Form 6-K
Table of Contents

 

 

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, 2017

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  ☒            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  ☒

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  ☒

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  ☒

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

 

 

 


Table of Contents

Telefónica, S.A.

TABLE OF CONTENTS

 

Item

       Sequential
Page
Number
 

1.

  Telefónica - 2016 Annual Accounts   
 

•        Account Auditor’s Report, Annual Financial Statements and Management Report of Telefónica, S.A., all for the Fiscal Year 2016.

     4  
 

•        Account Auditor’s Report, Annual Financial Statements and Management Report of the Consolidated Group of Companies, all for the Fiscal Year 2016.

     267  


Table of Contents

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 2016 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 23rd, 2017

 


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LOGO

AUDIT REPORT, ANNUAL FINANCIAL STATEMENTS, AND

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

YEAR ENDED DECEMBER 31, 2016


Table of Contents

Independent Audit Report

TELEFÓNICA, S.A.

Financial Statements and Management Report

for the year ended

December 31, 2016


Table of Contents

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, 2016, 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.


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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, 2016, 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 2016 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 2016 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/ Alicia Martínez Durán

Alicia Martínez Durán

February 23, 2017

 

2


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2016

TELEFÓNICA, S.A.

Annual financial statements and management report for the year ended December 31, 2016


Table of Contents

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

     19  

Note 8. Investments in group companies and associates

     21  

Note 9. Financial investments

     31  

Note 10. Trade and other receivables

     35  

Note 11. Equity

     36  

Note 12. Financial liabilities

     42  

Note 13. Bonds and other marketable debt securities

     44  

Note 14. Interest-bearing debt and derivates

     46  

Note 15. Payable to group companies and associates

     50  

Note 16. Derivate financial instruments and risk management policies

     53  

Note 17. Income tax

     65  

Note 18. Trade, other payables and provisions

     70  

Note 19. Revenue and expenses

     73  

Note 20. Other information

     81  

Note 21. Cash flow analysis

     89  


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Note 22. Discontinued operations

     93  

Note 23. Events after the reporting period

     94  

Note 24. Additional note for English translation

     95  

Appendix I: Details of subsidiaries and associates at December  31, 2016

     96  

Annex II: Board and Senior Management Compensation

     101  

Management report 2016

     110  

Business Model

     110  

Economic results of Telefónica, S.A.

     112  

Investment activity

     113  

Share price performance

     116  

Research, development and innovation

     117  

Environment

     120  

Human rights

     122  

Responsible business and fiscal responsibility

     123  

Human Resources

     125  

Managing diversity

     127  

Liquidity and capital resources

     128  

Financing

     128  

Treasury shares

     130  

Risks and uncertainties facing the Company

     132  

Trend evolution

     145  

Events after the reporting period

     147  

Annual Corporate Governance Report for Listed Companies

     148  


Table of Contents
LOGO   Financial Statements

 

 

Telefónica, S.A.

Balance sheet at December 31

 

Millions of euros

                    
     Notes      2016      2015 (*)  

ASSETS

        

NON-CURRENT ASSETS

        76,817        62,177  

Intangible assets

     5        23        28  

Software

        9        8  

Other intangible assets

        14        20  

Property, plant and equipment

     6        205        222  

Land and buildings

        131        143  

Plant and other PP&E items

        53        62  

Property, plant and equipment under construction and prepayments

        21        17  

Investment property

     7        399        401  

Land

        94        94  

Buildings

        305        307  

Non-current investments in Group companies and associates

     8        68,211        50,300  

Equity instruments

        65,249        47,971  

Loans to Group companies and associates

        2,950        2,313  

Other financial assets

        12        16  

Financial investments

     9        5,016        5,073  

Equity instruments

        339        384  

Loans to third parties

        —          41  

Derivatives

     16        4,667        4,638  

Other financial assets

     9        10        10  

Deferred tax assets

     17        2,963        6,153  

CURRENT ASSETS

        6,443        22,809  

Net assets held for sale

     8        —          12,508  

Trade and other receivables

     10        447        594  

Current investments in Group companies and associates

     8        3,227        7,504  

Loans to Group companies and associates

        3,167        7,426  

Derivatives

     16        30        40  

Other financial assets

        30        38  

Investments

     9        1,942        2,060  

Loans to companies

        42        60  

Derivatives

     16        1,652        1,996  

Other financial assets

        248        4  

Accruals

        16        33  

Cash and cash equivalents

        811        110  
     

 

 

    

 

 

 

TOTAL ASSETS

        83,260        84,986  
     

 

 

    

 

 

 

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

 

(*) Revised data, see Note 2

 

 

Telefónica, S.A.    4


Table of Contents
LOGO   Financial Statements

 

 

Millions of euros

                   
     Notes      2016     2015 (*)  

Equity and liabilities

       

EQUITY

        20,277       23,136  

CAPITAL AND RESERVES

        20,943       23,926  

Share capital

     11        5,038       4,975  

Share premium

     11        3,227       3,227  

Reserves

     11        12,928       18,081  

Legal

        985       984  

Other reserves

        11,943       17,097  

Treasury shares and own equity instruments

     11        (1,480     (1,656

Profit for the year

     3        24       5  

Interim dividend

     3        —         (1,912

Other equity instruments

     11        1,206       1,206  

UNREALIZED GAINS (LOSSES) RESERVE

     11        (666     (790

Available-for-sale financial assets

        8       11  

Hedging instruments

        (674     (801

NON-CURRENT LIABILITIES

        45,471       46,255  

Non-current provisions

     18        367       835  

Non-current borrowings

     12        7,249       8,610  

Bonds and other marketable debt securities

     13        —         800  

Bank borrowings

     14        4,427       4,825  

Derivatives

     16        2,684       2,847  

Other debts

        138       138  

Non-current borrowings from Group companies and associates

     15        37,274       36,683  

Deferred tax liabilities

     17        571       88  

Long term deferred revenues

        10       39  

CURRENT LIABILITIES

        17,512       15,595  

Current provisions

     18        121       43  

Current borrowings

     12        3,712       1,628  

Bonds and other marketable debt securities

     13        1,158       85  

Bank borrowings

     14        1,635       1,269  

Derivatives

     16        679       274  

Other financial liabilities

     14        240       —    

Current borrowings from Group companies and associates

     15        13,146       13,217  

Trade and other payables

     18        486       619  

Accruals

        47       88  
     

 

 

   

 

 

 

TOTAL EQUITY AND LIABILITIES

        83,260       84,986  
     

 

 

   

 

 

 

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

 

(*) Revised data, see Note 2

 

 

Telefónica, S.A.    5


Table of Contents
LOGO   Financial Statements

 

 

Telefónica, S.A.

Income statements for the years ended December 31

 

Millions of euros

   Notes      2016     2015 (*)  

Revenue

     19        2,710       5,936  

Rendering of services to Group companies and associates

        548       599  

Rendering of services to non-group companies

        59       4  

Dividends from Group companies and associates

        1,928       5,171  

Interest income on loans to Group companies and associates

        175       162  

Impairment and gains (losses) on disposal of financial instruments

        3,045       (5,309

Impairment losses and other losses

     8        2,049       (5,309

Gains (losses) on disposal and other gains and losses

     8        996       —    

Other operating income

     19        46       91  

Non-core and other current operating revenue - Group companies and associates

        30       22  

Non-core and other current operating revenue - non-group companies

        16       69  

Employees benefits expense

     19        (310     (315

Wages, salaries and others

        (281     (284

Social security costs

        (29     (31

Other operational expense

        (356     (786

External services - Group companies and associates

     19        (109     (135

External services - non-group companies

     19        (252     (624

Taxes other than income tax

        5       (27

Depreciation and amortization

     5, 6 and 7        (38     (46

Gains (losses) on disposal of fixed assets

        (4     17  

OPERATING PROFIT

        5,093       (412

Finance revenue

     19        922       593  

Finance costs

     19        (2,996     (2,804

Change in fair value of financial instruments

        —         (19

Gain (loss) on available-for-sale financial assets recognized in the period

     9 and 11        —         (19

Exchange rate gains (losses)

     19        (170     (98

Impairment and gains (losses) on disposal of financial instruments with third-parties

     9.3 and 19.9        17       426  

NET FINANCIAL EXPENSE

        (2,227     (1,902

PROFIT BEFORE TAX

     21        2,866       (2,314

Income tax

     17        (2,842     2,319  

PROFIT FOR THE YEAR CONTINUED OPERATIONS

        24       5  

Discontinued operations net of taxes

     2 and 22        —         —    

PROFIT FOR THE YEAR

        24       5  

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


Table of Contents
LOGO   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      2016      2015 (*)  

Profit of the period

        24        5  
     

 

 

    

 

 

 

Total income and expense recognized directly in equity

     11        368        580  
     

 

 

    

 

 

 

From measurement of available-for-sale financial assets

        13        467  

From cash flow hedges

        477        380  

Income tax impact

        (122      (267
     

 

 

    

 

 

 

Total amounts transferred to income statement

     11        (244      (306
     

 

 

    

 

 

 

From measurement of available-for-sale financial assets

        (17      (481

From cash flow hedges

        (308      56  

Income tax impact

        81        119  
     

 

 

    

 

 

 

TOTAL RECOGNIZED INCOME AND EXPENSE

        148        279  
     

 

 

    

 

 

 

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

 

(*) Revised data, see Note 2

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, (*)

     4,657       19,118       (1,587     2,604       (1,790     1,206        (1,064     23,144  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total recognized income and expense

     —         —         —         5       —         —          274       279  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Transactions with shareholders and owners

     318       1,374       (69     —         (1,912     —          —         (289

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, (*)

     4,975       21,308       (1,656     5       (1,912     1,206        (790     23,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total recognized income and expense

     —         —         —         24       —         —          124       148  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Transactions with shareholders and owners

     63       (3,247     176       —         —         —          —         (3,008

Capital decreases (Note 11)

     (74     (739     813       —         —         —          —         —    

Dividends paid (Note 11)

     137       (2,543     —         —         —         —          —         (2,406

Other transactions with shareholders and owners

     —         35       (637     —         —         —          —         (602

Other movements

     —         1       —         —         —         —          —         1  

Appropriation of prior year profit (loss)

     —         (1,907     —         (5     1,912       —          —         —    

Balance at December 31, 2016

     5,038       16,155       (1,480     24       —         1,206        (666     20,277  

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

 

(*) Revised data, see Note 2

 

 

Telefónica, S.A.    7


Table of Contents
LOGO   Financial Statements

 

 

Telefónica, S.A.

Cash flow statements for the years ended December 31

 

Millions of euros

   Notes      2016     2015 (*)  

A) CASH FLOWS FROM OPERATING ACTIVITIES

        3,193       2,451  

Profit before tax

        2,866       (2,314

Adjustments to profit:

        (2,855     1,988  

Depreciation and amortization

     5,6 and 7        38       46  

Impairment of investments in Group companies and associates

     8        (2,049     5,309  

Change in long term provisions

        24       81  

Gains on the sale of financial assets

        (992     5  

Losses on disposal of property, plant and equipment

        —         (22

Dividends from Group companies and associates

     19        (1,928     (5,171

Interest income on loans to Group companies and associates

     19        (175     (162

Net financial expense

        2,227       1,902  

Change in working capital

        (132     337  

Trade and other receivables

        43       165  

Other current assets

        39       (26

Trade and other payables

        (156     222  

Other current liabilities

        (58     (24

Other cash flows from operating activities

     21        3,314       2,440  

Net interest paid

        (1,868     (1,801

Dividends received

        4,212       3,091  

Income tax receipts

        970       1,150  

Other payments/proceeds from operating activities

        —         —    

B) CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES

        (1,563     (2,867

Payments on investments

     21        (5,002     (4,915

Proceeds from disposals

     21        3,439       2,048  

C) CASH FLOWS USED IN FINANCING ACTIVITIES

        (924     (4,042

Payments on equity instruments

        (624     (1,626

Proceeds from financial liabilities

     21        2,095       (3,227

Debt issues

        15,884       8,465  

Repayment and redemption of debt

        (13,789     (11,692

Capital increase

          3,048  

Dividends paid

     21        (2,395     (2,237

D) NET FOREIGN EXCHANGE DIFFERENCE

        (5     (16

E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

        701       (4,474

Cash and cash equivalents at January 1

        110       4,584  

Cash and cash equivalents at December 31

        811       110  

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


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LOGO   Financial Statements

 

 

TELEFÓNICA, S.A.

Annual financial statements for the ended December 31, 2016

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 Telefónica 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


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LOGO   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 602/2016, dated December 2, 2016 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 2016.

The accompanying financial statements for the year ended December 31, 2016 were prepared by the Company’s Board of Directors at its meeting on February 22, 2017 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 2015 and 2016 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 figures related to the investment in Telefónica Europe, plc and the transactions with this company were classified as held for sale assets and discontinued operations, respectively, in 2015 Annual Financial Statements.

On May 11, 2016 the European Commission made public its decision to prohibit the transaction. Following this decision, the Board of Directors of Telefónica at its meeting on June 29, 2016 agreed that Telefónica will continue to explore different strategic alternatives for O2 UK, to be implemented when market conditions are deemed appropriate. Given that the execution of a sale transaction is less certain, following the submission of the financial information of the second quarter of 2016 Telefónica’s operations in UK were no longer presented as discontinued operations and data related to the investment in Telefónica Europe, plc ceased to be classified as held for sale. Thus, items are presented line by line according to their nature in financial statements. Comparative financial statements have been amended accordingly with respect to those published in the financial statements for the year 2015. The impacts of this classification change are described in Note 22.

In accordance with PGC 2007 approved by Royal Decree 1514/2007, goodwill and intangible assets with indefinite useful life were not amortized. However, following the provisions of Royal Decree 602/2016, dated December 2, 2016, that modify PGC 2007, starting January 1, 2016 the Company amortizes goodwill and intangibles with indefinite useful lives on a systematic basis.

Pursuant to the sole transitory provision of the mentioned Royal Decree 602/2016, in 2016 the Company elected to retrospectively amortize the carrying amount of goodwill and intangible assets with indefinite useful lives (see Note 5). Thus, amortization charges for all periods prior to 2015 have been recognized in reserves, on a straight-line basis and over a ten-year useful life starting January 1, 2008, which is the initial date of the period in which the currently in force PGC 2007 was first applied.

 

 

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Therefore, comparative information for earlier periods presented has been adjusted for application of these new requirements, as follows:

 

    An increase in the intangible asset amortization with a charge to,

 

    Initial balance of reserves as of December 31, 2015 amounting to 24 million euros, including a balance of 10 million euros related to the non-distributable reserve for goodwill amortization (see Note 11.c).

 

    Amortization charge amounting to 3 million euros in the profit and loss account for the year ended December 31, 2015.

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.

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, and of all the options available to achieve an outcome, it considers the most efficient one in terms of tax within the legal framework the Company is subject to. 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.

 

 

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Note 3. Proposed appropriation of profit

Telefónica, S.A. obtained 24 million euros of profit in 2016. Accordingly, the Company’s Board of Directors will submit the following proposed appropriation of 2016 profit for approval at the Shareholders’ Meeting:

 

Millions of euros

      

Proposed appropriation:

  

Profit for the year

     24  

Distribution to:

  

Legal reserve

     2  

Interim Dividend

     22  

 

 

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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  

 

 

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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 post-tax cash flows deriving from the use of the asset or its cash generating unit, as applicable, are discounted to their present value, using a post-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the asset, whenever the result obtained is the same that would be obtained by discounting pre-tax cash flows at a pre-tax discount rate.

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

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.

 

 

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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 recognized in 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:

 

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

 

  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 2016 and 2015 are as follows:

 

Millions of euros              

Item

   2016      2015 (*)  

Total assets

     123,641        120,329  
  

 

 

    

 

 

 

Equity:

     

Attributable to equity holders of the parent

     18,157        15,771  

Attributable to minority interests

     10,228        9,665  

Revenue from operations

     52,036        54,916  

Profit for the year:

     

Attributable to equity holders of the parent

     2,369        616  

Attributable to minority interests

     30        135  

 

(*) Amended data

 

 

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Note 5. Intangible assets

The movements in the items composing intangible assets and the related accumulated amortization in 2016 and 2015 are as follows:

2016

 

Millions of euros

   Opening
balance
    Additions and
allowances
    Disposals     Transfers     Closing
balance
 

INTANGIBLE ASSETS, GROSS

     254       8       (33     1       230  

Software

     132       3       —         5       140  

Other intangible assets

     122       5       (33     (4     90  

ACCUMULATED AMORTIZATION

     (226     (13     33       (1     (207

Software

     (124     (7     —         —         (131

Other intangible assets

     (102     (6     33       (1     (76

Net carrying amount

     28       (5     —         —         23  

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

     (240     (16     30       —          (226

Software

     (116     (8     —         —          (124

Other intangible assets (*)

     (124     (8     30       —          (102

Net carrying amount

     34       (8     —         2        28  

 

(*) Revised data, see Note 2

At December 31, 2016 and 2015 commitments exist to acquire intangible assets amounting to 1.4 and 0.2 million euros, respectively.

At December 31, 2016 and 2015, the Company had 140 million euros and 164 million euros, respectively, of fully amortized intangible assets.

After the merger of Terra Networks, S.A. with Telefónica, S.A., in 2006 the Company registered a goodwill, which was amortized on an annual basis until the entry into force of PGC 2007. As of December 31, 2007 that asset had a net carrying amount of 33.9 million euros. Subsequently, Telefónica, S.A. tested for impairment that asset every year, which did not disclose any need to recognise a write-down. The Company has set aside 1.6 million euros annually (5% of the net carrying amount of the asset) of its profit to a non-distributable reserve for goodwill amortization. The balance of this reserve at December 31, 2015 was 12 million euros.

After the publication of Royal Decree 602/2016, on December, 2, 2016, modifying PGC 2007, the Company has amortized all its intangible assets with infinite useful life in a retrospective way since they had not been amortized when PGC 2007 entered into force. Retrospective amortization was obliged to revise 2015 figures of other intangible asset amortization, in the amounts detailed in Note 2.

 

 

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Note 6. Property, plant and equipment

The movements in the items composing property, plant and equipment and the related accumulated depreciation in 2016 and 2015 are as follows:

2016

 

Millions of euros

   Opening
balance
    Additions and
allowances
    Disposals      Transfers     Closing
balance
 

PROPERTY, PLANT AND EQUIPMENT, GROSS

     572       8       —          (11     569  

Land and buildings

     232       —         —          (9     223  

Plant and other PP&E items

     323       1       —          1       325  

Property, plant and equipment under construction and prepayments

     17       7       —          (3     21  

ACCUMULATED DEPRECIATION

     (350     (14     —          —         (364

Buildings

     (89     (3     —          —         (92

Plant and other PP&E items

     (261     (11     —          —         (272

Net carrying amount

     222       (6     —          (11     205  

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  

Firm commitments to acquire property, plant and equipment at December 31, 2016 and 2015 amounted to 3 million euros and 1 million euros, respectively. At December 31, 2016 and 2015, the Company had 205 million euros and 178 million euros, respectively, of fully depreciated items of property, plant and equipment.

 

 

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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 70 million euros and 68 million euros at the 2016 and 2015 year-ends, respectively. Also included is the net carrying amount of the remaining assets (mainly plant and property) of 30 and 37 million euros at December 31, 2016 and 2015, respectively. The land and buildings rented to other Group Companies have been included as “Investment properties” in Note 7.

 

 

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Note 7. Investment properties

The movements in the items composing investment properties in 2016 and 2015 and the related accumulated depreciation are as follows:

2016

 

Millions of euros

  Opening
balance
    Additions and
allowances
    Disposals     Transfers     Closing
balance
 

INVESTMENT PROPERTIES, GROSS

    486       —         —         9       495  

Land

    94       —         —         —         94  

Buildings

    392       —         —         9       401  

ACCUMULATED DEPRECIATION

    (85     (11     —         —         (96

Buildings

    (85     (11     —         —         (96

Net carrying amount

    401       (11     —         9       399  

 

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  

“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 and the building of its headquarters in Barcelona, known as “Diagonal 00”.

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 was booked as “Profit from the sale of fixed assets” in the income statement.

In 2016, the Company has buildings with a total area of 311,128 square meters leased to several Telefónica Group and other companies, equivalent to an occupancy rate of 95.35% of the buildings it has earmarked for lease. In 2015, it had a total of 328,314 square meters leased, equivalent to an occupancy rate of 93.27% of the buildings earmarked for lease.

 

 

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Total income from leased buildings in 2016 (see Note 19.1) amounted to 44 million euros (48 million euros in 2015). Future minimum rentals receivable under non-cancellable leases are as follows:

 

     2016      2015  

Millions of euros

   Future minimum
recoveries
     Future minimum
recoveries
 

Up to one year

     40        44  

Between two and five years

     5        9  

Over 5 years

     1        1  
  

 

 

    

 

 

 

Total

     46        54  
  

 

 

    

 

 

 

The most significant lease contracts held with subsidiaries occupying Distrito Telefónica have been renewed in 2016 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 2017.

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.

 

 

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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 2016 and 2015 are as follows:

2016

 

Millions of euros

   Opening
balance
    Additions      Disposals     Transfers     Exchange
losses
    Dividends     Hedges of a net
investment
    Closing
balance
    Fair
value
 

Equity instruments (Net) (1)

     47,971       6,446        (236     12,338       —         (619     (651     65,249       127,748  

Equity instruments (Cost)

     62,182       4,397        (285     26,154       —         (619     (651     91,178    

Impairment losses

     (14,211     2,049        49       (13,816     —         —         —         (25,929  

Loans to Group companies and associates

     2,313       1,853        (1,315     191       (92     —         —         2,950       2,985  

Other financial assets

     16       11        —         (15     —         —         —         12       12  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current investment in Group companies and associates

     50,300       8,310        (1,551     12,514       (92     (619     (651     68,211       130,745  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans to Group companies and associates

     7,426       1,293        (5,400     (181     29       —         —         3,167       3,171  

Derivatives

     40       30        (40     —         —         —         —         30       30  

Other financial assets

     38       6        (29     15       —         —         —         30       30  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current investments in Group companies and associates

     7,504       1,329        (5,469     (166     29       —         —         3,227       3,231  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value at December 31, 2016 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.

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  

Derivatives

     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.

 

 

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The most significant transactions occurred in 2016 and 2015 as well as their accounting impacts are described below:

2016

As detailed in Note 2, following the decision of the European Commission to prohibit the sale of Telefónica Europe, plc to the Hutchison Whampoa Group, and as a consequence of the strategy approved by the Board of Directors of Telefónica at its meeting on June 29, 2016, the investment in the company which was previosly considered as a “Held for sale asset” has been reclassified to the “Long Term investment in Group companies and associates” caption amounting to 12,501 million euros. The reclassification is shown in 2015 and 2016 charts of movements under the “Transfers” column.

During the first semester of 2016, Telefónica has decided to rearrange the assets related to infrastructures of the Group, including the telecommunication towers as well as the network of underwater and terrestrial optic fiber unifying the concept within the same holding company (Telxius Telecom, S.A.U.). In the framework of this reorganization the following investing transactions have been made by Telefónica, S.A.:

 

    On January 29, 2016, Telefónica Internacional, S.A.U. sold at its net book value the 50% of its stake in Telefónica América, S.A. to Telefónica, S.A. After this transaction Telefónica, S.A. became the sole stakeholder of Telefónica America, S.A.U. On March 7th, 2016, the company’s denomination was changed to Telxius Telecom, S.A.U. Telxius Telecom, S.A.U. was thus designated to be the parent company of the rearranged group of the above mentioned infrastructure entities.

 

    On February 16, 2016 Telefónica Móviles España, S.A.U. carried out a partial split-off of Wireless Towers, S.L.U. (a newly-incorporated company renamed after as Telxius Torres España, S.L.U.) with the aim of placing in this new company the business line of ownership and exploitation of mobile phone towers. Telefónica, S.A. has recorded the split-off transaction at book value of the assets (214 million euros), and therefore it is not reflected in the chart of movements above.

 

    On March 28, 2016 Telefónica International Wholesale Services América, S.A. executed a capital increase of 187 million dollars fully subscribed and paid pro-rata by the shareholders. The transaction implied a disboursement of 122 million euros for Telefónica, S.A., included as “Additions” in the 2016 chart of movements. The funds were used to compensate prior years’ negative reserves before the nonmonetary contribution of the company to Telxius Telecom, S.A.U. The contribution was completed on March 31 at its book value (448 million euros), and therefore it is not reflected in the chart of movements above.

 

    On March 30, 2016 Telxius Telecom, S.A.U. made a capital increase of 1,450 million euros fully subscribed and paid by the Company. On May 27, 2016 an additional capital increase was carried forward amounting to 502 million euros, also fully subscribed and paid by Telefónica, S.A. The total amount of these transactions is shown as Additions in 2016 chart.

 

    On March 31, 2016, Telxius entered into a purchase agreement to acquire all the shares of Telxius Torres España, S.L.U. from Telefónica, S.A. at fair value (1,210 million euros). The profit of the transaction amounts to 996 million euros in the income statement of Telefónica, S.A.

 

 

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On the other hand, with respect to the investment of Telefónica, S.A. in Colombia Telecomunicaciones, S.A., this company and its shareholders are analyzing the most appropriate steps to strengthen their equity position.

2015

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 Participaçoes, Ltda approved a capital increase of 3,223 million reales. Telefónica, S.A. paid 1,270 million reales (equivalent 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 aproximately 3.5% of the share capital of Telefônica 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 Telecomunicaçoes 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. has therefore ended the divesting process of its indirect stake at Telecom Italia, S.p.A., in accordance with the regulatory and competence requirements.

 

 

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Other movements

The column “Dividends” contains mainly a distribution of reserves made by Telco TE, S.p.A. amounting to 603 million euros. These reserves were originated prior to the investment in the company.

Movement in “Transfers” in “Loans to Group Companies and Associates” both 2016 and 2015 mainly includes the reclassification between long-term and current loans in accordance with the loan maturity schedule.

In addition to the aforementioned reclassification of the investment in Telefónica Europe, plc, in 2015 “Transfers” figure under the caption of “Equity Instruments” the reclassification to “Held for sale assets” of the net carrying amount of the investment in Telefónica Gestión de Servicios Compartidos España, S.A.U. amounting to 8 million euros.

“Impairment losses” Transfers in both 2016 and 2015 corresponds to the reclassification of the negative carrying amount of certain investments amounting to -163 and 31 million euros, respectively.

In 2016 and 2015, Telefónica, S.A. bought and sold the following shareholdings:

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

 

Millions of euros

Companies

   2016      2015  

Telefônica Brasil, S.A.

     —          3,064  

Sao Paulo Telecomunicaçoes, Ltda

     —          401  

Telefónica Internacional, S.A.U.

     —          2,157  

Telxius Telecom, S.A.U.

     1,952        —    

Telefónica de Contenidos, S.A.U.

     733        —    

Telefónica Digital Holding, S.L.U.

     301        399  

Telefónica Móviles Argentina Group

     327        —    

Telco TE, S.p.A

     —          603  

Telefónica Móviles México, S.A. de C.V.

     548        110  

Telefónica Global Technology, S.A.U.

     202        —    

Other companies

     334        77  
  

 

 

    

 

 

 

Total Group companies and associates

     4,397        6,811  
  

 

 

    

 

 

 

2016

Additions related to Telxius Telecom, S.A.U. have been fully described at the beginning of this Note. “Other companies” includes the amount of the capital increase carried out by Telefónica International Wholesale Services América, S.A. amounting to 122 million euros also detailed at the beginning of this Note.

On January 27, 2016 Telefónica de Contenidos, S.A.U. made a capital increase amounting to 733 million euros totally subscribed and paid by the Telefónica, S.A.

On April 5, 2016 and with the aim of financing its subsidiary Telefónica Digital UK, Telefónica Digital Holding, S.L.U. executed a capital increase of 301 million euros fully subscribed and paid by its shareholder Telefónica, S.A.

On May 1, 2016 Telefónica, S.A. has granted Telefónica Móviles Argentina Holdings, S.A. with credits over Telefónica Móviles Argentina, S.A. amounting to a total of 1,110 million Argentinian pesos, including nocional and accrued interests. On May 5, 2016 the Company has subscribed a capital increase launched by Telefónica Móviles Argentina, S.A., pro-rata its stake, with a disboursement of 174 million Argentinian pesos, equivalent to 11 million euros. In addition, on June 16, 2016, Telefónica, S.A. has made an irrevocable capital contribution of 280 million dollars (248 million euros) in Telefónica Móviles Argentina, S.A. After this contribution the Company has increased its stake form 15.4% to 21.1%.

In order to provide Telefónica México, S.A. de C.V. with the funds needed to cancel credit lines, in December 2016 the subsidary has made a capital increase amounting to 548 million euros fully subscribed and paid by its sole stakeholder, Telefónica, S.A.

As of June 22, Telefónica, S.A. has capitalized all the equity loans given to its subsidiary Telefónica Global Technology, S.A.U. amounting to 202 million euros.

 

 

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2015

Transactions referring the investment increase in Telefônica Brasil, S.A. and Sao Paulo Telecomunicaçoes, Ltda 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.L.U. 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 subsidary 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.

b) Disposals of investments and capital decreases:

 

Millions of euros
Companies

   2016      2015  

Phenix Investments, S.A.

     —          340  

Telxius Torres España, S.L.U.

     214        —    

Others

     71        —    
  

 

 

    

 

 

 

Total Group companies and associates

     285        340  
  

 

 

    

 

 

 

2016

Disposal of Telxius Torres España, S.L.U. refers to the sale at fair value amount of this subsidiary to Telxius Telecom, S.A.U. as detailed at the beginning of the Note.

2015

The disposal in 2015 refers to the decrease and pay back of the share premium reserve of Phenix Investments, S.A.

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.

 

 

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As a result of these estimations and the effect of the net investment hedge in 2016, a reversal of the impairment provision of 2,049 million euros was recognized (5,309 million euros of impairment in 2015, including the write down regarding Telefónica Europe, plc, which was previously recognized under the caption “net assets held for sale”). This amount derives mainly from the following companies:

(a) reverse of the write down by 2,491 million euros for Telefônica Brasil, S.A. (1,872 million euros in 2015) and reverse of 705 million euros for Sao Paulo Telecomunicaçoes, Ltda. (753 million euros in 2015).

(b) write down, net of hedges, of 582 million euros for Telefónica Europe, plc (852 million euros, net of hedges, in 2015).

(c) write down of 1,264 million euros for Telefónica México, S.A. de C.V. (233 million euros in 2015).

(d) the total reversal of the write down of 1,133 million euros booked in 2015 for Telefónica Internacional, S.A.U. (this company was merged with Telefónica Latinoamérica Holding, S.L.), mainly due to the revaluation of the Brazilian Real which has a possitive impact in the investments of 36,01% stake in Telefônica Brasil, S.A.

(e) write down of 232 million euros for Telefónica Digital Holding, S.L.U. (267 million euros in 2015).

Main hypothesis used for the calculation of the discounted cash flows of investments

In the case of Brazil, revenues reflect the strength of Telefónica’s leadership driven by its leadership and quality and capturing integration synergies; and in the United Kingdom, the drive of mobile data.

In addition, in Brazil favorable effects in the macro-finance scenario have been produced. Firstly, and most remarkable, the appreciation of the exchange rate has resolved into an increase in the value of the assets nominated in Brazilian reales by 18%. Secondly, the improvement in the macroeconomic environment of the country during the second semester of 2016, as well as the more stable political situation as a consequence of the government compromise to implement structural changes in the country, has significantly reduced the uncertainties about the economic sustainability in the middle and long term.

The operating income before depreciation and amortization (OIBDA) margin for Brazil is in line with the average of analysts’ three year forecasts for peers in emerging markets, at approximately 36%, and also considers analysts’ long-term opinions about Brazil. Over the term of the strategic plan, the operator will invest a percentage at the lower end of the range for its peers. However, this is also in line with the investment needs identified by analysts (17%). Discount rate of 11.3% is slightly lower than the rate used in 2015 (11.9%), in line with the expectations of the analysts’ consensus. The perpetuity growth rate is in line with the Brazilian Central Bank’s medium-term inflation target (4.5%, within a range of ±1.5 p.p.) and is aligned with the analyst consensus for the Strategic Plan horizon (around 5%) and below the forecast nominal GDP growth rate (which oscillates around 7%). A conservative outlook has been maintained, in line with analysts’ expectations.

Regarding the investment in México, the economic uncertainty and resultant financial volatility associated with the change of president in the United States of America (which have been concluded in a 16% exchange rate depreciation of the Mexican Peso against euro in 2016 with a subsequent negative effect on revenues) and the changing competitive environment in the Mexican telecommunications market, have led to a slowdown in the growth forecast in the business plan of the operator and a set of efficiency ratios that have improved more slowly than in previous years. This new economic scenario requires a more conservative medium-term outlook to be taken in the valuation parameters. The after-tax discount rates increased from 9.05% in 2015 to 9.86% in 2016 as a result of the financial volatility mentioned earlier.

 

 

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With regard to United Kingdom, the long-term OIBDA margin for operations (26%) is somewhat lower than the average for European peers over a three year period in 34%. With respect to the ratio of CapEx over revenues, over the term of the strategic plan, in United Kingdom the ratio of invest at a percentage of revenue is aligned with the range for peers in the region (around 13%) and it is in line with analysts’ estimations. The discount rate (7.1%) is considered to have greater market risk, due to the increase in uncertainty of British equity securities as a result of Brexit, however, this risk is in line with the estimates given by analysts. Accordingly, the currency which is the main variable used for external adjustments because of the great commercial dependence on Europe, has suffered a 16% depreciation against euro in 2016, and therefore a negative impact in the British net assets and cash flows nominated in euros. In the United Kingdom the perpetuity growth rate is a 0.8% in line with the analysts’ consensus.

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

8.4. Transactions protected for tax purposes

Transactions carried out in 2016 that qualify for special tax treatment, as defined in Articles 76 and 87, as applicable, of Chapter VII of Title VII of Legislative Royal Decree 27/2014 of November 27 approving the Spanish Corporate Income Tax Law, are 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 February 18, 2016 Telefónica Móviles España, S.A.U. spins off neutrally the activity branch of the towers in Spain, in favour of the company Wireless Towers España, S.L.U. In accordance with the accounting valuation principles, the asset subject to the spun-off is recognized at its net carrying amount, 214 million euros. The market value of the spun-off asset is 1,210 million euros.

On March 30, 2016, Telefónica, S.A., as stakeholder of Telefónica International Wholesale Services America, S.A., made a non-monetary contribution of the 73.14% of the shares of this company S.A. to the reserves of Telxius Telecom, S.A.U., which the Company also owned. The contribution transaction is governed by the tax neutral regime. In accordance with the accounting valuation principle the contribution is recognized at its net carrying amount (447 million euros). The market value of the contributed asset was 1,233 million euros.

On May 5, 2016, Telefónica Digital España, S.L., as sole stakeholder of Telefónica Digital Identity & Privacy S.L., approved the merger by absorption of this latter by the first, with the subsequent dissolution without liquidation of the absorbed company and the transfer en bloc of its assets and liabilities to Telefónica Digital España, S.L., which also acquires all its rights and obligations by universal succession. The deed of the merger was filed in the Madrid Companies Register on June 17, 2016.

On July 1, 2016, Telefónica, S.A. as stakeholder of Telefónica Global Technology, S.A., adopted the agreements to partially spin off this company in favour of Telefónica de España, S.A.U., which is also wholly-owned by the Company. Through the spin-off it is transferred en bloc the independent unit of production, consisting of the maintenance and operation of the Data Center in Alcalá de Henares, as well as its infrastructure, just as the one located in the Data Center in Julián Camarillo street, and the services delivery. Telefónica, S.A as sole stakeholder of both companies, recognizes a net carrying amount of 152 million euros, the partial spin-off transaction of the cost in TGT and the capital increase in Telefónica de España, S.A.U. The spin-off was notarized on September 1, 2016.

On September 26, 2016, filed in the Madrid Companies Register on October 7, 2016, Telefónica Internacional, S.A.U. (absorbed) merged with Telefónica Latinoamérica Holding, S.L. (absorbing). In accordance with the accounting principles the merged asset is recognized at its net carrying amount (9,722 million euros) in Telefónica, S.A. There is no appreciation. The transaction was governed by the Special Regime.

 

 

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8.5. The breakdown and maturity of loans to Group companies and associates in 2016and 2015 are follows:

2016

 

Millions of euros                                                 

Company

   2017      2018      2019      2020      2021      2022 and
subsequent
years
     Final balance,
current and
non-current
 

Telefónica Móviles España, S.A.U.

     88        400        —          —          —          —          488  

Telefónica Móviles México, S.A. de C.V.

     —          796        —          —          —          —          796  

Telefónica de Contenidos, S.A.U.

     386        —          —          —          —          —          386  

Telefónica de España, S.A.U.

     259        —          550        —          —          —          809  

Telxius Telecom, S.A.U.

     8        —          —          —          140        560        708  

Telefónica Latinoamérica Holding, S.L.

     2,099        —          —          —          —          —          2,099  

Other companies

     327        139        59        176        17        113        831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,167        1,335        609        176        157        673        6,117  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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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 Latinoamérica Holding, S.L.

     1,039        —          —          —          —          —          1,039  

Other companies

     416        69        178        29        55        62        809  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,426        857        578        596        123        159        9,739  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

    The financing extended to Telefónica Móviles España, S.A.U. in 2016 consists of a loan for 400 million euros, with maturity date in 2018, and formalised in 2013 to enable this company to meet its payment obligations. These credits have 1 million euros of accrued interest receivable.

Moreover, 87 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (68 million euros in 2015).

 

    At December 31, 2016 and 2015, the account receivable with Telefónica Móviles México, S.A. de C.V. amounts to 11,697 million Mexican pesos, equivalent to 538 and 623 million euros, respectively. This consideration is recognised as non-current pursuant to the expected collection date at the reporting date. At December 31, 2016, accrued interest receivable totals 258 million euros (255 million euros in 2015), which forms part of the non-current balance receivable.

 

    At December 31, 2016, the account receivable with Telefónica de Contenidos, S.A.U. consist of a 340 million-euro participating loan awarded in 2013 and maturity date in May 2016 that has been extended until May 2017 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, 2016 and 2015, no accrued interest is outstanding.

In addition, 46 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (no amounts were outstanding for this concept in 2015).

 

 

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    The 2016 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 93 million euros comprising tax receivables from the subsidiary for its tax expense declared in the consolidated tax return (370 million euros in 2015) and accrued interest of 1 million euros.

On May 27, 2016 with the aim of enabling the necessary funds for restructuing the infrastructure business line of the Group as described above, the Company has granted its subsidiary Telxius Telecom, S.A.U. with a credit of 560 million euros at a fix interest rate and maturity in 2026 and a credit of 140 million euros and an interest rate referred to euribor maturing 2021.

In addition, 8 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return.

 

    In 2015 the outstanding balance of Telefónica Internacional, S.A.U. included dividends distributed and not paid by 3,529 million euros. In July and November 2016 parcial payments have been received of 328 and 1,500 million euros, respectively. On January 1, 2016 the company has merged with Telefónica Latinoamérica Holding, S.L., and this last one being the merged company. As of December 31, 2016 there are unpaid dividends from both companies amounting to 2,041 million euros.

Moreover, 58 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (103 million euros in 2015).

 

    On December, 30, 2015, General Shareholders’ Meeting of Telfin Ireland, Ltd. approved a dividend distribution totaling 455 million euros. This amount has been received in 2016.

 

    In 2016, under “Other companies” it is included a long term tax receivable with Telefónica Emisiones, S.A.U. amounting to 96 millon euros due to the limitation of the deductibles financial expenses (calculated in the tax group).

The Company has also extended 446 million euros (597 million euros in 2015) 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 597 million euros (825 million euros in 2015).

Total accrued interest receivable at December 31, 2016 included under “Current loans to group companies and associates” amounted to 2 million euros (271 million euros in 2015).

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 2017 and 2018 (see Note 19.3).

 

 

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Note 9. Financial investments

9.1. The breakdown of “Financial investments” at December 31, 2016 and 2015 is as follows:

2016

 

     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

     339        1,757        2,910        5,006        339        4,667        —          —          10        10        10        5,016        5,016  

Equity instruments

     339        —          —          339        339        —          —          —          —          —          —          339        339  

Derivatives (Note 16)

     —          1,757        2,910        4,667        —          4,667        —          —          —          —          —          4,667        4,667  

Loans to third parties and other financial assets

     —          —          —          —          —          —          —          —          10        10        10        10        10  

Current financial investments

     —          716        936        1,652        —          1,652        —          42        248        290        290        1,942        1,716  

Loans to third parties

     —          —          —          —          —          —          —          42        248        290        290        290        64  

Derivatives (Note 16)

     —          716        936        1,652        —          1,652        —          —          —          —          —          1,652        1,652  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial investments

     339        2,473        3,846        6,658        339        6,319        —          42        258        300        300        6,958        6,732  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

 

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9.2 Held-for-trading financial assets and hedges

These two categories include the fair value of outstanding derivative financial instruments at December 31, 2016 and 2015 (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, 2016 and 2015 are as follows:

December 31, 2016

 

Millions of euros

   Opening
balance
     Additions      Disposals     Other
movements
    Fair value
adjustments
    Closing
balance
 

Banco Bilbao Vizcaya Argentaria, S.A.

     298        —          —         (9     (6     283  

Other companies

     86        35        (68     —         3       56  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     384        35        (68     (9     (3     339  

 

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  

Telco, S.p.A.

     73        —          (603     15       515       —    

Other companies

     63        32        —         —         (9     86  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     483        32        (603     5       467       384  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Banco Bilbao Vizcaya Argentaria, S.A.

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 2016 and 2015 under “other movements”, relates to the sale of rights to scrip dividends that the bank distributed in both years.

At December 31, 2016 Telefónica, S.A.’s investment in BBVA represents 0.67% of that company’s share capital.

Telco, S.p.A.

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.

 

 

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9.4 Other financial assets and loans to third parties

The breakdown of investments included in this category at December 31, 2016 and 2015 is as follows:

 

Millions of euros

   2016      2015  

Other non-current financial assets:

     

Loans to third parties

     —          41  

Guarantees given

     10        10  

Other non-current financial assets

     —          —    

Other current financial assets:

     

Loans to third parties

     42        60  

Other current financial assets

     248        4  
  

 

 

    

 

 

 

Total

     300        115  
  

 

 

    

 

 

 

“Other current financial assets” includes 240 million euros of the collateral funds reinvested in BBVA (see Notes 12 and 20).

9.4.1 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 quarterly cashed until the contract vesting in 2017. The pending amounts are registered in the balance sheet according to its maturity schedule and amounting to 41 million euros as short term at December 31, 2016. As of December 31, 2015 there were 41 million euros as long term loans to third parties and 55 million euros as short term loans to third parties.

 

 

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Note 10. Trade and other receivables

The breakdown of “Trade and other receivables” at December 31, 2016 and 2015 is as follows:

 

Millions of euros

   2016      2015  

Trade receivables

     3        10  

Trade receivables from Group companies and associates

     247        295  

Other receivables

     16        1  

Employee benefits receivable

     —          2  

Tax receivables (Note 17)

     181        286  
  

 

 

    

 

 

 

Total

     447        594  
  

 

 

    

 

 

 

“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 2016 and 2015 include balances in foreign currency equivalent to 117 million and 150 million euros, respectively. In both years these amounts relate entirely to receivables in US dollars.

These balances gave rise to exchange losses in the income statement of approximately 3 million euros in 2016 (22 million euros of exchange gains in 2015).

 

 

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Note 11. Equity

11.1 Capital and reserves

a) Share capital

2016

On October 11, 2016, the deed of a share capital decrease was registered, cancelling 74,627,988 of own shares, reducing the company´s share capital by 74,627,988 euros.

On December 7, 2016, the deed of a share capital increase of 137,233,781 euros 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 5,037,804,990 euros subsequent to this increase.

At December 31, 2016, Telefónica, S.A.´s share capital amounted to 5,037,804,990 euros and consisted of 5,037,804,990 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’).

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 euros recorded as “share capital”. The difference with the effective amount issued, amounting 3,048,350,914.56 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 public deed 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.

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).

 

 

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In addition, at the May 30, 2014 Shareholders’ Meeting of Telefónica, S.A., 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 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 euros or the equivalent in another currency. For promissory notes, the outstanding balance of promissory notes issued under this 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 this delegation shall be taken into account.

At December 31, 2016 and 2015, Telefónica, S.A. held the following treasury shares:

 

            Euros per share                
     Number of
shares
     Acquisition
price
     Trading price      Market value (1)      %  

Treasury shares at 12/31/16

     141,229,134        10.48        8.82        1,246        2.80339

Treasury shares at 12/31/15

     141,639,159        11.69        10.24        1,450        2.84690

 

(1) Millions of euros

The movement in treasury shares of Telefónica, S.A. in 2016 and 2015 is as follows:

 

     Number of shares  

Treasury shares at 12/31/14

     128,227,971  

Acquisitions

     138,036,450  

Disposals

     (47,824,300

PIP II share plan delivery (see Note 19.3)

     (2,724,699

Share redemption

     (74,076,263

Treasury shares at 12/31/15

     141,639,159  

Acquisitions

     77,087,297  

Disposals

     (2,869,334

Share redemption

     (74,627,988

Treasury shares at 12/31/16

     141,229,134  

 

 

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Acquisitions

The amount of the acquisitions of treasury shares in 2016 and 2015 was 668 million euros and 1,654 million euros, respectively.

Share redemption and disposals

On October 13, 2016, 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 May 12, 2016, the public deed of this share capital reduction was registered in the Madrid Mercantile Registry (Registro Mercantil). Therefore, 74,627,988 of the own shares of Telefónica, S.A. totalling 813 million euros have been cancelled.

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, the public deed of this share capital reduction was registered in the Madrid Mercantile Registry (Registro Mercantil). Therefore, 74,076,263 of the own shares of Telefónica, S.A. totalling 886 million euros have been cancelled.

Treasury shares sold, including share plans redemptions, in 2016 and 2015 amount to 26 million euros and 593 million euros, respectively.

The main treasury share sale transaction in 2015 was the agreement entered by Telefónica, S.A. 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. The impact in equity amounted to 555 million euros.

On June 30, 2016 the third phase of the Telefónica, S.A. long-term inventive plan called “Performance and Investment Plan 2013-2016” (PIP 2013-2016”) ended. No shares were delivered to Telefónica Group Management (see Note 19).

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 (see Note 19).

The Company also has a derivative instrument, to be settled by offset, on a nominal value equivalent to 35.2 million of Telefónica shares in 2016 (33.8 million shares in 2015), 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, 2015 the balance of this reserve amounted to 984 million euros. The General Shareholders’ Meeting held on May 12, 2016 approved the allocation of 1 million euros in this caption. After the capital increase carried forward in 2016, the Company needs to increase the legal reserve by 23 million euros. The proposed appropriation of profit (see Note 3) includes an allocation of 2 million euros.

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 2016 and 2015, 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, 2016 and 2015 was 85 million euros and 93 million euros, respectively.

 

 

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    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 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 and 2016 new reserves for cancelled capital share amounting to 74 million euros, in both years have been created. The cumulative amount of the reserve for cancelled share capital at December 31, 2016 and 2015 was 731 and 656 million euros, respectively.

 

    Pursuant to the provisions of Royal Decree 1514/2007, since 2008, after the distribution of profits for each year, the Company set aside a non-distributable reserve of 2 million euros for goodwill amortization. Pursuant to the provisions of Royal Decree 602/2016 of December 2, 2016, the goodwill amortization amounting to 10 million euros has been registered with a counterpart in this reserve (see Note 2).

 

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

d) Dividends

Dividend distribution in 2016

Approval was given at the Shareholder´s Meeting of Telefónica S.A. of May 12, 2016 to pay a dividend with a charge to unrestricted reserves of a fixed gross 0.40 euros per outstanding share carrying dividend rights. The dividend was paid in full on May 19, 2016, and the total amount paid was 1,906 million euros.

On November 11, 2016 the Executive Commission of Telefónica, S.A.’s Board of Directors approval to pay a scrip dividend amounting to approximately 0.35 per share consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase with a charge to reserves by such amount as may be determined pursuant to the terms and conditions of the resolution, by means of the issue of new ordinary shares having a par value of one euro, to fulfill said allotments.The payment was paid on December 7, 2016, with and impact in equity amounting to 500 million euros.

The shareholders of 70.01% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Thus, the final number of shares issued in the capital increase was 137,233,781 shares with a nominal value of 1 euro each.

Dividend Distribution 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 Telefónica, 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.

 

 

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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.

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 41st day after the Issue Date up to the 25th 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 2016 and 2015 are as follows:

2016

 

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)

     11       13        (3     (17     4        8  

Cash flow hedges (Note 16)

     (801     477        (119     (308     77        (674
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

     (790     490        (122     (325     81        (666
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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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
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Note 12. Financial liabilities

The breakdown of “Financial liabilities” at December 31, 2016 and 2015 is as follows:

2016

 

    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

    1,721       963       2,684       —         2,684       —         41,839       45,248       44,523       47,932  

Payable to Group companies and associates

    —         —         —         —         —         —         37,274       40,680       37,274       40,680  

Bank borrowings

    —         —         —         —         —         —         4,427       4,430       4,427       4,430  

Derivatives (Note 16)

    1,721       963       2,684       —         2,684       —         —         —         2,684       2,684  

Other financial liabilities

    —         —         —         —         —         —         138       138       138       138  

Current financial liabilities

    628       51       679       —         679       —         16,179       16,274       16,858       16,953  

Payable to Group companies and associates

    —         —         —         —         —         —         13,146       13,233       13,146       13,233  

Bank borrowings

    —         —         —         —         —         —         1,635       1,637       1,635       1,637  

Bonds and other marketable debt securities

    —         —         —         —         —         —         1,158       1,164       1,158       1,164  

Derivatives (Note 16)

    628       51       679       —         679       —         —         —         679       679  

Other financial liabilities

    —         —         —         —         —         —         240       240       240       240  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

    2,349       1,014       3,363       —         3,363       —         58,018       61,522       61,381       64,885  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

The entire amount of “Other financial liabilities” relates to the received deposit of 240 million as collateral guarantees with BBVA (see Note 9 and 20).

 

 

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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, 2016 and 2015 are as follows:

2016

Millions of euros

   Non-convertible
debentures and
bonds
     Other marketable
debt securities
     Total  

Opening balance

     820        65        885  

Additions

     —          374        374  

Disposals

     —          (69      (69

Revaluation and other movements

     (32      —          (32

Closing balance

     788        370        1,158  

Details of maturities:

        

Non-current

     —          —          —    

Current

     788        370        1,158  

2015

Millions of euros

   Non-convertible
debentures and
bonds
     Other marketable
debt securities
     Total  

Opening balance

     902        6        908  

Additions

     —          83        83  

Disposals

     (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  

The balance of “Non-convertible debentures and bonds” in 2016 is 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. Under ¨revaluation and other movements¨ it is included the payment of the coupon for that issuance amounting to 45 million euros in 2016.

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.

 

 

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Maturities of the nominal amounts of debenture and bond issues at December 31, 2016 and 2015 are as follows:

2016

 

Millions of euros                 Maturity         

Name

   Interest rate      % interest rate     2017      2018      2019      2020      2021      Subsequent
years
     TOTAL  

DEBENTURES AND BONDS:

                         

Bonds exchangeable into Telecom Italia shares

     FIXED        6.00     750        —          —          —          —          —          750  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total issues

          750        —          —          —          —          —          750  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

13.2 At December 31, 2016, 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, 2016 the outstanding balance on this promissory note program was 370 million euros (65 million euros in 2015).

13.3 The average interest rate during 2016 on debentures and bonds outstanding during the year was 6.01% (5.96% in 2015) and the average interest rate on corporate promissory notes was 0.045% (0.14% in 2015).

 

 

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Note 14. Interest-bearing debt and derivatives

14.1 The balances at December 31, 2016 and 2015 are as follows:

December 31, 2016

 

Millions of euros

                    

Item

   Current      Non-current      Total  

Loans with financial entities

     1,635        4,427        6,062  

Derivative financial liabilities (Note 16)

     679        2,684        3,363  
  

 

 

    

 

 

    

 

 

 

Total

     2,314        7,111        9,425  
  

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

 

14.2 The nominal values of the main interest-bearing debts at December 31, 2016 and 2015 are as follows:

 

Description

   Value Date      Marturity Date      Currency      Limit
12/31/16
(millions)
     Balance
(million of euros)
 

Structured Financing (*)

     05/03/11        07/30/21        USD        200        190  

Structured Financing (*)

     02/22/13        01/31/23        USD        669        635  

Structured Financing (*)

     08/01/13        10/31/23        USD        532        505  

Syndicated facility (1)

     02/18/14        02/18/21        EUR        3,000        —    

Bilateral

     06/26/14        06/26/18        EUR        1,500        1,500  

Syndicated facility (2)

     02/19/15        02/19/22        EUR        2,500        550  

Bilateral

     06/30/15        06/30/20        EUR        200        200  

Syndicated facility (3)

     11/17/15        02/15/19        EUR        1,500        —    

Structured Financing (*)

     12/11/15        03/11/26        USD        737        324  

Structured Financing (*)

     12/11/15        03/11/26        EUR        492        240  

Bilateral loan

     02/23/16        02/23/19        EUR        100        100  

Bilateral loan

     02/23/16        02/23/21        EUR        100        100  

Loan

     03/08/16        03/08/21        EUR        300        300  

Bilateral loan

     10/24/16        03/19/19        EUR        300        300  

 

(1) Extended for 12 additional months of the syndicated facility signed in February 2014.
(2) Extended for 12 additional months of the syndicated facility signed in February 2015.
(3) On November 15, 2016 an amendment was signed extending the maturity for 12 additional months of the syndicated facility and an early repayment of 1,500 million euros was made.
* Facilities with amortization schedule.

 

 

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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        1,500  

Syndicated facility

   02/19/15    02/19/20(3)     EUR        2,500        500  

Bilateral

   06/30/15    06/30/20     EUR        200        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.

 

 

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14.3 Maturities of balances at December 31, 2016 and 2015 are as follows:

December 31, 2016

 

     Maturity         

Millions of euros

Items

   2016      2017      2018      2019      2020      Subsequent
years
     Closing
balance
 

Loans with financial entities

     1,635        1,159        702        380        965        1,221        6,062  

Derivative financial liabilities (Note 16)

     679        298        348        1,003        515        519        3,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,314        1,457        1,050        1,383        1,480        1,740        9,425  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

     Maturity         

Millions of euros

Items

   2016      2016      2017      2018      2019      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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

14.4 Interest-bearing debt arranged or repaid in 2016 mainly includes the following:

 

Description

   Limit
12/31/2016
(millions)
     Currency      Outstanding
balance
12/31/2016
(million euros)
     Arrangement
date
     Maturity date      Drawdown
2016
(million euros)
     Repayment
2016
(million euros)
 

Telefónica, S.A.

 

  

Structured financing (*)

     669        USD        635        02/22/13        01/31/23        —          (111

Structured financing (*)

     532        USD        505        08/01/13        10/31/23        124        (82

Syndicated facility (1)

     3,000        EUR        —          02/18/14        02/18/21        1,280        (1,980

Syndicated facility (2)

     2,500        EUR        550        02/19/15        02/19/22        300        (250

Syndicated facility (3)

     1,500        EUR        —          11/17/15        02/15/19        3,070        (3,070

Structured financing (*)

     737        USD        324        12/11/15        03/11/26        337        (12

Structured financing (*)

     492        EUR        240        12/11/15        03/11/26        248        (8

Bilateral loan

     100        EUR        100        02/23/16        02/23/19        100        —    

Bilateral loan

     100        EUR        100        02/23/16        02/23/21        100        —    

Loan

     300        EUR        300        03/08/16        03/08/21        300        —    

Bilateral loan

     300        EUR        300        10/24/16        03/19/19        300        —    

 

(1) Extended for 12 additional months of the syndicated facility signed in February 2014.
(2) Extended for 12 additional months of the syndicated facility signed in February 2015.
(3) On November 15, 2016 an amendment was signed extending the maturity for 12 additional months of the syndicated facility and an early repayment of 1,500 million euros was made.
(*) Facility with amortization schedule.

14.5 Average interest on loans and borrowings

The average interest rate in 2016 on loans and borrowings denominated in euros was 0.566% and 2.066% for foreign-currency loans and receivables.

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.

 

 

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14.6 Unused credit facilities

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

At December 31, 2016 and 2015, Telefónica had undrawn credit facilities amounting to 10,302 million euros and 11,705 million euros, respectively.

Financing arranged by Telefónica, S.A. at December 31, 2016 and 2015 is not subject to compliance with financial ratios (covenants).

 

 

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Note 15. Payable to group companies and associates

15.1 The breakdown at December 31, 2016 and 2015 is as follows:

December 31, 2016

 

Millions of euros

   Non-current      Current      Total  

Loans

     37,218        12,365        49,583  

Trade payables to Group companies and associates

     6        239        245  

Derivatives (Note 16)

     18        202        220  

Payable to subsidiaries due to taxation on a consolidated basis

     32        340        372  
  

 

 

    

 

 

    

 

 

 

Total

     37,274        13,146        50,420  
  

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

 

The maturity of these loans at the 2016 and 2015 year ends is as follows:

December 31, 2016

 

Company (Millions of euros)

   2017      2018      2019      2020      2021      2020 and
subsequent
years
     Final balance,
current and
non-current
 

Telefónica Emisiones, S.A.U.

     5,901        3,902        3,467        4,853        3,588        13,031        34,742  

Telefónica Europe, B.V.

     2,814        1,121        848        1,445        621        3,771        10,620  

Telfisa Global, B.V.

     3,577        —          —          —          —          —          3,577  

Telefónica Participaciones, S.A.U.

     73        —          —          —          571        —          644  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12,365        5,023        4,315        6,298        4,780        16,802        49,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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December 31, 2015

 

Company (Millions of euros)

   2016      2017      2018      2019      2020      2019 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  

Telefónica Participaciones, S.A.U.

     73        72        —          —          —          —          145  

Others

     25        —          —          —          —          —          25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financing raised by Telefónica, S.A. through its subsidiary Telefónica Europe, B.V. at December 31, 2016 amounting 10,620 million euros (8,560 million euros in 2015). This financing entails a number of loans paying market interest rates calculated on a Euribor plus spread basis, with an average interest rate in 2016 of 4.20% (5.01% in 2015). The main source of this financing was the funds obtained through the issuance of undated deeply subordinated reset rate guaranteed securities amounting 6,052 million euros (5,167 million euros in 2015), bonds and debentures amounting 1,686 million euros (1,648 million euros in 2015) and commercial paper amounting 2,630 million euros (1,431 million euros in 2015).

Financing raised by Telefónica, S.A. through Telefónica Emisiones, S.A.U. at December 31, 2016 was 34,742 million euros (36,937 million euros in 2015). This financing is arranged as loans from these companies on the same terms as those of the issuance programs. The average interest rate in 2016 was 4.26% (4.63% in 2015). 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 2016 mainly by tapping the European capital markets, issuing bonds totaling 4,900 million euros (1,467 million euros in 2015).

The characteristics of the main bonds issued during 2016 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

     04/13/16        04/13/22        1,400        EUR        1,400        0.75
     04/13/16        04/13/26        1,350        EUR        1,350        1.46
     10/17/16        10/17/20        1,250        EUR        1,250        0.318
     10/17/16        10/17/31        750        EUR        750        1.93
     12/28/16        12/28/51        150        EUR        150        4.00

Telefónica Participaciones, S.A.U.

                 

Cash-settled equity-link bonds non-dilutive (*)

     03/09/16        03/09/21        600        EUR        600        0

 

(*) Based on the quotation of Telefónica, S.A. shares.

 

 

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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, 2016 and 2015 as a result of fair value interest rate and exchange rate hedges.

Telfisa Global, B.V. centralizes and handles cash management and flows for the Telefónica Group in Latin America, the United States, Europe and Spain since 2016. The balance payable to this subsidiary is formalized through several Deposit Agreements accruing interest at market rates and amounting to 3,577 million euros in 2016 (2,571 million euros in 2015).

Financing raised by Telefónica, S.A. through Telefónica Finanzas, S.A.U. was 500 million euros during 2015. In 2016, it has been transferred to Telfisa Global, B.V. in charge of the integrated cash management of the companies comprising the Telefónica Group.

Financing raised by Telefónica, S.A. through Telefónica Participaciones, S.A.U. at December 31, 2016 totals 644 million euros (145 million euros in 2015). This financing of 2016 corresponds to these two concepts:

 

    A loan with a principal of 600 million euros at an annual interest rate of 0.25%; which funds are a result of the issuance of non-dilutive convertible bonds carried out by Telefónica Participaciones, S.A.U., guaranteed by Telefónica, S.A. at March 9, 2016. These bonds are benchmarked against the value of Telefónica S.A. shares, with an aggregate nominal amount of 600 million euros, an issue price of 101.25% and 5-year maturity.

 

    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., 3-year maturity and an annual coupon of 4.90%. The nominal amount of the bonds necessarily convertible into treasury shares, amounting to 1,500 million euros, has been booked as ¨Other equity instruments¨.

15.2 The balance of “Payable to subsidiaries due to taxation on a consolidated basis” was 372 million euros and 197 million euros at December 31, 2016 and 2015, 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 here correspond to Telefónica Latinoamérica Holding, S.L. (the acquiring company from the merger with Telefónica Internacional, S.A.U. carried out on the accounting date of January 1, 2016) for 228 million euros (84 million in 2015), Telefónica Digital España, S.A.U. for 26 million euros (38 million in 2015), Latin American Cellular Holdings, S.L. for 49 million euros in 2016 (which had no significant amount relating to it in 2015).

 

 

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Note 16. Derivative financial instruments and risk management policies

a) Derivative financial instruments

During 2016, 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, 2016, the total outstanding balance of derivatives transactions was 126,938 million euros (144,823 million euros in 2015), of which 105,303 million euros related to interest rate risk and 21,635 million euros to foreign currency risk. In 2015, 112,276 million euros related to interest rate risk and 32,547 million euros to foreign currency risk.

It should be noted that at December 31, 2016, Telefónica, S.A. had transactions with financial institutions to hedge exchange rate risk for other Telefónica Group companies amounting to 1,739 million euros (2,618 million euros in 2015). At year-end 2016 and 2015, 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.

 

 

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The breakdown of Telefónica, S.A.’s interest rate and exchange rate derivatives at December 31, 2016, their notional amounts at year end and the expected maturity schedule is as follows:

2016

 

Millions of euros           Telefónica receives      Telefónica pays  

Type of risk

   Value in Euros      Carrying      Currency      Carrying     Currency  

Euro interest rate swaps

     79,252             

Fixed to fixed

     265        265        EUR        265       EUR  

Fixed to floating

     44,866        44,899        EUR        44,866       EUR  

Floating to fixed

     34,121        34,121        EUR        34,121       EUR  

Foreign currency interest rate swaps

     23,939             

Fixed to floating

             

CHFCHF

     582        625        CHF        625       CHF  

CZKCZK

     194        5,250        CZK        5,250       CZK  

GBPGBP

     4,203        3,595        GBP        3,595       GBP  

JPYJPY

     81        10,000        JPY        10,000       JPY  

USDUSD

     15,469        16,304        USD        16,304       USD  

Floating to fixed

             

CZKCZK

     46        1,250        CZK        1,250       CZK  

GBPGBP

     1,391        1,190        GBP        1,190       GBP  

USDUSD

     1,973        2,079        USD        2,079       USD  

Exchange rate swaps

     11,836             

Fixed to fixed

             

EURBRL

     159        163        EUR        546       BRL  

Fixed to floating

             

JPYEUR

     95        15,000        JPY        95       EUR  

Floating to floating

             

CHFEUR

     515        625        CHF        515       EUR  

GBPEUR

     2,048        1,600        GBP        2,048       EUR  

JPYEUR

     101        10,000        JPY        101       EUR  

USDEUR

     8,918        11,417        USD        8,918       EUR  

Forwards

     7,526             

BRLEUR

     56        203        BRL        (56     EUR  

CLPEUR

     1        840        CLP        (1     EUR  

CZKEUR

     47        1,250        CZK        (46     EUR  

EURBRL

     573        573        EUR        (1,969     BRL  

EURCLP

     208        208        EUR        (146,800     CLP  

EURGBP

     2,614        2,614        EUR        (2,236     GBP  

EURMXN

     1        1        EUR        (21     MXN  

EURUSD

     1,849        1,849        EUR        (1,949     USD  

GBPEUR

     1,011        860        GBP        (1,011     EUR  

GBPUSD

     3        3        GBP        (3     USD  

USDBRL

     22        22        USD        (76     BRL  

USDCLP

     4        4        USD        (2,824     CLP  

USDCOP

     3        4        USD        (10,691     COP  

USDGBP

     19        21        USD        (17     GBP  

USDPEN

     2        2        USD        (8     PEN  

Swaption

     435             

Fixed to floating

             

EUREUR

     205        205        EUR        205       EUR  

Floating to fixed

             

EUREUR

     230        230        EUR        230       EUR  
  

 

 

            

Subtotal

     122,988             
  

 

 

            

 

 

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Millions of euros  

Notional amounts of structured products with options

   Value in euros      Notional      Currency  

Interest rate options Caps & Floors

     1,677        

Caps&Floors

     1,677        

GBP

     877        750        GBP  

EUR

     800        800        EUR  

Currency options

     2,273        

USDEUR

     1,558        1,558        EUR  

EURUSD

     715        715        EUR  
  

 

 

       

Subtotal

     3,950        
  

 

 

       

TOTAL

     126,938        
  

 

 

       

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

     1,460        160        50        1,250        —    

Pension Plan

     5,160        375        1,155        955        2,675  

Loans

     30,939        3,024        8,761        7,477        11,677  

in national currency

     20,310        1,625        5,400        5,360        7,925  

in foreign currencies

     10,629 &nb