Edgar Filing: TELEFONICA S A

Filing Annual Accounts 2018 Combined Document

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, 2019

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 – 2018 Annual Accounts

	• Account Auditor's Report, Annual Financial Statements and Management Report of Telefónica, S.A., all for the Fiscal Year 2018.
	• Account Auditor's Report, Annual Financial Statements and Management Report of the Consolidated Group of Companies, all for the Fiscal Year 2018.

2018

TELEFÓNICA, S.A.

Annual financial statements and management report for the year ended December 31, 2018

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	29
Note 10. Trade and other receivables	33
Note 11. Equity	34
Note 12. Financial liabilities	39
Note 13. Bonds and other marketable debt securities	41
Note 14. Interest-bearing debt and derivatives	43
Note 15. Payable to group companies and associates	46
Note 16. Derivative financial instruments and risk management policies	48
Note 17. Income tax	60
Note 18. Trade, other payables and provisions	65
Note 19. Revenue and expenses	67
Note 20. Other information	75
Note 21. Cash flow analysis	82
Note 22. Events after the reporting period	85
Note 23. Additional note for English translation	87
Appendix I: Details of subsidiaries and associates at December 31, 2018	88
Appendix II: Board and Senior Management Compensation	92
Management report 2018	99
Business Model	99
Economic results of Telefónica, S.A.	102
Investment activity	103
Share price performance	106
Research, development and innovation	107
Environment, human resources and managing diversity	112
Liquidity and capital resources	120
Financing	120
Treasury shares	122
Risks factors associated with the issuer	124
Trend evolution	143



Events after the reporting period	144
Annual Corporate Governance Report for Listed Companies	146



		Financial Statements

Telefónica, S.A.

Balance sheet at December 31



Millions of euros
ASSETS	Notes	2018	2017
NON-CURRENT ASSETS		75,034	76,400
Intangible assets	5	20	17
Software		8	8
Other intangible assets		12	9
Property, plant and equipment	6	177	210
Land and buildings		123	126
Plant and other PP&E items		48	48
Property, plant and equipment under construction and prepayments		6	36
Investment property	7	404	389
Land		100	94
Buildings		304	295
Non-current investments in Group companies and associates	8	68,040	69,166
Equity instruments		66,530	67,025
Loans to Group companies and associates		1,503	2,141
Other financial assets		7	—
Financial investments	9	3,415	3,761
Equity instruments		298	340
Derivatives	16	2,421	2,509
Other financial assets	9	696	912
Deferred tax assets	17	2,978	2,857
CURRENT ASSETS		10,810	8,465
Net assets held for sale	8	69	—
Trade and other receivables	10	388	575
Current investments in Group companies and associates	8	4,510	3,460
Loans to Group companies and associates		4,473	3,426
Derivatives	16	8	10
Other financial assets		29	24
Investments	9	1,821	1,557
Loans to companies		972	759
Derivatives	16	842	793
Other financial assets		7	5
Accruals		11	5
Cash and cash equivalents		4,011	2,868
TOTAL ASSETS		85,844	84,865

The accompanying Notes 1 to 23 and Appendices I and II are an integral part of these balance sheets



		Telefónica, S.A. 4



		Financial Statements



Millions of euros
EQUITY AND LIABILITIES	Notes	2018		2017
EQUITY		20,949		19,865
CAPITAL AND RESERVES		21,497		20,520
Share capital	11	5,192		5,192
Share premium	11	4,538		4,538
Reserves	11	9,439		10,924
Legal & Statutory		1,111		1,066
Other reserves		8,328		9,858
Treasury shares and own equity instruments	11	(686	)	(688	)
Profit for the year	3	3,014		554
UNREALIZED GAINS (LOSSES) RESERVE	11	(548	)	(655	)
Available-for-sale financial assets		(49	)	42
Hedging instruments		(499	)	(697	)
NON-CURRENT LIABILITIES		46,371		48,874
Non-current provisions	18	494		459
Non-current borrowings	12	4,408		7,314
Bank borrowings	14	2,033		4,186
Derivatives	16	2,207		2,796
Other debts		168		332
Non-current borrowings from Group companies and associates	15	41,154		40,642
Deferred tax liabilities	17	291		427
Long term deferred revenues		24		32
CURRENT LIABILITIES		18,524		16,126
Current provisions	18	93		123
Current borrowings	12	2,483		1,352
Bonds and other marketable debt securities	13	181		204
Bank borrowings	14	2,094		896
Derivatives	16	208		252
Current borrowings from Group companies and associates	15	15,578		14,101
Trade and other payables	18	362		539
Accruals		8		11
TOTAL EQUITY AND LIABILITIES		85,844		84,865

The accompanying Notes 1 to 23 and Appendices I and II are an integral part of these balance sheets



		Telefónica, S.A. 5



		Financial Statements

Telefónica, S.A.

Income statements for the years ended December 31



Millions of euros	Notes	2018		2017
Revenue	19	4,921		3,715
Rendering of services to Group companies and associates		517		558
Rendering of services to non-group companies		21		35
Dividends from Group companies and associates		4,259		3,027
Interest income on loans to Group companies and associates		124		95
Impairment and gains (losses) on disposal of financial instruments	8	(412	)	(1,130	)
Impairment losses and other losses		(587	)	(1,443	)
Gains (losses) on disposal and other gains and losses		175		313
Other operating income	19	68		42
Non-core and other current operating revenue - Group companies and associates		46		26
Non-core and other current operating revenue - non-group companies		22		16
Employees benefits expense	19	(143	)	(174	)
Wages, salaries and others		(118	)	(149	)
Social security costs		(25	)	(25	)
Other operational expense		(316	)	(412	)
External services - Group companies and associates	19	(102	)	(113	)
External services - non-group companies	19	(198	)	(287	)
Taxes other than income tax		(16	)	(12	)
Depreciation and amortization	5, 6 and 7	(32	)	(36	)
Gains (losses) on disposal of fixed assets		—		2
OPERATING PROFIT		4,086		2,007
Finance revenue	19	359		411
Finance costs	19	(2,230	)	(2,299	)
Change in fair value of financial instruments		—		(30	)
Gain (loss) on available-for-sale financial assets recognized in the period	9 and 11	—		(30	)
Exchange rate gains (losses)	19	49		185
NET FINANCIAL EXPENSE		(1,822	)	(1,733	)
PROFIT BEFORE TAX	21	2,264		274
Income tax	17	750		280
PROFIT FOR THE YEAR		3,014		554

The accompanying Notes 1 to 23 and Appendices I and II are an integral part of these income statements



		Telefónica, S.A. 6



		Financial Statements

Telefónica, S.A.

Statements of changes in equity for the years ended December 31

A) Statement of recognized income and expense



Millions of euros	Notes	2018		2017
Profit of the period		3,014		554
Total income and expense recognized directly in equity	11	652		(139	)
From valuation of available-for-sale financial assets		(91	)	2
From cash flow hedges		991		(191	)
Income tax impact		(248	)	50
Total amounts transferred to income statement	11	(545	)	150
From valuation of available-for-sale financial assets		—		30
From cash flow hedges		(727	)	161
Income tax impact		182		(41	)
TOTAL RECOGNIZED INCOME AND EXPENSE		3,121		565

The accompanying Notes 1 to 23 and Appendices I and II are an integral part of these statements of changes in equity.

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



Millions of euros	Share capital	Share premium and Reserves		Treasury shares		Profit for the year		Other net equity instruments		Net unrealized gains (losses) reserve		Total
Balance at December 31, 2016	5,038	16,155		(1,480	)	24		1,206		(666	)	20,277
Total recognized income and expense	—	—		—		554		—		11		565
Transactions with shareholders and owners	—	(2,019	)	792		—		—		—		(1,227	)
Dividends paid (Note 11)	—	(2,019	)	—		—		—		—		(2,019	)
Other transactions with shareholders and owners	—	—		792		—		—		—		792
Other movements	154	1,302		—		—		(1,206	)	—		250
Appropriation of prior year profit (loss)	—	24		—		(24	)	—		—		—
Balance at December 31, 2017	5,192	15,462		(688	)	554		—		(655	)	19,865
Total recognized income and expense	—	—		—		3,014		—		107		3,121
Transactions with shareholders and owners	—	(2,039	)	2		—		—		—		(2,037	)
Dividends paid (Note 11)	—	(2,051	)	—		—		—		—		(2,051	)
Other transactions with shareholders and owners	—	12		2		—		—		—		14
Appropriation of prior year profit (loss)	—	554		—		(554	)	—		—		—
Balance at December 31, 2018	5,192	13,977		(686	)	3,014		—		(548	)	20,949

The accompanying Notes 1 to 23 and Appendices I and II are an integral part of these statements of changes in equity.



		Telefónica, S.A. 7



		Financial Statements

Telefónica, S.A.

Cash flow statements for the years ended December 31



Millions of euros	Notes	2018		2017
A) CASH FLOWS FROM OPERATING ACTIVITIES		2,364		1,424
Profit before tax		2,264		274
Adjustments to profit:		(2,117	)	(153	)
Depreciation and amortization	5,6 and 7	32		36
Impairment of investments in Group companies and associates	8	587		1,443
Change in long term provisions		—		73
Gains on the sale of financial assets		(175	)	(313	)
Losses on disposal of property, plant and equipment		—		(3	)
Dividends from Group companies and associates	19	(4,259	)	(3,027	)
Interest income on loans to Group companies and associates	19	(124	)	(95	)
Net financial expense		1,822		1,733
Change in working capital		(272	)	(71	)
Trade and other receivables		51		(15	)
Other current assets		(134	)	(76	)
Trade and other payables		(189	)	20
Other cash flows from operating activities	21	2,489		1,374
Net interest paid		(1,618	)	(1,505	)
Dividends received and other		3,518		2,931
Income tax receipts		589		(52	)
B) CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES	21	(64	)	(2,829	)
Payments on investments		(2,139	)	(6,441	)
Proceeds from disposals		2,075		3,612
C) CASH FLOWS USED IN FINANCING ACTIVITIES		(1,130	)	3,426
Proceeds from financial liabilities	21	918		5,330
Debt issues		9,983		14,687
Repayment and redemption of debt		(9,065	)	(9,357	)
Dividends paid	21	(2,048	)	(1,904	)
D) NET FOREIGN EXCHANGE DIFFERENCE		(27	)	36
E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		1,143		2,057
Cash and cash equivalents at January 1		2,868		811
Cash and cash equivalents at December 31		4,011		2,868

Notes 1 to 23 and Appendices I and II are an integral part of these cash flow statements.



		Telefónica, S.A. 8



		Financial Statements

TELEFÓNICA, S.A.

Annual financial statements for the ended December 31, 2018

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



		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 2018.

The accompanying financial statements for the year ended December 31, 2018 were prepared by the Company’s Board of Directors at its meeting on February 20, 2019 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 2018 and 2017 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.

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.

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.



		Telefónica, S.A. 10



		Financial Statements

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, the outcome of ongoing tax proceedings or unforeseen future transactions that could affect tax balances. The information about deferred tax assets and unused tax credits for loss carryforwards, whose effect has been registered when necessary in balance, is included in Note 17.



		Telefónica, S.A. 11



		Financial Statements

Note 3. Proposed appropriation of profit

Telefónica, S.A. obtained 3,014 million euros of profit in 2018.

Accordingly, the Company’s Board of Directors will submit the following proposed appropriation of 2018 profit for approval at the Shareholders’ Meeting:



Millions of euros
Proposed appropriation:
Profit for the year	3,014
Distribution to:
Legal reserve
Unrestricted reserves	3,014



		Telefónica, S.A. 12



		Financial Statements

Note 4. Recognition and measurement accounting policies

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

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

a) Intangible assets

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

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

b) Property, plant and equipment and investment property

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

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



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

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

c) Impairment of non-current assets

Non-current assets are assessed at each reporting date for indicators of impairment. Where such indicators exist, or in the case of assets which are subject to an annual impairment test, the Company estimates the asset’s recoverable amount as the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future 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.



		Telefónica, S.A. 13



		Financial Statements

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.

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 counter-guarantee on the Company’s balance sheet, the value of the counter-guarantee 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 counter-guarantee are initially measured at fair value which, unless there is evidence to the contrary, is the same as the premium



		Telefónica, S.A. 14



		Financial Statements

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 2018 and 2017 are as follows:



Millions of euros
Item	2018	2017
Total assets	114,047	115,066
Equity:
Attributable to equity holders of the parent	17,947	16,920
Attributable to minority interests	9,033	9,698
Revenue from operations	48,693	52,008
Profit for the year:
Attributable to equity holders of the parent	3,331	3,132
Attributable to minority interests	619	246



		Telefónica, S.A. 15



		Financial Statements

Note 5. Intangible assets

The movements in the items composing intangible assets and the related accumulated amortization in 2018 and 2017 are as follows:

2018



Millions of euros	Opening balance		Additions and allowances		Disposals		Transfers		Closing balance
INTANGIBLE ASSETS, GROSS	236		10		(1	)	3		248
Software	146		3		—		4		153
Other intangible assets	90		7		(1	)	(1	)	95
ACCUMULATED AMORTIZATION	(219	)	(10	)	1		—		(228	)
Software	(138	)	(7	)	—		—		(145	)
Other intangible assets	(81	)	(3	)	1		—		(83	)
NET CARRYING AMOUNT	17		—		—		3		20

2017



Millions of euros	Opening balance		Additions and allowances		Disposals	Transfers		Closing balance
INTANGIBLE ASSETS, GROSS	230		4		—	2		236
Software	140		2		—	4		146
Other intangible assets	90		2		—	(2	)	90
ACCUMULATED AMORTIZATION	(207	)	(12	)	—	—		(219	)
Software	(131	)	(7	)	—	—		(138	)
Other intangible assets	(76	)	(5	)	—	—		(81	)
NET CARRYING AMOUNT	23		(8	)	—	2		17

At December 31, 2018 and 2017 commitments to acquire intangible assets are 0.9 and 0.5 million euros, respectively.

At December 31, 2018 and 2017, the Company had 189 million euros and 182 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 net 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 certain aspects in PGC 2007 such as the indefinite useful life of goodwill, among others, which was was made definite again, the Company amortized the aforementioned goodwill in a retrospective way as it had not been amortized since PGC 2007 entered into force. Since December 31, 2017 these assets are fully amortized.



		Telefónica, S.A. 16



		Financial Statements

Note 6. Property, plant and equipment

The movements in the items composing property, plant and equipment and the related accumulated depreciation in 2018 and 2017 are as follows:

2018



Millions of euros	Opening balance		Additions and allowances		Disposals	Transfers		Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS	588		7		—	(31	)	564
Land and buildings	223		3		—	(5	)	221
Plant and other PP&E items	329		4		—	4		337
Property, plant and equipment under construction and prepayments	36		—		—	(30	)	6
ACCUMULATED DEPRECIATION	(378	)	(9	)	—	—		(387	)
Buildings	(97	)	(1	)	—	—		(98	)
Plant and other PP&E items	(281	)	(8	)	—	—		(289	)
NET CARRYING AMOUNT	210		(2	)	—	(31	)	177

2017



Millions of euros	Opening balance		Additions and allowances		Disposals		Transfers		Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS	569		22		(1	)	(2	)	588
Land and buildings	223		—		(1	)	1		223
Plant and other PP&E items	325		1		—		3		329
Property, plant and equipment under construction and prepayments	21		21		—		(6	)	36
ACCUMULATED DEPRECIATION	(364	)	(14	)	—		—		(378	)
Buildings	(92	)	(5	)	—		—		(97	)
Plant and other PP&E items	(272	)	(9	)	—		—		(281	)
NET CARRYING AMOUNT	205		8		(1	)	(2	)	210

Firm commitments to acquire property, plant and equipment at December 31, 2018 and 2017 amounted to 0.5 million euros and 2 million euros, respectively. At December 31, 2018 and 2017, the Company had 241 and 225 million euros, respectively, of fully depreciated items of property, plant and equipment.

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

“Property, plant and equipment” includes the net carrying amount of the land and buildings occupied by Telefónica, S.A. at its Distrito Telefónica headquarters, amounting to 68 and 69 million euros at 2018 and 2017 year-ends, respectively. It also includes the net carrying amount of the remaining assets in this site (mainly property, plant and equipment items) of 10 and 20 million euros at December 31, 2018 and 2017, respectively.



		Telefónica, S.A. 17



		Financial Statements

During 2018 a new parking for employees located in the Distrito Telefónica complex has been completed. The 78% of its area has been estimated to be rented to other Group Companies. The remaining area, 22% of the total, has been included as Additions of Land and Buildings in the 2018 chart of movements.

The land and buildings rented to other Group Companies have been included as “Investment properties” in Note 7.



		Telefónica, S.A. 18



		Financial Statements

Note 7. Investment properties

The movements in the items composing investment properties in 2018 and 2017 and the related accumulated depreciation are as follows:

2018



Millions of euros	Opening balance		Additions and allowances		Disposals	Transfers	Closing balance
INVESTMENT PROPERTIES, GROSS	495		—		—	28	523
Land	94		—		—	6	100
Buildings	401		—		—	22	423
ACCUMULATED DEPRECIATION	(106	)	(13	)	—	—	(119	)
Buildings	(106	)	(13	)	—	—	(119	)
NET CARRYING AMOUNT	389		(13	)	—	28	404

2017



Millions of euros	Opening balance		Additions and allowances		Disposals	Transfers	Closing balance
INVESTMENT PROPERTIES, GROSS	495		—		—	—	495
Land	94		—		—	—	94
Buildings	401		—		—	—	401
ACCUMULATED DEPRECIATION	(96	)	(10	)	—	—	(106	)
Buildings	(96	)	(10	)	—	—	(106	)
NET CARRYING AMOUNT	399		(10	)	—	—	389

“Investment properties” mainly includes the value of land and buildings leased by Telefónica, S.A. to other Group companies at Distrito Telefónica, headquarters in Madrid and the building of its head offices in Barcelona, known as “Diagonal 00”.

After the opening of the new parking mentioned in the previous note, the value of the area rented to other Group companies that was registered under the "Property, plant and equipment under construction" caption in 2017 has been transferred to final assets (amounting to 22 million euros) and has started its amortization. Moreover, the 78% of the value of the land where the parking is located has been transferred to investment properties in 2018 amounting to 6 million euros.

In 2018, the Company has buildings with a total area of 356,171 square meters leased to several Telefónica Group companies, equivalent to an occupancy rate of 90.29% of the buildings it has earmarked for lease. In 2017, it had a total of 310,389 square meters leased, equivalent to an occupancy rate of 91.22% of the buildings earmarked for lease.

Total income from leased buildings in 2018 (see Note 19.1.a.) amounted to 43 million euros (45 million euros in 2017). Future minimum rentals receivable under non-cancellable leases are as follows:



		Telefónica, S.A. 19



		Financial Statements



	2018	2017
Millions of euros	Future minimum recoveries	Future minimum recoveries
Up to one year	40	40
Between two and five years	2	1
Over 5 years	1	—
Total	43	41

The most significant lease contracts held with subsidiaries occupying Distrito Telefónica have been renewed in 2018 for a non-cancellable period of 12 months. The numbers also include non-cancellable lease revenues from Diagonal 00, whose contracts have an expiration date in December 2019.

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



		Telefónica, S.A. 20



		Financial Statements

Note 8. Investments in group companies and associates

8.1. The movements in the items composing investments in Group companies and associates in 2018 and 2017 are as follows:

2018



Millions of euros	Opening balance		Additions		Disposals		Transfers		Exchange losses		Dividends		Net investment hedges		Closing balance		Fair value
Equity instruments (Net) (1)	67,025		113		(209	)	(69	)	—		(281	)	(49	)	66,530		122,108
Equity instruments (Cost)	92,717		700		(209	)	(69	)	—		(281	)	(49	)	92,809
Impairment losses	(25,692	)	(587	)	—		—		—		—		—		(26,279	)
Loans to Group companies and associates	2,141		73		(186	)	(550	)	25		—		—		1,503		1,492
Other financial assets	—		7		—		—		—		—		—		7		7
Total non-current investment in Group companies and associates	69,166		193		(395	)	(619	)	25		(281	)	(49	)	68,040		123,600
Loans to Group companies and associates	3,426		4,845		(4,326	)	550		(22	)	—		—		4,473		3,967
Derivatives	10		8		(10	)	—		—		—		—		8		8
Other financial assets	24		29		(24	)	—		—		—		—		29		29
Total current investments in Group companies and associates	3,460		4,882		(4,360	)	550		(22	)	—		—		4,510		4,004

(1) Fair value at December 31, 2018 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.

2017



Millions of euros	Opening balance		Additions		Disposals		Transfers		Exchange losses		Dividends	Net investment hedges		Closing balance		Fair value
Equity instruments (Net) (1)	65,249		2,864		(965	)	(22	)	—		—	(101	)	67,025		122,904
Equity instruments (Cost)	91,178		4,307		(980	)	(1,687	)	—		—	(101	)	92,717
Impairment losses	(25,929	)	(1,443	)	15		1,665		—		—	—		(25,692	)
Loans to Group companies and associates	2,950		44		(361	)	(406	)	(86	)	—	—		2,141		2,172
Other financial assets	12		5		—		(17	)	—		—	—		—		—
Total non-current investment in Group companies and associates	68,211		2,913		(1,326	)	(445	)	(86	)	—	(101	)	69,166		125,076
Loans to Group companies and associates	3,167		3,750		(3,856	)	406		(41	)	—	—		3,426		3,020
Derivatives	30		10		(30	)	—		—		—	—		10		10
Other financial assets	30		9		(32	)	17		—		—	—		24		24
Total current investments in Group companies and associates	3,227		3,769		(3,918	)	423		(41	)	—	—		3,460		3,054

(1) Fair value at December 31, 2017 of Group companies and associates quoted in an active market (Telefônica Brasil, S.A.) was calculated taking the listing of the investments on the last day of the year; the rest of the shareholdings are stated at the value of discounted cash flows based on those entities’ business plans.



		Telefónica, S.A. 21



		Financial Statements

The most significant transactions occurred in 2018 and 2017 as well as their accounting impacts are described below:

2018

On July 13 2018, a new company named Reginatorium Participaciones, S.L.U. was incorporated by Telefónica, S.A. On July 26, 2018 Telefónica made a non-monetary contribution to this new subsidiary equivalent to the net carrying value of its stake in Telxius Telecom, S.A. ("Telxius") corresponding to 60% of Telxius' share capital.

On July 27, 2018 the company was renamed Pontel Participaciones, S.L. ("Pontel") and on the same date, Telefónica sold 16.65% of it to the Pontegadea Group amounting to 378,8 million euros (a valuation of 15.2 euros per share of Telxius). An investment of 16.65% in Pontel is equivalent to a 9.99% indirect ownership in Telxius. The transaction has generated a revenue of 175 million euros in the profit and loss account of 2018.

On November 8, 2018 Telefónica reached an agreement with Catalana Occidente Group for the sale of its total stake in Seguros de Vida y Pensiones Antares, S.A., the insurance company in Spain, amounting to 161 million euros. As of December 31, 2018 the net carrying value of the investment has been transferred to "Long Term assets held for sale" totaling 69 million euros and shown as Transfers in the 2018 chart of movements. The closing of this transaction has taken place on February 14, 2019 after the pertinent regulatory authorizations were obtained.

2017

On February 10, 2017 Telefónica and Taurus Bidco S.à.r.l. (hereinafter “KKR”, an entity managed by Kohlberg Kravis Roberts & Co. L.P.) reached an agreement for the sale of up to 40% of the share capital of Telxius Telecom, S.A. in exchange for an aggregate amount of 1,275 million euros (12.75 euros per share).

The agreement envisaged a sale of 62 million shares of Telxius Telecom, S.A. (representing 24.8% of its share capital) for an amount of 790.5 million euros as well as a call option over additional 38 million shares (representing 15.2% of its total share capital) for a minimum price of 484.5 million euros.

On October 24, 2017, Telefónica announced that, after obtaining all the relevant regulatory approvals, it has transferred to KKR 62 million shares of Telxius with a profit of 191 million euros. On December 13, 2017 KKR exercised the call option foreseen in the agreement over 38 million shares of Telxius Telecom, S.A. in exchange for 484.5 million euros resulting in an income on the "Gain on disposals" caption of the 2017 income statement amounting to 120 million euros.

The Group is carrying out a simplification process of corporate structure and pursuant to this process several mergers by absorption have been completed in 2017. The net book value of the absorbed companies has been accounted for in the surviving company as an increase in its investment cost. Therefore the cost and the impairment provision of the absorbed investments have been reversed. This movement is shown as "Tranfers" in 2017 chart of movements.

The merger transactions affecting 2017 investments were the following:


•	In September 2017 Telefónica Latinoamérica Holding, S.L. carried out a merge by absorption of Telefónica Datacorp, S.A. and Ecuador Cellular Holding, S.L., which were both direct subsidiaries of Telefónica, S.A.


•	On the same date, Telefónica Digital Holding, S.L.U. was merged and absorbed by Telefónica Digital España, S.L.U., and after this transaction the latter company becomes a direct affiliate of Telefónica, S.A.


•	In November, 2017 Telefónica Móviles Argentina Holding, S.A. was merged to Telefónica Móviles Argentina, S.A. After this transaction the Company increased its direct ownership from 21.1% to 73.2%.



		Telefónica, S.A. 22



		Financial Statements


•	In December 2017, Telefónica International Wholesale Services II, S.L. carried out a merge by absorption of Telefónica International Wholesale Services, S.L., which was a direct affiliate of Telefónica, S.A.

Other movements

In 2018 the column “Dividends” includes distributions of reserves made by Telxius Telecom, S.A. amounting to 217 million euros and by Pontel Participaciones, S.L. amounting to 64 million euros.

Movement in “Transfers” in “Loans to Group Companies and Associates” both 2018 and 2017 includes the reclassification between long-term and current loans in accordance with the loan maturity schedule as well as the accrued interests rendered by those loans, outstanding at year end.

The transfers in the caption of “Impairment losses” in 2017 corresponded to the reversal of the negative carrying amount of certain investments from the non-current provisions caption (see Note 18) amounting to -22 million euros.

In 2018 and 2017, Telefónica, S.A. bought and sold the following shareholdings:

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



Millions of euros
Companies	2018	2017
Telefónica Latinoamérica Holding, S.L.	—	3,838
Telefónica Digital España, S.L.U.	194	—
Telefónica Digital Holding, S.L.U. (absorbed by Telefónica Digital España, S.L.U.)	—	220
Telefónica Móviles México, S.A. de C.V.	460	129
Lotca Servicios Integrales, S.L.	—	85
Telefónica Ingeniería de Seguridad, S.A.U.	32	—
Other companies	14	35
Total Group companies and associates	700	4,307

2018

On January 11, 2018, with the aim of achieving a positive equity figure, Telefónica Digital España, S.L.U. has made a capital increase of 194 million euros fully subscribed and paid by the Company.

On March 22, 2018 Telefónica Móviles México S.A. de C.V. has completed a capital increase of 4,000 million Mexican pesos, equivalent to 176 million euros. On December 17, 2018 an additional capital increase of 6,550 million Mexican pesos, equivalent to 284 million euros was launched. Both transactions have been fully subscribed and paid by Telefónica, S.A.

On July 17, 2018, the Company has decided to capitalize a credit granted to its subsidiary Telefónica Ingeniería de Seguridad, S.A.U. amounting to 26.4 million euros. In addition, on December 27, 2018 a capital increase was made by the subsidiary totaling 5.2 million euros, fully subscribed and paid by Telefónica, S.A.

2017

On January 26, 2017 Telefónica Latinoamérica Holding, S.L. made a capital increase totaling 747 million euros fully subscribed and paid by Telefónica, S.A. Additionally, on December 21, 2017, Telefónica Latinoamérica



		Telefónica, S.A. 23



		Financial Statements

Holding, S.L. increased its share capital in 3,091 million euros. The transaction was been fully subscribed and paid by the Company.

On January 12, 2017, with the aim of achieving a positive equity figure, Telefónica Digital Holding, S.L.U. (absorbed by Telefónica Digital España, S.L.U.) made a capital increase of 220 million euros fully subscribed and paid by the Company.

On January 12, 2017 Telefónica Móviles México, S.A. de C.V. completed a capital increase of 3,000 million Mexican pesos, equivalent to 129 million euros. The transaction was fully subscribed and paid by Telefónica, S.A.

On May 4, 2017 the Company decided to capitalize the credits granted in previous years to Lotca Servicios Integrales, S.L. amounting to 85 million euros.

b) Disposals of investments and capital decreases:



Millions of euros
Companies	2018	2017
Telxius Telecom, S.A.	—	960
Pontel Participaciones, S.L.	204	—
Others	5	20
Total Group companies and associates	209	980

2018

The disposal of Pontel Participaciones, S.L. reflects the sale of shares to the Pontegadea Group, as fully described at the beginning of this note.

2017

The disposal of Telxius Telecom, S.A. refers to the sale of shares to KKR, as fully described at the beginning of this note.

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 based on the expected cash flows to be received from each subsidiary in its functional currency, discounted using the appropriate rate, net of the liabilities associated with each investment (mainly net debt), considering the percentage of ownership in each subsidiary and translated to euros at the official closing rate of each currency at December 31. Moreover, and only for the companies where discounted cash flow analysis is not available, due to the specific nature of their businesses, the impairment is calculated by comparing their Equity figure as of the end of the period and the net book value of those investments.

As a result of these estimations and the effect of the net investment hedge in 2018, an impairment provision of 587 million euros was recognized (write down of 1,443 million euros in 2017). This amount derives mainly from the following companies:


a.	a write down of 1,038 million euros for Telefônica Brasil, S.A. (write down amounting to 510 million euros in 2017) and 243 million euros for Sao Paulo Telecomunicaçoes, Ltda (113 million euros in 2017);


b.	a write down reversal, net of hedges, of 4,062 million euros for Telefónica Europe, plc (an impairment of 460 million euros, net of hedges, was registered in 2017);



		Telefónica, S.A. 24



		Financial Statements


c.	write down of 2 million euros for Telefónica Contenidos, S.A.U. (177 million euros in 2017);


d.	write down of 219 million euros for Telefónica Digital España, S.L.U. (141 million euros in 2017) and


e.	a write down by 1,075 million euros for Telefónica México, S.A. de C.V. (write down reversal by 96 million euros in 2017);


f.	In 2017 no write down was recorded for the investment of Telefónica Latinoamérica Holding, S.L.U. In 2018 an impairment of 1,962 million euros has been recorded. The write down is mainly originated by the write down of Telefônica Brasil, S.A. as indicated in section a).

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

Brazil has faced a complex macro-economic scenario in 2018. Several adverse effects have caused, on the one hand, a growth rate lower than its target (1.4% versus target of 2% at the beginning of the year) and on the other hand, an exchange rate depreciation of the Brazilian Real by 17% and a 30 basic points (b.p.) increase in the country risk. For 2019, the macroeconomic scenario envisages a slight growth in the Gross Domestic Product (GDP) up to 2.5% and in domestic consumption. The Operating Income before Depreciation and Amortization (OIBDA) margin for Brazil is 42%, within the range of analysts' long-term forecasts (between 37% and 43%). Over the term of the strategic plan, the operator will invest a percentage in line with the investment needs identified by analysts (18%). The perpetuity growth rate is in line with the Brazilian Central Bank’s medium-term inflation target (4%, within a range of ±1.5 p.p.) and is aligned with the analyst consensus for the Strategic Plan horizon (below 4.5%) yet below the forecast nominal GDP growth rate (which oscillates around 6.5%).

Mexican economy in 2018 has grown around 2%, 1 b.p. below the average growth rate since 2010. Uncertainty arising from the presidential and parliament elections in July as well as the lack of agreement regarding the new Mexico, United States and Canada commercial treaty are the answers for the under performance of the economy. The Mexican peso versus US dollar exchange rate reflects this uncertainty: Its quotation for the most part of the year has been historically high, preventing inflation rate from dropping and allowing an improvement domestic rent for Mexican families. Interest rate increase in the United States has a harmful effect in Mexico as the investment in the country becomes less profitable from investors' point of view. In the mid term, the key is the government commitment to structural changes in-force several years ago, specially related to the efficiency in the oil sector, tax administration and public sector. In this context, the WACC has increased to 10.6% (9.6% in 2017). Mexican economy is estimated to accelerate during the strategic plan horizon with an inflation rate below 4% from 2019. However, the cell phone market is expected to decrease due to a strong competition with AMX who has a 72% market share in 2018, 5 b.p. bigger than the previous year. AMX and AT&T are using aggressive commercial campaigns aimed to reduce prepaid cell phone tariffs to a minimum price within the region. Telefónica Móviles México has not launched new price promotions for this segment since the beginning of 2018. As a consequence of these two reasons the revenues of Telefónica Móviles México have been reduced in 2018.

With respect to the United Kingdom, domestic consumption was shown a more dynamic trend (growing above 1%) thanks to the improvement in the families' rent. Their income has been benefited from the increase in salaries, the drop of the inflation rate and the positive behaviour of the labour market, with an unemployment rate at its lowest. On the other hand, if the expectation of a more favourable end of the BrExit process is finally confirmed, the stability of the pound sterling exchange rate will extend the positive scenario to the following years ahead. The Strategic Plan includes a hypothesis of soft BrExit in the net results of the company. O2 UK is estimating to keep their market share of revenues based on the quality of services, adapting the range of products to the customer demands and improvement in B2B and IoT (Internet of Things). The increase in the OIBDA figure is achieved through an efficiency plan to keep the growth in expenses below the inflation rate, network sharing scheme with Vodafone and spectrum optimum usage). The long-term OIBDA margin is in line with analysts' forecasts over a three-year horizon, 26%. Regarding the ratio of CapEx over revenues, over the term of the strategic plan, the valuations consider the opinions of analysts with regard to investment needs (around 12%).



		Telefónica, S.A. 25



		Financial Statements

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

8.4. Transactions protected for tax purposes

The transaction carried out in 2018 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, is described 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 September 26, 2018, Telefónica Digital España, S.L.U., the sole stockholder of Synergic Partners, S.L. approved the merger by absorption of the latter and the transfer en bloc of its assets and liabilities to Telefónica Digital España, S.L.U. which also acquires all its rights and obligations by universal succession. The merger was filed in the Madrid Companies Register on November 6, 2018.

8.5. The breakdown and maturity of loans to Group companies and associates in 2018 and 2017 are follows:

2018



Millions of euros
Company	2019	2020	2021	2022	2023	2024 and subsequent years	Final balance, current and non-current
Telefónica Móviles España, S.A.U.	756	—	—	—	—	—	756
Telefónica Móviles México, S.A. de C.V.	—	860	—	—	—	—	860
Telfisa Global, B.V.	700	—	—	—	—	—	700
Telefónica de España, S.A.U.	2,352	—	—	—	—	—	2,352
Telxius Telecom, S.A.	—	—	—	280	—	280	560
Telefônica de Brasil, S.A.	258	—	—	—	—	—	258
Telefónica Latinoamérica Holding, S.L.U.	89	—	—	—	—	8	97
Other companies	318	—	35	—	16	24	393
Total	4,473	860	35	280	16	312	5,976



		Telefónica, S.A. 26



		Financial Statements

2017



Millions of euros
Company	2018	2019	2020	2021	2022	2023 and subsequent years	Final balance, current and non-current
Telefónica Móviles España, S.A.U.	861	—	—	—	—	—	861
Telefónica Móviles México, S.A. de C.V.	—	773	—	—	—	—	773
Telefónica de Contenidos, S.A.U.	733	—	—	—	—	—	733
Telefónica de España, S.A.U.	987	550	—	—	—	—	1,537
Telxius Telecom, S.A.	—	—	—	140	280	280	700
Telefónica Latinoamérica Holding, S.L.U.	484	—	—	—	—	8	492
Other companies	361	23	52	—	15	20	471
Total	3,426	1,346	52	140	295	308	5,567

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


•	The financing extended to Telefónica Móviles España, S.A.U. in 2018 includes dividends distributed and unpaid in December 2018 amounting to 552 million euros. The loan of 400 million euros outstanding in 2017 has been cancelled at maturity date.

Moreover, 204 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (155 million euros in 2017).

•

At December 31, 2018 and 2017, the account receivable with Telefónica Móviles México, S.A. de C.V. amounts to 11,697 million Mexican pesos, equivalent to 520 and 496 million euros, respectively. This asset is recognised as non-current pursuant to the expected collection date at the reporting date. At December 31, 2018, accrued interest receivable totals 340 million euros (277 million euros in 2017), which forms part of the non-current balance receivable.


•	In December 2018, Telfisa Global, B.V. has distributed dividends totaling 700 million euros which are unpaid as of the date of these financial statements.


•	The 2018 balance of 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.


◦	dividends distributed and unpaid in December 2018 amounting to 1,574 million euros.


◦	Additionally, there is also a balance of 227 million euros comprising tax receivables from the subsidiary for its tax expense declared in the consolidated tax return (323 million euros in 2017) and accrued interest of 1 million euros.

•

On May 27, 2016, with the aim of enabling the necessary funds for restructuring the infrastructure business line of the Group as described at the beginning of this note, the Company granted its subsidiary, Telxius Telecom, S.A. with a credit of 280 million euros at a fix interest rate and maturity in 2022, a credit of 280 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. This last credit has been cancelled prior to its maturity in 2018.



		Telefónica, S.A. 27



		Financial Statements


•	The balance totaling 258 million euros shown in 2018 with Telefônica Brasil, S.A. entirely corresponds to dividends agreed by the subsidiary and unpaid at year end.


•	The balance of unpaid dividends from Telefónica Latinoamérica Holding, S.L.U. in 2017 amounting to 391 million euros has been collected in 2018.

Moreover, 97 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (101 million euros in 2017).

The Company has also extended 589 million euros (686 million euros in 2017) 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 686 million euros (446 million euros in 2017).

Total accrued interest receivable at December 31, 2018 and 2017 included under “Current loans to group companies and associates” amount to 2 million euros.

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.

Invoices of share plans that were already vested and are outstanding at year end are shown as other current financial assets. Amounts derived from the new share plan scheme launched in 2018 with a maturity date in 2020 are included as other non-current financial assets (see Note 19.3).



		Telefónica, S.A. 28



		Financial Statements

Note 9. Financial investments

9.1. The breakdown of “Financial investments” at December 31, 2018 and 2017 is as follows:

2018



	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	Fair value	Total carrying amount	Total fair value
Non-current financial investments	298	826	1,595	2,719	298	2,421	—	—	696	696	696	3,415	3,415
Equity instruments	298	—	—	298	298	—	—	—	—	—	—	298	298
Derivatives (Note 16)	—	826	1,595	2,421	—	2,421	—	—	—	—	—	2,421	2,421
Loans to third parties and other financial assets	—	—	—	—	—	—	—	—	696	696	696	696	696
Current financial investments	—	322	520	842	—	842	—	972	7	979	980	1,821	1,822
Loans to third parties and other financial assets	—	—	—	—	—	—	—	972	7	979	980	979	980
Derivatives (Note 16)	—	322	520	842	—	842	—	—	—	—	—	842	842
Total financial investments	298	1,148	2,115	3,561	298	3,263	—	972	703	1,675	1,676	5,236	5,237



		Telefónica, S.A. 29



		Financial Statements

2017



	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	Fair value	Total carrying amount	Total fair value
Non-current financial investments	340	1,087	1,422	2,849	340	2,509	—	—	912	912	902	3,761	3,751
Equity instruments	340	—	—	340	340	—	—	—	—	—	—	340	340
Derivatives (Note 16)	—	1,087	1,422	2,509	—	2,509	—	—	—	—	—	2,509	2,509
Loans to third parties and other financial assets	—	—	—	—	—	—	—	—	912	912	902	912	902
Current financial investments	—	132	661	793	—	793	—	759	5	764	764	1,557	1,557
Loans to third parties and other financial assets	—	—	—	—	—	—	—	759	5	764	764	764	764
Derivatives (Note 16)	—	132	661	793	—	793	—	—	—	—	—	793	793
Total financial investments	340	1,219	2,083	3,642	340	3,302	—	759	917	1,676	1,666	5,318	5,308

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. Additionally, on this valuation, the credit valuation adjustment or CVA net for counterparty (CVA + DVA), which is the methodology used to measure the credit risk of the counterparties and of Telefónica itself is calculated to adjust the fair value determination of the derivatives. This adjustment reflects the possibility of insolvency or deterioration of the credit quality of the counterparty and Telefónica.



		Telefónica, S.A. 30



		Financial Statements

9.2 Held-for-trading financial assets and hedges

These two categories include the fair value of outstanding derivative financial instruments at December 31, 2018 and 2017 (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, 2018 and 2017 are as follows:

December 31, 2018



Millions of euros	Opening balance	Additions	Disposals	Other movements	Fair value adjustments		Closing balance
Banco Bilbao Vizcaya Argentaria, S.A.	313	—	—	—	(108	)	205
Promotora de Informaciones, S.A. (PRISA)	27	49	—	—	17		93
Total	340	49	—	—	(91	)	298

December 31, 2017

Millions of euros

Opening balance

Additions

Disposals

Other movements