firsthalfyear2018




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 July, 2018

Commission File Number: 001-09531

Telefónica, S.A.
(Translation of registrant's name into English)

Distrito Telefónica, Ronda de la Comunicación s/n,
28050 Madrid, Spain
3491-482 87 00
(Address of principal executive offices)

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

Form 20-F 
X
 
Form 40-F 
 

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

Yes 
 
 
No
X

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

Yes 
 
 
No
X

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

Yes 
 
 
No
X

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








Telefónica, S.A.


TABLE OF CONTENTS


Item
 
Sequential Page Number
 
 
 
1.
 
Telefónica Group: 2018 First half-yearly financial report

2











 


 


 

FIRST HALF 2018
Condensed consolidated interim financial statements and Consolidated interim management report for the six-months ended June 30, 2018






Index
Note 3. Accounting policies
Note 6. Intangible assets, property, plant and equipment and goodwill
Note 8. Changes in equity and shareholder remuneration
Note 9. Financial assets and other non-current assets
Note 10. Receivables and other current assets
Note 11. Breakdown of financial assets by category
Note 12. Financial liabilities
Note 13. Payables and other non-current liabilities
Note 14. Payables and other current liabilities
Note 15. Breakdown of contractual assets and liabilities, and capitalized costs
Note 16. Average number of Group employees
Note 17. Other expenses
Note 18. Income tax
Note 19. Other information
Note 20. Events after the reporting period
Interim consolidated management report
     Consolidated results
Segment results
Risks and uncertainties facing the Company



telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Telefónica Group
Consolidated statements of financial position
Millions of euros
Notes
06/30/2018

12/31/2017

ASSETS
 
 
 
A) NON-CURRENT ASSETS
 
91,567

95,135

Intangible assets
(Note 6)
17,118

18,005

Goodwill
(Note 6)
25,527

26,841

Property, plant and equipment
(Note 6)
32,674

34,225

Investments accounted for by the equity method
(Note 7)
68

77

Financial assets and other non-current assets
(Note 9)
8,768

8,167

Deferred tax assets
(Note 18)
7,412

7,820

B) CURRENT ASSETS
 
19,384

19,931

Inventories
 
1,220

1,117

Receivables and other current assets
(Note 10)
10,816

10,093

Tax receivables
(Note 18)
1,092

1,375

Other current financial assets
(Note 11)
2,552

2,154

Cash and cash equivalents
(Note 11)
3,662

5,192

Non-current assets classified as held for sale
 
42


TOTAL ASSETS (A+B)
 
110,951

115,066


 
Notes
06/30/2018

12/31/2017

EQUITY AND LIABILITIES
 
 
 
A) EQUITY
 
23,715

26,618

Equity attributable to equity holders of the parent and other holders of equity instruments
(Note 8)
14,821

16,920

Equity attributable to non-controlling interests
(Note 8)
8,894

9,698

B) NON-CURRENT LIABILITIES
 
59,397

59,382

Non-current financial liabilities
(Note 12)
46,798

46,332

Payables and other non-current liabilities
(Note 13)
1,823

1,687

Deferred tax liabilities
(Note 18)
2,360

2,145

Non-current provisions
 
8,416

9,218

C) CURRENT LIABILITIES
 
27,839

29,066

Current financial liabilities
(Note 12)
7,972

9,414

Payables and other-current liabilities
(Note 14)
15,485

15,095

Current tax payables
(Note 18)
2,252

2,341

Current provisions
 
2,130

2,216

TOTAL EQUITY AND LIABILITIES (A+B+C)
 
110,951

115,066

Unaudited data at June 30, 2018.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.


 
 
 
 
 
Telefónica, S.A. 3


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Telefónica Group
Consolidated income statements
Millions of euros
Notes
January- June

January- June

INCOME STATEMENTS
 
2018

2017

Revenues
(Note 4)
24,334

26,091

Other income
 
680

709

Supplies
 
(6,678
)
(7,362
)
Personnel expenses
 
(3,125
)
(3,493
)
Other expenses
(Note 17)
(7,109
)
(7,766
)
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA)
(Note 4)
8,102

8,179

Depreciation and amortization
(Notes 4 and 6)
(4,405
)
(4,809
)
OPERATING INCOME
(Note 4)
3,697

3,370

Share of income (loss) of investments accounted for by the equity method
(Note 7)
5

3

Finance income
 
827

673

Exchange gains
 
1,808

2,416

Finance costs
 
(1,321
)
(1,869
)
Exchange losses
 
(1,697
)
(2,417
)
Net financial expense
 
(383
)
(1,197
)
PROFIT BEFORE TAX
 
3,319

2,176

Corporate income tax
(Note 18)
(1,298
)
(520
)
PROFIT FOR THE PERIOD
 
2,021

1,656

Attributable to equity holders of the Parent
 
1,739

1,600

Attributable to non-controlling interests
 
282

56

Basic and diluted earnings per share attributable to equity holders of the parent (euros)
 
0.29

0.29

Unaudited data.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.


 
 
 
 
 
Telefónica, S.A. 4


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Telefónica Group
Consolidated statements of comprehensive income
Millions of euros
January - June
2018

January - June
2017

Profit for the period
2,021

1,656

Other comprehensive (loss) income
41

318

Gains (Losses) from financial assets measured at Fair value through comprehensive income
7

42

Income tax impact
(2
)
5

Reclassification of losses (gains) included in the income statement

32

Income tax impact


 
5

79

Gains (Losses) on hedges
(71
)
231

Income tax impact
22

(55
)
Reclassification of losses (gains) included in the income statement
65

75

Income tax impact
(19
)
(19
)
 
(3
)
232

Gains (Losses) on hedges costs
63


Income tax impact
(16
)

Reclassification of losses (gains) included in the income statement


Income tax impact


 
47


Share of gains (losses) recognized directly in equity of associates and others
(8
)
9

Income tax impact

(2
)
Reclassification of losses (gains) included in the income statement


Income tax impact


 
(8
)
7

Translation differences
(3,053
)
(3,350
)
Total other comprehensive (loss) income recognized in the period (Items that may be reclassified subsequently to profit or loss)
(3,012
)
(3,032
)
Actuarial gains (losses) and impact of limit on assets for defined benefit pension plans
1

57

Income tax impact

(14
)
 
1

43

Gains (Losses) from financial assets measured at Fair value through comprehensive income
(41
)

Income tax impact
(9
)

 
(50
)

Total other comprehensive income (loss) recognized in the period (Items that will not be reclassified subsequently to profit or loss)
(49
)
43

Total comprehensive (loss) income recognized in the period
(1,040
)
(1,333
)
Attributable to:


 

Equity holders of the parent and other holders of equity instruments
(741
)
(871
)
Non-controlling interests
(299
)
(462
)
 
(1,040
)
(1,333
)
Unaudited data.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.


 
 
 
 
 
Telefónica, S.A. 5


telefonicalogooka16.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 





Telefónica Group
Consolidated statement of changes in equity
 
Attributable to equity holders of the parent and other holders of equity instruments
Non-controlling interests

Total equity

Millions of euros
Share capital

Share premium

Treasury Shares

Other equity instruments

Legal reserve

Retained earnings

Fair value financial assets

Hedges

Equity of associates and others

Translation differences

Total

Financial position at December 31, 2017
5,192

4,538

(688
)
7,518

987

18,225

74

384

37

(19,347
)
16,920

9,698

26,618

Adjustment on initial application of new reporting standards (Note 8)





823

(292
)



531

68

599

Financial position at January 1, 2018
5,192

4,538

(688
)
7,518

987

19,048

(218
)
384

37

(19,347
)
17,451

9,766

27,217

Profit for the year





1,739





1,739

282

2,021

Other comprehensive income (loss) for the year





6

(44
)
(3
)
45

(2,484
)
(2,480
)
(581
)
(3,061
)
Total comprehensive income (loss) for the year





1,745

(44
)
(3
)
45

(2,484
)
(741
)
(299
)
(1,040
)
Dividends and distribution of profit (Note 8)




51

(2,102
)




(2,051
)
(568
)
(2,619
)
Net movement in treasury shares


1



(1
)







Acquisitions and disposals of non-controlling interests and business combinations













Undated Deeply Subordinated Securities (Note 8)



451


(277
)




174

(6
)
168

Other movements





(12
)




(12
)
1

(11
)
Financial position at June 30, 2018
5,192

4,538

(687
)
7,969

1,038

18,401

(262
)
381

82

(21,831
)
14,821

8,894

23,715

Unaudited data.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.


 
 
 
 
 
Telefónica, S.A. 6


telefonicalogooka16.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 





Telefónica Group
Consolidated statements of changes in equity
 
Attributable to equity holders of the parent and other holders of equity instruments
Non-controlling interests

Total equity

Millions of euros
Share capital

Share premium

Treasury Shares

Other equity instruments

Legal reserve

Retained earnings (1)

Available-for-sale investments

Hedges

Equity of associates and others

Translation differences

Total

Financial position at December 31, 2016
5,038

3,227

(1,480
)
7,803

985

17,093

9

191

31

(14,740
)
18,157

10,228

28,385

Profit for the year





1,600





1,600

56

1,656

Other comprehensive income (loss) for the year





39

79

231

6

(2,826
)
(2,471
)
(518
)
(2,989
)
Total comprehensive income (loss) for the year





1,639

79

231

6

(2,826
)
(871
)
(462
)
(1,333
)
Dividends and distribution of profit (Note 8) (1)




2

(1,990
)




(1,988
)
(433
)
(2,421
)
Net movement in treasury shares


1








1


1

Acquisitions and disposals of non-controlling interests and business combinations (Note 5)


754



(83
)




671

(671
)

Undated Deeply Subordinated Securities (Note 8)






(100
)




(100
)
(6
)
(106
)
Other movements





13





13

1

14

Financial position at June 30, 2017
5,038

3,227

(725
)
7,803

987

16,572

88

422

37

(17,566
)
15,883

8,657

24,540

Unaudited data.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
(1) The amount in "Dividends and distribution of profit" was modified, including the second tranche of the dividend approved by the 2017 General Shareholders' Meeting, which was paid in December 2017 (see Note 8).





 
 
 
 
 
Telefónica, S.A. 7


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Telefónica Group
Consolidated statements of cash flows
Millions of euros
January - June
2018

January - June
2017

Cash received from operations
29,760

32,024

Cash paid from operations
(22,317
)
(24,557
)
Net payments of interest and other financial expenses net of dividends received
(986
)
(976
)
Taxes paid
(356
)
(537
)
Net cash flow provided by operating activities
6,101

5,954

(Payments on investments)/proceeds from the sale in property, plant and equipment and intangible assets, net
(4,582
)
(4,405
)
Proceeds on disposals of companies, net of cash and cash equivalents disposed
1

30

Payments on investments in companies, net of cash and cash equivalents acquired
(2
)
(6
)
Proceeds on financial investments not included under cash equivalents
480

155

Payments on financial investments not included under cash equivalents
(586
)
(544
)
(Payments)/proceeds on placements of cash surpluses not included under cash equivalents
(604
)
(1,112
)
Government grants received
37


Net cash flow used in investing activities
(5,256
)
(5,882
)
Dividends paid
(1,433
)
(1,136
)
Proceeds from share capital increase

3

Proceeds/(payments) of treasury shares and other operations with shareholders and with minority interests


Operations with other equity holders
68

(135
)
Proceeds on issue of debentures and bonds, and other debts
2,672

6,789

Proceeds on loans, borrowings and promissory notes
2,284

2,823

Repayments of debentures and bonds, and other debts
(3,760
)
(2,534
)
Repayments of loans, borrowings and promissory notes
(1,744
)
(2,439
)
Financed operating payments and investments in property, plant and equipment and intangible assets payments (Note 12)
(230
)
(841
)
Net cash used in financing activities
(2,143
)
2,530

Effect of changes in exchange rates
(232
)
(292
)
Effect of changes in consolidation methods and others


Net increase (decrease) in cash and cash equivalents during the period
(1,530
)
2,310

CASH AND CASH EQUIVALENTS AT JANUARY 1
5,192

3,736

CASH AND CASH EQUIVALENTS AT JUNE 30
3,662

6,046

RECONCILIATION OF CASH AND CASH EQUIVALENTS WITH THE STATEMENT OF FINANCIAL POSITION
 
 
BALANCE AT JANUARY 1
5,192

3,736

Cash on hand and at banks
3,990

2,077

Other cash equivalents
1,202

1,659

BALANCE AT JUNE 30
3,662

6,046

Cash on hand and at banks
2,609

3,745

Other cash equivalents
1,053

2,301

Unaudited data.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.


 
 
 
 
 
Telefónica, S.A. 8


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Telefónica, S.A. and subsidiaries composing the Telefónica Group
Notes to the condensed consolidated interim financial statements for the six-months ended June 30, 2018
Note 1. Background and general information
Telefónica, S.A. and its subsidiaries and investees (“Telefónica”, “the Company”, the “Telefónica Group” or "the Group”) make up an integrated and diversified telecommunications group operating mainly in Europe and Latin America. The Group’s activity is centered around services of wireline and wireless telephony, broadband, internet, data traffic, Pay TV and other digital services.
The parent company of the Group is Telefónica, S.A., a public limited company incorporated on April 19, 1924 for an indefinite period. Its registered office is at calle Gran Vía 28, Madrid (Spain).
As a multinational telecommunications company which operates in regulated markets, the Group is subject to different laws and regulations in each of the jurisdictions in which it operates, pursuant to which permits, concessions or licenses must be obtained in certain circumstances to provide the various services.
In addition, certain wireline and wireless telephony services are provided under regulated rate and price systems.

Note 2. Basis of presentation of the consolidated financial statements
The condensed consolidated interim financial statements for the six-month period ended June 30, 2018 (hereinafter, the “interim financial statements”) have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting and Article 12 of Royal Decree 1362/2007, of October 19. Therefore, they do not contain all the information and disclosures required in complete annual consolidated financial statements and, for adequate interpretation, should be read in conjunction with the consolidated financial statements (Consolidated annual accounts) for the year ended December 31, 2017.
The accompanying interim financial statements were approved by the Company’s Board of Directors at its meeting of July 25, 2018.
The figures in these interim financial statements are expressed in millions of euros, unless otherwise indicated, and may therefore be rounded.
Comparison of information
Comparisons in the accompanying interim financial statements refer to the six-month periods ended June 30, 2018 and 2017, except in the consolidated statement of financial position, which compares information at June 30, 2018 and at December 31, 2017.
No significant changes took place in the scope of consolidation of the Group in the six months ended June 30, 2018.
With respect to seasonality, the historical performance of consolidated results does not indicate that the operations of the Group, taken as a whole, are subject to significant variations between the first and second halves of the year.

 
 
 
 
 
Telefónica, S.A. 9


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Impact of adopting new accounting standards in 2018
On January 1, 2018 the new IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers became effective, resulting in changes in the accounting policies applied in prior periods.
IFRS 15 Revenues from Contracts with Customers
IFRS 15 sets out the requirements for recognising revenue from contracts with customers. The Group has adopted IFRS 15 using one of the two transition methods allowed: the modified retrospective method, with the cumulative effect from initial application recognised as an adjustment to the opening balance of retained earnings at the date of initial application, January 1, 2018 (see Note 8). Accordingly, the 2017 information presented for comparative purposes has not been restated - i.e. it is prepared and presented in accordance with the accounting standards effective at that moment: under IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations.
Under the provisions in IFRS 15, it is possible to elect to apply certain practical expedients to reduce complexity in the application of the new requirements. The main practical expedients applied by the Group are:
Completed contracts: not to apply the standard retrospectively to contracts that are completed contracts at January 1, 2018.
Portfolio approach: the Group will apply the requirements of the standard to groups of contracts with similar characteristics (residential customers and small and medium-sized entities, where standard offers are marketed), since, for the cluster identified, the effects do not differ significantly from an application on a contract by contract basis.
The details of the new significant accounting policies and the nature of the main changes to previous accounting policies in relation to revenue recognition under the new model in IFRS 15 are set out in Note 3. The most significant impacts relate to the first-time recognition of contract assets, that, under IFRS 15, lead to the earlier recognition of revenue from the sale of goods, and the acceleration and deferral of the incremental costs of obtaining contracts, that under IFRS 15, result in the later recognition of customer acquisition costs.
The impacts of adopting IFRS 15 on the Group’s interim financial statements for the six-month period ended June 30, 2018 are set out below:
Millions of euros
06/30/2018

06/30/2018

06/30/2018

ASSETS
IFRS 15

IAS 18

IFRS 15 Impact

A) NON-CURRENT ASSETS
91,567

91,267

300

Intangible assets
17,118

17,118


Goodwill
25,527

25,527


Property, plant and equipment
32,674

32,674


Investments accounted for by the equity method
68

68


Financial assets and other non-current assets
8,768

8,438

330

Deferred tax assets
7,412

7,442

(30
)
B) CURRENT ASSETS
19,384

18,533

851

Inventories
1,220

1,220


Receivables and other current assets
10,816

9,976

840

Tax receivables
1,092

1,081

11

Other current financial assets
2,552

2,552


Cash and cash equivalents
3,662

3,662


Non-current assets classified as held for sale
42

42


TOTAL ASSETS (A+B)
110,951

109,800

1,151


 
 
 
 
 
Telefónica, S.A. 10


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


 
06/30/2018

06/30/2018

06/30/2018

EQUITY AND LIABILITIES
IFRS 15

IAS 18

IFRS 15 Impact

A) EQUITY
23,715

22,955

760

Equity attributable to equity holders of the parent and other holders of equity instruments
14,821

14,157

664

Equity attributable to non-controlling interests
8,894

8,798

96

B) NON-CURRENT LIABILITIES
59,397

59,158

239

Non-current financial liabilities
46,798

46,798


Payables and other non-current liabilities
1,823

1,748

75

Deferred tax liabilities
2,360

2,196

164

Non-current provisions
8,416

8,416


C) CURRENT LIABILITIES
27,839

27,687

152

Current financial liabilities
7,972

7,972


Payables and other-current liabilities
15,485

15,422

63

Current tax payables
2,252

2,163

89

Current provisions
2,130

2,130


TOTAL EQUITY AND LIABILITIES (A+B+C)
110,951

109,800

1,151

Millions of euros
January - June 2018

January - June 2018

January - June 2018

INCOME STATEMENTS
IFRS 15

IAS 18

IFRS 15 Impact

Revenues
24,334

24,361

(27
)
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA)
8,102

8,081

21

Depreciation and amortization
(4,405
)
(4,405
)

OPERATING INCOME
3,697

3,676

21

Share of profit (loss) of investments accounted for by the equity method
5

5


Net financial expense
(383
)
(378
)
(5
)
PROFIT BEFORE TAX
3,319

3,303

16

Corporate income tax
(1,298
)
(1,297
)
(1
)
PROFIT FOR THE PERIOD
2,021

2,006

15

Attributable to equity holders of the Parent
1,739

1,732

7

Attributable to non-controlling interests
282

274

8

Basic and diluted earnings per share attributable to equity holders of the parent (euros)
0.29

0.28

0.01

IFRS 9 Financial Instruments
IFRS 9 sets out a new accounting framework for the recognition, classification, measurement and derecognition of financial instruments, impairment losses on financial assets and hedge accounting. The details of the new significant accounting policies and the nature of the main changes to previous accounting policies in relation to financial instruments under the new standard IFRS 9 are set out in Note 3.
Pursuant to the transition provisions in IFRS 9, the Group has elected the exemption not to restate comparative periods to be presented in the year of initial application (i.e. 2017 information presented for comparative purposes is prepared and presented in accordance with the accounting standards effective at that moment: under IAS 39 Financial Instruments: Recognition and Measurement, and related interpretations). The difference

 
 
 
 
 
Telefónica, S.A. 11


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


in the carrying amounts of financial assets and financial liabilities resulting from the adoption of the new requirements is recognised in retained earnings as at January 1, 2018 (see Note 8)
The main impact of adopting IFRS 9 on the Group’s interim financial statements resulted in an increase amounting to 204 million euros over the bad debt provision balance and fair value adjustments on customer receivables. In addition to this, financial assets have changed to the new measurement categories under IFRS 9 (see Note 11).
Translation of Telefónica Venezolana's financial statements
Venezuela has been considered a hyperinflationary economy since 2009. We review on a regular basis the economic conditions in Venezuela and the specific circumstances of our Venezuelan operations. Assessment of the exchange rate that better reflects the economics of Telefónica’s business activities in Venezuela relies on several factors and is performed considering all the information available at each closing date.
In light of the economic environment and in the absence of official rates that are representative of the situation in Venezuela, in the first half of 2018 the Group maintained its policy to estimate an exchange rate that matches the progression of inflation in Venezuela and contributes to reflect the economic and financial position of the Group’s Venezuelan operations within its consolidated financial statements in a more accurate way (hereinafter, synthetic exchange rate). Thus, the exchange rate used to translate the financial statements of the Venezuelan subsidiaries as of June 30, 2018 amounts to 2,369,815 VEF/USD (36,115 VEF/USD as of December 31, 2017 and 3,547 VEF/USD as of June 30, 2017). The inflation rates applied by the Group to Venezuela are 6,461.8% and 192.1% for the six-month period ended June 30, 2018 and 2017, respectively (2,874.1% for the year 2017).
The exchange rate resulting from the last auction of the exchange mechanism introduced in January 2018 (Exchange Agreement No. 39) is 134,262.5 VEF/EUR.
The following table presents the contribution of Telefónica Venezolana to certain items of the consolidated income statement, the statement of cash flows and statement of financial position of the Telefónica Group for the first half of 2018, applying the synthetic exchange rate:
Millions of euros
 
Contribution of Telefónica Venezolana to the consolidated financial statements of the Telefónica Group
 
Revenues
13

Operating income before depreciation and amortization (OIBDA)
1

Depreciation and amortization
(41
)
Financial result (1)
106

Profit before tax
65

Income tax (2)
(91
)
Result for the period
(26
)
Other comprehensive income (movement of translation differences)

(10
)
Net cash flow provided by operating activities
5

Capital expenditures (CapEx)
1

Non-current assets
261

(1) The financial result resulting from the hyperinflation adjustment to the net monetary position and from the exchange differences arising from foreign currency items held by Telefónica Venezolana amounted to 106 million euros in the six-month period ended June 30, 2018 (loss of 20 million euros in the six-month period ended June 30, 2017).
(2) Deferred tax recognized for the inflation adjustments of the net assets, which are not deductible according to the present tax regime in Venezuela.

 
 
 
 
 
Telefónica, S.A. 12


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Alternative measures not defined in IFRS
The Management of the Group uses a series of measures in its decision-making, in addition to those expressly defined in the IFRS, because they provide additional information useful to assess the Group’s performance, solvency and liquidity. These measures should not be viewed in isolation or as a substitute for the measures presented according to the IFRS.
Operating income before depreciation and amortization (OIBDA)
Operating income before depreciation and amortization (OIBDA) is calculated by excluding solely depreciation and amortization from operating income. OIBDA is used to track the performance of the business and to establish operating and strategic targets of the Telefónica Group companies. OIBDA is a commonly reported measure and is widely used among analysts, investors and other interested parties in the telecommunications industry, although not a measure explicitly defined in IFRS, and therefore, may not be comparable to similar indicators used by other companies. OIBDA should not be considered as a substitute for operating income.
The following table presents the reconciliation of OIBDA to operating income for the Telefónica Group for the six-months periods ended June 30, 2018 and 2017:
Millions of euros
January - June 2018

January - June 2017

Operating Income Before Depreciation and Amortization (OIBDA)
8,102

8,179

Depreciation and amortization
(4,405
)
(4,809
)
Operating income
3,697

3,370


The following table presents the reconciliation of OIBDA to operating income for each business segment for the six-months periods ended June 30, 2018 and 2017:
January - June 2018
Millions of euros
Telefónica Spain

Telefónica United Kingdom

Telefónica Germany

Telefónica Brazil

Telefónica Hispam Norte

Telefónica Hispam Sur

Other companies and elimina-
tions

Total Group

Operating Income Before Depreciation and Amortization (OIBDA)
2,507

879

882

2,257

434

1,024

119

8,102

Depreciation and amortization
(816
)
(491
)
(980
)
(992
)
(456
)
(537
)
(133
)
(4,405
)
Operating income
1,691

388

(98
)
1,265

(22
)
487

(14
)
3,697

January - June 2017 (revised, see Note 4)
Millions of euros
Telefónica Spain

Telefónica United Kingdom

Telefónica Germany

Telefónica Brazil

Telefónica Hispam Norte

Telefónica Hispam Sur

Other companies and elimina-
tions

Total Group

Operating Income Before Depreciation and Amortization (OIBDA)
2,425

849

861

2,138

613

1,183

110

8,179

Depreciation and amortization
(850
)
(523
)
(1,006
)
(1,156
)
(497
)
(630
)
(147
)
(4,809
)
Operating income
1,575

326

(145
)
982

116

553

(37
)
3,370


 
 
 
 
 
Telefónica, S.A. 13


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Debt indicators
As calculated by us, net financial debt includes: (i) current and non-current financial liabilities in our consolidated statement of financial position (which includes the negative mark-to-market value of derivatives) and (ii) other payables included in “Payables and other non-current liabilities” and "Payables and other current liabilities" (mainly corresponding to payables for deferred payment of radio spectrum that have a financial component). From these liabilities, the following are subtracted: i) cash and cash equivalents, ii) current financial assets (which include short-term derivatives), iii) the positive mark-to-market value of derivatives with a maturity beyond one year, and iv) other interest-bearing assets (components of “Receivables and other current assets” and “Financial assets and other non-current assets” in our consolidated statement of financial position). The accounts included in the net financial debt calculation recorded in "Payables and other non-current liabilities" or "Financial assets and other non-current assets" have a maturity beyond one year and a financial component. In "Receivables and other current assets" we include the customer financing of terminal sales classified as short term, and "Financial assets and other non-current assets" includes derivatives, installments for the long term sales of terminals to customers and other long term financial assets (which at June 30, 2018 includes the credit related to the judicial decision in favor of Telefónica Brasil about PIS/COFINS, see Note 9).
We calculate net financial debt plus commitments by adding gross commitments related to employee benefits to net financial debt, and deducting the value of long-term assets associated with those commitments and the tax benefits arising from the future payments of those commitments.

We believe that net financial debt and net financial debt plus commitments are meaningful for investors and analysts because they provide an analysis of our solvency using the same measures used by our Management. We use net financial debt and net financial debt plus commitments to calculate internally certain solvency and leverage ratios used by Management. Nevertheless, neither net financial debt nor net financial debt plus commitments as calculated by us should be considered as a substitute for gross financial debt as presented in the consolidated statement of financial position.
The following table presents a reconciliation of net financial debt and net financial debt plus commitments as of June 30, 2018 and December 31, 2017 to the Telefónica Group’s gross financial debt as indicated in the consolidated statement of financial position:

 
 
 
 
 
Telefónica, S.A. 14


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Millions of euros
06/30/2018
12/31/2017
Non-current financial liabilities
46,798
46,332
Current financial liabilities
7,972
9,414
Gross financial debt (Note 12)
54,770
55,746
Cash and cash equivalents
(3,662)
(5,192)
Other current financial assets
(2,552)
(2,154)
Positive mark-to-market value of long-term derivative instruments (Note 9)
(2,854)
(2,812)
Other liabilities included in "Payables and other non-current liabilities"
652
708
Other liabilities included in "Payables and other current liabilities"
114
111
Other assets included in "Financial assets and other non-current assets"
(2,141)
(1,516)
Other assets included in "Receivables and other current assets"
(734)
(661)
Net financial debt
43,593
44,230
Gross commitments related to employee benefits
6,130
6,578
Value of associated long-term assets
(784)
(749)
Tax benefits
(1,422)
(1,533)
Net commitments related to employee benefits
3,924
4,296
Net financial debt plus commitments
47,517
48,526

Free Cash Flow
The Group’s free cash flow is calculated starting from “Net cash flow provided by operating activities” as indicated in the consolidated statement of cash flows; deducting (Payments on investments)/Proceeds from the sale of investments in property, plant and equipment and intangible assets, net, adding the cash received form government grants and deducting dividends paid to minority interests. The cash used to cancel commitments related to employee benefits (originally included in the Net cash flow provided by operating activities) is added as it represents the payments of principal of the debt incurred with those employees.
The definition of free cash flow was revised in 2017, so that the cash received from the sale of real estate (which in the first six-month period of 2017 amounted to 5 million euros) is no longer excluded from the cash flow proceeding from the operations. Cash received from the sale of real estate is included in the "(Payments on investments)/Proceeds from the sale of investments in property, plant and equipment and intangible assets, net" figure within the free cash flow.
We believe that free cash flow is a meaningful measure for investors and analysts because it provides an analysis of the cash flow available to protect solvency levels and to remunerate the parent company’s shareholders and other equity holders. The same measure is used internally by our management. Nevertheless, free cash flow as calculated by us should not be considered as a substitute for the various flows of cash as presented in the consolidated statements of cash flows.

 
 
 
 
 
Telefónica, S.A. 15


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


The following table presents the reconciliation between Telefónica Group’s Net cash flow provided by operating activities as indicated in the consolidated statement of cash flows and the free cash flow for the six-months periods ended June 30, 2018 and 2017:
Millions of euros
January - June 2018

January - June 2017

Net cash flow provided by operating activities
6,101

5,954

(Payments on investments)/Proceeds from the sale of property, plant and equipment and intangible assets, net
(4,582
)
(4,405
)
Government grants received
37


Dividends paid to minority shareholders
(406
)
(255
)
Payments related to cancellation of commitments
398

332

Free cash flow
1,548

1,626


Note 3. Accounting policies
The accounting policies applied in the preparation of the interim financial statements for the six-month period ended June 30, 2018 are consistent with those used in the preparation of the Group’s consolidated annual financial statements for the year ended December 31, 2017, except for the following new standards and amendments to standards published by the International Accounting Standards Board (IASB) and endorsed by the EU for use in Europe, which are effective for annual periods beginning on or after January 1, 2018.
IFRS 15 Revenues from Contracts with Customers
IFRS 15 establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. The core principle is that an entity should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The main changes introduced by the new standard are as follows:
a)
Under IFRS 15, for bundled packages that combine multiple wireline, wireless, data, internet or television goods or services, the total revenue is allocated to each performance obligation based on their standalone selling prices in relation to the total consideration of the package and is recognised when (or as) the obligation is satisfied, regardless of whether there are undelivered items. This criteria differs from previous accounting where the portion of the total consideration that was contingent upon delivery of undelivered elements was not allocated to delivered elements. Consequently, when bundles include a discount on equipment, the adoption of these new requirements results in an increase of revenues recognised from the sale of handsets and other equipment, generally recognised upon delivery to the end customer, in detriment of ongoing service revenue over subsequent periods. The difference between the revenue from the sale of equipment and the consideration received from the customer upfront is recognised as a contract asset on the statement of financial position.
b)
IFRS 15 requires the recognition of an asset for those incremental costs (sales commissions and other third party acquisition costs) directly related with obtaining a contract and that are expected to be recovered. These are subsequently amortised over the same period as the revenue associated with such asset. Costs to obtain a contract are expensed when incurred if the Group estimates that their amortisation period is one year or less.
c)
IFRS 15 sets out more detailed requirements on how to account for contract modifications. Certain changes must be accounted for as a retrospective change (i.e. as a continuation of the original contract), while other

 
 
 
 
 
Telefónica, S.A. 16


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


modifications must be accounted for prospectively as separate contracts, like the end of the original contract and the creation of a new one.
d)
The Group does not adjust the transaction price for a significant financing component where the period between the transfer of goods or services to the customer and payment by the customer is not expected to exceed one year.
Information on the impact of initially applying this standard is disclosed in Note 2.
IFRS 9 Financial Instruments
IFRS 9 sets out the requirements for recognising and measuring financial assets and financial liabilities. This new standard includes:
a)
a model for classifying financial assets that is driven by an asset’s cash flow characteristics and the business model in which it is held. IFRS 9 simplifies the previous measurement model for financial assets and establishes three main categories: amortised cost, fair value through profit or loss and fair value through Other Comprehensive Income (OCI).
b)
a model for classifying financial liabilities, where there are no significant changes from the criteria applied in prior periods, except for the recognition in other comprehensive income, rather than in profit or loss of changes in own credit risk for those financial liabilities measured at fair value through profit or loss.
c)
a new model for impairment losses on financial assets not measured at fair value through profit or loss, i.e. the expected credit loss model, which replaces the incurred loss model applied previously. Under this new impairment model entities are required to account for expected credit losses from when the financial assets are first recognized. The Group applies the IFRS 9 simplified approach to measure loss allowances for trade receivables and contract assets based on lifetime expected credit losses.
d)
a new hedge accounting model, less restrictive, that more closely aligns the accounting treatment with the entity’s risk management activities, requiring an economic relationship between the hedged item and the hedging instrument and requiring that the coverage ratio be the same as that applied by the entity for its risk management. The new standard modifies the criteria for documentation of hedging relationships and includes enhanced disclosure requirements about risk management activity.
Information on the impact of initially applying this standard is disclosed in Note 2.
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
These amendments contain requirements on the accounting for:
a)
the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments;
b)
the classification of a share-based payment transaction with a net settlement feature for withholding tax obligations; and
c)
accounting where a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.
The application of these amendments did not have a significant impact on the Group’s interim consolidated financial position or results.
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)
These amendments provide a number of options to addresses concerns arising from the different effective dates of IFRS 9 and IFRS 17 Insurance Contracts, whose effective date is 1 January 2021. The modifications are not relevant for the Group as it has not used any of the exemptions included within the amendments.

 
 
 
 
 
Telefónica, S.A. 17


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Transfers of Investment Property (Amendments to IAS 40)
This amendment clarifies when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. The application of these amendments did not have a significant impact on the Group’s interim consolidated financial position or results.
Annual Improvements to IFRS Standards 2014-2016 Cycle
The annual improvements projects provide a vehicle for making non-urgent but necessary amendments to IFRSs, with the aim of removing inconsistencies and clarifying wording. The amendment relating to the measurement of an associate or joint venture at fair value clarifies that entities that elect to measure investments in joint ventures and associates at fair value through profit or loss may make this election separately for each associate or joint venture. The application of these amendments did not have a significant impact on the Group’s interim consolidated financial position or results.
IFRIC 22 Foreign Currency Transactions and Advance Consideration
This new interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration in a foreign currency, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. The application of this interpretation did not have a significant impact on the Group’s interim consolidated financial position or results.

New standards and amendments to standards issued but not effective as of June 30, 2018
At the date of preparation of the interim consolidated financial statements, the following IFRSs and amendments had been published, but their application was not mandatory:
Standards and amendments
Mandatory application: annual periods beginning on or after
IFRS 16
Leases
January 1, 2019
IFRIC 23
Uncertainty over Income Tax Treatments
January 1, 2019
Amendments to IFRS 9
Prepayment Features with Negative
Compensation
January 1, 2019
Amendments to IAS 19
Plan Amendment, Curtailment or Settlement
January 1, 2019
Amendments to IAS 28
Long-term Interests in Associates and Joint Ventures
January 1, 2019
Improvements to IFRS Standards 2015-2017 Cycle
January 1, 2019
IFRS 17
Insurance Contracts
January 1, 2021
Based on the analyses made to date, the Group estimates that the adoption of the new standard on lease contracts, IFRS 16 Leases, issued but not yet effective, might have a significant impact on the consolidated financial statements at the time of its adoption and prospectively. Regarding the rest of the standards, amendments and interpretations issued but not yet effective, based on the analyses undertaken to date the

 
 
 
 
 
Telefónica, S.A. 18


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Group estimates that they will not have a significant impact on the consolidated financial statements in the initial period of application.
IFRS 16 Leases
IFRS 16 requires lessees to recognise assets and liabilities arising from all leases (except for short-term leases and leases of low-value assets) in the statement of financial position.
The Group acts as a lessee on a very significant number of lease agreements over different assets, such as third-party towers, circuits, office buildings and stores and land where the towers are located, mainly. A significant portion of these contracts is accounted for as operating lease under the current lease standard, with lease payments being recognised generally on a straight-line basis over the contract term.
The Group is currently in the process of estimating the impact of this new standard on such contracts. This analysis includes the estimation of the lease term, based on the non-cancellable period and the periods covered by options to extend the lease, when the exercise depends only on Telefónica and where such exercise is reasonably certain. This will depend, to a large extent, on the specific facts and circumstances by class of assets in the telecom industry (technology, regulation, competition, business model, among others). In addition to this, the Group will make assumptions to calculate the discount rate, which will mainly be based on the incremental borrowing rate of interest for the estimated term. On the other hand, the Group will not separately recognise non-lease components from lease components for those classes of assets in which non-lease components are not material with respect to the total value of the lease.
Moreover, the standard allows for two transition methods: retrospectively for all periods presented, or using a modified retrospective approach where the cumulative effect of adoption is recognised at the date of initial application. The Group has decided to adopt the latter transition method; therefore, the cumulative effect of initial application shall be recognised as an adjustment to retained earnings in the year of initial application of IFRS 16. Also, certain practical expedients are available on first-time application in connection with the right of use asset measurement, discount rates, impairment, leases that finish within the twelve months subsequent to the date of first application, initial direct costs, and term of the lease. The Group is evaluating which of these practical expedients will be adopted. In this regard, the Group shall apply the practical expedient that allows not to reassess whether a contract is or contains a lease on the date of initial application of IFRS 16 but to directly apply the new requirements to all those contracts which under current accounting were identified as leases.
Due to the different alternatives available, together with the complexity of the estimations and the significant number of lease contracts, the Group has not yet completed the implementation process, so at present it is not possible to make a reasonable estimation of the impact of initial application of the new requirements. However, based on the volume of contracts affected, as well as the magnitude of the future lease commitments, as disclosed in the Group's Consolidated Annual Financial Statements, the Group expects that the changes introduced by IFRS 16 would have a significant impact on its financial statements from the date of adoption, including the recognition on the balance sheet of right of use assets and their corresponding lease obligations in connection with the majority of contracts that are classified as operating leases under the current lease standard. Also, amortization of the right of use assets and recognition of interest costs on the lease obligation on the statements of income will replace amounts recognised as lease expense under the current lease standard. Classification of lease payments in the statement of cash flows will also be affected by the requirements of the new lease standard. On the other side, the Group's Financial Statements will include broader disclosures with relevant information regarding lease contracts.

 
 
 
 
 
Telefónica, S.A. 19


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Note 4. Segment information
The organizational structure approved by the Board of Directors of Telefónica, S.A. on February 26, 2014 was made up of the following segments: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Central America, Ecuador and Uruguay).
On January 31, 2018, the Board of Directors of Telefónica also resolved to adopt a new organisational structure in order to make the Group more agile, simple and focused on management, customer service, growth, efficiency and profitability.
In this context, Telefónica Hispanoamérica was split into two new segments in order to more effectively manage the different market situations: Telefónica Hispam Sur, encompassing operations in Argentina, Chile, Peru and Uruguay, and Telefónica Hispam Norte, encompassing the operations in Colombia, Mexico, Central America, Ecuador and Venezuela.
The comparative results of the segments of the Group for the first half of 2017 and the comparative segmentation of assets, liabilities and investments accounted for by the equity method as of December 31, 2017 have been restated to reflect this new organization. These changes in the segments have had no impact on the consolidated results of the Group.
These segments include the information related to wireline, wireless, cable, data, internet, television businesses and other digital services provided in each country or countries. Any services not specifically included in these segments are part of “Other companies and eliminations”, which includes, in particular, Telxius (as further explained below), the companies belonging to the cross-sectional areas, other Group companies as well as eliminations in the consolidation process. Inter-segment transactions are carried out at market prices.
Telxius' financials are reported under "Other companies and eliminations". Revenues of Telxius in the first half of 2018 amounted to 366 million euros (370 million euros in the first half of 2017), of which 223 million euros correspond to inter-segment revenues (229 million euros in the first half of 2017). OIBDA of Telxius in the first half of 2018 amounted to 173 million euros (179 million euros in the first half of 2017). The capital expenditures in the first half of 2018 in Telxius amounted to 98 million euros (56 million euros in the first half of 2017).
The Group manages borrowing activities centrally. Also, Telefónica, S.A. is the head of the Telefónica tax group in Spain. Therefore, a significant part of the related assets and liabilities is included under “Other companies and eliminations” and the results of the segments are disclosed up to operating income. Revenue and expenses arising from intra-group invoicing for the use of the trademark and management services have been eliminated from the operating results of each Group segment. These adjustments have no impact on the Group’s consolidated results.
Segment reporting takes into account the impact of the purchase price allocation to the assets acquired and the liabilities assumed for the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.


 
 
 
 
 
Telefónica, S.A. 20


telefonicalogooka16.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 





The following table presents income and CapEx information (capital expenditures in intangible assets and property, plant and equipment, see Note 6) regarding the Group’s operating segments:
January - June 2018
Millions of euros
Telefónica
Spain

Telefónica
United Kingdom

Telefónica Germany

Telefónica
 Brazil

Telefónica Hispam Norte

Telefónica
Hispam Sur

Other companies and eliminations

Total Group

Revenues
6,265

3,223

3,525

5,227

1,998

3,631

465

24,334

External revenues
6,144

3,204

3,510

5,217

1,953

3,607

699

24,334

Inter-segment revenues
121

19

15

10

45

24

(234
)

Other operating income and expenses
(3,758
)
(2,344
)
(2,643
)
(2,970
)
(1,564
)
(2,607
)
(346
)
(16,232
)
OIBDA
2,507

879

882

2,257

434

1,024

119

8,102

Depreciation and amortization
(816
)
(491
)
(980
)
(992
)
(456
)
(537
)
(133
)
(4,405
)
Operating income
1,691

388

(98
)
1,265

(22
)
487

(14
)
3,697

Capital expenditures (CapEx)
778

987

424

892

165

553

133

3,932

January - June 2017 (revised)
Millions of euros
Telefónica
Spain

Telefónica
United Kingdom

Telefónica Germany

Telefónica
 Brazil

Telefónica
Hispam Norte

Telefónica
Hispam Sur

Other companies and eliminations

Total Group

Revenues
6,226

3,208

3,542

6,193

2,212

4,207

503

26,091

External revenues
6,083

3,190

3,523

6,180

2,150

4,188

777

26,091

Inter-segment revenues
143

18

19

13

62

19

(274
)

Other operating income and expenses
(3,801
)
(2,359
)
(2,681
)
(4,055
)
(1,599
)
(3,024
)
(393
)
(17,912
)
OIBDA
2,425

849

861

2,138

613

1,183

110

8,179

Depreciation and amortization
(850
)
(523
)
(1,006
)
(1,156
)
(497
)
(630
)
(147
)
(4,809
)
Operating income
1,575

326

(145
)
982

116

553

(37
)
3,370

Capital expenditures (CapEx)
704

434

435

915

277

645

97

3,507




 
 
 
 
 
Telefónica, S.A. 21


telefonicalogooka16.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 





The following table presents assets and liabilities by segment:
June 2018
Millions of euros
Telefónica
Spain

Telefónica
United Kingdom

Telefónica Germany

Telefónica
 Brazil

Telefónica
Hispam Norte

Telefónica
Hispam Sur

Other companies and eliminations

Total Group

Fixed assets
15,244

9,719

14,059

20,960

5,873

7,280

2,184

75,319

Investments accounted for by the equity method
2

8


2

1


55

68

Total allocated assets
24,277

12,916

16,759

27,397

8,898

10,406

10,298

110,951

Total allocated liabilities
13,801

4,790

6,042

7,538

5,004

5,230

44,831

87,236

December 2017 (revised)
Millions of euros
Telefónica
Spain

Telefónica
United Kingdom

Telefónica Germany

Telefónica
 Brazil

Telefónica
Hispam Norte

Telefónica
Hispam Sur

Other companies and eliminations

Total Group

Fixed assets
15,288

9,198

14,611

23,845

6,075

7,840

2,214

79,071

Investments accounted for by the equity method
2

7


2

1


65

77

Total allocated assets
22,722

11,610

17,225

30,229

9,194

11,009

13,077

115,066

Total allocated liabilities
13,391

4,063

5,889

8,130

5,118

5,611

46,246

88,448



 
 
 
 
 
Telefónica, S.A. 22


telefonicalogooka16.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 





The composition of segment revenues is as follows:
Millions of euros
January - June 2018
January - June 2017
Segments
Fixed

Mobile

Other and elims.

Total

Fixed

Mobile

Other and elims.

Total

Spain (*)






6,265







6,226

United Kingdom

3,032

191

3,223


3,048

160

3,208

Germany
391

3,127

7

3,525

440

3,092

10

3,542

Brazil
1,943

3,285

(1
)
5,227

2,411

3,781

1

6,193

Hispam Norte
356

1,641

1

1,998

386

1,826


2,212

Hispam Sur
1,423

2,209

(1
)
3,631

1,639

2,568


4,207

Other and inter-segment eliminations


465

465



503

503

Total Group



24,334




26,091

Note: In the countries of the Telefónica Hispam Norte and Telefónica Hispam Sur segments with separate fixed and mobile operating companies, the intercompany revenues have not been considered.
(*) The detail of revenues for Telefónica Spain is shown in the table below.

Given the convergence reached at Telefónica Spain due to the high penetration of the convergent offers in Telefónica Spain, the revenue breakdown by fixed and mobile is less relevant in this segment. For this reason, the following revenue breakdown is shown, which Management believes is more meaningful.
Millions of euros
 
 
Telefónica Spain
January - June 2018

January - June 2017

Mobile handset sale
179

165

Ex-Mobile handset sale
6,086

6,061

    Consumer
3,336

3,273

    Corporate
1,715

1,710

    Others (*)
1,035

1,078

Total
6,265

6,226

(*) Other includes wholesale, subsidiaries and other revenues.

 
 
 
 
 
Telefónica, S.A. 23


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Note 5. Business combinations and acquisitions of non-controlling interests
Business combinations
No material business combinations were finalized within the Group in the six months ended June 30, 2018 and 2017.
Acquisition by Coltel of control over Telebucaramanga, Metrotel and Optecom
On September 30, 2017, as part of the early termination agreement regarding the contract with PARAPAT, Colombia Telecomunicaciones, S.A. ESP (Coltel) acquired control of the Colombian companies Empresa de Telecomunicaciones de Telebucaramanga S.A. ESP (“Telebucaramanga”), operating in the city of Bucaramanga; Metropolitana de Telecomunicaciones S.A. ESP (“Metrotel”); and Operaciones Tecnológicas y Comerciales S.A.S. (“Optecom”), operating in the city of Barranquilla, for an overall price of 509,975 million Colombian pesos (approximately 147 million euros on the transaction date). These companies primarily provide fixed telephony, data, pay TV, installation and maintenance services.
As of the date when the present interim financial statements were drawn up, the process for allocating the purchase price is provisional. This analysis should conclude in the coming months, yet will not last longer than twelve months from the acquisition date stipulated in the standard.
Transactions with non-controlling interests
Share swap with KPN
In March 2017 Telefónica entered into a swap agreement with Koninklijke KPN NV (hereinafter, KPN) to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital) in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter (see Note 8). The exchange ratio was determined based on the average of the volume weighted average price of the respective shares over the last five trading sessions. As a result of this agreement, Telefónica increased from 63.2% to 69.2% its shareholding in Telefonica Deutschland.

Note 6. Intangible assets, property, plant and equipment and goodwill
The movements in "Intangibles assets" and "Property, plant and equipment" in the first half of 2018 are as follows:
Millions of euros
Intangibles assets

Property, plant and equipment

Total

Balance at 12/31/2017
18,005

34,225

52,230

Additions
1,171

2,761

3,932

Depreciation and amortization
(1,647
)
(2,758
)
(4,405
)
Disposals
(2
)
(21
)
(23
)
Translation differences and
hyperinflation adjustments
(635
)
(1,290
)
(1,925
)
Transfers and others
226

(243
)
(17
)
Balance at 06/30/2018
17,118

32,674

49,792



 
 
 
 
 
Telefónica, S.A. 24


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


As a result of its participation in the Principal Stage of the spectrum auction conducted in the United Kingdom, Telefónica UK Limited (O2 UK) was granted four blocks of 10 MHz in the 2.3 GHz spectrum band and eight blocks of 5 MHz in the 3.4 GHz band. The investment for these new frequencies by O2 UK was 524 million pounds sterling (approximately 588 million euros).
The additions by segment are detailed in Note 4.
The movement in "Goodwill" in the first half of 2018 is as follows:
Millions of euros
Goodwill

Balance at 12/31/2017
26,841

Translation differences
(1,206
)
Write-offs
(108
)
Balance at 06/30/2018
25,527

The movement of translation differences is mainly related to the depreciation of the Brazilian real.
The Group carries out periodically a sensitivity analysis of the goodwill impairment test, by considering reasonable changes in the main assumptions used in such test.
As indicated in the consolidated financial statements for 2017, the goodwill allocated to Telefónica Móviles México could be impaired by variations in the discount rate (WACC) and the perpetuity growth rate. During the first half of 2018, changes in the macroeconomic and financial conditions were revealed, reflected in the risk premiums that are computed in the cost of capital. In this context, the estimated WACC increased to 10.0% (from 9.5% used at the end of 2017) and the estimated perpetuity growth rate decreased 0.4 p.p.
As a consequence of the update of the assumptions used in calculating the value in use, and the carrying value of the company at June 30, 2018, a partial write-off of the goodwill allocated to Telefónica Móviles México was recognized, amounting to 108 million euros (see Note 17).
Regarding the sensitivity of the calculation, an additional 50 b.p. increase in the WACC could result in an additional impairment amounting to 134 million euros, while with an additional 25 b.p. decrease in the perpetuity growth rate the impact would be 56 million euros. On the other hand, a decrease of 1 p.p. in the long-term OIBDA margin could result in a negative impact of 125 million euros and with an increase of 0.5 p.p. in the long-term CapEx ratio the negative impact would be 63 million euros.

Note 7. Related parties
Significant shareholders
The significant shareholders of the Company are Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), Caja de Ahorros y Pensiones de Barcelona (“la Caixa”) and Blackrock, Inc., with stakes in Telefónica, S.A. of 5.17%, 5.01% and 4.989%, respectively.
During the first six months of 2018 and 2017 the Group did not carry out any significant transactions with Blackrock, Inc., other than the dividends paid corresponding to its stake.
A summary of significant transactions between the Telefónica Group and the companies of BBVA and those of la Caixa, carried out at market prices, is as follows:

 
 
 
 
 
Telefónica, S.A. 25


telefonicalogooka15.jpg
 
Condensed consolidated interim financial statements 2018
 
 
 


Millions of euros
January-June

January-June

 
2018

2017

Finance costs
25

26

Receipt of services
13

7

Purchase of goods and other expenses
27

34

Total costs
65

67

Finance income
23

11

Dividends received(1)
5

8

Services rendered
36

50

Sale of goods
28

25

Total revenue
92

94

Finance arrangements: loans and capital contributions (borrower)
759

888

Guarantees
260

274

Commitments
88

80

Finance arrangements: loans and capital contributions (lessee)
1,175

1,865

Dividends paid
116

120

Factoring operations
637

250

Other transactions
12

11

(1) At June 30, 2018, Telefónica holds a 0.66% stake (0.66% at June 30, 2017) in the share capital of Banco Bilbao Vizcaya Argentaria, S.A.

In addition, the nominal value of outstanding derivatives held with BBVA and la Caixa in the first half of 2018 amounted to 20,318 and 546 million euros, respectively (21,480 million euros held with BBVA and 385 million euros held with la Caixa in the first half of 2017). This figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying. The net fair value of these same derivatives in the statement of financial position as of June 30, 2018 is 371 and -20 million euros, respectively (748 and -32 million euros, as of June 30, 2017).
Additionally, at June 30,2018 there were collateral guarantees net on derivatives with BBVA amounting to 100 million euros. In the same period of the previous year there was no amount related to this concept.
Other related parties
Certain Telefónica Group subsidiaries performed during the first half of 2018 transactions with Global Dominion Access Group, related to the Group´s ordinary course of business (mainly in Telefónica Spain amounting to 30 million euros).
Associates and joint ventures
The breakdown of items related to associates and joint ventures recognized in the consolidated statements of financial position and income statements is as follows:
Millions of euros
06/30/2018

12/31/2017

Investments accounted for by the equity method
68

77

Loans to associates and joint ventures
16

16

Receivables from associates and joint ventures for current operations (Note 10)
30

32

Financial debt, associates and joint ventures
93

10

Payables to associates and joint ventures (Note 14)
351

491