Explanations of items in the balance sheet

18. Cash and cash equivalents

As of the reporting date, cash and cash equivalents amounted to € 117,573k. Cash and cash equivalents consist of bank balances, checks, and cash in hand. Bank balances generally bear variable interest rates for call money. As in the previous year, the current low interest rate level – which is even negative at present for amounts denominated in euros – meant that no interest was earned on bank balances.

The development and application of cash and cash equivalents is stated in the Consolidated Cash Flow Statement.

19. Trade accounts receivable

As of December 31, 2019 bad debt allowances for trade accounts receivable amounted to € 80,480k (prior year: € 69,945k). The development of bad debt allowances can be seen below:

Additions charged to the income statement of each period under review do not comprise receivables arising during the year and eliminated before the reporting date.

As of December 31, the age profile of trade accounts receivable less the aforementioned allowances was as follows:

20. Contract assets

The development of bad debt allowances was as follows:

21. Inventories

As of December 31, inventories consisted of the following items:

Goods recognized as material expense from inventories in cost of sales amounted to € 734,579k in the reporting period (prior year: € 702,983k). Of this total, an amount of € 4,616k refers to impairment of inventories (prior year: € 8,372k).

Allowances include € 8,114k for mobile telephony/mobile internet and IP-TV (prior year: € 3,475k), and € 3,266k for domain stock (prior year: € 3,332k).

22. Prepaid expenses

Current prepaid expenses of € 237,036k (prior year: € 224,840k) consist mainly of contract initiation costs of € 92,106k (prior year: € 81,655k), contract fulfillment costs of € 60,747k (prior year: € 72,180k), and prepayments for wholesale fees of € 45,957k (prior year: € 37,920k), which were deferred and charged to the income statement on the basis of the underlying contractual period.

Non-current prepaid expenses of € 284,252k (prior year: € 341,220k) consist mainly of contract initiation costs of € 83,480k (prior year: € 84,524k), contract fulfillment costs of € 46,829k (prior year: € 52,597k), and prepayments as part of long-term purchasing contracts with pre-service providers of € 136,444k (prior year: € 182,334k).

At the end of the reporting period, the final balances of capitalized contract initiation costs amounted to € 175,586k (prior year: € 166,179k) and of capitalized contract fulfillment costs to € 107,576k (prior year: € 124,777k). In the fiscal year 2019, amortization of capitalized contract initiation costs amounted to € 83,699k (prior year: € 83,063k). Amortization of capitalized contract fulfillment costs amounted to € 85,283k in the fiscal year 2019 (prior year: € 87,638k).

The final balances of prepayments for wholesale fees amounted to € 182,401k as of the reporting date (prior year: € 220,254k). A total of € 37,853k was expensed in fiscal year 2019 (prior year: € 39,158k).

23. Other current assets

23.1 Other current financial assets

The decline in receivables from pre-service providers mainly relates to advertising cost subsidies.

The put option on the sale of shares in an associated company was exercised in the reporting period in connection with the sale of shares in Virtual Minds.

23.2 Other current non-financial assets

24. Shares in associated companies

The Group holds interests in several associated companies. The main investments include Tele Columbus AG, Berlin, and AWIN AG, Berlin, which the Group holds via its subsidiary United Internet Investments Holding AG & Co KG (formerly: United Internet Investments Holding GmbH), and via 1&1 Mail & Media Applications SE, Montabaur.

Tele Columbus AG is an independent broadband cable network operator active in the German multimedia and communication sector with most of its network infrastructures in eastern Germany (Berlin, Brandenburg, Saxony, Saxony-Anhalt, and Thuringia), as well as in North Rhine-Westphalia and Hesse. Tele Columbus offers its customers digital TV program packages, as well as internet and telephone connections.

The shareholding in Tele Columbus AG corresponds to the proportion of voting rights. As in the previous year, it is valued using the equity method. As of the reporting date, the Group’s total stake in Tele Columbus amounted to 29.9% (prior year: 28.52%).

Due to the strong decline in the share price in the previous year, a cumulative writedown of € 204 million was recognized. In the reporting period, the share price recovered slightly and led to a reversal of impairment losses recognized in profit or loss of € 18.5 million. By contrast, the prorated earnings of Tele Columbus burdened earnings by € 19.8 million.

AWIN AG, Berlin, is a global affiliate marketing network which offers services in the field of e-commerce and online marketing. Awin is the world’s largest affiliate marketer, linking network advertisers and publishers around the world.

The following table contains summarized financial information on Tele Columbus AG and Awin AG on the basis of a 100% shareholding as of December 31, 2019:

As financial information on Tele Columbus AG as of December 31, 2019 had not yet been published at the time of preparation, the summarized financial information is estimated on the basis of the company’s quarterly statements as of September 30, 2019, taking account of adjustments which the United Internet Group believed to be necessary at this time. There were no results from discontinued operations.

A reconciliation with the carrying amounts in the Consolidated Financial Statements as of December 31, 2019 – with an estimation of investment results for the fourth quarter – is presented below:

The following table contains summarized financial information on the main associated companies on the basis of a 100% shareholding as of December 31, 2018:

As financial information on Tele Columbus AG as of December 31, 2018 had not yet been published at the time of preparing the Consolidated Financial Statements for the previous year, the summarized financial information is estimated on the basis of the quarterly statements as of September 30, 2018, taking account of adjustments which the United Internet Group believed to be necessary at this time. There were no results from discontinued operations.

A reconciliation with the carrying amounts in the Consolidated Financial Statements as of December 31, 2018 – with an estimation of investment results for the fourth quarter – is presented below:

As of December 31, 2019, other associated companies disclosed an aggregated carrying amount of € 26,624k (prior year: € 40,152k) and an aggregated loss of € 5,107k (prior year: € 4,630k). The earnings/loss contributions of other associated companies are only included in the aggregated loss on a prorated basis.

Financial information is based in part on local accounting regulations as a reconciliation of this financial information with IFRS would incur disproportionately high costs.

25. Other non-current financial assets

The development of other non-current financial assets was as follows:

In the fiscal year 2019, United Internet sold its shares in Rocket Internet SE in several steps (share of voting rights as of December 31, 2018: 9.0%). United Internet Investments Holding AG & Co. KG had already sold 2,500,000 shares at a price of € 25 per share in July 2019. In the fourth quarter of 2019, the public share buyback offer of Rocket Internet amounting to 15,076,729 shares was accepted for all remaining 11,219,841 Rocket Internet shares held by the Company against payment of the offer price of € 21.50 per share. Due to the oversubscription of its buyback offer, Rocket Internet was only able to consider the acceptance declaration of United Internet Investments Holding for a total of 8,764,483 shares. The 2,455,358 Rocket Internet shares still held after the completion of the share buyback offer were already acquired by Mr. Oliver Samwer at the end of 2019 as agreed at the offer price. The cumulative gain from revaluation recognized directly in equity amounted to € 83.8 million. Following the sale of Rocket Internet shares this accounting gain recognized in other comprehensive income was realized and reclassified to accumulated profit.

26. Property, plant, and equipment

Further details and an alternative presentation of the development of property, plant, and equipment in the fiscal years 2019 and 2018 can be found in the exhibit to the Notes to the Consolidated Financial Statements (Development of Non-current Assets).

The carrying value of property, plant, and equipment held as lessee as part of lease arrangements amounts to € 350.0 million as of December 31, 2019. The carrying value of property, plant, and equipment held as part of finance leases in the previous year amounted to € 81.3 million.

As of the reporting date, there are purchase obligations for property, plant, and equipment totaling € 113.3 million (prior year: € 50.9 million).

27. Intangible assets (without goodwill)

Further details and an alternative presentation of the development of intangible assets in the fiscal years 2019 and 2018 can be found in the exhibit to the Notes to the Consolidated Financial Statements (Development of Non-current Assets).

The carrying amount of the customer base results from the following company acquisitions:

The residual amortization period for the customer base from the acquisition of the Drillisch Group (now 1&1 Drillisch) amounts to 4 to 12 years, depending on the customer groups, whereby 7 years applies to the major share. The residual amortization period for the customer base from the acquisition of STRATO AG amounts to 2 to 12 years, depending on the product groups, whereby 10 years applies to the major share. The residual amortization period for the customer base of the home.pl transaction amounts to 7 years and for Arsys 4 years. The residual amortization period for the customer base from the acquisition of the Versatel Group amounts to 1 to 21 years, depending on the products and services, whereby 21 years applies to the major share.

The carrying amounts of intangible assets with indefinite useful lives (trademarks) totaled € 211,029k (prior year: € 191,002k). Intangible assets with indefinite useful lives were subjected to an impairment test on the level of the cash-generating units as of the reporting date.

Spectrum licenses

The United Internet subsidiary 1&1 Drillisch participated in the 5G spectrum auction ending on June 12, 2019 and purchased two frequency blocks of 2 x 5 MHz in the 2 GHz band, which are limited until December 31, 2040, and five frequency blocks of 10 MHz in the 3.6 GHz band, , which are limited until 2040. While the 3.6 GHz spectrum is already available, the frequency blocks in the 2 GHz band will only be available from January 1, 2026.

The intangible assets resulting from the purchase were recognized at cost. 

The carrying amounts of the frequency blocks as of December 31, 2019 are comprised as follows:

There was no amortization in the 2019 financial year. The acquired frequency blocks will not be amortized until actual network operation commences and if these frequency blocks are also available at that time. The spectrum licenses are not yet usable and were therefore subjected to an impairment test in the fiscal year 2019. The impairment test was performed on the balance sheet date on the level of the cash-generating units. It did not result in any impairment in the fiscal year.

The following table provides an overview of trademarks:

The useful life of trademarks is determined as being indefinite, as there are no indications that the flow of benefits will end in future. In derogation from the previous year, the useful life of the STRATO trademark was determined as being indefinite in the reporting period. The background is the strategic realignment from a single-brand strategy to a dual-brand strategy. Based on a single-brand strategy, the STRATO trademark was written down in the previous year. As a result of the realignment, an impairment reversal of € 19.4 million was recognized for the STRATO trademark in the reporting period.

Internally generated intangible assets relate to capitalized costs from software.

Other intangible assets mainly refer to beneficial purchasing agreements of the Drillisch Group.

As of the balance sheet date, there were purchase commitments for non-current assets amounting to € 165.3 million (prior year: € 0 million).

28. Goodwill

Further details and an alternative presentation of the development of goodwill in the fiscal years 2019 and 2018 can be found in the exhibit to the Notes to the Consolidated Financial Statements (Development of Non-current Assets).

29. Impairment of goodwill and intangible assets with indefinite useful lives, as well as intangible assets not yet usable (spectrum license)

Goodwill and intangible assets with indefinite useful lives are subjected to an impairment test at least once per year. With reference to its internal budgeting process, the Group has chosen the last quarter of the fiscal year to conduct its statutory annual impairment test.

Goodwill acquired in the course of business combinations is allocated for impairment test purposes to cash-generating units.

Due to the merger of 1&1 IONOS Cloud GmbH (formerly ProfitBricks GmbH) and 1&1 IONOS SE as of January 1, 2019, the former separate cash-generating unit 1&1 IONOS Cloud GmbH was regarded as being part of the cash-generating unit 1&1 Hosting as of the end of the fiscal year. As a result, the goodwill of 1&1 IONOS Cloud GmbH was allocated in full to the cash-generating unit 1&1 Hosting. The impairment test is thus conducted on the level of the cash-generating unit 1&1 Hosting. Prior to the merger of goodwill of both cash-generating units, an impairment test was conducted on the goodwill of both units without any indication of an impairment need.

Impairment charges are always disclosed separately in the Income Statement and the Statement on the Development of Non-current Assets.

Goodwill as of December 31 is allocated to the cash-generating units as follows:

*1&1 IONOS Cloud GmbH has been merged into 1&1 IONOS SE, Montabaur

Goodwill after company acquisitions

The carrying amounts of goodwill according to cash-generating unit result from various transactions over the past years. The Group’s goodwill is mainly the result of the following company acquisitions:

• The goodwill of the cash-generating unit World4You results from the acquisition of World4You in in 2018.
• The goodwill of the cash-generating unit 1&1 Consumer Access (formerly Drillisch) results from the acquisition of the Drillisch Group in 2017 and the merger of the cash-generating units 1&1 Telecom and Drillisch in 2018.
• The goodwill of the cash-generating unit 1&1 IONOS Cloud (formerly: ProfitBricks) results from the acquisition of the ProfitBricks Group in 2017. Due to the merger in fiscal year 2019, the cash-generating unit 1&1 IONOS Cloud has been incorporated into the cash-generating unit 1&1 Hosting.
• The goodwill of the cash-generating units Versatel and 1&1 Telecom reflect goodwill from the acquisition of the Versatel Group in 2014. In the fiscal year 2018, goodwill of the cash-generating unit 1&1 Telecom was combined with the cash-generating unit 1&1 Consumer Access.
• The goodwill of the cash-generating unit STRATO results from the acquisition of the STRATO Group in 2017.
• The goodwill of the cash-generating unit home.pl results from the acquisition of home.pl S.A. in 2015.
• The goodwill of the cash-generating unit Arsys results from the acquisition of Arsys Internet S.L. in 2013.
• The goodwill of the cash-generating unit united-domains results from the acquisition of united-domains AG in 2008.
• The goodwill of the cash-generating unit Fasthosts results from the acquisition of Fasthosts Internet Ltd. in 2006 and the acquisition of Dollamore Ltd. in 2008.
• The goodwill of the cash-generating unit InterNetX results from the acquisition of InterNetX GmbH in 2005.
• The goodwill of the cash-generating unit 1&1 Mail & Media mainly comprises goodwill from the acquisition of the portal business of WEB.DE AG in 2005.

Scheduled impairment test on December 31, 2019

For the Consumer Access, Business Access, Consumer Applications, and Business Applications segments, the recoverable amounts of the cash-generating units are determined on the basis of a calculation of fair value less disposal costs using cash flow forecasts. The hierarchy of fair value less disposal costs as defined by IFRS 13 is set at Level 3 for these impairment tests.

Following the acquisition of licenses during the 5G spectrum auction, an additional cash-generating unit 5G was established for the Consumer Access segment in the reporting period. As the market price derived on the balance sheet date using market capitalization no longer relates solely to the cash-generating unit Consumer Access, it was no longer used for the impairment test as Level 1 of the cash-generating unit.

The cash flow forecasts are based on the Company’s budgets for the fiscal year 2020. These budget calculations were extrapolated by management for a period of up to 21 years (prior year: up to 22 years) for the respective cash-generating units on the basis of external market studies and internal assumptions. Following this period, management assumes an annual increase in cash flow of 0.1% for the Consumer Access segment (prior year: 0.5%) and an annual increase in cash flow of 0.1% for the Business Access segment (prior year: 0.5%). Management assumes an annual increase in cash flow of 0.1% for the Consumer Applications segment (prior year: 0.5%) and an annual increase in cash flow for the Business Applications segment of between 0.1% and 0.9% (prior year: between 0.5% and 1.6%). The expected increase corresponds to long-term average growth of the sector in which the respective cash-generating unit operates. The discount rates after tax used for cash flow forecasts are 3.8% for the Consumer Access segment (prior year: 5.7%) and 3.4% for the Business Access segment (prior year: 4.9%). The discount rate for the Consumer Applications segment is 4.6% (prior year: 5.2%), and the discount rate used for the Business Applications segment is in a range between 4.9% and 6.4% (prior year: between 6.5% and 8.6%).

The following table presents the basic assumptions used when checking impairment of individual cash-generating units to which goodwill has been allocated, in order to determine their fair value less disposal costs:

The cash flow forecasts depend heavily on the estimation of future sales revenue. The management of the respective cash-generating unit expects a varied development of sales within its planning horizon. Sales revenue figures in the detailed planning period of the cash-generating units for the Consumer Access and Business Access segments are based on average annual sales growth rates of 1.9% (prior year: between 1.9% and 3.6%). Sales revenue figures in the detailed planning period of the cash-generating units for the Consumer Applications and Business Applications segments are based on average annual sales growth rates of between 1.8% and 4.9% (prior year: between 1.4% and 21.1%).

Fair value less disposal costs is mainly based on the present value of the perpetual annuity, which is particularly sensitive to changes in assumptions on the long-term growth rate and the discount rate. For the calculation of fair value less disposal costs, disposal cost rates of between 0.2% and 3.0% were assumed (prior year: between 0.1% and 3.0%).

In the Business Applications segment, trademarks recognized amount to € 51,209k (prior year: € 32,722k), in the Consumer Applications segment they amount to € 41,520k (prior year: € 41,042k), in the Business Access segment to € 62,000k (prior year: € 62,000k), and in the Consumer Access segment to € 56,300k (prior year: € 56,300k) (see Note 27).

In the course of business combinations, the trademarks were valued at their fair values less disposal cost using appropriate measurement methods (generally the so-called “royalty relief” method; in the cash-generating unit mail.com using the residual value method) and tested again for impairment on the reporting date. The trademark-relevant cash flows were multiplied with the trademark-relevant royalty rates. These range from 0.5% to 2.5% (prior year: 0.5% to 2.5%) for the Business Applications segment; amount to 2.5% (prior year: 2.5%) for the Consumer Applications segment; range from 0.25% to 0.5% (prior year: 0.25% to 0.5%) for the Business Access segment; and amount to 0.75% (prior year: 0.75%) for the Consumer Access segment. The forecast of trademark-relevant cash flows was based on the same assumptions regarding market development and discount rates as used for the calculation of fair values.

At the end of the fiscal year 2019, a strategic realignment from a single-brand strategy to a dual-brand strategy was implemented. As a result of this strategic realignment, the STRATO trademark now has an indefinite usable period once again. The result of the test was an impairment reversal need of € 19,438k for the STRATO trademark in the Applications segment (prior year: € 1,300k). The fair value of the STRATO trademark at the end of the reporting period amounts to € 20,533k (prior year: € 1,899k).

Sensitivity of assumptions

The sensitivity of the assumptions made with respect to the impairment of goodwill or trademarks depends on the respective cash-generating units.

In the course of analyzing sensitivity for cash-generating units to which goodwill or trademarks have been allocated, an increase in the discount rates (after taxes) of 1 percentage point and a decline in the long-term growth rate in perpetuity of 0.1 to 0.25 percentage points was assumed, as in the previous year. These assumptions would not result in any changes to the impairment test.

As in the previous year, the Company’s management believes that, on the basis of reasonable judgment, no generally possible change in one of the basic assumptions used to determine fair value less disposal costs of a cash-generating unit could cause the carrying value to significantly exceed the recoverable amount.

Intangible assets not yet usable (spectrum)

The 5G spectrum carried in the balance sheet results from the 5G spectrum auction of 2019. 1&1 Drillisch purchased two frequency blocks of 2 x 5 MHz in the 2 GHz band and five frequency blocks of 10 MHz in the 3.6 GHz band, which are each usable for a limited period up to December 31, 2040. The frequency blocks in the 3.6 GHz band are immediately available and the frequency blocks in the 2 GHz band will be available from January 1, 2026. The spectrum is not usable until the Group has its own network and was therefore subjected to an impairment test on the level of the cash-generating unit “5G” in the newly created “5G” segment during the fiscal year 2019.

The recoverable amount of the cash-generating unit “5G” is determined by calculating fair value less cost of disposal with the aid of cash flow forecasts. The hierarchy of fair value less disposal costs as defined by IFRS 13 is set at Level 3 for these impairment test.

The planning calculation on which the impairment test is based includes income statement planning and capital expenditure planning for the fiscal years 2020 to 2040. As the spectrum runs until 2040, the test was conducted for the period 2020 to 2040. Disposal costs of around 3% were assumed for calculating fair value less costs of disposal. The discount rate after tax used for the cash flow forecast in the reporting period was 4%. There was no impairment need in the reporting period. This also reflects the Management Board’s qualitative expectations (there are no internal or external indications of impairment) due to the relative proximity of the acquisition date and the balance sheet date.

30. Trade accounts payable

Trade accounts payable amount to € 481,627k (prior year: € 566,754k), of which liabilities with terms of more than one year total € 6,092k (prior year: € 9,024k).

31. Liabilities due to banks

a) Liabilities due to banks

As in the previous year, bank liabilities of € 1,735.5 million as of December 31, 2019 mainly comprise promissory note loansand syndicated loans.

Promissory note loans

At the end of the reporting period, total liabilities from promissory note loans with terms until March 2025 amounted to € 835.5 million. As of the balance sheet date, liabilities from promissory note loans totaling € 238.0 million are current and due in December 2020.

The outstanding 7 tranches from the promissory note loans 2014 and 2017 are mainly fixed-interest. Depending on the term, the fixed interest rates vary between 0.897% and 2.150% p.a..

The interest rate for the variable-interest tranche of 2017 is tied to the respective 6-month EURIBOR rate plus a margin of 0.80% p.a.. The promissory note loans are redeemable on maturity and 100% repayable.

Syndicated loans & syndicated loan facilities

As of the balance sheet date, a syndicated loan totaling € 200.0 million redeemable on maturity in August 2021 was outstanding. The syndicated loan totaling € 200.0 million with a term until August 2019 was redeemed in full in the past fiscal year.

The outstanding syndicated loan has a variable interest rate. The effective interest rate for interest periods of 3 and 6 months is tied to the respective EURIBOR rate plus a margin p.a.. This margin depends on the ratio of net liabilities to EBITDA (leverage) of the United Internet Group. At the end of the reporting period, the applicable interest rate was 0.60% p.a. (prior year: 0.70%). Redemption payments are possible at any time. By exercising a contractually agreed extension option in 2019, the term of the revolving syndicated loan was extended by one year, from the original date of January 2024 to January 2025.

As of December 31, 2019, € 700 million of the revolving syndicated loan facility had been drawn (prior year: € 700 million). As a result, funds of € 110 million (prior year: € 110 million) were still available to be drawn from the credit facility.

There are also variable interest rates for drawings from the revolving syndicated loan. The effective interest rates for the interest periods of 1, 3, or 6 months are tied to the EURIBOR rate plus a margin p.a.. The margin depends on the ratio of net liabilities to EBITDA (leverage) of the United Internet Group. The applicable interest rate as of the reporting date amounts to 0.45% p.a. (prior year: 0.50%).

In addition, United Internet AG has a bilateral credit facility of € 200 million. The facility has been granted until further notice and bears interest at normal market rates. United Internet AG is the sole borrower for this facility. No drawings had been made from the credit facility as at the end of the reporting period.

The credit line of originally € 2.8 billion negotiated with a European banking syndicate on January 24, 2019 was terminated again by 1&1 Drillisch AG during the fiscal year 2019. 1&1 Drillisch signed an agreement with the German Federal Ministry of Transport and Digital Infrastructure (BMVI) and the German Federal Ministry of Finance (BMF) regarding the construction of mobile communication sites in so-called “not-spots”, and in return benefited from an agreement allowing it to pay for the acquired 5G spectrum in installments. As a result, the license fees which were originally to be paid in 2019 and 2024 can now be paid in installments over the period up to 2030. The one-off fees and expenses for the provision of credit lines amounted to € 6,347k in the fiscal year 2019.

The revolving credit line of 1&1 Drillisch AG amounting to € 100 million and with an original term until December 2019 was prematurely terminated in the reporting period.

At the end of the reporting period, United Internet thus had free credit lines totaling € 310 million (prior year: € 310 million).

No collateral was provided for any of the liabilities due to banks.

With the exception of the interest-bearing tranches of the promissory note loan, the fair values of bank liabilities mainly correspond to their carrying amounts. For further information on the promissory note loan, please refer to Note 41.

A euro cash pooling agreement (zero balancing) has been in place between United Internet AG and certain subsidiaries since July 2002. Under the agreement, credit and debit balances of the participating Group subsidiaries are pooled and netted via several cascades in a central bank account of United Internet AG and available each banking day. In addition, the Group extended cash pooling in the previous year to include the British pound sterling (GBP). All pooling participants are in the field of Hosting. Liquidity is focused on a central bank account of 1&1 IONOS SE.

b) Guaranty credit facilities

In addition to the above mentioned credit lines, the Group had the following guaranty credit facilities at the end of the reporting period, which in some cases can also be used by other Group companies.

The guaranty credit facilities are available in particular for the provision of operational bank guarantees. The guaranty credit facilities granted are mostly for unlimited periods (“until further notice”). One agreement is limited until June 30, 2020. No collateral was provided to banks.

The stated average interest rate as of the reporting date is based on utilization.

32. Contract liabilities

33. Other accrued liabilities

The development of accruals in fiscal year 2019 was as follows:

In the course of accounting for contract fulfillment costs in accordance with IFRS 15, accruals for termination fees were formed in the previous year.

The accruals for restoration obligations mainly refer to possible obligations to remove active telecommunication technology in leased main distribution frames (MDFs). Where applicable, the reversal was offset against non-current assets directly in equity.

Litigation risks consist of various legal disputes of Group companies.

Other accruals refer mainly to provisions for warranties and impending losses.

34. Other liabilities

34.1 Other current financial liabilities

34.2 Other current non-financial liabilities

Liabilities to the tax office mainly refer to sales tax liabilities.

34.3 Other non-current financial liabilities

Please refer to Note 45 regarding finance lease commitments.

On September 5, 2019, the United Internet subsidiary 1&1 Drillisch signed an agreement with the German Federal Ministry of Transport and Digital Infrastructure (BMVI) and the German Federal Ministry of Finance (BMF) regarding the construction of mobile communication sites in so-called “not-spots”. 1&1 Drillisch is thus helping to close existing supply gaps and improve the provision of mobile communications in rural regions by building base stations. In return, 1&1 Drillisch benefits from an agreement allowing it to pay for the acquired 5G spectrum in installments. As a result, the license fees which were originally to be paid to the German government 2019 and 2024 can now be spread over the period up to 2030.

The conditional purchase price liabilities refer to variable purchase price components from the acquisition of STRATO AG amounting to € 14,760k (prior year: € 6,150k), 1&1 IONOS Cloud GmbH (formerly: ProfitBricks GmbH) amounting to € 4,416k (prior year: € 4,416k), and the InterNetX put option amounting to € 5,347k (prior year: € 4,110k).

35. Maturities of liabilities

The maturities of liabilities are as follows:

The maturities of liabilities in the previous year were as follows:

In the course of determining the maturities of liabilities due to banks, management assumed that the amount drawn from the revolving syndicated loan facility as at the respective reporting date would remain constant until the end of the term (2025).

36. Share-based payment – employee stock ownership plans

There were five different employee stock ownership plans in the reporting period 2019. One model with so-called Stock Appreciation Rights (SAR) is aimed at the group of senior executives and managers and based on virtual stock options of United Internet AG. The second plan, the Long-Term Incentive Plan Hosting (LTIP) was introduced in the second half of 2017 and is aimed at the group of executives and employees in key positions in the Business Applications segment. The third plan, the Long Term Incentive Plan Versatel (LTIP) was introduced in the first half of 2018 and is aimed at the group of executives and employees in key positions in the Business Access segment. The fourth plan, the Stock Appreciation Rights Drillisch (SAR) was introduced in the first half of 2018 and is aimed at the group of executives and employees in key positions in the Consumer Access segment. The fifth plan, the Long-Term Incentive Plan Portal (LTIP) was introduced in the first half of 2019 and is aimed at the group of executives and employees in key positions in the Consumer Applications segment. The employee stock ownership plan (ESOP) for active core employees of Group companies expired in the previous year.

36.1 Stock Appreciation Rights (SAR United Internet)

The SAR plan employs so-called Stock Appreciation Rights (SARs) and is treated as an equity-settled, shared-based payment transaction. SARs refer to the commitment of United Internet AG (or a subsidiary) to pay the beneficiary a cash amount equivalent to the difference between the share price on the date of granting the option (strike price) and the share price on exercising the option. The exercise hurdle is 120% of the share price, which is calculated as the average closing price in electronic trading (Xetra) of the Frankfurt Stock Exchange over the ten days preceding issuance of the option. Payment of value growth to the entitled person is limited to 100% of the calculated share price.

An SAR corresponds to a virtual subscription right for one share of United Internet AG. However, it is not a share right and thus not a (genuine) option to acquire shares of United Internet AG. Nevertheless, United Internet AG retains the right to fulfill its commitment (or the commitment of a subsidiary) to pay the SAR in cash by also transferring United Internet AG shares from its stock of treasury shares to the beneficiary, at its own discretion.

Up to 25% of the option right may be converted at the earliest 24 months after the date of issue of the option; up to 50% at the earliest 36 months after the date of issue of the option. A total of up to 75% may be exercised at the earliest 48 months after the date of issue of the option; the full amount may be exercised at the earliest 60 months after the date of issue of the option.

No new SAR tranches were issued in the fiscal years 2018 and 2019.

The volatility used to determine fair value was calculated on the basis of historical volatility for the last 6 and 12 months prior to the measurement date, respectively. The strike price is calculated on the basis of the average share price of the last 10 days prior to the issuance date.

The total expense from the stock ownership plan amounts to € 33,613k (prior year: € 33,645k). The cumulative expense as of December 31, 2019 totaled € 33,302k (prior year: € 32,777k). Expenses of € 311k (prior year: € 868k) therefore relate to future years. The personnel expense for share options issued amounted to € 525k in the reporting period (prior year: € 1,067k).

The changes in the virtual stock options granted and outstanding are shown in the following table:

The range of strike prices for stock options outstanding at the end of the reporting period is between € 30.11 and € 44.06 (prior year: € 30.11 and € 44.06).

36.2 Long Term Incentive Plan Business Applications (LTIP Hosting)

An additional employee stock ownership plan (Long-Term Incentive Plan, LTIP) was introduced for the Business Applications segment in the fiscal year 2017. The LTIP is designed to align the long-term interests of management board members and other key employees of the 1&1 IONOS Group (Business Applications segment) with the interests of the company, in order to raise the equity value of the company (1&1 IONOS TopCo SE) and other companies of the 1&1 IONOS Group.

Within the LTIP plan, qualifying employees in the Hosting division will be allocated so-called Management Incentive Plan (MIP) units. The grant is made on a straight-line basis over a period of four years (beginning with the date of issue) and provided that the respective employee has not terminated his contract at the end of each year.

The entitlements under the LTIP plan can be settled in the form of shares or cash. In the case of settlement in the form of shares, rights may be settled by the provision of shares or options to acquire shares. As there is no current obligation for cash settlement, the plan is carried as equity-settled.

Using an option pricing model based on a Black-Scholes model in accordance with IFRS 2, the fair value of the options issued was calculated using the following material measurement parameters:

The volatility used to determine fair value was calculated using the price fluctuations of the past 180 days or last 360 days of the Business Applications division peer group.

Expense is recognized on a straight-line basis over the variable period until the anticipated occurrence of an event defined by the LTIP plan. This assessment is reviewed on each reporting date. Based on current estimates, the total underlying period is 4 years starting from October 1, 2017.

The fair value of commitments classified as equity instruments amounted to € 25,711k on the grant date (prior year: € 15,540k).

The total expense from the employee stock ownership plan amounts to € 25,711k (prior year: € 15,540k). The cumulative expense as of December 31, 2019 totaled € 12,280k (prior year: € 4,856k). Expenses for future years therefore account for € 13,431k (prior year: € 10,684k). The personnel expense from issued stock options amounted to € 7,424k in the reporting period (prior year: € 3,512k).

The changes in the MIP units granted and outstanding are shown in the following table:

36.3 Long Term Incentive Plan Versatel (LTIP Versatel)

An additional employee stock ownership plan (Long-Term Incentive Plan, LTIP) was introduced for the Business Access segment in the fiscal year 2018. The LTIP is designed to align the long-term interests of management board members and other key employees of the 1&1 Versatel Group (Business Access segment) with the interests of the company, in order to raise the equity value of the company (1&1 Versatel GmbH) and other companies of the 1&1 Versatel Group.

Within the LTIP plan, qualifying employees in the Business Access segment are allocated value growth shares. The grant is made over a period of six years (beginning with the date of issue) and provided that the respective employee has not terminated his contract at the end of each year. As of December 31, 2019, all outstanding units are unforfeitable.

The entitlements under the LTIP plan can be settled in the form of shares or cash. In the case of settlement in the form of shares, rights may be settled by the provision of shares or options to acquire shares. As there is no current obligation for cash settlement, the plan is carried as equity-settled.

The LTIP entitlement results from the difference between the terminal value and an initial value, which is multiplied by the respective value growth share and dilution factor.

Expense per participant is recognized on a straight-line basis over the period until the expiry of the respective LTIP contract, unless an event specified in the LTIP plan occurs. This assessment is reviewed on each reporting date. Based on current estimates, a total period of 6 years is used.

The total expense from the employee stock ownership plan amounts to € 2,918k (prior year: € 2,850k). In the reporting period, one employee with value growth shares left the company. As a consequence, the cumulative expense as of December 31, 2019 totaled € 266k (prior year: € 475k) and the personnel income from issued stock options amounted to € -209k in the reporting period (prior year: personnel expense € 475k). Expenses for future years therefore account for € 2,652k (prior year: € 2,375k).

36.4 Stock Appreciation Rights Drillisch (SAR Drillisch)

A further plan, Stock Appreciation Rights Drillisch (SAR),introduced in the first half of 2018, is aimed at executives and employees in key positions in the Consumer Access segment and is based on virtual stock options of 1&1 Drillisch AG.

An SAR Drillisch is the commitment of 1&1 Drillisch AG (or one of its subsidiaries), to pay the option beneficiary a consideration whose amount depends on the share price performance and the operating result (EBIT) of 1&1 Drillisch AG (consolidated). As part of the SAR plan, so-called SARs are allocated which are then granted over the vesting period. An SAR corresponds to a virtual subscription right for one share of 1&1 Drillisch AG. However, it is not a share right and thus not a (genuine) option to acquire shares of 1&1 Drillisch AG.

The entitlement arising from an SAR depends on the development of the share price and EBIT. Furthermore, various exercise conditions must be observed. The SAR entitlement is calculated by multiplying the number of SARs exercised by an EBIT factor and the difference between the strike price and the starting price. The EBIT factor is derived from the percentage degree to which the EBIT targets of 1&1 Drillisch AG (“Target EBIT”) have been achieved. The year preceding the exercise date is decisive. For the EBIT factor, only a degree of achievement of the EBIT targets of 80% (exercise hurdle) to 120% (cap) is taken into account. The starting and strike prices are calculated as the average (arithmetic mean) of the closing prices of the 1&1 Drillisch AG share in Xetra trading (or a functionally comparable successor system) of the Frankfurt Stock Exchange on the last 10 trading days prior to the starting or exercise date. If the percentage share price increase is higher than EBIT growth, there is a further cap of 150% on the share price increase.

The allocated SARs can only be exercised for the first time after 4 years at the earliest. Each year, the participant has an exercise window of one month, beginning on the day after publication of the annual financial statements of 1&1 Drillisch AG. The last exercise window available to the participant is in the year following the end of the term. SARs not exercised by then expire without compensation. The possibility of exercising SARs in the first exercise window is limited to a maximum of 25%, and in the second exercise window to 50%, of the total number of SARs allocated to the participant at these points in time – including earlier exercises.

1&1 Drillisch AG reserves the right to fulfill its commitment from the SAR plan (or the commitment of a subsidiary) to transfer shares of 1&1 Drillisch AG from its stock of treasury shares by also paying the beneficiary in cash, at its own discretion. As there is currently no obligation to settle in cash, these commitments are accounted for as equity-settled transactions.

Using an option pricing model based on a Monte Carlo simulation in accordance with IFRS 2, the fair value of the options issued was determined as follows:

The volatility used to determine fair value was calculated on the basis of historical volatility for the last 12 months prior to the measurement date. The strike price is calculated on the basis of the average share price of the last 10 days before the issuance date.

In fiscal year 2019, the total expense from the stock ownership plan amounts to € 3,881k (prior year: € 9,823k). The previously recognized cumulative expenditure as of December 31, 2019 for SARs exercised in the fiscal year and for SARs not yet exercised as of the reporting date amounts to € 1,436k (prior year: € 1,359k). Expenses for future years therefore amount to € 2,444k (prior year: € 8,464k)

The changes in the virtual stock options granted and outstanding are shown in the following table:

36.5 Long Term Incentive Plan Portal (LTIP Consumer Application)

An additional employee stock ownership plan (LTIP Portal) was introduced by 1&1 Mail & Media Applications SE in the fiscal year 2019. The LTIP is designed to attract and retain skilled executives as well as to align the long-term interests of management board members and other key employees of the group with the interests of the company, in order to raise the equity value of the company(1&1 Mail & Media Applications SE) and other companies of the group.

The plan entitles the beneficiaries to participate in a certain proportion of the increase in value of the 1&1 Mail & Media Group. Within the LTIP plan, qualifying employees are allocated value growth shares. The grant is made over a period of six years (beginning with the date of issue) and provided that the respective employee has not terminated his contract at the end of each year. The LTIP entitlement arises as soon as the full term of the LTIP contract ends or a trigger event (e.g., the sale of shares held by United Internet AG in 1&1 Mail & Media Applications SE or similar) occurs beforehand.

The entitlements under the LTIP plan can be settled in the form of shares or cash. In the case of settlement in the form of shares, rights may be settled by the provision of shares in the company, provided they are traded on a stock exchange in the meantime, or shares in another company listed on a stock exchange, or the corresponding options to acquire shares. As there is no current obligation for cash settlement, the plan is carried as equity-settled.

As of the grant date, the fair value of commitments classified as equity instruments amounted to € 4,015k.

The total expense from the employee stock ownership plan amounts to € 4,015k (prior year: € 0k). The cumulative expense as of December 31, 2019 totaled € 669k (prior year: € 0k). Expenses for future years therefore account for € 3,346k (prior year: € 0k). The personnel expense from issued stock options amounted to € 669k in the reporting period (prior year: € 0k).

37. Capital stock

As in the previous year, the fully paid-in capital stock of the reporting date amounted to € 205,000,000 divided into 205,000,000 (prior year: 194,000,000) registered no-par shares having a theoretical share in the capital stock of € 1 each.

Authorized capital

The Management Board is authorized, subject to the approval of the Supervisory Board, to increase the capital stock in the period ending May 20, 2020 by a maximum of € 102,500,000.00 by issuing on one or more occasions new no-par value shares in return for cash and/or non-cash contributions, whereby the subscription rights of shareholders can be excluded under certain conditions (Authorized Capital 2015).

In the case of a capital increase, shareholders shall be granted subscription rights. Pursuant to section 186 (5) AktG, shareholders can also be granted subscription rights indirectly. However, the Management Board is authorized, subject to the approval of the Supervisory Board, to exclude the rights of shareholders to subscribe:

• in the case of fractional amounts arising from the subscription ratio;
• in the case of a capital increase in return for cash contribution if the new shares are issued at an issuance price which is not substantially below the market price (as defined by section 203 (1) and (2) in conjunction with section 186 (3) sentence 4 AktG) of those Company shares already listed of the same type and with the same terms at the time of the final determination of the issuance price by the Management Board, which should be as near as possible to the share issue date, and the proportionate amount of the capital stock attributable to the new shares for which subscription rights are excluded does not exceed ten percent of the existing capital stock, neither at the time this authorization becomes effective nor when it is exercised. This amount includes the proportionate share of capital stock attributable to shares issued or used during the term of the authorization in direct or corresponding application of section 186 (3) sentence 4 AktG under exclusion of subscription rights. This amount also includes the proportionate share of capital stock attributable to shares issued or to be issued to serve conversion or warrant rights, providing the underlying bonds are issued during the term of this authorization under exclusion of subscription rights pursuant to section 186 (3) sentence 4 AktG;
• to the extent that this should be necessary in order to grant subscription rights for new shares to bearers of bonds with warrant or conversion rights or obligations issued by the Company or subordinated Group companies in the amount to which they are entitled on exercise of their warrant or conversion rights or fulfillment of their warrant or conversion obligation;
• in the case of capital increases in return for non-cash contribution to grant shares for the purpose of acquiring companies, parts of companies, interests in companies or other assets, including rights and receivables, or as part of business combinations.

Conditional capital

Capital stock is to be conditionally increased by up to € 25,000,000.00, divided into 25,000,000 no-par value shares (Conditional Capital 2015). The conditional capital increase is earmarked for shares to be granted to bearers or holders of warrant or convertible bonds granted by the Company or a subordinated Group company in accordance with the above authorization in the period up to May 20, 2020. The new shares shall be issued at the warrant or conversion price to be determined in the bond terms and in accordance with the above authorization. The conditional capital increase shall only be implemented to the extent that the warrant or conversion rights pertaining to the bonds are exercised or warrant or conversion obligations pertaining to the bonds are fulfilled, or the Company exercises its right to tender shares, and unless other fulfillment possibilities for servicing are used. The new shares used for the issue shall participate in profits from the beginning of the fiscal year in which they are created by exercising the warrant or conversion right; to the extent that it is legally permissible, the Management Board may, with the approval of the Supervisory Board, determine the profit participation of new shares and, notwithstanding section 60 (2) AktG, also for a fiscal year already expired. The Management Board is authorized to determine the further details of the implementation of the conditional capital increase.

38. Reserves

As of December 31, 2019, capital reserves amounted to € 2,643,946k (prior year: € 2,703,141k). The decline is mainly due to the Company’s purchase of further shares in 1&1 Drillisch AG as well as the purchase of treasury shares by 1&1 Drillisch AG itself.

The accumulated result includes the past results of consolidated companies, insofar as no dividends were paid, less expenses for share-based remuneration.

At the end of the reporting period, the revaluation reserve attributable to shareholders of United Internet AG consisted of the following items:

In the fiscal year 2019, United Internet sold its shares in Rocket Internet SE. In this connection, the corresponding accrued other comprehensive income was reclassified to accumulated profit.

Translation differences from the annual financial statements of foreign subsidiaries without an effect on profit or loss are recognized in the currency translation adjustment.

An overview of the composition and changes in the reserves described above for the fiscal years 2019 and 2018 is provided in the Statement of Changes in Shareholders’ Equity.

39. Treasury shares

Pursuant to section 71 (1) number 8 AktG, United Internet AG is entitled to acquire treasury shares until September 18, 2020 up to a limit of ten percent of capital stock. The purchase price may be no lower than ten percent of the share's market price, nor higher than ten percent above its market price. The authorization may not be used for the purpose of trading with treasury shares. Within the framework of this authorization, the Company purchased a total of 12,635,523 treasury shares for an amount of € 373,584k.

As of the balance sheet date 17,338,513 treasury shares were held (prior year: 4,702,990).

Treasury shares reduce equity and have no dividend entitlement.

40. Non-controlling interests

Non-controlling interests developed as follows:

Pro-rated changes relate to United Internet’s increased stake in 1&1 Drillisch AG and the acquisition of treasury stock by 1&1 Drillisch AG itself.

The addition in the previous year refers to the initial investment of non-controlling shareholders in the respective subsidiary.

The following financial information comprises summarized details on the assets, liabilities, profits or losses, and cash flows of the subsidiary with material non-controlling interests.

1&1 Drillisch Gruppe (Consumer Access)

1&1 Internet TopCo SE (Business Applications)

41. Additional details on financial instruments

The following table shows the carrying amounts for each category of financial assets and liabilities for fiscal year 2019:

The following net results were stated for the individual categories of financial instruments acc. to IFRS 9 in fiscal year 2019:

With the exception of trade accounts receivable in connection with finance leases, cash and cash equivalents, trade accounts receivable, and other current financial assets mostly have short remaining terms. Their carrying amounts on the reporting date are thus similar to fair value.

Investments and derivatives are carried at fair value. In the case of the remaining other non-current financial assets carried at amortized cost, it is assumed that their carrying amounts correspond to fair value.

Trade accounts payable mostly have short remaining terms. Their carrying amounts on the reporting date are thus similar to fair value. The same applies to current liabilities due to banks.

For the remaining other non-current liabilities recognized at amortized cost, it is assumed that their carrying amounts correspond to their fair values.

Non-current liabilities due to banks are loans which can be prematurely redeemed. In addition, both the basic interest rate and the margin are variable. The margin depends on predefined KPIs of the United Internet Group. Due to these factors, it is assumed that their carrying amounts of non-current liabilities correspond approximately to fair value. The fair value measurement of the promissory note loans is based at least in part on input parameters not observable on the market.

Due to changed interest rates, there are slight deviations between the carrying value and fair value of receivables and liabilities in connection with finance leases.

The conditional purchase price liabilities are carried at fair value. In the case of the remaining other non-current financial liabilities carried at amortized cost, it is assumed that their carrying amounts correspond to fair value.

The following table shows the carrying amounts for each category of financial assets and liabilities for fiscal year 2018:

(1) Without subsequent reclassification into the income statement

The following net results were stated for the individual categories of financial instruments in fiscal year 2018:

The fair value of financial assets and liabilities is stated at the amount at which the instrument concerned might be exchanged in a current transaction (excluding a forced sale or liquidation) between willing business partners.

The methods and assumptions used to determine fair values are shown below:

• Cash and short-term deposits, trade accounts receivable, trade accounts payable, and other current assets and liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
• Long-term fixed-rate and variable-rate receivables/borrowings are evaluated by the Group based on parameters such as interest rates, specific country risk factors, individual creditworthiness of the customer and the risk characteristics of the financed project. Based on this evaluation, allowances are taken to account for the expected losses of these receivables. As at December 31, 2018, and as in the previous year, the carrying amounts of such receivables, net of allowances, are not materially different from their calculated fair values.
• The fair value of bank loans and other financial liabilities is estimated by discounting future cash flows using interest rates currently available for debt on similar terms, credit risk and remaining maturities.
• Financial assets and liabilities measured at fair value are measured using appropriate measurement techniques. Where available, stock exchanges prices on active markets are used. The valuation of shares in non-listed companies is based mainly on present value models. The valuation of derivatives and conditional purchase price liabilities is based mainly option pricing models.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by measurement technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

Assets and liabilities measured at fair value

As in the previous year, there were no transfers between levels during the reporting period.

The following table shows the main non-observable input factors for the fair value measurements categorized in Level 3 of the fair value hierarchy and a quantitative sensitivity analysis as of December 31, 2019:

Reconciliation to fair value in Level 3:

42. Transactions with related parties

IAS 24 defines related parties as those persons and companies that control or can exert a significant influence over the other party. Mr. Ralph Dommermuth, the major shareholder, as well as from the members of the Management Board and Supervisory Board of United Internet AG and their close relatives were classified as related parties. Moreover, companies over which the related parties exert a controlling influence are classified as related parties.

There were no changes to the circle of related parties as compared with the Consolidated Financial Statements as at December 31, 2018.

At the Annual Shareholders' Meeting on May 21, 2015, Mr. Kurt Dobitsch (chairman), Mr. Michael Scheeren (deputy chairman), and Mr. Kai-Uwe Ricke were re-elected as members of the Company’s Supervisory Board. The Supervisory Board was elected for the period ending with the Annual Shareholders' Meeting which adopts the resolution to release the Supervisory Board members from their responsibility for fiscal year 2020.

In fiscal year 2019, the members of the Supervisory Board also held seats on supervisory boards or similar committees of the following companies:

Kurt Dobitsch

• 1&1 IONOS Holding SE, Montabaur (formerly: 1&1 Internet Holding SE) (as of March 27, 2019)
• 1&1 Telecommunication SE, Montabaur (deputy chair)
• 1&1 Mail & Media Applications SE, Montabaur (deputy chair)
• 1&1 Drillisch Aktiengesellschaft, Maintal
• Nemetschek SE, Munich (formerly: Nemetschek AG) (chair)
• Graphisoft S.E., Budapest/Hungary
• Vectorworks Inc., Columbia/USA
• Bechtle AG, Gaildorf
• Singhammer IT Consulting AG, Munich

Kai-Uwe Ricke

• 1&1 IONOS Holding SE, Montabaur (formerly: 1&1 Internet Holding SE) (until March 27, 2019)
• 1&1 Telecommunication SE, Montabaur
• 1&1 Mail & Media Applications SE, Montabaur (chair)
• 1&1 Drillisch Aktiengesellschaft, Maintal (deputy chair)
• EuNetworks Group Limited, London, United Kingdom
• Delta Partners Group Limited, Dubai, United Arab Emirates
• Delta Partners Capital Limited, Dubai, United Arab Emirates
• Delta Partners Growth Fund II GP Limited, Cayman Islands (formerly Dubai)
• Delta Partners Growth Fund II (Carry) General Partner Limited, Cayman Islands
• SUSI Partners AG, Zurich/Switzerland (until June 17, 2019)
• Virgin Mobile CEE B.V., Amsterdam/Netherlands
• Virgin Mobile Polska Sp.z.o.o, Warsaw/Poland (chair of the Administrative Board)
• Cash Credit Limited, Cayman Islands

Michael Scheeren

• 1&1 IONOS Holding SE, Montabaur (formerly: 1&1 Internet Holding SE)
• 1&1 Telecommunication SE, Montabaur (chair)
• 1&1 Mail & Media Applications SE, Montabaur
• 1&1 Drillisch Aktiengesellschaft, Maintal (chair)
• Tele Columbus AG, Berlin (as of August 29, 2019)

On May 21, 2015, the Annual Shareholders' Meeting adopted a new remuneration system which complies fully with the German Corporate Governance Code. It consists of a fixed remuneration component and an attendance fee per meeting. The fixed remuneration for an ordinary member of the Supervisory Board amounts to € 15k per full fiscal year. The Chairman of the Supervisory Board receives the double amount. The attendance fee amounts to € 1k for each meeting.

The members of the Supervisory Board of United Internet AG are also members of the supervisory board of various subsidiaries. As of fiscal year 2015, they also receive remuneration from these subsidiaries. The remuneration of the subsidiaries also consists of a fixed annual remuneration and an attendance fee for each meeting. The fixed annual remuneration varies between the subsidiaries, while the standard attendance fee amounts to € 1k for each meeting.

The following table provides details on the compensation received by members of the Supervisory Board of United Internet AG::

There are no subscription rights or share-based payments for members of the Supervisory Board.

The Supervisory Board is responsible for determining the remuneration of the Management Board. The members of the Management Board are compensated according to performance. This compensation consists of a fixed and a variable element (bonus). A target remuneration figure is agreed for the fixed component and the bonus, which is regularly reviewed. The last review was made in fiscal year 2017. The fixed remuneration component is paid monthly as a salary. The size of the bonus depends on reaching certain, fixed financial targets agreed at the beginning of the fiscal year. These targets are based mainly on sales and earnings figures. The target attainment corridor is generally between 90% to 120%. No bonus is paid below 90% of the agreed target and the bonus calculation ends at 120% of the agreed target. No subsequent amendment of the performance targets is allowed. There is no minimum guaranteed bonus. Payment is generally made after the Annual Financial Statements have been adopted by the Supervisory Board.

There are no retirement benefits from the Company to members of the Management Board.

The following table provides details on the compensation received by members of the Management Board:

* Share-based payments (so-called Stock Appreciation Rights) are compensation components with a long-term incentive and paid out over a total period of 6 years.

Total Management Board remuneration as defined by section 314 (1) number 6 a and b HGB, i.e., including the market value of share-based payments, amounted to € 503k (prior year:€ 768k). Members of the Management Board were not granted any advances or loans in the reporting period nor in the previous year.

As in the previous year, Mr. Frank Krause exercised no subscription rights in the fiscal year 2019.

Reference is also made to the Remuneration Report, which is part of the Combined Management Report.

The number of shares in United Internet AG held by members of the Management Board and the Supervisory Board is presented in the following table:

In addition, the United Internet Group can exert a significant influence on its associated companies.

Transactions with related parties

Sales to and purchases from related parties are conducted at standard market conditions. The open balances at year-end are unsecured, non-interest-bearing and settled in cash. There are no guarantees for receivables from or liabilities due to related parties. No allowances were recognized for receivables from related parties in fiscal year 2019 or the previous year. An impairment test is conducted annually. This includes an assessment of the financial position of the related party and the development of the market in which they operate.

United Internet’s premises in Montabaur and Karlsruhe are leased in part (prior year: in full) from Mr. Ralph Dommermuth, the Chief Executive Officer and a major shareholder of the Company. The corresponding lease agreements have different terms between the end of 2021 and June 2028. The resulting rent expenses are customary and amounted to € 6,765k in fiscal year 2019 (prior year: € 8,987k).

The following table presents rights of use in connection with related parties.

The following table presents lease liabilities in connection with related parties.

At the end of the reporting period, there were two loan agreements with associated companies totaling € 10,100k (prior year: € 8,600k). New loans totaling € 2,500k were extended to associated companies in the reporting period.

The loans have terms of one and up to eight years. The tranches each have fixed interest rates of 2.5% p.a. to 3.0% p.a. and 8%.

The following table presents the outstanding balances and total transactions volumes with associated companies in the respective fiscal year:

As in the previous year, receivables from other related parties mainly result from loans to AWIN.

43. Objectives and methods of financial risk management

Principles of risk management

The risk management system introduced by the United Internet Group is based on the COSO-ERM framework and is described in detail in the Management Report.

The principles of finance policy are set by the Management Board and monitored by the Supervisory Board. Certain transactions require the prior approval of the Supervisory Board.

The main financial liabilities used by the Group include bank loans, promissory note loans and overdraft facilities, trade accounts payable, and other financial liabilities.

The Group holds various financial assets which result directly from its business activities. They consist mainly of trade accounts receivable, available-for-sale financial investments, and short-term deposits.

As of the reporting date, the Group mainly held primary financial instruments.

The aim of financial risk management is to limit these risks through ongoing operating and financial activities. The Group is hereby exposed to certain risks with regard to its assets, liabilities, and planned transactions, especially liquidity risks and market risks, as described below.

Liquidity risk

Liquidity risk constitutes the risk that a company will be unable to meet the financial obligations arising from its financial liabilities. As in the previous year, the general liquidity risk of United Internet consists of the possibility that the Group may not be able to meet its current financial obligations in due time. To ensure the solvency and financial flexibility of the United Internet Group at all times, short-term liquidity forecasts and longer-term financial planning are conducted.

As a result of the expected positive contribution to liquidity from operations and the interest-optimized use of the credit lines already granted, the Group is able to ensure the continual coverage of its financial needs at all times. The credit commitments granted to the Company by banks and the existing syndicated loan facility offer sufficient flexibility for these needs. In order to maintain financial stability, a balanced financial structure is sought which provides both the diversification of financial instruments and a balanced maturity profile.

Global cash requirements and surpluses are managed by the central liquidity management system. The daily automated pooling of bank balances held by the participating Group companies (cash pooling) provides United Internet AG at all times with the predominant proportion of its cash denominated in euro. The Group has established standardized processes and systems to manage its bank and netting accounts as well as for the execution of payment transactions.

At the end of the reporting period, the Company had total liquid funds of € 117.4 million (prior year: € 58.1 million) as well as free credit lines of € 310 million and thus has more than sufficient liquidity reserves for the fiscal year 2020.

The following tables show all contractually fixed payments for redemption, repayments, and interest for financial liabilities carried in the balance sheet as of December 31, 2019 and 2018:

Payments from other financial liabilities mainly comprise payment obligations of € 1,008 million in connection with the 5G spectrum auction, as well as expected payments from derivatives of € 20.1 million (prior year: € 10.6 million) in fiscal year 2021. Payments to the German government do not follow a linear pattern and will increase to € 128 million as of the fiscal year 2026.

For the calculation of cash flows from liabilities to banks, management assumed that the portion of the revolving syndicated loan facility currently used amounting to € 700 million (prior year: € 700 million) would remain constantly drawn until the end of its term (2025).

Please refer to Note 31 for details on interest and redemption payments for liabilities to banks.

The Company has no significant concentration of liquidity risks.

Market risk

The activities of United Internet are mainly exposed to financial risks from changes in interest rates, exchange rates, stock exchange prices, and credit or contingency risks.

Interest risk

The interest (rate) risk refers to the risk that fair values or future interest payments on existing and future financial liabilities may fluctuate due to changes in market interest rates.

The Group is fundamentally exposed to interest risks as some of its financial instruments as of the reporting date bear variable interest rates with varying terms. An interest risk exists for drawdowns under the revolving syndicated loan and the syndicated loan totaling € 900 million, as well as the variable promissory note loan amounting to € 50 million.

With the aid of the liquidity planning, various investment possibilities or possibilities to reduce surplus liquidity are constantly analyzed. The maturity profile and amount of the Group’s variable-rate financial instruments are regularly reviewed and appropriate measures are taken to ensure liquidity and the management of interest risks.

Market interest rate changes might have an adverse effect on the interest result and are included in our calculation of sensitive factors affecting earnings. In order to present market risks, United Internet has developed a sensitivity analysis which shows the impact of hypothetical changes to relevant risk variables on pre-tax earnings. The reporting period effects are illustrated by applying these hypothetical changes in risk variables to the stock of financial instruments as of the reporting date.

Due to the current interest policy of the European Central Bank, the EURIBOR interest rate of relevance for the United Internet Group is negative as of the balance sheet date. No expenses were incurred due to negative interest on liquidity held. The Group does not expect any material changes in risk premiums in the foreseeable future. United Internet currently regards the interest risk for its existing variable-rate financial instruments as low.

The interest risk is negligible for other interest-bearing liabilities. At the end of the reporting period, there were no external interest-hedging transactions.

Currency risk

A currency risk is the risk that fair values or future cash flows of financial instruments may fluctuate due to changes in exchange rates. The Group companies are mainly exposed to currency risks as a result of their operations (if revenue and/or expenses are in a currency other than the functional currency of the respective company). In order to cover such foreign currency risks, United Internet strives to achieve an equilibrium between the incoming and outgoing payments in non-functional currencies (so-called natural hedging). Currency risks which do not affect cash flows (i.e., risks from translating the assets and liabilities of the Group’s foreign companies) are not hedged against. With regard to operating activities, individual Group companies perform their business mainly in their respective functional currencies. As in the previous year, the currency risk from operations is therefore regarded as low. In the reporting period, there were no currency risks which significantly affected cash flows. At the end of the reporting period, there were no external currency-hedging transactions.

The currency risks arising from original financial instruments in a currency and of a monetary nature other than that of the functional currency as of the reporting date were valued by the Company. No material currency risks arose from this analysis.

Stock exchange risk (valuation risk)

In the fiscal year 2019, the United Internet Group recognized financial assets (equity instruments) as follows:

• measured at fair value through other comprehensive income with no recycling of cumulative gains and losses upon derecognition or
• measured at fair value through profit or loss.

Depending on the measurement category and the share price development of listed investments, changes in equity without affecting income, or income and expenses, may arise as of the reporting date. An increase in stock exchange prices of 10% would have led to the Group’s recognition of an equity effect without affecting income of € 238k as of the reporting date (prior year: € 27,687k). A decrease in stock exchange prices of 10% would have reduced the Group’s equity by € 238k as of December 31, 2019 (prior year: € 27,687k). The aforementioned sensitivities do not take account of tax effects.

Credit and contingency risk

As a result of its operating activities, the Group is exposed to a contingency risk. In order to reduce default risks, a sophisticated and preventive fraud management system has been established which is permanently enhanced. Outstanding amounts are monitored locally and on a continual basis. Individual and lump-sum allowances are made to account for non-avoidable contingency risks.

With regard to trade accounts receivable, the maximum risk in the gross amount stated in the balance sheet is before allowances. Trade accounts receivable which are not impaired as of the reporting date, are classified according to periods in which they become overdue (see Note 19).

Internal rating system

A pre-contractual fraud check is generally conducted and collection agencies are also used for the management of receivables. In addition, a pre-contractual check of creditworthiness is made in the media sales business and collection agencies are also used for the management of receivables.

The Company has no significant concentration of credit risks.

Risks from financial covenants

The existing loans of United Internet AG are tied to so-called financial covenants. The infringement of a certain net debt-to-EBITDA ratio could result in individual banks terminating outstanding loans with the Company. In view of the low net debt-to-EBITDA ratio of United Internet at present, the probability of infringement is regarded as low. Compliance with the covenants is regularly monitored by the Company’s Management Board and was met throughout the year.

Capital management

In addition to the legal provisions for stock corporations, United Internet AG has no further obligations to maintain capital according to its statutes or other agreements. The key financial indicators used by the Company are mainly performance-oriented. The targets, methods, and processes of capital management are thus subordinate to these performance-oriented financial indicators.

In order to maintain and adapt its capital structure, the Company can adjust dividend payments or pay capital back to its shareholders, can purchase treasury shares and place them again if required, or issue new shares. Please refer to the statement of changes in shareholders’ equity. As of December 31, 2019 and December 31, 2018, no changes were made to the Company’s targets, methods, and processes.

44. Contingencies, contingent liabilities, and other commitments

Contingent liabilities

Contingent liabilities represent a possible obligation whose existence depends on the occurrence of one or more uncertain future events, or a current obligation whose payment is not likely or whose amount cannot be reliably estimated.

As of December 31, 2019, pre-service providers have filed claims in the low three-digit million range. United Internet AG considers the claims of the counterparties to be unfounded and regards an outflow of resources for these contingent liabilities as unlikely.

Litigation

Litigation risks mainly relate to various legal disputes of Group subsidiaries.

Accruals for litigation were formed for any commitments arising from these disputes (see Note 33).

Guarantees

As of the reporting date, the Group has issued no guarantees.

Guarantees and other obligations

The Company is jointly and severally liable for credit lines granted to companies of the United Internet Group by a bank. The credit facilities had only been utilized with regard to guarantees as of the reporting date.

The Management Board has no knowledge of any other facts which could have a significant, adverse effect on the business activities, the financial situation or the operating result of the Company.

45. Leases, other financial commitments, and guarantees

Group as lessee

The obligations mainly comprise leased network obligations including subscriber lines, buildings, technical equipment, and vehicles. The contracts generally include renewal options.

Most leases have options to prolong the contractual relationship. The terms of these prolongation options are negotiable or identical with the current terms.

The following expenses from leases were incurred in the reporting period:

As of December 31, 2019, the carrying amounts of right–of-use assets by class of underlying assets are as follows:

As of December 31, 2019, existing lease liabilities have the following terms:

For further information, please refer to the explanations in 2.3 and Note 43.

Group as lessor

Finance leases

The Group acts as the lessor of finance leases via the 1&1 Versatel Group. Receivables from finance leases are disclosed in trade accounts receivable. The following table shows a reconciliation of gross investments in leases and the present value of outstanding minimum lease payments, as well as their maturities:

Finance lease receivables relate solely to leases for the provision and use of dark fiber lines.

In fiscal year 2019, several new finance lease agreements were concluded with two lessees regarding the provision of fiber pairs. An amount of € 4.6 million (prior year: € 10.4 million) is recognized in gross investment less unrealized financial income for these leases. The maturities range from 14 to 15 years.

Other financial commitments and guarantees

As of December 31, 2019, there were the following other financial commitments which do not represent leases:

* Figures are based on minimum contractual terms.

46. Statement of cash flows

In fiscal year 2019, cash flow from operating activities includes interest paid of € 30,550k (prior year: € 30,016k) and interest received of € 4,503k (prior year: € 3,810k). Income tax payments in fiscal year 2019 amounted to € 373,894k (prior year: € 275,765k) while income tax proceeds totaled € 110,136k (prior year: € 6,114k).

Cash and cash equivalents include bank balances of € 2,764k (prior year: € 2,764k) which are only usable under certain conditions.

The acquisition of 5G spectrum licenses (exceptional redemption in the fiscal year 2019: € 61,266k) and the right-of-use assets and lease liabilities from initial application of IFRS 16 (exceptional redemption in the fiscal year 2019: €6,418k) were treated as non-cash transactions. Initial recognition of the 5G spectrum was made against the background of the deferral and installment payment agreed with the German government, extending the balance sheet and thus neutralizing cash flow. The first installment in December 2019 of € 61,266 thousand was disclosed in cash flow from financing activities. Leases are always recognized directly in equity upon initial recognition. Current payments include interest and repayment components. The latter are reported in cash flow from financing activities.

Cash inflows in connection with dividends received amounted to € 922k (prior year: € 3,542k) and mainly comprise dividends from afilias Ltd..

Reconciliation of balance sheet changes in financial liabilities: