Edgar Filing: TELEFONICA S A

Form 6-K

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of February, 2016

Commission File Number: 001-09531

Telefónica, S.A.

(Translation of registrant’s name into English)

Distrito Telefónica, Ronda de la Comunicación s/n,

28050 Madrid, Spain

3491-482 87 00

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F x Form 40-F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes ¨ No x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes ¨ No x

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes ¨ No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

Telefónica, S.A.

TABLE OF CONTENTS


Item		Sequential Page Number

1.	Telefónica - 2015 Annual Accounts

	• Account Auditor’s Report, Annual Financial Statements and Management Report of Telefónica, S.A., all for the Fiscal Year 2015.		4

	• Account Auditor’s Report, Annual Financial Statements and Management Report of the Consolidated Group of Companies, all for the Fiscal Year 2015.		245

Telefónica, S.A. hereby submits the Individual Annual Accounts of “Telefónica, S.A.” and the Consolidated Annual Accounts of “Telefónica S.A.” and its “Group of Subsidiaries” for 2015 financial year, that have been filed with the Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores - CNMV).

The aforesaid Annual Accounts will be submitted for approval of the next Annual General Shareholders’ Meeting of the Company, the dates of which will be announced due course.

Madrid, February 26^th, 2016

LOGO

AUDIT REPORT, ANNUAL FINANCIAL STATEMENTS, AND

MANAGEMENT REPORT OF TELEFÓNICA, S.A., ALL FOR THE

YEAR ENDED DECEMBER 31, 2015

Independent Audit Report

TELEFÓNICA, S.A.

Financial Statements and Management Report

for the year ended

December 31, 2015

LOGO

Translation of a report and financial statements originally issued in Spanish. In the event of

discrepancy, the Spanish-language version prevails (See Note 24)

INDEPENDENT AUDIT REPORT ON THE FINANCIAL STATEMENTS

To the Shareholders of

Telefónica, S.A.

Report on the financial statements

We have audited the accompanying financial statements of Telefónica, S.A., which comprise the balance sheet at December 31, 2015, and the income statement, the statement of changes in equity, the cash flow statement, and the notes thereto for the year then ended.

Directors’ responsibility for the financial statements

The Directors are responsible for the preparation of the accompanying financial statements so that they give a true and fair view of the equity and financial position and the results of Telefónica, S.A., in accordance with the regulatory framework for financial information applicable to the Entity in Spain, identified in Note 2.a to the accompanying financial statements, and for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on the accompanying financial statements based on our audit. We conducted our audit in accordance with prevailing audit regulations in Spain. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation of financial statements by the Directors of the Company in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Domicilio Social: PI. Pablo Ruiz Picasso. 1. 28020 Madrid - Inscrita en el Registro Mercantil de Madrid al Tomo 12749, Libro 0, Folio 215, Sección 8^a, Hoja M-23123, Inscripción 116. C.I.F. B-78970506. A member firm of Ernst & Young Global Limited.

LOGO

Opinion

In our opinion, the accompanying financial statements give a true and fair view, in all material respects, of the equity and financial position of Telefónica, S.A. at December 31, 2015, and its results and cash flow for the year then ended, in accordance with the applicable regulatory framework for financial information in Spain, and specifically the accounting principles and criteria contained therein.

Report on other legal and regulatory requirements

The accompanying 2015 management report contains such explanations as the Directors consider appropriate concerning the situation of the Company, the evolution of its business and other matters; however, it is not an integral part of the financial statements. We have checked that the accounting information included in the aforementioned management report agrees with the 2015 financial statements. Our work as auditors is limited to verifying the management report in accordance with the scope mentioned in this paragraph, and does not include the review of information other than that obtained from the Company’s accounting records.

ERNST & YOUNG, S.L.

/s/ Ignacio Viota del Corte

Ignacio Viota del Corte

February 26, 2016

A member firm of Ernst & Young Global Limited

2015

TELEFÓNICA, S.A.

Annual financial statements and management report for the year ended December 31, 2015

Index


Balance sheet at December 31			4

Income statements for the years ended December 31			6

Statements of changes in equity for the years ended December 31			7

Cash flow statements for the years ended December 31			8

Note 1. Introduction and general information			9

Note 2. Basis of presentation			10

Note 3: Proposed appropriation of profit			12

Note 4. Recognition and measurement accounting policies			13

Note 5. Intangible assets			16

Note 6. Property, plant and equipment			17

Note 7. Investment properties			18

Note 8. Investments in group companies and associates			20

Note 9. Financial investments			29

Note 10. Trade and other receivables			33

Note 11. Equity			34

Note 12. Financial liabilities			39

Note 13. Bonds and other marketable debt securities			41

Note 14. Interest-bearing debt and derivates			43

Note 15. Payable to group companies and associates			46

Note 16. Derivate financial instruments and risk management policies			49

Note 17. Income tax			60

Note 18. Trade, other payables and provisions			65

Note 19. Revenue and expenses			67

Note 20. Other information			74

Note 21. Cash flow analysis			81



Note 22. Discontinued operations			84

Note 23. Events after the reporting period			85

Note 24. Additional note for English translation			86

Appendix I: Details of subsidiaries and associates at December 31, 2015			87

Appendix II: Board of Director’s and Senior Executives’ Compensation			92

Management report 2015			99

Business Model			99

Economic results of Telefónica, S.A.			101

Investment activity			102

Share price performance			105

Research, development and innovation			106

Environment			108

Other aspects related to corporate social responsibility			110

Human Resources			112

Liquidity and capital resources			114

Financing			114

Treasury shares			116

Risks and uncertainties facing the Company			118

Trend evolution			130

Events after the reporting period			132

Annual Corporate Governance Report for Listed Companies			133


		Financial Statements

Telefónica, S.A.

Balance sheet at December 31


Millions of euros
	Notes	2015		2014
ASSETS
NON-CURRENT ASSETS			62,204		73,065
Intangible assets	5		55		58
Software			8		13
Other intangible assets			47		45
Property, plant and equipment	6		222		225
Land and buildings			143		142
Plant and other PP&E items			62		76
Property, plant and equipment under construction and prepayments			17		7
Investment property	7		401		417
Land			94		94
Buildings			307		323
Non-current investments in Group companies and associates	8		50,300		62,367
Equity instruments			47,971		59,123
Loans to Group companies and associates			2,313		3,227
Other financial assets			16		17
Financial investments	9		5,073		5,709
Equity instruments			384		483
Loans to third parties			41		217
Derivatives	16		4,638		4,998
Other financial assets	9		10		11
Deferred tax assets	17		6,153		4,289
CURRENT ASSETS			22,809		12,782
Net assets held for sale	8		12,508		—
Trade and other receivables	10		594		1,081
Current investments in Group companies and associates	8		7,504		5,168
Loans to Group companies and associates			7,426		5,031
Derivatives	16		40		105
Other financial assets			38		32
Investments	9		2,060		1,941
Loans to companies			60		1,399
Derivatives	16		1,996		488
Other financial assets			4		54
Accruals			33		8
Cash and cash equivalents			110		4,584

TOTAL ASSETS			85,013		85,847

The accompanying Notes 1 to 24 and Appendix I and II are an integral part of these balance sheets

Telefónica, S.A. 4


		Financial Statements


Millions of euros
	Notes	2015			2014
Equity and liabilities
EQUITY			23,163			23,168
CAPITAL AND RESERVES			23,953			24,232
Share capital	11		4,975			4,657
Share premium	11		3,227			460
Reserves	11		18,105			18,682
Legal			984			984
Other reserves			17,121			17,698
Treasury shares and own equity instruments	11		(1,656	)		(1,587	)
Profit for the year	3		8			2,604
Interim dividend	3		(1,912	)		(1,790	)
Other equity instruments	11		1,206			1,206
UNREALIZED GAINS (LOSSES) RESERVE	11		(790	)		(1,064	)
Available-for-sale financial assets			11			20
Hedging instruments			(801	)		(1,084	)
NON-CURRENT LIABILITIES			46,255			49,351
Non-current provisions	18		835			267
Non-current borrowings	12		8,610			8,069
Bonds and other marketable debt securities	13		800			831
Bank borrowings	14		4,825			4,027
Derivatives	16		2,847			3,122
Other debts			138			89
Non-current borrowings from Group companies and associates	15		36,683			40,728
Deferred tax liabilities	17		88			179
Long term deferred revenues			39			108
CURRENT LIABILITIES			15,595			13,328
Current provisions	18		43			46
Current borrowings	12		1,628			1,201
Bonds and other marketable debt securities	13		85			77
Bank borrowings	14		1,269			759
Derivatives	16		274			365
Current borrowings from Group companies and associates	15		13,217			11,702
Trade and other payables	18		619			336
Accruals			88			43

TOTAL EQUITY AND LIABILITIES			85,013			85,847

The accompanying Notes 1 to 24 and Appendices I and II are an integral part of these balance sheets

Telefónica, S.A. 5


		Financial Statements

Telefónica, S.A.

Income statements for the years ended December 31


Millions of euros	Notes	2015			*2014 ()**
Revenue	19		5,900			7,388
Rendering of services to Group companies and associates			563			608
Rendering of services to non-group companies			4			3
Dividends from Group companies and associates			5,171			6,670
Interest income on loans to Group companies and associates			162			107
Impairment and gains (losses) on disposal of financial instruments			(4,457	)		(1,175	)
Impairment losses and other losses	8		(4,457	)		(1,179	)
Gains (losses) on disposal and other gains and losses			—			4
Other operating income	19		91			94
Non-core and other current operating revenue - Group companies and associates			22			23
Non-core and other current operating revenue - non-group companies			69			71
Employees benefits expense	19		(315	)		(233	)
Wages, salaries and others			(284	)		(203	)
Social security costs			(31	)		(30	)
Other operational expense			(783	)		(328	)
External services - Group companies and associates	19		(132	)		(105	)
External services - non-group companies	19		(624	)		(198	)
Taxes other than income tax			(27	)		(25	)
Depreciation and amortization	5, 6 and 7		(43	)		(64	)
Gains (losses) on disposal of fixed assets			17			—
OPERATING PROFIT			410			5,682
Finance revenue	19		593			184
Finance costs	19		(2,804	)		(2,296	)
Change in fair value of financial instruments			(19	)		(57	)
Trading portfolio and other securities			—			(38	)
Gain (loss) on available-for-sale financial assets recognized in the period	9 y 11		(19	)		(19	)
Exchange rate gains (losses)	19		(102	)		(103	)
Impairment and gains (losses) on disposal of financial instruments with third-parties	9.3 y 19.9		426			(270	)
NET FINANCIAL EXPENSE			(1,906	)		(2,542	)
PROFIT BEFORE TAX	21		(1,496	)		3,140
Income tax	17		2,102			698
PROFIT FOR THE YEAR CONTINUED OPERATIONS			606			3,838
Discontinued operations net of taxes	2 y 22		(598	)		(1,234	)
PROFIT FOR THE YEAR			8			2,604

The accompanying Notes 1 to 24 and Appendices I and II are an integral part of these income statements

(*)	Revised data see Note 2

Telefónica, S.A. 6


		Financial Statements

Telefónica, S.A.

Statements of changes in equity for the years ended December 31

A) Statement of recognized income and expense


Millions of euros	Notes	2015			2014
Profit of the period			8			2,604

Total income and expense recognized directly in equity	11		580			(360	)

From measurement of available-for-sale financial assets			467			(59	)
From cash flow hedges			380			(411	)
Income tax impact			(267	)		110

Total amounts transferred to income statement	11		(306	)		127

From measurement of available-for-sale financial assets			(481	)		19
From cash flow hedges			56			163
Income tax impact			119			(55	)

TOTAL RECOGNIZED INCOME AND EXPENSE			282			2,371

The accompanying Notes 1 to 24 and Appendices I and II are an integral part of these statements of changes in equity.

B) Statements of total changes in equity for the years ended December 31


Millions of euros	Share capital			Share premium and Reserves			Treasury shares			Profit for the year			Interim dividend			Other net equity instruments		Net unrealized gains (losses) reserve			Total
Balance at December 31, 2013		4,551			18,988			(545	)		664			—			—		(831	)		22,827

Total recognized income and expense		—			—			—			2,604			—			—		(233	)		2,371

Transactions with shareholders and owners		106			(485	)		(1,042	)		—			(1,790	)		1,206		—			(2,005	)
Dividends paid (Note 11)		106			(348	)		—			—			(1,790	)		—		—			(2,032	)
Transactions with treasury shares or own equity instruments (net)		—			(113	)		(1,042	)		—			—			—		—			(1,155	)
Other transactions with shareholders and owners		—			(24	)		—			—			—			1,206		—			1,182
Other movements		—			(25	)		—			—			—			—		—			(25	)
Appropriation of prior year profit (loss)		—			664			—			(664	)		—			—		—			—
Balance at December 31, 2014		4,657			19,142			(1,587	)		2,604			(1,790	)		1,206		(1,064	)		23,168

Total recognized income and expense		—			—			—			8			—			—		274			282

Transactions with shareholders and owners		318			1,374			(69	)		—			(1,912	)		—		—			(289	)
Capital increases (Note 11)		281			2,726			—			—			—			—		—			3,007
Capital decreases (Note 11)		(74	)		(812	)		886			—			—			—		—			—
Dividends paid (Note 11)		111			(448	)		—			—			(1,912	)		—		—			(2,249	)
Transactions with treasury shares or own equity instruments (net)		—			(75	)		(1,510	)		—			—			—		—			(1,585	)
Other transactions with shareholders and owners		—			(17	)		555			—			—			—		—			538
Other movements		—			2			—			—			—			—		—			2
Appropriation of prior year profit (loss)		—			814			—			(2,604	)		1,790			—		—			—
Balance at December 31, 2015		4,975			21,332			(1,656	)		8			(1,912	)		1,206		(790	)		23,163

The accompanying Notes 1 to 24 and Appendices I and II are an integral part of these statements of changes in equity.

Telefónica, S.A. 7


		Financial Statements

Telefónica, S.A.

Cash flow statements for the years ended December 31


Millions of euros	Notes	2015			*2014 ()**
A) CASH FLOWS FROM OPERATING ACTIVITIES			2,421			8,418
Profit before tax			(1,496	)		3,140
Adjustments to profit:			1,137			(3,025	)
Depreciation and amortization	5,6 and 7		43			64
Impairment of investments in Group companies and associates	8		4,457			1,179
Change in long term provisions			81			(29	)
Gains on the sale of financial assets			5			(4	)
Losses on disposal of property, plant and equipment			(22	)		—
Dividends from Group companies and associates	19		(5,171	)		(6,670	)
Interest income on loans to Group companies and associates	19		(162	)		(107	)
Net financial expense			1,906			2,542
Change in working capital			370			81
Trade and other receivables			165			73
Other current assets			(26	)		(40	)
Trade and other payables			222			(49	)
Other current liabilities			9			97
Other cash flows from operating activities	21		2,410			8,222
Net interest paid			(1,831	)		(1,872	)
Dividends received			3,091			9,750
Income tax receipts			1,150			237
Other payments/proceeds from operating activities			—			107
B) CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES			(2,848	)		(3,024	)
Payments on investments	21		(4,915	)		(5,704	)
Proceeds from disposals	21		2,067			2,680
C) CASH FLOWS USED IN FINANCING ACTIVITIES			(4,031	)		(5,524	)
Payments on equity instruments			(1,615	)		(21	)
Proceeds from financial liabilities	21		(3,227	)		(3,502	)
Debt issues			8,465			10,038
Repayment and redemption of debt			(11,692	)		(13,540	)
Capital increase			3,048			—
Dividends paid	21		(2,237	)		(2,001	)
D) NET FOREIGN EXCHANGE DIFFERENCE			(16	)		(54	)
E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS			(4,474	)		(184	)
Cash and cash equivalents at January 1			4,584			4,768
Cash and cash equivalents at December 31			110			4,584

Notes 1 to 24 and Appendices I and II are an integral part of these cash flow statements.

(*)	Revised data see Note 2

Telefónica, S.A. 8


		Financial Statements

TELEFÓNICA, S.A.

Annual financial statements for the ended December 31, 2015

Note 1. Introduction and general information

Telefónica, S.A. (“Telefónica” or “the Company”) is a public limited company incorporated for an indefinite period on April 19, 1924, under the corporate name of Compañía Telefónica Nacional de España, S.A. It adopted its present name in April 1998.

The Company’s registered office is at Gran Vía 28, Madrid (Spain), and its Employer Identification Number (CIF) is A-28/015865.

Telefónica’s basic corporate purpose, pursuant to Article 4 of its Bylaws, is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. All the business activities that constitute this stated corporate purpose may be performed either in Spain or abroad and wholly or partially by the Company, either through shareholdings or equity interests in other companies or legal entities with an identical or a similar corporate purpose.

In keeping with the above, Telefónica is currently the parent company of a group that offers both fix and mobile telecommunications with the aim to turn the challenges of the new digital business into reality and being one of the most important players. The objective of the Telefonica Group is positioning as a Company with an active role in the digital business taking advantage of the opportunities of its size and industrial and strategic alliances.

The Company is taxed under the general tax regime established by the Spanish State, the Spanish Autonomous Communities and local governments, and files consolidated tax returns with most of the Spanish subsidiaries of its Group under the consolidated tax regime applicable to corporate groups.

Telefónica, S.A. 9


		Financial Statements

Note 2. Basis of presentation

a) True and fair view

These financial statements have been prepared from Telefónica, S.A.’s accounting records by the Company’s Directors in accordance with the accounting principles and standards contained in the Spanish GAAP in force approved by Royal Decree 1514/2007, on November 16 (PGC 2007), modified by Royal Decree 1159/2010, dated September 17, 2010 and other prevailing legislation at the date of these financial statements, to give a true and fair view of the Company’s equity, financial position, results of operations and of the cash flows obtained and applied in 2015.

The accompanying financial statements for the year ended December 31, 2015 were prepared by the Company’s Board of Directors at its meeting on February 24, 2016 for submission for approval at the General Shareholders’ Meeting, which is expected to occur without modification.

The figures in these financial statements are expressed in millions of euros, unless indicated otherwise, and therefore may be rounded. The euro is the Company’s functional currency.

b) Comparison of information

In 2014 and 2015 there have not been significant transactions that should be taken into account in order to ensure the comparison of information included in the Annual Financial Statements of both years.

As a consequence of the sale agreement signed on March 24, 2015 between Telefónica, S.A. and Hutchison 3G UK Investment Limited and Hutchison 3G UK Holdings (CI) Limited (together “Hutchison”) and according to PGC 2007 Valuation Rule Nº 7, 11 caption, the amounts included in 2014 figures of the different captions of the profit and loss accounts referred to transactions with UK affiliates have been revised for comparative purposes as they are significant from a geographical area point of view (see Note 22).


Profit and loss caption (Millions of euros)
	Approved 12/31/2014			Revision			Revised 12/31/2014
Rendering of services to Group companies		643			(35	)		608
Dividends from Group companies and associates		7,974			(1,304	)		6,670
Other operating income Group companies		25			(2	)		23
Impairment losses		(3,679	)		2,500			(1,179	)
Financial expenses Group companies		(104	)		(1	)		(105	)
Exchange rate losses		(96	)		(7	)		(103	)
Income Tax		615			83			698
Discontinuated operations net of taxes (Note 22)		—			1,234			(1,234	)

c) Materiality

These financial statements do not include any information or disclosures that, not requiring presentation due to their qualitative significance, have been determined as immaterial or of no relevance pursuant to the concepts of materiality or relevance defined in the PGC 2007 conceptual framework.

d) Use of estimates

The financial statements have been prepared using estimates based on historical experience and other factors considered reasonable under the circumstances. The carrying value of assets and liabilities, which is not readily apparent from other sources, was established on the basis of these estimates. The Company periodically reviews these estimates.

A significant change in the facts and circumstances on which these estimates are based could have an impact on the Company’s results and financial position.

Telefónica, S.A. 10


		Financial Statements

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the financial statements of the following year are discussed below.

Provisions for impairment of investments in Group companies and associates

Investments in group companies, joint ventures and associates are tested for impairment at each year end to determine whether an impairment loss must be recognized in the income statement or a previously recognized impairment loss be reversed. The decision to recognize an impairment loss (or a reversal) involves estimates of the reasons for the potential impairment (or recovery), as well as the timing and amount. In note 8.2 it is assessed the impairment of these investments.

There is a significant element of judgment involved in the estimates required to determine recoverable amount and the assumptions regarding the performance of these investments, since the timing and scope of future changes in the business are difficult to predict.

Deferred taxes

The Company assesses the recoverability of deferred tax assets based on estimates of future earnings. The ability to recover these taxes depends ultimately on the Company’s ability to generate taxable earnings over the period for which the deferred tax assets remain deductible. This analysis is based on the estimated schedule for reversing deferred tax liabilities, as well as estimates of taxable earnings, which are sourced from internal projections and are continuously updated to reflect the latest trends.

The appropriate valuation of tax assets and liabilities depends on a series of factors, including estimates as to the timing and realization of deferred tax assets and the projected tax payment schedule. Actual income tax receipts and payments could differ from the estimates made by the Company as a result of changes in tax legislation or unforeseen transactions that could affect tax balances. The information about deferred tax assets and unused tax credits for loss carryforwards, whose effect has been registered when necessary in balance, is included in Note 17.

Telefónica, S.A. 11


		Financial Statements

Note 3: Proposed appropriation of profit

Telefónica, S.A. obtained 8 million euros of profit in 2015. Accordingly, the Company’s Board of Directors will submit the following proposed appropriation of 2015 profit for approval at the Shareholders’ Meeting:


Millions of euros
Proposed appropriation:
Profit for the year			8
Distribution to:
Goodwill reserve (Note 11.1.c)			2
Legal reserve			1
Interim Dividend			5

At its meeting of April 29, 2015, the Company’s Board of Directors resolved to pay an interim dividend against 2015 profit of a fixed gross 0.40 euros for each of the outstanding shares carrying dividend rights. This dividend was paid in full on May 12, 2015. The total amount paid was 1,912 million euros (see Note 11.1.d).

In accordance with Article 277 of the Spanish Companies Law, the following table shows the provisional statement issued by the Directors to substantiate that the Company had sufficient liquidity at that time to distribute this dividend.


Millions of euros
Liquidity statement
Income from January 1 through March 31, 2015	2,201
Mandatory appropriation to reserves	—
Distributable income	2,201
Proposed interim dividend (maximum amount)	(1,975	)

Cash position
Funds available for distribution
Cash and cash equivalents	3
Unused credit facilities	9,314
Proposed interim dividend (maximum amount)	(1,975	)

Telefónica, S.A.’s Board of Directors also proposes for approval at the Shareholders’ Meeting that the difference between the distributable profit of year 2015 and interim dividend is registered against voluntary reserves in the amount of 1,907 million euros.

Telefónica, S.A. 12


		Financial Statements

Note 4. Recognition and measurement accounting policies

As stated in Note 2, the Company’s financial statements have been prepared in accordance with the accounting principles and standards contained in the Código de Comercio, which are further developed in the Plan General de Contabilidad currently in force (PGC 2007), as well as any commercial regulation in force at the reporting date.

Accordingly, only the most significant accounting policies used in preparing the accompanying financial statements are set out below, in light of the nature of the Company’s activities as a holding.

a) Intangible assets

Intangible assets are stated at acquisition or production cost, less any accumulated amortization or any accumulated impairment losses.

Intangible assets are amortized on a straight-line basis over their useful lives. The most significant items included in this caption are computer software licenses, which are generally amortized on a straight-line basis over three years.

b) Property, plant and equipment and investment property

Property, plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment in value.

The Company depreciates its property, plant and equipment once the assets are in full working conditions using the straight-line method based on the assets’ estimated useful lives, calculated in accordance with technical studies which are revised periodically based on technological advances and the rate of dismantling, as follows:


Estimated useful life	Years
Buildings		40
Plant and machinery		3 - 25
Other plant or equipment, furniture and fixtures		10
Other items of property, plant and equipment		4 - 10

Investment property is measured and depreciated using the same criteria described for land and buildings for own use.

c) Impairment of non-current assets

Non-current assets are assessed at each reporting date for indicators of impairment. Where such indicators exist, or in the case of assets which are subject to an annual impairment test, the Company estimates the asset’s recoverable amount as the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows deriving from the use of the asset or its cash generating unit, as applicable, are discounted to their present value, using a discount rate reflecting current market assessments of the time value of money and the risks specific to the asset.

Telefónica bases the calculation of impairment on the business plans of the various companies approved by the Board of Directors’ of Telefónica, S.A to which the assets are allocated. The projected cash flows, based on strategic business plans, cover a period of five years not including the present year when the analysis is calculated. Starting with the sixth year, an expected constant growth rate is applied.

d) Financial assets and liabilities

Financial investments

Telefónica, S.A. 13


		Financial Statements

All regular way purchases and sales of financial assets are recognized on the trade date, i.e. the date that the Company commits to purchase or sell the asset.

“Investments in group companies, joint ventures and associates” are classified into a category of the same name and are shown at cost less any impairment loss (see Note 4.c). Group companies are those over which the Company exercises control, either by exercising effective control or by virtue of agreements with the other shareholders. Joint ventures are companies which are jointly controlled with third parties. Associates are companies in which there is significant influence, but not control or joint control with third parties. Telefónica assesses the existence of significant influence not only in terms of percentage ownership but also in qualitative terms such as presence on the board of directors, involvement in decision-making, the exchange of management personnel, and access to technical information.

Financial investments which the Company intends to hold for an unspecified period of time and could be sold at any time to meet specific liquidity requirements or in response to interest rate movements and which have not been included in the other categories of financial assets defined in the PGC 2007 are classified as available-for-sale. These investments are recorded under “Non-current assets,” unless it is probable and feasible that they will be sold within 12 months.

Derivative financial instruments and hedge accounting

When Telefónica chooses not to apply hedge accounting criteria but economic hedging, gains or losses resulting from changes in the fair value of derivatives are taken directly to the income statement.

e) Revenue and expenses

Revenue and expenses are recognized on the income statement based on an accruals basis; i.e. when the goods or services represented by them take place, regardless of when actual payment or collection occurs.

The income obtained by the Company in dividends received from Group companies and associates, and from the interest accrued on loans and credits given to them, are included in revenue in compliance with the provisions of consultation No. 2 of BOICAC 79, published on September 30, 2009.

f) Related party transactions

In mergers and spin-offs of businesses involving the parent company and its direct or indirect subsidiary, in cases of non-monetary contributions of businesses between Group companies, and in cases of dividends, the contributed assets are valued, in general, at their pre-transaction carrying amount in the individual financial statements, given that the Telefónica Group does not prepare its consolidated financial statements in accordance with the Standards on Preparing Consolidated Financial Statements (Spanish “NOFCAC”).

In these same operations, companies may also opt to use the consolidated values under International Financial Reporting Standards (IFRS) as adopted by the European Union, providing that the consolidated figures do not differ from those obtained under the NOFCAC. Lastly, the Company may also opt to use the values resulting from a reconciliation to the NOFCAC. Any accounting difference is taken to reserves.

g) Financial guarantees

The Company has provided guarantees to a number of subsidiaries to secure their transactions with third parties (see Note 20.a). Where financial guarantees provided have a counterguarantee on the Company’s balance sheet, the value of the counterguarantee is estimated to be equal to the guarantee given, with no additional liability recognized as a result.

Guarantees provided for which there is no item on the Company’s balance sheet acting as a counterguarantee are initially measured at fair value which, unless there is evidence to the contrary, is the same as the premium received plus the present value of any premiums receivable. After initial recognition, these are subsequently measured at the higher of:

The amount resulting from the application of the rules for measuring provisions and contingencies.

Telefónica, S.A. 14


		Financial Statements

ii)

The amount initially recognized less, when applicable, any amounts take to the income statement corresponding to accrued income.

h) Consolidated data

As required under prevailing legislation, the Company has prepared separate consolidated annual financial statements, drawn up in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The balances of the main headings of the Telefónica Group’s consolidated financial statements for 2015 and 2014 are as follows:


Millions of euros
Item	2015		2014
Total assets		122,974		122,348

Equity:
Attributable to equity holders of the parent		17,891		21,135
Attributable to minority interests		9,665		9,186
Revenue from operations		47,219		43,458
Profit for the year:
Attributable to equity holders of the parent		2,745		3,001
Attributable to minority interests		135		251

Telefónica, S.A. 15


		Financial Statements

Note 5. Intangible assets

The movements in the items composing intangible assets and the related accumulated amortization in 2015 and 2014 are as follows:

2015


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers		Closing balance
INTANGIBLE ASSETS, GROSS		274			8			(30	)		2		254
Software		129			2			—			1		132
Other intangible assets		145			6			(30	)		1		122
ACCUMULATED AMORTIZATION		(216	)		(13	)		30			—		(199	)
Software		(116	)		(8	)		—			—		(124	)
Other intangible assets		(100	)		(5	)		30			—		(75	)
Net carrying amount		58			(5	)		—			2		55

2014


Millions of euros	Opening balance			Additions and allowances			Disposals		Transfers			Closing balance
INTANGIBLE ASSETS, GROSS		261			10			—		3			274
Software		120			5			—		4			129
Other intangible assets		141			5			—		(1	)		145
ACCUMULATED AMORTIZATION		(203	)		(13	)		—		—			(216	)
Software		(108	)		(8	)		—		—			(116	)
Other intangible assets		(95	)		(5	)		—		—			(100	)
Net carrying amount		58			(3	)		—		3			58

At December 31, 2015 and 2014 commitments exist to acquire intangible assets amounting to 0.2 and 0.7 million euros, respectively.

At December 31, 2015 and 2014, the Company had 164 million euros and 175 million euros, respectively, of fully amortized intangible assets.

Telefónica, S.A. 16


		Financial Statements

Note 6. Property, plant and equipment

The movements in the items composing property, plant and equipment and the related accumulated depreciation in 2015 and 2014 are as follows:

2015


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers			Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS		557			24			(7	)		(2	)		572
Land and buildings		228			8			(4	)		—			232
Plant and other PP&E items		322			3			(2	)		—			323
Property, plant and equipment under construction and prepayments		7			13			(1	)		(2	)		17
ACCUMULATED DEPRECIATION		(332	)		(20	)		2			—			(350	)
Buildings		(86	)		(3	)		—			—			(89	)
Plant and other PP&E items		(246	)		(17	)		2			—			(261	)
Net carrying amount		225			4			(5	)		(2	)		222

2014


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers			Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS		567			6			(13	)		(3	)		557
Land and buildings		228			—			—			—			228
Plant and other PP&E items		313			3			—			6			322
Property, plant and equipment under construction and prepayments		26			3			(13	)		(9	)		7
ACCUMULATED DEPRECIATION		(305	)		(40	)		13			—			(332	)
Buildings		(82	)		(17	)		13			—			(86	)
Plant and other PP&E items		(223	)		(23	)		—			—			(246	)
Net carrying amount		262			(34	)		—			(3	)		225

Firm commitments to acquire property, plant and equipment at December 31, 2015 and 2014 amounted to 1 million euros and 3 million euros, respectively. At December 31, 2015 and 2014, the Company had 178 million euros and 139 million euros, respectively, of fully depreciated items of property, plant and equipment.

Telefónica, S.A. has taken out insurance policies with appropriate limits to cover the potential risks which could affect its property, plant and equipment.

“Property, plant and equipment” includes the net carrying amount of the land and buildings occupied by Telefónica, S.A. at its Distrito Telefónica headquarters, amounting to 68 million euros and 74 million euros at the 2015 and 2014 year-ends, respectively. Also included is the net carrying amount of the remaining assets (mainly plant and property) of 37 and 48 million euros at December 31, 2015 and 2014, respectively. The land and buildings rented to other Group Companies have been included as “Investment properties” in Note 7.

Telefónica, S.A. 17


		Financial Statements

Note 7. Investment properties

The movements in the items composing investment properties in 2015 and 2014 and the related accumulated depreciation are as follows:

2015


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers		Closing balance
INVESTMENT PROPERTIES, GROSS		499			—			(13	)		—		486
Land		94			—			—			—		94
Buildings		405			—			(13	)		—		392
ACCUMULATED DEPRECIATION		(82	)		(10	)		7			—		(85	)
Buildings		(82	)		(10	)		7			—		(85	)
Net carrying amount		417			(10	)		(6	)		—		401

2014


Millions of euros	Opening balance			Additions and allowances			Disposals		Transfers		Closing balance
INVESTMENT PROPERTIES, GROSS		470			29			—		—		499
Land		65			29			—		—		94
Buildings		405			—			—		—		405
ACCUMULATED DEPRECIATION		(71	)		(11	)		—		—		(82	)
Buildings		(71	)		(11	)		—		—		(82	)
Net carrying amount		399			18			—		—		417

As of September 4^th, 2014 the Company exerted its pre-emptive rights and acquired the building of its headquarters in Barcelona, known as “Diagonal 00”, for 107 million euros plus transaction taxes. Until the purchase moment, the building was registered as an asset in financial leasing and the liability associated with this transaction amounted to 79.5 million euros. Having examined it, the Company estimated that the additional investment corresponded only to a higher value of land, so the difference between liability and purchase cost was booked as addition under the “Land” caption.

In addition to the “Diagonal 00” building mentioned above, “Investment properties” mainly includes the value of land and buildings leased by Telefónica, S.A. to other Group companies at the Distrito Telefónica head offices in Madrid.

In October 2015 the sale of the building addressed in Don Ramón de la Cruz street (Madrid) was completed. This building had been rented as a whole to other Group companies. The profit from the sale of the asset amounting to 22 million euros has been booked as “Profit from the sale of fixed assets” in the profit and loss account.

In 2015, the Company has buildings with a total area of 328,314 square meters leased to several Telefónica Group and other companies, equivalent to an occupancy rate of 93.27% of the buildings it has earmarked for lease. In 2014, it had a total of 322,039 square meters leased, equivalent to an occupancy rate of 92.81% of the buildings earmarked for lease.

Telefónica, S.A. 18


		Financial Statements

Total income from leased buildings in 2015 (see Note 19.1) amounted to 48 million euros (49 million euros in 2014). Future minimum rentals receivable under non-cancellable leases are as follows:


	2015		2014
Millions of euros	Future minimum recoveries		Future minimum recoveries
Up to one year		44		48
Between two and five years		9		17
Over 5 years		1		1

Total		54		66

The most significant lease contracts held with subsidiaries occupying Distrito Telefónica have been renewed in 2015 for a non-cancellable period of 12 months. The figures also include non-cancellable lease revenue from Diagonal 00, the contracts for which expire in July 2016.

The main contracts of operating leases in which Telefónica, S.A. acts as lessee and there is no sub-lease are described in Note 19.5.

Telefónica, S.A. 19


		Financial Statements

Note 8. Investments in group companies and associates

8.1. The movements in the items composing investments in Group companies, joint ventures and associates in 2015 and 2014 are as follows:

2015


Millions of euros	Opening balance			Additions			Disposals			Transfers			Exchange losses			Dividends		Hedges of a net investment		Closing balance			Fair value
Equity instruments (Net) (1)		59,123			2,354			(340	)		(13,166	)		—			—		—		47,971			110,470
Equity instruments (Cost)		82,005			6,811			(340	)		(26,294	)		—			—		—		62,182
Impairment losses		(22,882	)		(4,457	)		—			13,128			—			—		—		(14,211	)
Loans to Group companies and associates		3,227			124			(202	)		(795	)		(41	)		—		—		2,313			2,337
Other financial assets		17			18			—			(19	)		—			—		—		16			16

Total non-current investment in Group companies and associates		62,367			2,496			(542	)		(13,980	)		(41	)		—		—		50,300			112,823

Loans to Group companies and associates		5,031			4,779			(3,108	)		795			(71	)		—		—		7,426			7,438
Derivates		105			40			(105	)		—			—			—		—		40			40
Other financial assets		32			19			(32	)		19			—			—		—		38			38

Total current investments in Group companies and associates		5,168			4,838			(3,245	)		814			(71	)		—		—		7,504			7,516

(1)

Fair value at December 31, 2015 of Group companies and associates quoted in an active market (Telefônica Brasil, S.A.) was calculated taking the listing of the investments on the last day of the year; the rest of the shareholdings are stated at the value of discounted cash flows based on those entities’ business plans.

2014


Millions of euros	Opening balance			Additions			Disposals			Transfers			Exchange losses		Dividends			Hedges of a net investment		Closing balance			Fair value
Equity instruments (Net) (1)		58,155			3,549			—			(2,727	)		—		(2	)		148		59,123			131,415
Equity instruments (Cost)		80,107			4,728			—			(2,976	)		—		(2	)		148		82,005
Impairment losses		(21,952	)		(1,179	)		—			249			—		—			—		(22,882	)
Loans to Group companies and associates		4,205			801			(12	)		(1,789	)		22		—			—		3,227			3,335
Other financial assets		20			14			—			(17	)		—		—			—		17			17

Total non-current investment in Group companies and associates		62,380			4,364			(12	)		(4,533	)		22		(2	)		148		62,367			134,767

Loans to Group companies and associates		5,956			4,302			(5,723	)		482			14		—			—		5,031			5,031
Derivates		10			311			(216	)		—			—		—			—		105			105
Other financial assets		26			19			(30	)		17			—		—			—		32			32

Total current investments in Group companies and associates		5,992			4,632			(5,969	)		499			14		—			—		5,168			5,168

(1)

Fair value at December 31, 2014 of Group companies and associates quoted in an active market (Telefônica Brasil, S.A.) was calculated taking the listing of the investments on the last day of the year; the rest of the shareholdings are stated at the value of discounted cash flows based on those entities’ business plans.

Telefónica, S.A. 20


		Financial Statements

The most significant transactions occurred in 2015 and 2014 as well as their accounting impacts are described below:

2015

On March 24, 2015 Telefónica, S.A. signed an agreement with Hutchison to acquire Telefónica’s operations in the UK. As detailed in Notes 2 and 22, since the agreement date, the net carrying amount of the investment in Telefónica Europe, plc. subject to the transaction (13,189 million euros) was reclassified under “Non-current assets held for sale”. The investment write off in 2015 has been included under the same balance sheet caption amounting to 852 million euros (note 22). The write off adjustment in the income statements ended December 31, 2015 have been recognized under “Profit after tax from discontinued operations”. 2014 figure amounting to 2,500 million euros has been accordingly reclassified to the same caption.

Once the pertinent regulatory authorizations were obtained on April 27, 2015, and with the aim of raising the funds needed to complete the acquisition of Global Village Telecom, S.A. and its parent company GVT Participaçoes, S.A. the General Shareholdings’ Meeting of Telefônica Brasil, S.A. launched a capital increase of 15,812 million reales. Telefónica, S.A. subscribed 3,995 million reales (equivalent to 1.262 million euros). On the same date, and with the object of subscribing the above mentioned capital increase, SP Telecomunicaçoes Participaoes, Ltda approved a capital increase of 3,223 million reales. Telefónica, S.A. paid 1,270 million reales (equivalente to 401 million euros).

On June 24, 2015 and in compliance with the undertakings assumed in the agreement entered into for the acquisition of Global Village Telecom, S.A. (GVT), it has, through its 100% subsidiary Telco TE S.p.A., delivered 1,110 million ordinary shares of Telecom Italia S.p.A. (representing 8.2% of its ordinary shares ) to Vivendi, S.A. and has received from Vivendi, S.A. all the ordinary shares and part of the preferred shares of Telefônica Brasil S.A. that Vivendi S.A. received as consideration for the sale of GVT, which together represent 4.5% of the total share capital of Telefônica Brasil S.A. The fair value of Telecom Italia shares contributed to Vivendi has been calculated using the quoted price at the approval date amounting to 1,264 million euros. This same amount has been used to value the 4.5% additional investment in Telefônica Brasil, S.A.

On July 29, 2015, Telefónica, S.A. entered into an agreement with Vivendi, S.A. through which Telefónica has committed to deliver 46 million of its treasury shares in exchange for 58.4 million of Telefônica Brasil, S.A. shares, representing approximately 3.5% of the share capital of Telefónica Brasil, S.A. The execution of the agreement was performed on September 16, 2015 and valued at the quoted price of Telefónica’s shares at that date, 538 million euros.

As a consequence of the aforementioned transactions, the direct stake of Telefónica, S.A. in Telefônica Brasil, S.A. was increased to 29.77% and the stake at SP Telecommunicaçoes Participaçoes, Ltda is 39.4% of its capital.

On June 18, 2015 the public deed of Telco, S.p.A.’s spin off transaction was filed to the Companies Register. As a result of the process, Telecom Italia, S.p.A. ordinary shares owned by Telco, S.p.A. (equivalent to a 22.3% of the company’s share capital) were transferred to its stakeholders. Therefore, Telefónica, S.A. through a 100% owned newly incorporated subsidiary, Telco TE, S.p.A. received ordinary shares representing 14.72% of Telecom Italia’s share capital. In this same spin off process, Telco TE, S.p.A. registered the part of the liability that Telco, S.p.A. owed its stakeholders, pro-rata their percentage of ownership. The net book value of assets and liabilities registered was 603 million euros and it is included as “additions” in the table of movements above (Note 9.3).

On the other hand, Telco TE S.p.A. entered into a purchase agreement with a financing institution for the sale of 872 million ordinary shares of Telecom Italia S.p.A., representing 6.5% of the ordinary shares of this company, for an amount of 1,025 million euros.

Likewise, Telefónica has arranged several hedging instruments which will allow Telefónica to repurchase the shares of Telecom Italia S.p.A. that are necessary to meet its exchange obligations under the mandatory exchangeable bonds for shares of Telecom Italia S.p.A., issued by Telefónica, S.A. in July 2014.

Telefónica, S.A. 21


		Financial Statements

Telefónica, S.A. has therefore ended the divesting process of its indirect stake at Telecom Italia, S.p.A., in accordance with the regulatory and competence requirements.

2014

On January 28th, 2014 Telefónica announced that after obtaining the relevant regulatory approval, the sale transaction of the 65.9% of the capital share of Telefónica Czech Republic, a.s. to PPF Group N.V.I. was completed. This concept was registered in 2013 balance under caption “Non-current assets held for sale” for an amount of 2,302 million euros.

On June 16, 2014 the three Italian shareholders of Telco, S.p.A. requested the initiation of the process of “demerger” (spin off) of the company, as provided in the Shareholders Agreement. Implementation of the demerger, approved by the General Meeting of Shareholders of Telco, S.p.A. held on July 9, 2014, was approved in 2015 by anti-trust and telecommunications authorities (including Brazil and Argentina).

At a meeting on December 22, 2014, the Brazilian telecommunications regulator (ANATEL) approved the demerger on condition of suspension of Telefónica’s voting rights in Telecom Italia, S.p.A. and its subsidiaries, among certain other measures. Telefónica agreed with the aforementioned suspension of voting rights and offered the presentation of a formal statement to ANATEL in this regard. Therefore, on the same date Telefónica ceased to have significant influence through its indirect holding in Telecom Italia, S.p.A. and reclassified this investment as an available-for-sale financial asset (see Note 9).

Other movements

Movement in “Transfers” in both 2015 and 2014 mainly includes the reclassification between long-term and current loans in accordance with the loan maturity schedule, as well as the reclassification under “Loans to third parties” of the bond and not yet due accrued interest of Telco, S.p.A.

In 2015 “Transfers” figure under the caption of “Equity Instruments” mainly corresponds to the reclassification of the net carrying amount of the investment in Telefónica Europe, plc as stated at the beginning of the Note amounting to 13,189 million euros. In addition, as of December 31, 2015, the Company has reached an agreement to sell its affiliated company Telefónica Gestión de Servicios Compartidos España, S.A.U. Therefore, the net carrying amount of this investment has also been included as “Held for sale assets” amounting to 8 million euros. On the other hand, the increase of the negative carrying amount of certain investments has been reclassified to the caption “Long Term Accruals” (31 million euros).

In 2014, movement in “Transfers” in “Equity instruments” caption refers to the net book value reclassification of the investment in Telco, S.p.A. (amounting to 358 million euros). Offsetting this figure, it is also included the reclassification to “Long term provisions” of the negative net book value of some investments in group companies totaling 131 million euros.

Telefónica, S.A. 22


		Financial Statements

In 2015 and 2014, Telefónica, S.A. bought and sold the following shareholdings:

a) Acquisitions of investments and capital increases (Additions):


Millions of euros Companies	2015		2014
Telefônica Brasil, S.A.		3,064		—
Sao Paulo Telecommunicaçoes, S.A.		401		—
Telefónica Internacional, S.A.U.		2,157		—
Telfin Ireland, Ltd.		—		3,700
Telefónica de Contenidos, S.A.U.		—		400
Telefónica Digital Holdings, S.A.U.		399		268
Telefónica Finanzas México, S.A. de C.V.		—		138
Telco TE, S.p.A.		603		—
Telefónica Móviles México, S.A. de C.V.		110		56
Other companies		77		166

Total		6,811		4,728

2015

Transactions referring the investment increase in Telefônica Brasil, S.A. and Sao Paulo Telecommunicaçoes, S.A. have been detailed at the beginning of this Note.

On June 25, 2015 Telefónica Internacional, S.A.U. made a capital increase with share premium reserve amounting to 2,157 million euros totally subscribed and paid by the Company.

With the object of regaining equity balance, on February 26, 2015 Telefónica Digital Holding, S.A. increased its share capital subscribed in full with a loan capitalization of 156 million euros and proceeds in cash amounting to 175 million euros. Moreover, on November 18, 2015 and with the aim of enabling the fulfillment of its financing needs, the company has executed a capital increase of 68 million euros subscribed and paid in full by Telefónica, S.A.

The amount in the above chart regarding Telco TE, S.p.A. has been explained at the beginning of the Note.

In order to provide Telefónica México, S.A. de C.V. with the funds needed to cancel short term payments, in November and December the subsidiary has made several capital increases amounting to 2,000 million mexican pesos (110 million euros) fully subscribed and paid by its sole stakeholder, Telefónica, S.A.

2014

With the object of regaining equity balance, on January 16^th, 2014 Telefónica Digital Holding, S.A.U. increased its share capital totally subscribed and paid by Telefónica, S.A. amounting 31 million euros. On October 2^nd, 2014 an additional capital increase was completed totaling 237 million euros also totally subscribed and paid by Telefónica, S.A. with the same objective of regaining the equity balance of the company and its affiliates.

On January 22^nd, 2014 Telefónica México, S.A. de C.V. completed a share capital increase amounting to 1,000 million Mexican pesos (56 million euros) fully subscribed by Telefónica, S.A.

On March 25, 2014 Telefónica Finanzas México, S.A. de C.V. has increased its share capital by 2,500 million Mexican pesos (138 million euros) fully subscribed and paid by Telefónica, S.A.

On July 7^th, 2014, and within the framework of the purchase of the shares that Promotora de Informaciones, S.A. (PRISA) owns in Distribuidora de Televisión Digital, S.A. (DTS), Telefónica de Contenidos, S.A. increased its share capital in 300 million euros totally subscribed by Telefónica, S.A. With the aim of raising the funds needed to complete the acquisition of this investment once the relevant regulatory approvals are

Telefónica, S.A. 23


		Financial Statements

achieved, on November 17^th, the company increased its share capital in 100 million euros, fully subscribed and paid by Telefónica, S.A.

On August 1st and September 18th, Telefónica, S.A. completed two capital increases fully subscribed and paid in Telfin Ireland, Ltd totaling 2,900 million and 800 million euros, respectively, in order to provide the company with the funds needed to fulfill borrowing activities for other subsidiaries of the Telefónica Group such as Telefónica Deutschland and carry out their activities.

b) Disposals of investments and capital decreases:

The disposal in 2015 refers to the decrease and pay back of the share premium reserve of Phenix Investments, S.A. In 2014 there were no disposals.

8.2. Assessment of impairment of investments in group companies, joint ventures and associates

At each year end, the Company re-estimates the future cash flows derived from its investments in Group companies and associates. The estimate is made based on the discounted cash flows to be received from each subsidiary in its functional currency, net of the liabilities associated with each investment (mainly net borrowings and provisions), considering the percentage of ownership in each subsidiary and translated to euros at the official closing rate of each currency at December 31.

As a result of these estimations and the effect of the net investment hedge in 2015, an impairment provision of 4,457 million euros was recognized (1,179 million euros in 2014). This amount derives mainly from the following companies:

(a) write down of 1,872 million euros for Telefônica Brasil, S.A. (559 million euros in 2014) and 753 million euros for Sao Paulo Telecomunicaçoes, S.A. (176 million euros in 2014).

(b) write down of 233 million euros for Telefónica México, S.A. de C.V. (126 million euros in 2014).

(c) write down of 1,142 million euros for Telefónica Internacional, S.A.U., mainly originated by the impact in this subsidiary’s investments of the valuation of its 36,01% stake in Telefônica Brasil, S.A.

(d) write down of 123 million euros for Telcel, C.A. with no amount in 2014.

(e) write down of 267 million euros for Telefónica Digital Holding, S.A.U. (300 million euros in 2014).

The impairment provision in Telefónica Europe, plc is shown, in both 2015 and 2014 as indicated in Note 2 under the caption “Discontinued operations” (Note 22).

The valuation of Telefônica Brasil, S.A. and Sao Paulo Telecomunicaçoes, S.A. was bolstered by the acquisition of GVT in 2015. However, the improvement in operating numbers was significantly impacted by the financial volatility resulting from the country’s medium-term economic and political uncertainties.

These economic and financial tensions were felt mainly in the discount rate. As a result, the cost of capital in Brazil increased by 1 p.p. vs. 2014, in line with analysts’ expectations. This increase is the result of both higher costs of capital, mainly explained by the increase in the country’s risk premium, and higher costs of external finance. The performance of the Brazilian real also generated significant exchange rate losses in 2015, with a 32% depreciation of the currency compared to 2014.

With regard to the full-year growth rate for 2015 (5%), this was not significantly different to that applied in 2014, in line with the analysts’ consensus; a conservative approach has also been taken, considering that this rate is consistent with the Brazilian Central Bank’s medium-term inflation target (4.5%, within a band of ±2 p.p.), being below the consensus inflation rate expected by analysts over the Strategic Plan horizon (around 6%) and also lower than the forecast nominal GDP growth rate (around 7%). Conservative hypothesis have been used in accordance with analysts consensus.

Telefónica, S.A. 24


		Financial Statements

Turning to the operational side, OIBDA margins over the Strategic Plan horizon have shown an average 1.5 p.p. improvement compared to last year’s forecasts. This performance, together with the OIBDA margin used for full-year growth (36%) and the investment rate required for long-term business continuity (16.3%) agrees with analysts’ forecasts. Moreover, the synergies deriving from the acquisition of GVT have been incorporated within the time range of the cash flow projections into the valuation, considering both incremental increases in revenues and estimated savings over the coming years.

8.3. The detail of subsidiaries and associates is shown in Appendix I.

8.4. Transactions protected for tax purposes

Transaction carried out in 2015 that qualify for special tax treatment, as defined in Articles 83 or 94, as applicable, of Chapter VIII of Title VII of Legislative Royal Decree 4/2004 of March 5 approving the Revised Spanish Corporate Income Tax Law, is detailed in the following paragraph. Transactions qualified for special tax treatment carried out in prior years are disclosed in the financial statements for those years.

On July 29, 2015, Telefónica, S.A. as sole stakeholder of Telefónica Gestión de Servicios Compartidos España, S.A.U., decided to partially spin off (with an effect in its share capital and reserves decrease) the activity of major investment management, and its contribution to a newly incorporated company named Telefónica Servicios Globales, S.L. On December 15, 2015 both spin off deed and new incorporation deed were filed in the Madrid Companies Register. Telefónica, S.A. as sole stakeholder of the spinned off subsidiary, has booked the investment in the new company by the net carrying amount of the assets transferred (14 million euros).

On May 25, 2015, Telefónica, S.A., the sole stakeholder of Taetel, S.L.U., resolved to approve the merger of this company with Venturini España, S.A.U. and Compañía de Inversiones y Teleservicios, S.A.U. The takeover merger deed was filed in the Madrid Companies Register on July, 16^th 2015. Telefónica, S.A. has booked the increase of the investment in Taetel, S.L.U., at the net carrying amount of the two merged companies, Venturini España, S.A.U. (4 million euros) and Compañía de Inversiones y Teleservicios, S.A.U. (126 million euros).

On July 22, 2015, Telefónica de España, S.A.U., as sole stakeholder of Movistar Loyalty, S.L.U. resolved the merger of the company with the subsequent liquidation and and transfer en bloc of its assets and liabilities to Telefónica de España, S.A.U.., which will also acquires all its rights and obligations by universal succession. The takeover merger deed was filed in the Madrid Companies Register on October 6, 2015.

Telefónica, S.A. 25


		Financial Statements

8.5. The breakdown and maturity of loans to Group companies and associates in 2015 and 2014 are follows:

2015


Millions of euros
Company	2016		2017		2018		2019		2020		2021 and subsequent years		Final balance, current and non-current
Telefónica Móviles España, S.A.U.		710		—		400		—		—		—		1,110
Telefónica Móviles México, S.A. de C.V.		255		623		—		—		—		—		878
Telefónica de Contenidos, S.A.U.		419		—		—		—		—		—		419
Telefónica de España, S.A.U.		371		165		—		550		—		—		1,086
Telefónica Global Technology, S.A.U.		18		—		—		17		68		97		200
Telfin Ireland, Ltd.		455		—		—		—		—		—		455
Telefónica Internacional, S.A.U.		3,632		—		—		—		—		—		3,632
Telefónica Latinoamerica Holding, S.L.		1,039		—		—		—		—		—		1,039
Telefônica Brasil, S.A.		111		—		—		—		—		—		111
Other companies		416		69		178		29		55		62		809

Total		7,426		857		578		596		123		159		9,739

2014


Millions of euros
Company	2015		2016		2017		2018		2019		2020 and subsequent years		Final balance, current and non-current
Telefónica Móviles España, S.A.U.		276		638		—		400		—		—		1,314
Telefónica Móviles México, S.A. de C.V.		226		654		—		—		—		—		880
Telefónica de Contenidos, S.A.U.		419		—		—		—		—		—		419
Telefónica de España, S.A.U.		471		—		165		—		550		—		1,186
Telefónica Global Technology, S.A.U.		4		—		—		—		21		177		202
Telefónica Emisiones, S.A.U.		138		—		—		—		—		—		138
Telefónica Digital Holding, S.A.U.		—		155		—		—		—		—		155
Telefónica Internacional, S.A.U.		3,272		—		—		—		—		—		3,272
Other companies		225		106		29		203		36		93		692

Total		5,031		1,553		194		603		607		270		8,258

Telefónica, S.A. 26


		Financial Statements

The main loans granted to Group and associated companies are described below:

•

The financing extended to Telefónica Móviles España, S.A.U. in 2015 and 2014 consists of two loans for 638 million euros and 400 million euros, with maturity date in 2016 and 2018, respectively, and formalised in 2013 to enable this company to meet its payment obligations. These credits have 4 million euros of accrued interest receivable.

Moreover, 68 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (272 million euros in 2014).

At December 31, 2015, the account receivable with Telefónica Móviles México, S.A. de C.V. amounts to 11,697 million Mexican pesos, equivalent to 623 million euros (11,697 million Mexican pesos, equivalent to 654 million euros in 2014). This consideration is recognised as non-current pursuant to the expected collection date at the reporting date. At December 31, 2015, accrued interest receivable totals 255 million euros (226 million euros in 2014), which forms part of the current balance receivable.

•

At December 31, 2015, the account receivable with Telefónica de Contenidos, S.A.U. is broken down as follows:

A 340 million-euro participating loan awarded in 2013 and maturity date in May 2015 that has been extended until May 2016 with the same principal amount and conditions, all of which has been drawn down. Interest on this loan is calculated according to the performance of Telefónica de Contenidos, S.A.U. At December 31, 2015 and 2014, no accrued interest is outstanding.

A 79 million-euro participating loan extended in 2005 and maturing in 2015, which has also been extended until May 2016 with the same principal amount and conditions, all of which has been drawn down.

•

The 2015 balance for Telefónica de España, S.A.U. consists of a 550 million euros credit facility granted and drawn down in full in November 2014 and maturing in 2019, and a credit facility of 165 million euros maturing in 2017. Additionally, there is also a balance of 370 million euros comprising tax receivables from the subsidiary for its tax expense declared in the consolidated tax return (470 million euros in 2014) and accrued interest of 1 million euros.

•

At December 31, 2015, the account receivable from Telefónica Global Technology, S.A.U. consists of a number of long-term financing agreements under participating loans which bear interest based on the business performance of the company, with an outstanding balance at December 31, 2015 of 182 million euros (202 million euros in 2014). There are 18 million euros of interest accrued and not paid included in the chart.

•

During January and February 2014, according to their maturity schedule, Telefónica Emisiones S.A.U. bonds totaling 153 million euros and 57 million pounds sterling (equivalent to 69 million euros) were cancelled. The remaining bonds (136 million euros), were booked as short term financial assets according to their maturity schedule have been fully cancelled in the first half of 2015.

•

On December, 30, 2015, General Shareholders’ Meeting of Telfin Ireland, Ltd. approved a dividend distribution totaling 455 million euros. Out of this amount, 275 million euros correspond to an unrestricted reserve distribution and 180 million are an interim dividend distribution. Both amounts are registered as short term financial receivables at the closing date of these annual accounts.

•

In 2015 the General Shareholders’ Meeting of Telefónica Internacional, S.A.U. approved the distribution of 1,000 million euros against unrestricted reserves. The amount has been registered as short term financial receivables. In 2015 Telefónica Internacional, S.A.U. has partially cancelled the outstanding amount of dividends from 2014 by the assignment of a loan granted to Telefónica Latinoamérica Holding, S.L.amounting to 709 million euros (706 million as principal

Telefónica, S.A. 27


		Financial Statements

and 3 million of accrued interest). At the date of these annual accounts this financial account receivable has not been cancelled.

In 2014 the General Shareholders’ Meeting of Telefónica Internacional, S.A.U. approved the distribution of 3,238 million euros against unrestricted reserves. The amount was registered as short term financial receivables.

Moreover, 103 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (34 million euros in 2014).

•

In addition to the assignment of the loan granted to Telefónica Latinoamérica Holding, S.L. by Telefónica Internacional, S.A.U. detailed in the previous paragraphs, in December 2015 the Company has approved a dividend distribution charged against unrestricted reserves of 341 million euros. This amount has been partially offset by tax balances due to the subsidiary, and therefore the outstanding balance at year-end is 1,039 million euros.

The Company has also extended 597 million euros (825 million euros in 2014) of loans in connection with the taxation of Telefónica, S.A. as the head of the tax group pursuant to the consolidated tax regime applicable to corporate groups (see Note 17). The most significant amounts have already been disclosed through this Note. All these amounts fall due in the short term.

Disposals of current loans to group companies and associates includes the cancellation of balances receivable from subsidiaries on account of their membership of Telefónica, S.A.’s tax group totaling 825 million euros (355 million euros in 2014).

Total accrued interest receivable at December 31, 2015 included under “Current loans to group companies and associates” amounted to 271 million euros (234 million euros in 2014).

8.6. Other financial assets with Group companies and associates

This includes rights to collect amounts from other Group companies related to share-based payment plans involving Telefónica, S.A. shares offered by subsidiaries to their employees maturing in 2016, 2017 and 2018 (see Note 19.3).

Telefónica, S.A. 28


		Financial Statements

Note 9. Financial investments

9.1. The breakdown of “Financial investments” at December 31, 2015 and 2014 is as follows:

2015


	Assets at fair value														Assets at amortized cost
									Measurement hierarchy

Millions of euros	Available-for-sale financial assets		Financial assets held for trading		Hedges		Subtotal assets at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on observable market data		Loans and receivables		Other financial assets		Subtotal assets at amortized cost		Subtotal liabilities at fair value		Total carrying amount		Total fair value
Non-current financial investments		384		2,339		2,299		5,022		384		4,638		—		41		10		51		51		5,073		5,073
Equity instruments		384		—		—		384		384		—		—		—		—		—		—		384		384
Derivatives (Note 16)		—		2,339		2,299		4,638		—		4,638		—		—		—		—		—		4,638		4,638
Loans to third parties and other financial assets		—		—		—		—		—		—		—		41		10		51		51		51		51
Current financial investments		—		590		1,406		1,996		—		1,996		—		60		4		64		64		2,060		2,060
Loans to third parties		—		—		—		—		—		—		—		60		4		64		64		64		64
Derivatives (Note 16)		—		590		1,406		1,996		—		1,996		—		—		—		—		—		1,996		1,996

Total financial investments		384		2,929		3,705		7,018		384		6,634		—		101		14		115		115		7,133		7,133

Telefónica, S.A. 29


		Financial Statements

2014


	Assets at fair value														Assets at amortized cost
									Measurement hierarchy

Millions of euros	Available-for-sale financial assets		Financial assets held for trading		Hedges		Subtotal assets at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on observable market data		Loans and receivables		Other financial assets		Subtotal assets at amortized cost		Subtotal liabilities at fair value		Total carrying amount		Total fair value
Non-current financial investments		483		2,457		2,541		5,481		483		4,998		—		217		11		228		236		5,709		5,717
Equity instruments		483		—		—		483		483		—		—		—		—		—		—		483		483
Derivatives (Note 16)		—		2,457		2,541		4,998		—		4,998		—		—		—		—		—		4,998		4,998
Loans to third parties and other financial assets		—		—		—		—		—		—		—		217		11		228		236		228		236
Current financial investments		—		250		238		488		—		488		—		1,399		54		1,453		1,447		1,941		1,935
Loans to third parties		—		—		—		—		—		—		—		1,399		54		1,453		1,447		1,453		1,447
Derivatives (Note 16)		—		250		238		488		—		488		—		—		—		—		—		488		488

Total financial investments		483		2,707		2,779		5,969		483		5,486		—		1,616		65		1,681		1,683		7,650		7,652

Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.

The calculation of the fair values of the Company’s financial debt instruments required an estimate for each currency of a credit spread curve using the prices of the Company’s bonds and credit derivatives.

Telefónica, S.A. 30


		Financial Statements

9.2 Held-for-trading financial assets and hedges

These two categories include the fair value of outstanding derivate financial instruments at December 31, 2015 and 2014 (see Note 16).

9.3 Available-for-sale financial assets.

This category mainly includes the fair value of investments in listed companies (equity instruments) over which the Company does not have significant control or influence. The movement of items composing this category at December 31, 2015 and 2014 are as follows:

December 31, 2015


Millions of euros	Opening balance		Additions		Disposals			Other movements			Fair value adjustments			Closing balance
Banco Bilbao Vizcaya Argentaria, S.A.		347		—		—			(10	)		(39	)		298
Telefónica Czech Republic, a.s.		—		—		—			—			—			—
Telco, S.p.A.		73		—		(603	)		15			515			—
Other companies		63		32		—			—			(9	)		86

Total		483		32		(603	)		5			467			384

December 31, 2014


Millions of euros	Opening balance		Additions		Disposals			Other movements			Fair value adjustments			Closing balance
Banco Bilbao Vizcaya Argentaria, S.A.		382		—		—			(14	)		(21	)		347
Telefónica Czech Republic, a.s.		166		—		(160	)		—			(6	)		—
Telco, S.p.A.		—		—		(270	)		358			(15	)		73
Other companies		43		37		—			—			(17	)		63

Total		591		37		(430	)		344			(59	)		483

As a result of the loss of significant influence in its indirect investment in Telecom Italia, S.p.A., as reported at the beginning of Note 8, in December 2014 the net carrying amount of the investment in Telco, S.p.A. was registered under this caption, having been previously recognized as associated company. At this same moment, the Company reviewed the value of this investment, booking it at the quoted price of Telecom Italia’s shares (0.89 euro per share) minus Telco’s debt. As a result of the valuation, 270 million euros of Financial Expense, third parties were registered (See Note 19.9).

The revaluation in the quotation of Telecom Italia, S.p.A.’s shares since January 2015 until the spin off date is shown under “Fair Value adjustments” column of the charts above. In June 2015, the spin off deed of Telco, S.p.A. was filed to the Companies Register. After this spin off, the net book value of the assets and liabilities of the company that according to the percentage of ownership corresponded pro-rata to Telefónica, S.A., were transferred to a newly incorporated subsidiary, Telco TE, S.p.A. as indicated in Note 8. This transaction is registered as “Disposal” in 2015 chart of movements and has originated a financial revenue of 500 million euros (see Note 19).

The impacts shown in the column “Fair value adjustments” on both years include the fair value adjustment, net of tax effect of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA). These impacts are registered in the Equity of the Company (Note 11.2.). The effect, recorded both in 2015 and 2014 under “other movements”, relates to the sale of rights to scrip dividends that the bank distributed in both years.

Telefónica, S.A. 31


		Financial Statements

At December 31, 2015 Telefónica, S.A.‘s investment in BBVA represents 0.69% of that company’s share capital.

The investment in Telefónica Czech Republic, a.s. was sold in October 2014 for an amount of 160 million euros. The result of the transaction has been recognised as financial result of the Company.

9.4 Other financial assets and loans to third parties

The breakdown of investments included in this category at December 31, 2015 and 2014 is as follows:


Millions of euros	2015		2014
Other non-current financial assets:
Loans to third parties		41		217
Guarantees given		10		11
Other non-current financial assets		—		0
Other current financial assets:
Loans to third parties		60		1,399
Other current financial assets		4		54

Total		115		1,681

9.4.1 Loans to third parties

The full amount within non-current loans in 2014 was the deferred account receivable generated from the sale of Telefónica Czech Republic, a.s. completed on January 28, 2014. This same item amounted to 86 million euros as current loans. In November 2015, the Company agreed with PPF Group, N.V.I. an early prepayment of the total outstanding amount.

On February 27, 2015 Telco, S.p.A. reimbursed the total amounts of bank liabilities and bonds with the proceeds from its shareholders (2,555 million euros of which 1,687 million corresponded pro-rata to Telefónica, S.A.). After the spin off process of Telco, S.p.A. previously mentioned, the liability of the shareholders’ loan was transferred to Telco TE, S.p.A. In June 2015, this loan was completely cancelled. In 2014, the same concept was shown as loans to third parties.

In June 2015, when the sale of the shares of Telecom Italia, S.p.A. was completed (see Note 8), Telefónica arranged several hedging instruments which will allow Telefónica to repurchase the shares of Telecom Italia, S.p.A. that are necessary to meet its exchange obligations under the mandatory exchangeable bonds for shares of Telecom Italia S.p.A. (see Note 13). This “Equity Swap” contract envisages a premium for Telefónica, S.A. that it is being quaterly cashed until the contract vesting in 2017. The pending amounts are registered in the balance sheet according to its maturity schedule. As of December 31, 2015 there are 41 million euros as long term loans to third parties and 55 million euros as short term loans to third parties.

Telefónica, S.A. 32


		Financial Statements

Note 10. Trade and other receivables

The breakdown of “Trade and other receivables” at December 31, 2015 and 2014 is as follows:


Millions of euros	2015		2014
Trade receivables		10		2
Trade receivables from Group companies and associates		295		422
Other receivables		1		1
Employee benefits receivable		2		2
Tax receivables (Note 17)		286		654

Total		594		1,081

“Trade receivables from Group companies and associates” mainly includes amounts receivable from subsidiaries for the impact of the rights to use the Telefónica brand and the monthly office rental fees (see Note 7).

“Trade receivables” and “Trade receivables from Group companies and associates” in 2015 and 2014 include balances in foreign currency equivalent to 150 million and 267 million euros, respectively. In both years these amounts relate entirely to receivables in US dollars.

These balances gave rise to exchange gains in the income statement of approximately 22 million euros in 2015 (2 million euros of exchange gains in 2014).

Telefónica, S.A. 33


		Financial Statements

Note 11. Equity

11.1 Capital and reserves

a) Share capital

2015

On April 20, 2015, the public deed evidencing the share capital increase granted by Telefónica, S.A. was registered with the Commercial Registry of Madrid for a nominal value of 281,213,184 million euros recorded as “share capital”. The difference with the effective amount issued, amounting 3,048,350,914.56 million euros was recorded as Share premium.

On July 24, 2015, the public deed of the share capital reduction was registered, cancelling 74,076,263 of the own shares, reducing the company’s share capital by 74,076,263 euros.

On December 10, 2015, the need of a share capital increase of 110,857,946 euros was executed, during which 110,857,946 ordinary share with a par value of 1 euro each were issued, with a charge to reserves, as part of the scrip dividend shareholder remuneration deal. Share capital amounts to 4,975,199,197 euros subsequence to this increase.

At December 31, 2015, Telefónica, S.A.’s share capital amounted to 4,975,199,197 euros and consisted of 4,975,199,197 fully paid ordinary shares of a single series, par value of 1 euro, all recorded by the book-entry system and traded on the Spanish electronic trading system (“Continuous Market”), where they form part of the “Ibex 35” Index, on the four Spanish Stock Exchanges (Madrid, Barcelona, Valencia and Bilbao) and listed on the London and Buenos Aires Stock Exchanges, and on the New York and Lima Stock Exchanges, through American Depositary Shares (‘ADSs’).

2014

On December 9, 2014, the deed of a share capital increase of 106,179,744 euros was executed, during which 106,179,744 ordinary shares with a par value of 1 euro each were issued, with a charge to reserves, as part of the scrip dividend shareholder remuneration deal. Share capital amounts to 4,657,204,330 euros subsequent to this increase.

Authorizations by Shareholders’ Meeting

With respect to authorizations given regarding share capital, on June 12, 2015, authorization was given at the Annual Shareholders’ Meeting of Telefónica, S.A. for the Board of Directors, at its discretion and in accordance with the Company’s needs, to increase the Company’s capital, once or several times, within a maximum period of five years from that date, up to a maximum nominal increase of 2,469,208,757 euros, equivalent to half of Telefónica, S.A.’s share capital at that date, by issuing and placing new shares, -with or without a share premium, and, in all cases, in exchange for cash, expressly considering the possibility that the new shares may not be fully subscribed. The Board of Directors was also empowered to exclude, partially or fully, pre-emptive subscription rights under the terms of Section 506 of the Spanish Enterprises Act. However, the power to exclude preemptive rights is limited to 20% of the Company’s share capital on the date of adoption of this resolution.

Furthermore, on May 30, 2014, shareholders voted to authorize the acquisition by the Board of Directors of Telefónica, S.A. treasury shares, up to the limits and pursuant to the terms and conditions established at the Shareholders’ Meeting, within a maximum period of five years from that date. However, it specified that in no circumstances could the par value of the shares acquired, added to that of the treasury shares already held by Telefónica, S.A. and by any of its controlled subsidiaries, exceed the maximum legal percentage at any time (currently 10% of Telefónica, S.A.’s share capital).

In addition, at the May 30, 2014 Shareholders’ Meeting, authorization was given for the Board of Directors to issue debentures, bonds, notes and other fixed-income securities and hybrid instruments, including preferred shares at one or several times within a maximum period of five years from that date. These securities may be

Telefónica, S.A. 34


		Financial Statements

in the form of debentures, bonds, promissory notes or any other kind of fixed-income security, or debt instruments of similar category or hybrid instruments whatever may be the forms admitted in law, plain or, in the case of debentures, bonds and hybrid instruments convertible into shares of the Company and/or exchangeable for shares of any of the Group companies, or any other company. This delegation also includes warrants or other similar securities that might give the right to directly or indirectly subscribe or acquire shares of the Company, whether newly issued or outstanding, and which may be paid for by physical delivery or by offset. The aggregated amount of the issuance(s) of securities approved under this delegation of powers may not exceed, at any given time, the sum of 25,000 million or the equivalent in another currency. For promissory notes, the outstanding balance of promissory notes issued under the authorization will be calculated for purposes of the aforementioned limit. Also for purposes of the foregoing limit, in the case of warrants, the sum of the premiums and exercise prices of the warrants for each issuance that is approved under the delegation shall be taken into account.

At December 31, 2015 and 2014, Telefónica, S.A. held the following treasury shares:


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 12/31/15		141,639,159		11.69		10.24		1,450		2.84690	%

(1)	Millions of euros


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 12/31/14		128,227,971		11.68		11.92		1,528		2.75332	%

(1)	Millions of euros

The movement in treasury shares of Telefónica, S.A. in 2015 and 2014 is as follows:


	Number of shares
Treasury shares at 12/31/13		29,411,832
Acquisitions		100,723,415
Disposals		(129,177	)
GESP share plan delivery		(1,778,099	)
Treasury shares at 12/31/14		128,227,971
Acquisitions		138,036,450
Disposals		(47,824,300	)
Share redemption		(74,076,263	)
PIP II share plan delivery (Note 19.3)		(2,724,699	)
Treasury shares at 12/31/15		141,639,159

Acquisitions

The amount of the acquisitions of treasury shares in 2015 and 2014 was 1,654 million euros and 1,176 million euros, respectively.

Share redemption and disposals

On July 24, 2015, pursuant to the resolution of the share capital reduction, by the cancellation of own shares, adopted by the Annual General Shareholders’ Meeting of Telefónica held on June 12, 2015, and following the execution agreement adopted by the Board of Directors of the Company, the public deed of this share capital reduction was registered in the Madrid Mercantile Registry (Registro Mercantil). Therefore, 74,076,263 of the

Telefónica, S.A. 35


		Financial Statements

own shares of Telefónica, S.A. totalling 886 million euros have been cancelled, reducing the company’s share capital by 74 million euros.

Treasury shares sold in 2015 and 2014 amounted to 593 million euros and 1 million euros, respectively. The main treasury share sale transaction was on July 29, 2015 when Telefónica, S.A. entered into an agreement with Vivendi, S.A. through which Telefónica has committed to deliver 46.0 million of its treasury shares, in exchange for 58.4 million preferred shares of Telefônica Brasil, S.A. (received by Vivendi, S.A. in the context of the acquisition of GVT Participaçoes, S.A.), representing 3.5% of the share capital of Telefônica Brasil, S.A. (See Note 8). The impact in equity amounts to 555 million euros.

On June 30, 2015, the second phase of the Telefónica, S.A. long-term incentive plan called “Performance and Investment Plan 2012-2015” (“PIP 2012-2015”) ended. According to the level of “Total Shareholder Return” (TSR) achieved, 77%, 2,724,699 shares were delivered. In addition to these disposals, on November 28, 2014, 1,778,099 shares were delivered to Group employees when the second phase of the Global Employee Share Plan (“the GESP”) matured.

Options on treasury shares

At December 31, 2015, all the contracts of call option on treasury shares subject to physical delivery at a fixed price have reached the maturity date or have been executed (76 million options on treasury shares at December 31, 2014), which were presented as a reduction in equity under the caption “Treasury shares”. These contracts were valued, in previous periods, at the amount of premium paid, and upon maturity if the call options were exercised the premium was reclassified as treasury shares together with the price paid. If they were not exercised upon maturity their value was recognized directly in equity.

The Company also has a derivative instrument, to be settled by offset, on a nominal value equivalent to 33,8 million of Telefónica shares in 2015 (32 million shares in 2014), recognized in both years under “Current interest-bearing debt” in the accompanying balance sheet.

b) Legal reserve

According to the text of the Corporate Enterprises Act, companies must transfer 10% of profit for the year to a legal reserve until this reserve reaches at least 20% of share capital. The legal reserve can be used to increase capital by the amount exceeding 10% of the increased share capital amount. Except for this purpose, until the legal reserve exceeds the limit of 20% of share capital, it can only be used to offset losses, if there are no other reserves available. At December 31, 2014, the Company had duly set aside this reserve. After the capital increase carried forward in 2015, the Company needs to increase the legal reserve by 11 million euros. The proposed appropriation of profit (see Note 3) includes an allocation of the 10% of 2015 net profit (1 million euros) regarding this concept.

c) Other reserves

“Other reserves” includes:

•

The “Revaluation reserve” which arose as a result of the revaluation made pursuant to Royal Decree-Law 7/1996 dated June 7. The revaluation reserve may be used, free of tax, to offset any losses incurred in the future and to increase capital. From January 1, 2007, it may be allocated to unrestricted reserves, provided that the capital gain has been realized. The capital gain will be deemed to have been realized in respect of the portion on which the depreciation has been recorded for accounting purposes or when the revalued assets have been transferred or derecognized. In this respect, at the end of 2015 and 2014, an amount of 8 million euros corresponding to revaluations reserves subsequently considered unrestricted has been reclassified to “Other reserves” in both periods. The balance of this reserve at December 31, 2015 and 2014 was 93 million euros and 101 million euros, respectively.

•

Reserve for cancelled share capital: In accordance with Section 335.c) of the Corporate Enterprises Act and to render null and void the right of opposition provided for in Section 334 of the same Act, whenever the Company decreases capital it records a reserve for cancelled share capital for an

Telefónica, S.A. 36


		Financial Statements

amount equal to the par value of the cancelled shares, which can only be used if the same requirements as those applicable to the reduction of share capital are met. In 2015 a new reserve for cancelled capital share amounting to 74 million euros has been created. The cumulative amount of the reserve for cancelled share capital at December 31, 2015 and 2014 was 656 and 582 million euros, respectively.

•

Pursuant to the provisions of Royal Decree 1514/2007, since 2008, after the distribution of profits for each year, the Company sets aside a non-distributable reserve of 2 million euros for goodwill amortization. The balance of this reserve at December 31, 2015 was 12 million euros. The proposed appropriation of 2015 profit (see Note 3) includes an allocation of 2 million euros to this restricted reserve.

•

In addition to the restricted reserves explained above, “Other reserves” includes unrestricted reserves from gains obtained by the Company in prior years.

d) Dividends

Dividends paid in 2015

Approval was given at the Board of Directors’ Meeting of April 29, 2015 to pay a gross 0.4 euros dividend per outstanding share against 2015 profit. This dividend was paid on May 12, 2015 and the total gross amount paid was 1,912 million euros.

At its meeting held on November 13, 2015, the Executive Commission of Telefonica, S.A.’s Board of Directors agreed to carry out the execution of the increase in paid-up capital, related to the shareholders compensation by means of a scrip dividend, approved by the Annual General Shareholder´s Meeting held on June 12, 2015.

Thus, each shareholder received one free allotment right for each Telefónica share held. Such free allotment rights were traded on the Continuous Market in Spain during a period of fifteen calendar days. Once this trading period ended, the shareholders of 20.01% of the free-of-charge allotment rights accepted the irrevocable purchase commitment assumed by Telefónica, S.A. Cash payment to these shareholders was made on December 7, 2015, representing an impact in equity of 337 million euros.

The shareholders of 79.99% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Nevertheless, Telefónica, S.A. has waived the subscription of new shares corresponding to its treasury shares, so the final number of shares issued in the capital increase was 110,857,946 shares with a nominal value of 1 euro each.

Dividends paid in 2014

The Board of Directors’ at its meeting of April 25th, 2014 approved the payment of an interim dividend of 0.4 euros per share outstanding. The dividend was paid on May 7^th, 2014 and the total amount paid was 1,790 million euros.

The Executive Commission of Telefonica, S.A. Board of Directors, at its meeting held on November 14, 2014, agreed to carry out the execution of the free-of-charge capital increase, related to the shareholders compensation by means of a scrip dividend, approved by the Annual General Shareholder´s Meeting held on May 30, 2014.

After this approval, each shareholder received one free allotment right for each Telefónica Share held. Such free allotment rights were traded on the continuous Market in Spain during a period of fifteen calendar days.

Once this trading period ended, the shareholders of 15.8% of the free-of-charge allotment rights have accepted the purchase commitment assumed by Telefónica, S.A. Cash payment to these shareholders was carried into effect on December 8, 2014, assuming an impact on equity of 242 million euros.

The shareholders of 84.2% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Nevertheless, Telefónica, S.A. has waived the subscription of new shares that

Telefónica, S.A. 37


		Financial Statements

correspond to the treasury shares, so the final number of shares issued in the capital increase was 106,179,744 shares with a nominal value of 1 euro each.

e) Other equity instruments

On September 24, 2014, Telefónica Participaciones, S.A.U., issued 1,500 million euros of bonds necessarily convertible into new and/or existing shares of Telefónica, S.A. at a nominal fixed interest rate of 4.9%, due on September 25, 2017, guaranteed by Telefónica, S.A. The notes could be converted at the option of the noteholders or the issuer at any time from the 41^st day after the Issue Date up to the 25^th trading day prior to the Maturity Date. The minimum conversion price of the notes will be equal to 11.9 euros per share and the maximum conversion price will be equal to 14.5775 euros per share, resulting in a premium equal to 22.5% over the minimum conversion price.

On the same date, Telefónica, S.A. issued bonds with the same amount and characteristics of the previously detailed bond and a derivative instrument (warrant) in order to hedge the conversion price of the bonds. These bonds were wholly acquired by Telefónica Participaciones, S.A.U. In the balance sheet of Telefónica, S.A. the present value of the coupons was recorded as debt (See Note 15), the warrant was accounted as long term liabilities to group companies (see Note 16) and the remaining amount of 1,206 million euros has been recorded as “other net equity instruments”.

11.2 Unrealized gains (losses) reserve

The movements in the items composing “Unrealized gains (losses) reserve” in 2015 and 2014 are as follows:

2015


Millions of euros	Opening balance			Valuation at market value		Tax effect of additions			Amounts transferred to income statement			Tax effect of transfers			Closing balance
Available-for-sale financial assets (Note 9.3)		20			467		(130	)		(481	)		135			11
Cash flow hedges (Note 16)		(1,084	)		380		(137	)		56			(16	)		(801	)

Total		(1,064	)		847		(267	)		(425	)		119			(790	)

2014


Millions of euros	Opening balance			Valuation at market value			Tax effect of additions		Amounts transferred to income statement		Tax effect of transfers			Closing balance
Available-for-sale financial assets (Note 9.3)		49			(59	)		17		19		(6	)		20
Cash flow hedges (Note 16)		(880	)		(411	)		93		163		(49	)		(1,084	)

Total		(831	)		(470	)		110		182		(55	)		(1,064	)

Telefónica, S.A. 38


		Financial Statements

Note 12. Financial liabilities

The breakdown of “Financial liabilities” at December 31, 2015 and 2014 is as follows:

2015


	LIABILITIES AT FAIR VALUE
							MEASUREMENT HIERARCHY						LIABILITIES AT AMORTIZED COST
Millions of euros	Financial liabilities held for trading		Hedges		Subtotal financial liabilities at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on other directly observable market data		Trade and other payables		Subtotal liabilities at fair value		TOTAL CARRYING AMOUNT		TOTAL FAIR VALUE
Non-current financial liabilities		2,361		486		2,847		—		2,847		—		42,446		44,868		45,293		47,715
Payable to Group companies and associates		—		—		—		—		—		—		36,683		39,109		36,683		39,109
Bank borrowings		—		—		—		—		—		—		4,825		4,805		4,825		4,805
Bonds and other marketable debt securities		—		—		—		—		—		—		800		816		800		816
Derivatives (Note 16)		2,361		486		2,847		—		2,847		—		—		—		2,847		2,847
Other financial liabilities		—		—		—		—		—		—		138		138		138		138
Current financial liabilities		236		38		274		—		274		—		14,571		13,853		14,845		14,127
Payable to Group companies and associates		—		—		—		—		—		—		13,217		12,502		13,217		12,502
Bank borrowings		—		—		—		—		—		—		1,269		1,265		1,269		1,265
Bonds and other marketable debt securities		—		—		—		—		—		—		85		86		85		86
Derivatives (Note 16)		236		38		274		—		274		—		—		—		274		274

Total financial liabilities		2,597		524		3,121		—		3,121		—		57,017		58,721		60,138		61,842

Telefónica, S.A. 39


		Financial Statements

2014


	LIABILITIES AT FAIR VALUE
							MEASUREMENT HIERARCHY						LIABILITIES AT AMORTIZED COST
Millions of euros	Financial liabilities held for trading		Hedges		Subtotal financial liabilities at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on other directly observable market data		Trade and other payables		Subtotal liabilities at fair value		TOTAL CARRYING AMOUNT		TOTAL FAIR VALUE
Non-current financial liabilities		2,322		800		3,122		—		3,122		—		45,675		50,313		48,797		53,435
Payable to Group companies and associates		—		—		—		—		—		—		40,728		45,287		40,728		45,287
Bank borrowings		—		—		—		—		—		—		4,027		4,070		4,027		4,070
Bonds and other marketable debt securities		—		—		—		—		—		—		831		867		831		867
Derivatives (Note 16)		2,322		800		3,122		—		3,122		—		—		—		3,122		3,122
Other financial liabilities		—		—		—		—		—		—		89		89		89		89
Current financial liabilities		264		101		365		—		365		—		12,538		11,930		12,903		12,295
Payable to Group companies and associates		—		—		—		—		—		—		11,702		11,107		11,702		11,107
Bank borrowings		—		—		—		—		—		—		759		760		759		760
Bonds and other marketable debt securities		—		—		—		—		—		—		77		63		77		63
Derivatives (Note 16)		264		101		365		—		365		—		—		—		365		365
Other financial liabilities		—		—		—		—		—		—		—		—		—		—

Total financial liabilities		2,586		901		3,487		—		3,487		—		58,213		62,243		61,700		65,730

Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.

Telefónica, S.A. 40


		Financial Statements

Note 13. Bonds and other marketable debt securities

13.1 The balances and movements in issues of debentures, bonds and commercial paper at December 31, 2015 and 2014 are as follows:

2015


Millions of euros	Non-convertible debentures and bonds			Other marketable debt securities			Total
Opening balance		902			6			908
Additions		—			83			83
Depreciation and amortization		(50	)		(24	)		(74	)
Revaluation and other movements		(32	)		—			(32	)
Closing balance		820			65			885
Details of maturities:
Non-current		800			—			800
Current		20			65			85

2014


Millions of euros	Non-convertible debentures and bonds			Other marketable debt securities			Total
Opening balance		761			359			1,120
Additions		750			6			756
Depreciation and amortization		(613	)		(361	)		(974	)
Revaluation and other movements		4			2			6
Closing balance		902			6			908
Details of maturities:
Non-current		831			—			831
Current		71			6			77

In March 2015, in accordance with its maturity schedule, the Company cancelled the bonds issued in 2000. This movement is included as “Disposals” in the column of Non-convertible debentures and bonds of the 2015 chart of movements.

The additions shown in the table of movements for 2014 in the column “Non-convertible debentures and bonds” referred to Telefónica’s bond issuance made on July 24, 2014 amounting to 750 million euros. The bonds were mandatorily exchangeable into ordinary shares of Telecom Italia, S.p.A, maturing on July 24, 2017. The bonds might be exchanged in advance of the transfer of the shares, except under certain circumstances where the company might opt to redeem the bonds in cash.

Telefónica, S.A. 41


		Financial Statements

Maturities of the nominal amounts of debenture and bond issues at December 31, 2015 and 2014 are as follows:

2015


Millions of euros						Maturity
Name	Interest rate		% interest rate			2016		2017		2018		2019		2020		Subsequent years		TOTAL
DEBENTURES AND BONDS:
Bonds exchangeable into Telecom Italia shares		FIXED		6.00	%		—		750		—		—		—		—		750

Total issues							—		750		—		—		—		—		750

2014


Millions of euros						Maturity
Name	Interest rate		% interest rate			2015		2016		2017		2018		2019		Subsequent years		TOTAL
DEBENTURES AND BONDS:
MARCH 00		FLOATING		2.80	%(*)		50		—		—		—		—		—		50
Bonds exchangeable into Telecom Italia shares		FIXED		6.00	%		—		—		750		—		—		—		750

Total issues							50		—		750		—		—		—		800

(*)	The applicable interest rate (floating, set annually) is the sterling 10-year swap rate multiplied by 1.0225.

13.2 At December 31, 2015, Telefónica, S.A. had a corporate promissory note program registered with the CNMV, with the following features:

Millions of euros Amount

Placement
system

Nominal amount of the
Promissory notes

Terms of the
Promissory notes

Placement

500 million; can be increased to 2,000 million

Auctions

100,000 euros

30, 60, 90, 180, 365, 540

and 731 days

Competitive auctions

Tailored

100,000 euros

Between 3 and

731 days

Specific transactions

At December 31, 2015 the outstanding balance on this promissory note program was 65 million euros (6 million euros in 2014).

13.3 The average interest rate during 2015 on debentures and bonds outstanding during the year was 5.96% (5.15% in 2014) and the average interest rate on corporate promissory notes was 0.14% (0.43% in 2014).

Telefónica, S.A. 42


		Financial Statements

Note 14. Interest-bearing debt and derivates

14.1 The balances at December 31, 2015 and 2014 are as follows:

December 31, 2015

Millions of euros

Item

Current

Non-current

Total

Loans with financial entities

1,269

4,825

6,094

Derivative financial liabilities (Note 16)

274

2,847

3,121

Total

1,543

7,672

9,215

December 31, 2014

Millions of euros

Item

Current

Non-current

Total

Loans with financial entities

759

4,027

4,786

Derivative financial liabilities (Note 16)

365

3,122

3,487

Total

1,124

7,149

8,273

14.2 The nominal values of the main interest-bearing debts at December 31, 2015 and 2014 are as follows:

Description

Value Date

Marturity Date

Currency

Limit
12/31/15
(millions)

Balance
(million of euros)

Structured financing*

05/03/11

07/30/21

USD

247

226

Structured financing*

02/22/13

01/31/23

USD

786

722

Structured financing*

08/01/13

10/31/23

USD

618

447

Syndicated facility

02/18/14

02/18/19

⁽¹⁾

EUR

3,000

700

Bilateral*

06/26/14

06/26/18

⁽²⁾

EUR

1,500

Syndicated facility

02/19/15

02/19/20

⁽³⁾

EUR

2,500

500

Bilateral

06/30/15

06/30/20

EUR

200

Syndicated facility

11/17/15

02/17/18

EUR

3,000

—

Structured financing*

12/11/15

03/11/26

USD

750

—

Structured financing*

12/11/15

03/11/26

EUR

500

—

*	Facilities with amortization schedule.

(1)	The parties could mutually agree to extend the maturity to as late as 2021.

(2)	On 06/25/15 an amendment was signed modifying the maturity date and including an amortization schedule. On 07/01/15 an early repayment for 500 million euros was made.

(3)	The parties could mutually agree to extend the maturity to as late as 2022.

Description

Value Date

Marturity Date

Currency

Limit
12/31/14
(millions)

Balance
(million of euros)

Syndicated loan (1)*

04/21/06

04/21/17

EUR

700

Syndicated loan Tranche A3

07/28/10

07/28/16

EUR

328

Structured financing*

02/22/13

01/31/23

USD

905

571

Bilateral

06/26/14

06/26/17

EUR

2,000

*	Facilities with amortization schedule.

(1)	350 million euros are scheduled to mature on 04/21/15

Telefónica, S.A. 43


		Financial Statements

14.3 Maturities of balances at December 31, 2015 and 2014 are as follows:

December 31, 2015



	Maturity
Millions of euros Items	2016		2017		2018		2019		2020		Subsequent years		Closing balance
Loans with financial entities		1,269		174		1,596		1,065		872		1,118		6,094
Derivative financial liabilities (Note 16)		274		658		330		256		799		804		3,121

Total		1,543		832		1,926		1,321		1,671		1,922		9,215

December 31, 2014



	Maturity
Millions of euros Items	2015		2016		2017		2018		2019		Subsequent years		Closing balance
Loans with financial entities		759		508		2,531		232		427		329		4,786
Derivative financial liabilities (Note 16)		365		147		345		476		357		1,797		3,487

Total		1,124		655		2,876		708		784		2,126		8,273

14.4 Interest-bearing debt arranged or repaid in 2015 mainly includes the following:

•

On February 19, 2015, Telefónica, S.A. signed a 2,500 million euros syndicated credit facility maturing in 2020, even though by mutual agreement between the parties could be extended to a maximum maturity in 2022. At December 31, 2015, the outstanding balance under this financing was 500 million euros. This agreement entered into effect on February 26, 2015 and allowed us to cancel in advance the syndicated loan facility of Telefónica Europe, B.V. (Telefónica, S.A.’s subsidiary) dated on March 2, 2012 with two tranches of 756 million euros and 1,469 million pounds sterling originally scheduled to mature in 2017. On the same date, Telefónica, S.A. signed an amendment to its 3,000 million euros syndicated credit facility arranged on February 18, 2014 maturing in 2019 in which was included an option by mutual agreement between the parties to extend the maturity up to 2021. At December 31, 2015, the outstanding balance under this financing was 700 million euros.

•

On June 25, 2015, Telefónica, S.A. signed an amendment to its 2,000 million euros bilateral loan arranged on June 26, 2014 modifying the maturity date to June 26, 2018 and including an amortization schedule. On July 1, 2015 an early repayment for 500 million euros was made of which original maturity was in 2017.

•

On June 30, 2015, Telefónica, S.A. entered into a long-term credit facility for an aggregate amount of 200 million euros which matures in 2020. At December 31, 2015, the outstanding balance under this facility was 200 million euros.

•

On November 17, 2015, Telefónica, S.A. signed a 3,000 million euros syndicated revolving facility maturing in 2018. As of December 31, 2015, there was no outstanding amount under this credit.

•

On December 11, 2015, Telefónica, S.A. entered into a long-term credit facility for an aggregate amount of 750 million US dollars (approximately 689 million euros) at a fixed rate with the guarantee of the Swedish Export Credits Guarantee Board (EKN) which matures in 2026. At December 31, 2015, there was no outstanding amount under this facility.

•

On December 11, 2015, Telefónica, S.A. entered into a long-term credit facility for an aggregate amount of 500 million euros at a fixed rate with the guarantee of the Finnish Export Credits Guarantee Board (Finnvera) which matures in 2026. At December 31, 2015, there was no outstanding amount under this facility.

•

During 2015, Telefónica, S.A. made an early repayment for 328 million euros of its syndicated loan (tranche A3) dated July 28, 2010 and scheduled to mature originally on July 28, 2016. As of December 31, 2015 there was no outstanding balance under this facility.

Telefónica, S.A. 44


		Financial Statements

•

During 2015, Telefónica, S.A. repaid in full its syndicated loan dated April 21, 2006 (for a total amount of 700 million euros), of which 350 million euros were scheduled to mature originally in 2017.

•

During 2015, Telefónica, S.A. drew down 198 million dollars (equivalent to 182 million euros) and repaid 105 million dollars (equivalent to 96 million euros) of its 1,001 million dollars long-term credit facility arranged on February 22, 2013 and maturing in 2023. At December 31, 2015 the outstanding amount of this facility was 786 million dollars (equivalent to 722 million euros).

•

During 2015, Telefónica, S.A. drew down 353 million dollars (equivalent to 324 million euros) and repaid 59 million dollars (equivalent to 54 million euros) of its 734 million dollars long-term credit facility arranged on August 1, 2013 and maturing in 2023. At December 31, 2015 the outstanding amount of this facility was 487 million dollars (equivalent to 447 million euros).

14.5 Average interest on loans and borrowings

The average interest rate in 2015 on loans and borrowings denominated in euros was 0.557% and 2.099% for foreign-currency loans and receivables.

The average interest rate in 2014 on loans and borrowings denominated in euros was 1.048% and 2.250% for foreign-currency loans and receivables.

14.6 Unused credit facilities

The balances of loans and borrowings relate only to amounts drawn down.

At December 31, 2015 and 2014, Telefónica had undrawn credit facilities amounting to 11,705 million euros and 7,445 million euros, respectively.

Financing arranged by Telefónica, S.A. at December 31, 2015 and 2014 is not subject to compliance with financial ratios (covenants).

Telefónica, S.A. 45


		Financial Statements

Note 15. Payable to group companies and associates

15.1 The breakdown at December 31, 2015 and 2014 is as follows:

December 31, 2015



Millions of euros	Non-current		Current		Total
Loans		36,517		12,221		48,738
Trade payables to Group companies and associates		7		805		812
Derivatives (Note 16)		131		22		153
Payable to subsidiaries due to taxation on a consolidated basis		28		169		197

Total		36,683		13,217		49,900

December 31, 2014


Millions of euros	Non-current		Current		Total
Loans		40,415		11,265		51,680
Trade payables to Group companies and associates		21		152		173
Derivatives (Note 16)		107		12		119
Payable to subsidiaries due to taxation on a consolidated basis		185		273		458

Total		40,728		11,702		52,430

The maturity of these loans at the 2015 and 2014 year ends is as follows:

December 31, 2015



Company (Millions of euros)	2016		2017		2018		2019		2020		2020 and subsequent years		Final balance, current and non-current
Telefónica Emisiones, S.A.U.		7,369		5,283		3,998		3,443		3,704		13,140		36,937
Telefónica Europe, B.V.		1,683		—		1,119		850		1,558		3,350		8,560
Telfisa Global, B.V.		2,571		—		—		—		—		—		2,571
Telefónica Finanzas, S.A.U.		500		—		—		—		—		—		500
Others		98		72		—		—		—		—		170

Total		12,221		5,355		5,117		4,293		5,262		16,490		48,738

December 31, 2014


Company (Millions of euros)	2015		2016		2017		2018		2019		2019 and subsequent years		Final balance, current and non-current
Telefónica Emisiones, S.A.U.		3,962		6,391		4,774		3,786		3,347		14,897		37,157
Telefónica Europe, B.V.		1,451		—		—		1,104		847		5,035		8,437
Telfisa Global, B.V.		3,913		—		—		—		—		—		3,913
Telefónica Finanzas, S.A.U.		1,837		75		—		—		—		—		1,912
Others		102		—		142		—		—		17		261

Total		11,265		6,466		4,916		4,890		4,194		19,949		51,680

Telefónica, S.A. 46


		Financial Statements

Financing raised by Telefónica, S.A. through its subsidiary Telefónica Europe, B.V. at December 31, 2015 was 8,560 million euros (8,437 million euros in 2014). This financing entails a number of loans paying market interest rates calculated on a Euribor plus spread basis, with an average interest rate in 2015 of 5.01% (5.00% in 2014). The main source of this financing was the funds obtained through the issuance of undated deeply subordinated reset rate guaranteed securities amounting 5,167 million euros (5,120 million euros in 2014), bonds and debentures amounting 1,648 million euros (1,530 million euros in 2014) and commercial paper amounting 1,431 million euros (496 million euros in 2014).

Financing raised by Telefónica, S.A. through Telefónica Emisiones, S.A.U. at December 31, 2015 was 36,937 million euros (37,157 million euros in 2014). This financing is arranged as loans from these companies on the same terms as those of the issuance programs. The average interest rate in 2015 was 4.63% (4.69% in 2014). The financing arranged includes, as a related cost, the fees or premiums taken to the income statement for the period corresponding to the financing based on the corresponding effective interest rates. Telefónica Emisiones, S.A.U. raised financing in 2015 mainly by tapping the European and US capital markets, issuing bonds totaling 1,467 million euros (2,962 million euros in 2014). The characteristics of the main bonds issued during 2015 are the following:

Description

Issue date

Maturity date

Amount in
millions
(nominal)

Currency of
issue

Amount in
millions of
euros
(nominal)

Coupon

Telefónica Emisiones, S.A.U.

EMTN bonds

06/18/15

06/19/17

300

EUR

300

Euribor 3M+0.33

09/14/15

09/14/21

1,000

EUR

1,000

1.477

12/11/15

12/11/17

100

EUR

100

Euribor 3M+0.53

Part of the amount owed by Telefónica, S.A. to Telefónica Emisiones, S.A.U. and to Telefónica Europe, B.V. includes restatements to amortized cost at December 31, 2015 and 2014 as a result of fair value interest rate and exchange rate hedges.

Meanwhile, at December 31, 2015, Telefónica, S.A. had raised financing from Telefónica Finanzas, S.A.U., in charge of the integrated cash management of the companies comprising the Telefónica Group in Spain, with an outstanding balance of 500 million euros at December 31, 2015 (1,912 million euros at December 31, 2014) in a series of loans bearing interest at market rates.

Telfisa Global, B.V. centralizes and handles cash management and flows for the Telefónica Group in Latin America, the United States and Europe. The balance payable to this subsidiary is formalized through several Deposit Agreements accruing interest at market rates and amounting to 2,571 million euros in 2015 (3,913 million euros in 2014).

Financing raised by Telefónica, S.A. through Telefónica Participaciones, S.A.U. at December 31, 2015 totals 145 million euros (217 million euros in 2014) and it has been shown as “Others” in 2015 and 2014 chart of movements. This financing corresponds to the actual value of the interests from a bond issuance launched on September 24, 2014 by Telefónica, S.A. and fully subscribed by Telefónica Participaciones, S.A.U. with an average interest rate of 4.90% (see Note 11.e). The nominal value of the previously mentioned issuance (1,500 million euros) of bonds necessarily convertible into treasury shares has been booked as “Other equity instruments”.

Loans to Group companies under current assets include accrued interest receivable at December 31, 2015 of 755 million euros (917 million euros in 2014).

Telefónica, S.A. 47


		Financial Statements

15.2 The balance of “Payable to subsidiaries due to taxation on a consolidated basis” was 197 million euros and 458 million euros at December 31, 2015 and 2014, respectively. This basically includes payables to Group companies for their contribution of taxable income (tax losses) to the tax group headed by Telefónica, S.A. (see Note 17). The current- or non-current classification is based on the Company’s projection of maturities.

The main amounts are those relating to Telefónica Internacional, S.A.U. for 84 million euros (97 million euros in 2014), Telefónica Digital España, S.A.U. for 38 million euros (56 million euros in 2014), Telefónica Móviles España, S.A.U. for 8 million euros (101 million euros in 2014), Latin American Cellular Holdings, S.L for 122 million euros in 2014 and no significant amounts in 2015.

Telefónica, S.A. 48


		Financial Statements

Note 16. Derivate financial instruments and risk management policies

a) Derivative financial instruments

During 2015, the Group continued to use derivatives to limit interest and exchange rate risk on otherwise unhedged positions, and to adapt its debt structure to market conditions.

At December 31, 2015, the total outstanding balance of derivatives transactions was 144,823 million euros (162,926 million euros in 2014), of which 112,276 million euros related to interest rate risk and 32,547 million euros to foreign currency risk. In 2014, 132,950 million euros related to interest rate risk and 29,276 million euros to foreign currency risk.

It should be noted that at December 31, 2015, Telefónica, S.A. had transactions with financial institutions to hedge exchange rate risk for other Telefónica Group companies amounting to 2,618 million euros (2,420 million euros in 2014). At year-end 2015 and 2014, the Company had no transactions to hedge interest rate risk for other Group companies. These external trades are matched by intra-group hedges with identical terms and maturities between Telefónica, S.A. and Group companies, and therefore involve no risk for the Company. External derivatives not backed by identical intragroup transactions consist of hedges on net investment and future acquisitions that, by their nature, cannot be transferred to Group companies and/or transactions to hedge financing raised by Telefónica, S.A. as parent company of the Telefónica Group, which are transferred to Group subsidiaries in the form of financing rather than via derivative transactions.

The breakdown of Telefónica, S.A.’s interest rate and exchange rate derivatives at December 31, 2015, their notional amounts at year end and the expected maturity schedule is as follows:

Telefónica, S.A. 49


		Financial Statements


2015
Millions of euros			Telefonica receives				Telefonica pays
Type of risk	Value in Euros		Carrying		Currency		Carrying		Currency
Euro interest rate swaps		79,718
Fixed to fixed		65		65		EUR		65		EUR
Fixed to floating		44,199		44,199		EUR		44,199		EUR
Floating to fixed		35,454		35,454		EUR		35,454		EUR
Foreign currency interest rate swaps		30,273
Fixed to floating
CHFCHF		577		625		CHF		625		CHF
CZKCZK		429		11,600		CZK		11,600		CZK
GBPGBP		5,212		3,825		GBP		3,825		GBP
JPYJPY		130		17,000		JPY		17,000		JPY
USDUSD		19,403		21,124		USD		21,124		USD
Floating to fixed
CZKCZK		46		1,250		CZK		1,250		CZK
GBPGBP		2,510		1,843		GBP		1,843		GBP
USDUSD		1,966		2,141		USD		2,141		USD
Exchange rate swaps		16,303
Fixed to fixed
BRLEUR		96		313		BRL		96		EUR
EURBRL		516		516		EUR		2,193		BRL
EURCZK		361		361		EUR		9,759		CZK
Fixed to floating
JPY/EUR		95		15,000		JPY		95		EUR
Floating to floating
CHFEUR		515		625		CHF		515		EUR
EURGBP		551		551		EUR		405		GBP
GBPEUR		1,721		1,350		GBP		1,721		EUR
JPYEUR		167		17,000		JPY		167		EUR
USDEUR		12,281		15,858		USD		12,281		EUR
Forwards		13,428
BRLEUR		107		412		BRL		107		EUR
CLPEUR		1		990		CLP		1		EUR
EURBRL		230		230		EUR		977		BRL
EURCLP		49		49		EUR		37,800		CLP
EURGBP		5,697		5,697		EUR		4,181		GBP
EURMXN		1		1		EUR		13		MXN
EURUSD		4,129		4,129		EUR		4,495		USD
GBPEUR		1,554		1,140		GBP		1,554		EUR
USDBRL		16		18		USD		70		BRL
USDCLP		4		4		USD		2,757		CLP
USDCOP		1		1		USD		4,402		COP
USDEUR		1,178		1,273		USD		1,178		EUR
USDGBP		51		58		USD		38		GBP
USDPEN		2		2		USD		7		PEN

Telefónica, S.A. 50


		Financial Statements


CZKEUR	408	11,009	CZK	408	EUR
Spots	2
EURGBP	2	2	EUR	1	GBP
USDGBP	—	1	USD	—	GBP

Subtotal	139,724

Millions of euros

Notional amounts of structured products with options

Value in euros

Notional

Currency

Interest rate options Caps & Floors

2,285

Caps&Floors

2,285

USD

EUR

1,250

EUR

GBP

1,022

750

GBP

Currency options

2,814

EURUSD

714

EUR

USDEUR

1,558

1,696

USD

EURGBP

542

EUR

Subtotal

5,099

TOTAL

144,823

The breakdown by average maturity is as follows:


Millions of euros
Hedged underlying item	Notional		Up to 1 year		From 1 to 3 years		From 3 to 5 years		Over 5 years
With underlying instrument
Promissory notes		261		—		61		200		—
Loans		33,533		3,309		9,297		8,528		12,399
in national currency		22,035		1,775		5,100		6,900		8,260
in foreign currencies		11,498		1,534		4,197		1,628		4,139
Debentures and bonds MtM		76,601		17,275		18,333		20,973		20,020
in national currency		30,445		3,045		12,650		12,050		2,700
in foreign currencies		46,156		14,230		5,683		8,923		17,320
Other underlying*		34,428		15,389		10,401		2,710		5,928
CCS		9,086		9,086		—		—		—
Currency options		2,323		1,853		438		32		—
Forward		2,990		718		2,272		—		—
IRS		20,029		3,732		7,691		2,678		5,928

Total		144,823		35,973		38,092		32,411		38,347

(*)	Most of these transactions are related to economic hedges of investments, assets and liabilities of subsidiaries, and provisions for restructuring plans.

Telefónica, S.A. 51


		Financial Statements

The breakdown of Telefónica, S.A.’s derivatives in 2014, their notional amounts at year end and the expected maturity schedule is as follows:


2014
Millions of euros			Telefonica receives				Telefonica pays
Type of risk	Value in Euros		Carrying		Currency		Carrying		Currency
Euro interest rate swaps		101,258
Fixed to fixed		85		85		EUR		85		EUR
Fixed to floating		45,923		45,923		EUR		45,923		EUR
Floating to fixed		55,200		55,200		EUR		55,200		EUR
Floating to floating		50		50		EUR		50		EUR
Foreign currency interest rate swaps		29,456
Fixed to floating
CHFCHF		520		625		CHF		625		CHF
CZKCZK		418		11,600		CZK		11,600		CZK
GBPGBP		4,866		3,790		GBP		3,790		GBP
JPYJPY		117		17,000		JPY		17,000		JPY
USDUSD		18,674		22,672		USD		22,672		USD
Floating to fixed
CZKCZK		45		1,250		CZK		1,250		CZK
GBPGBP		2,359		1,838		GBP		1,838		GBP
USDUSD		2,457		2,984		USD		2,984		USD
Exchange rate swaps		15,191
Fixed to fixed
EURBRL		466		466		EUR		1,502		BRL
EURCLP		51		51		EUR		37,800		CLP
EURCZK		352		352		EUR		9,759		CZK
Fixed to floating
JPYEUR		95		15,000		JPY		95		EUR
Floating to floating
CHFEUR		515		625		CHF		515		EUR
EURCZK		148		148		EUR		4,114		CZK
EURGBP		519		519		EUR		405		GBP
GBPEUR		829		700		GBP		829		EUR
JPYEUR		167		17,000		JPY		167		EUR
USDEUR		12,049		16,074		USD		12,049		EUR
Forwards		12,435
BRLEUR		2,755		9,312		BRL		2,755		EUR
CLPEUR		14		10,063		CLP		14		EUR
EURBRL		384		384		EUR		5		BRL
EURCZK		24		24		EUR		667		CZK
EURGBP		1,646		1,646		EUR		1,282		GBP
EURMXN		225		225		EUR		4,031		MXN
EURUSD		2,939		2,939		EUR		3,569		USD
GBPEUR		2,176		1,725		GBP		2,176		EUR
GBPUSD		57		44		GBP		69		USD
USDBRL		21		25		USD		66		BRL
USDCLP		5		6		USD		3,752		CLP
USDCOP		1		1		USD		2,976		COP

Telefónica, S.A. 52


		Financial Statements


USDEUR	1,884	2,357	USD	1,884	EUR
USDGBP	36	44	USD	28	GBP
USDPEN	2	2	USD	5	PEN
CZKEUR	266	7,352	CZK	266	EUR

Subtotal	158,340

Millions of euros

Notional amounts of structured products with options

Value in Euros

Notional

Currency

Interest rate options Caps & Floors

2,236

Caps&Floors

2,236

USD

EUR

1,250

EUR

GBP

963

750

GBP

Currency options

2,350

GBPEUR

797

EUR

USDEUR

1,553

1,885

USD

Subtotal

4,586

TOTAL

162,926

The breakdown by average maturity is as follows:

Millions of euros

Hedged underlying item

Notional

Up to 1 year

From 1 to 3 years

From 3 to 5 years

Over 5 years

With underlying instrument

Promissory notes

260

—

200

Loans

33,111

3,863

6,191

8,597

14,460

in national currency

22,785

2,850

3,500

5,450

10,985

in foreign currencies

10,326

1,013

2,691

3,147

3,475

Debentures and bonds MtM

79,792

8,701

26,511

13,636

30,944