- Deutsche Telekom complies with applicable accounting standards and provides maximum transparency in its financial reporting
- Rating agencies already take all rental and lease obligations into account in their credit ratings
On January 13, 2016, the International Accounting Standards Board (IASB) published a new standard for the accounting of leases. Below we would like to explain what impact the new standard will have on Deutsche Telekom and whether it will change key financial indicators.
What changes does the new standard bring?
Deutsche Telekom is primarily a lessee. The majority of the leases in the Group relate to the leasing of mobile communication sites. In addition to real estate, leased sites include, for example, technical facilities on buildings for the installation of mobile antennas. The International Financial Reporting Standard IFRS 16, which provides new provisions for the accounting treatment of leases, will in the future no longer allow lessees to recognize certain leases outside of the statement of financial position. Instead, all non-current leases must be recognized in the form of an asset (for the right of use) and a financial liability (for the payment obligation). Thus each lease will be mapped in Deutsche Telekom's statement of financial position. Short-term leases of less than twelve months and leases of low-value assets are exempt from the reporting obligation.
In the past there was talk in some parts of the media of "hidden liabilities." Do analysts and rating agencies know about these additional liabilities?
In terms of the information provided to the company's various stakeholders, nothing is changing. There is no question of "hidden liabilities" because the rental and lease obligations previously not recognized in the statement of financial position are already disclosed in the notes to the financial statements in the Annual Report. Accordingly, as of December 31, 2014, non-discounted obligations for the coming years amounted to 18.9 billion euros. Analysts include these obligations in their models and perform their valuations of companies on this basis - regardless of whether the obligations are included in the statement of financial position or are disclosed in the notes to the financial statements in the Annual Report. The same applies for rating agencies. They also already take all rental and lease obligations into account in their credit ratings for Deutsche Telekom. Deutsche Telekom views the future standard in a positive light, because instead of the current, simplified calculations of rating agencies, the actually expected future cash flows will be precisely taken into account in the statement of financial position, in terms of both amount and timing.
Will any key financial ratios change?
There will no longer be a distinction in the financial statements between assets that are leased and assets that are purchased on credit. The new standard will result in an increase in property, plant and equipment in the consolidated statement of financial position, but at the same time, net debt will increase. In the income statement, leases will be recognized in the future as capital expenditure (capex) on the purchasing side and will no longer be recorded as an operating expense. As a result, the operating expense under otherwise identical circumstances will decrease, while depreciation and amortization and the interest expense increase. This will lead to an improvement in EBITDA. However, EBITDA will not improve by the same amount as the increase in net debt. This will give rise to an arithmetical decrease in one of the most important statement of financial position ratios, the ratio of net debt to adjusted EBITDA (relative gearing), although financially there is no change.
When do the new rules come into force?
The new standard is not expected to apply until financial year 2019, including the adjustment of prior years.