37 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 13 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, 2018

Of which:
sale and leaseback transactions

Dec. 31, 2017

Of which:
sale and leaseback transactions

Land and buildings

326

120

430

199

Technical equipment and machinery

2,177

(1)

2,012

0

Other

7

0

6

0

NET CARRYING AMOUNTS OF LEASED ASSETS CAPTALIZED

2,510

119

2,448

199

The increase of EUR 0.2 billion in technical equipment and machinery is primarily a result of new finance leases for network upgrades at T-Mobile US.

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

Maturity

Total

Of which: sale and lease­back trans­actions

Total

Of which: sale and lease­back trans­actions

Total

Of which: sale and lease­back trans­actions

Dec. 31, 2018

 

 

 

 

 

 

Within 1 year

954

78

105

22

849

56

In 1 to 3 years

1,076

65

135

35

941

30

In 3 to 5 years

294

50

89

30

205

20

After 5 years

626

182

150

58

476

124

 

2,950

375

478

145

2,472

230

Dec. 31, 2017

 

 

 

 

 

 

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

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 2018 financial year (2017: EUR 3.9 billion, 2016: EUR 3.9 billion). The following table provides a breakdown of future obligations arising from operating leases that are deemed to be reasonably certain:

millions of €

Maturity

Dec. 31, 2018

Dec. 31, 2017

Within 1 year

3,575

3,209

In 1 to 3 years

5,798

5,348

In 3 to 5 years

3,961

3,457

After 5 years

4,950

3,307

 

18,284

15,321

The increase in expected future minimum lease payments from operating leases as of December 31, 2018 is mainly a result of newly leased cell sites and currency translation effects in the United States operating segment.

A need to adjust the disclosures on obligations arising from operating leases as of December 31, 2017 was identified at T-Mobile US in 2018. Certain automatic contract extensions for real estate (mainly cell sites) were not fully recorded. As a result, the lease liabilities disclosed were EUR 0.2 billion too low. The disclosures on obligations arising from operating leases for the prior period were therefore adjusted retrospectively as of December 31, 2018.

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, 2018

Dec. 31, 2017

Minimum lease payments

143

157

Unguaranteed residual value

4

2

Gross investment

146

159

Unearned finance income

1

(6)

NET INVESTMENT (PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS)

147

153

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

millions of €

 

Dec. 31, 2018

 

Dec. 31, 2017

Maturity

Gross investment

Present value
of minimum
lease payments

 

Gross investment

Present value
of minimum
lease payments

Within 1 year

61

64

 

84

81

In 1 to 3 years

61

61

 

62

58

In 3 to 5 years

19

19

 

13

12

After 5 years

5

4

 

1

2

 

146

147

 

160

153

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 10 years. The future minimum lease payments arising from non-cancelable operating leases are as follows:

millions of €

Maturity

Dec. 31, 2018

Dec. 31, 2017

Within 1 year

704

748

In 1 to 3 years

448

496

In 3 to 5 years

311

336

After 5 years

452

536

 

1,915

2,116

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 2018, sales of mobile terminal equipment under installment plans increased.