a business and partial recognition of the gain or loss resulting from the sale or contribution of assets that do not constitute a business, regardless of whether that business is housed in a subsidiary or not.||As the effective date has been postponed indefinitely, the amendments to IFRS 10 and IAS 28 are not relevant at present.|
|IFRS 14||Regulatory Deferral Accounts||n. a.||This standard is applicable to first-time adopters of IFRSs only.||No relevance for Deutsche Telekom. In addition, the European Commission has decided not to endorse IFRS 14.|
|Amendments to IAS 40||Transfers of Investment Property||January 1, 2018||Clarification of transfers into or out of investment property.||No material impact.|
|Amendments to IFRS 2||Classification and Measurement of Share-based Payment Transactions||January 1, 2018||Clarifications of classification and measurement of share-based payment transactions.||No material impact.|
|IFRIC 22||Foreign Currency Transactions and Advance Consideration||January 1, 2018||IFRIC 22 clarifies what exchange rate is to be applied on initial recognition of a foreign-currency transaction in an entity’s functional currency in cases where the entity receives or pays advance consideration before the related asset, expense or income is recognized. The exchange rate for the underlying asset, expense or income is taken as that prevailing on the date of initial recognition of the non-monetary prepayment asset or deferred income liability.||No material impact.|
|Amendments to IAS 28||Long-term Interests in Associates and Joint Ventures||January 1, 2019||The amendments clarify that an entity applies IFRS 9 including its impairment requirements to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but are not accounted for using the equity method.||No material impact.|
|Amendments to IFRS 9||Prepayment Features with Negative Compensation||January 1, 2019||The amendment sets out that, if certain conditions are met, financial assets can be measured at amortized cost or fair value through other comprehensive income if, in the case of an early termination, compensation is required to be paid to the party that triggers the early termination of the contract.||No material impact.|
|IFRIC 23||Uncertainty over Income Tax Treatments||January 1, 2019||IFRIC 23 brings clarity to IAS 12 “Income Taxes” in relation to the recognition and measurement of current income taxes, deferred tax assets, and deferred tax liabilities if there is uncertainty regarding the treatment of income taxes.||No material impact.|
|Annual Improvements Project||Annual Improvements to IFRSs
|January 1, 2019||Clarification of many published standards.||No material impact.|
|IFRS 17||Insurance Contracts||January 1, 2021||IFRS 17 governs the accounting for insurance contracts and replaces IFRS 4.||No material impact.|
|a For standards not yet endorsed by the EU, the date of first-time adoption scheduled by the IASB is assumed for the time being as the likely date of first-time adoption.|
In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers.” Application of the standard is mandatory for reporting periods beginning on or after January 1, 2018. This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces in particular IAS 18 “Revenue” and IAS 11 “Construction Contracts” and has a material effect on the presentation of Deutsche Telekom’s results of operations and financial position. Depending on the business model applied, the new provisions affect the following issues in particular:
- In the case of multiple-element arrangements (e.g., mobile contract plus handset) with subsidized products delivered in advance, a larger portion of the total remuneration is attributable to the component delivered in advance (mobile handset), requiring earlier recognition of revenue in future. This leads to the recognition of what is known as a contract asset – a receivable arising from the customer contract that has not yet legally come into existence – in the statement of financial position.
- At the same time, it results in higher revenue from the sale of goods and merchandise and to lower revenue from the provision of services.
- The extent of the changes resulting from the initial application of IFRS 15 that are described above therefore largely depends on the business models used by the subsidiary in question. Whereas the sale of subsidized handsets in connection with the conclusion of service contracts in the retail business is still common in the Germany operating segment, handsets are not sold at a discount at all or only to a limited extent in the United States and to some extent in the Europe operating segments; payment-by-installment models or leased models are offered to customers instead.
- In the future, expenses for sales commissions (customer acquisition costs) must be capitalized and recognized over the estimated customer retention period.
- On first-time application of the standard, both total assets and shareholders’ equity will increase due to the capitalization of contract assets and customer acquisition costs for contracts not yet fully completed.
- Deferral, i.e., later recognition of revenue in cases where “material rights” are granted, such as offering additional discounts for future purchases of further products.
- Contract liabilities (which, as deferred revenue, were already recognized as liabilities in the past) must be netted against the contract assets for each customer contract.
- For the purposes of determining whether Deutsche Telekom sells products for its own account (principal = gross revenue) or for the account of others (agent = net revenue), there are no material changes for the existing agreements.
Deutsche Telekom will utilize the option for simplified initial application, i.e., contracts that are not completed by January 1, 2018 will be accounted for as if they had been recognized in accordance with IFRS 15 from the very beginning. The cumulative effect arising from the transition will be recognized as an adjustment to the opening balance of equity in the year of initial application. Prior-year comparatives will not be adjusted; instead, Deutsche Telekom will provide an explanation of the reasons for the changes in items in the statement of financial position and the income statement for the current period as a result of applying IFRS 15 for the first time.
The effects were analyzed as part of a Group-wide project for implementing the new standard. Based on management’s current estimate, Deutsche Telekom expects the transition to the new standard to result in a cumulative increase in retained earnings of between EUR 2.2 billion and EUR 2.6 billion before deferred taxes as of January 1, 2018. This effect will be mainly attributable to the first-time recognition of
- Contract assets that, under IFRS 15, would have led to the earlier recognition of revenue from the sale of goods and merchandise, and
- Deferred customer acquisition costs that, under IFRS 15, would have resulted in the later recognition of selling expenses.
The change in the forecast transition effects before taxes compared with previous quarters is due on the one hand to the final interpretation of the judgments of IFRS 15 and on the other to an updated simulation of the impact of the transition.
As regards the new standard’s impact on the consolidated income statement, Deutsche Telekom expects the overall share of revenue from the provision of services to decrease, and the overall share of revenue from the sale of goods and merchandise to increase, by around 2 percentage points. As outlined above, IFRS 15 will also result in earlier recognition of revenue and later recognition of expenditure. On the assumption that business development remains unchanged, this will mean the following for a mass market characterized by a large number of customer contracts that are being concluded at different points in time:
- Higher revenue, on the conclusion of new contracts, from the sale of goods and lower selling expenses from the capitalization of contract assets and customer acquisition costs, partly offset by
- lower service revenues and higher selling expenses arising the amortization of capitalized contract assets and customer acquisition costs for existing contracts.
Compared with the current accounting method, major effects on earnings can thus also arise if business development changes, for example, if volumes or prices change or if there are changes to business models or products offered.
In July 2014, the IASB issued IFRS 9 „Financial Instruments.“ Application of the standard is mandatory for reporting periods beginning on or after January 1, 2018. The standard introduces new classification and measurement requirements for financial instruments and replaces IAS 39.
The effects were analyzed as part of a Group-wide project for implementing the new standard. On the basis of management’s current estimate, the first-time and ongoing application of the standard does not have any material impact on Deutsche Telekom’s consolidated financial statements.The new provisions mainly comprise the following items of relevance to Deutsche Telekom:
- Depending on the respective underlying business model, the new provisions on the classification of financial assets will in some cases give rise to changes in measurement and presentation. The measurement of debt instruments – especially trade receivables held for potential sale – at fair value through other comprehensive income will have minor effects at the transition date. Effects may arise in ongoing application, particularly from changes in the volumes of receivables held for potential sale in the future. Equity instruments held are irrevocably allocated to a measurement category instrument by instrument upon initial recognition. Deutsche Telekom will measure equity instruments held at fair value through other comprehensive income without reclassification in profit or loss of the cumulative gains and losses on disposal (OCI option).
- The new provisions on the accounting of impairment losses will lead to expected losses having to be expensed earlier in some cases. Application of the simplified approach also for financial assets with a significant financing component, and impairment losses on the contract assets to be recognized for the first time as of January 1, 2018 in accordance with IFRS 15, will lead to a minor increase in impairment losses. Effects may arise in ongoing application from a change in business development (for example, changes in volumes or prices) or from changes to business models where these are reflected in the amounts reported for long-term trade receivables and contract assets.
- In the future, the hedging relationships will be accounted for in accordance with the requirements of IFRS 9. The transition of existing hedging relationships to the new regime will not have any material effects. Cash flow hedges for hedging interest rate and currency risks will be de-designated and redesignated on the transition to IFRS 9 so that future use can be made of the opportunity to recognize the costs of hedging in other comprehensive income. The other hedging relationships will continue unchanged.
In January 2016, the IASB issued IFRS 16 “Leases.” The standard will be effective for the first time for financial years beginning on or after January 1, 2019. Early application is permitted. Deutsche Telekom did not apply this option, however. From the date of first-time adoption, the new lease standard will have a material effect on Deutsche Telekom’s consolidated financial statements, particularly on the results of operations, net cash from operating activities, total assets, and the presentation of the financial position.
Deutsche Telekom will not apply the new lease standard retrospectively in full, but will make use of the corresponding exemption provisions for lessees, also known as the modified retrospective method. On the transition to the new regulations, payment obligations from existing operating leases (see Note 33 “Leases”) will be discounted using the relevant incremental borrowing rate. The resulting present value will be recognized as a lease liability. The right-of-use assets will be carried in the amount of the lease liability, adjusted by the amount of the prepaid or accrued lease payments.
With regard to the options and simplifications under IFRS 16, Deutsche Telekom takes the following approach:
- Right-of-use assets and lease liabilities will be reported separately in the statement of financial position.
- The recognition, measurement and disclosure requirements of IFRS 16 will also be applied in full to current leases and leases of low-value assets.
- A distinction will not be made in leases that contain both lease components and non-lease components. Each lease component will be accounted for as a lease in conjunction with other related performance components.
- IFRS 16 will not be applied to the majority of leases for intangible assets.
Depending on whether Deutsche Telekom is the supplier or the customer in an arrangement or on how the contractual facts have been designed in the various business models in our operating segments, the application of IFRS 16 will have the following material effects:
- The lease payments largely relate to leases of cell sites (land, space in cell towers or rooftop surface areas), network infrastructure, and buildings used for administrative or technical purposes.
- In the future, payment obligations for operating leases that in accordance with the existing regulations must be stated in the notes to the consolidated financial statements will be reported as right-of-use assets and lease liabilities.
- Deutsche Telekom anticipates a significant increase in total assets on first-time adoption due to the capitalization of right-of-use assets and the recognition of lease liabilities. The increase in lease liabilities leads to a corresponding increase in net debt. Due to the significant amount of liabilities from straight-line leases in accordance with IAS 17, which in accordance with IFRS 16 must be deducted from the right-of-use assets, the capitalized right-of-use assets under IFRS 16 will be lower than the lease liabilities under IFRS 16 by the amount of those straight-line lease liabilities (Note 14 “Other liabilities”).
- Going forward, depreciation charges and interest expense will be reported in the income statement instead of lease expense. This will give rise to a significant improvement in EBITDA.
- In the statement of cash flows, the repayment portion of the lease payments from existing operating leases will reduce net cash from/used in financing activities and no longer affect net cash from operating activities. Only the interest payments will remain in net cash from operating activities, the total of which will rise.
- For Deutsche Telekom as a lessor, the number of identified leases will change. This does not affect the contracts for routers or similar hardware provided to customers as part of data and network solutions or contracts for handsets and smart home network solutions provided to customers. It is expected that these will continue to be defined as leases. In fact, the number of identified leases for modems/routers for the latest generation of devices provided to consumers as part of fixed-network mass-market contracts is expected to decrease. Deutsche Telekom is still analyzing whether contracts related to services provided in data centers and in connection with wholesale fixed-network customers contain lease components or not.
The overall effects of IFRS 16 are being analyzed as part of a Group-wide project for implementing IFRS 16, though a reliable estimate of the quantitative effects is not possible at the present time due to the variety and complexity of business models as well as the total number of the relevant transactions.
Readers are also referred to the Disclaimer at the end of this report as regards the forward-looking statements contained in this section; the latter reflect the current views of the management of Deutsche Telekom with regard to future events.