CONSOLIDATED ANNUAL REPORT AND SEPARATE ANNUAL REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS
PUBLIC LIMITED COMPANY
FOR THE YEAR ENDED DECEMBER 31, 2023
2 INDEX TO THE CONSOLIDATED AND SEPARATE ANNUAL REPORTS CONSOLIDATED ANNUAL REPORT.............................................................................................................................................3 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT .........................................................4 CONSOLIDATED FINANCIAL STATEMENTS ...............................................................................................................................7 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT ................................................................................................... 8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION - ASSETS ...................................................................................................... 9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – LIABILITIES & EQUITY ........................................................................ 10 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME.................................................. 11 CONSOLIDATED STATEMENT OF CASH FLOWS ...................................................................................................................................... 13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY........................................................................................................................ 14 NOTES TO THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ......................................................................................... 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................. 17 CONSOLIDATED BUSINESS / MANAGEMENT REPORT ........................................................................................................ 114 SEPARATE ANNUAL REPORT ................................................................................................................................................. 154 SEPARATE FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT .............................................................. 155 SEPARATE FINANCIAL STATEMENTS .................................................................................................................................... 158 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT ............................................................................................159 STATEMENT OF FINANCIAL POSITION - ASSETS .................................................................................................................................160 STATEMENT OF FINANCIAL POSITION – LIABILITIES AND EQUITY ..............................................................................................161 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ..............................................................................162 STATEMENT OF CASH FLOWS ....................................................................................................................................................................163 STATEMENT OF CHANGES IN EQUITY .....................................................................................................................................................164 NOTES TO THE SEPARATE STATEMENT OF CHANGES IN EQUITY ................................................................................................165 NOTES TO THE SEPARATE FINANCIAL STATEMENTS ........................................................................................................................167 SEPARATE BUSINESS / MANAGEMENT REPORT .................................................................................................................. 257
3 CONSOLIDATED ANNUAL REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
4 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
5 INDEX TO THE CONSOLIDATED ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT .........................................................4 CONSOLIDATED FINANCIAL STATEMENTS ...............................................................................................................................7 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT ................................................................................................... 8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION - ASSETS ...................................................................................................... 9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – LIABILITIES & EQUITY ........................................................................ 10 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME.................................................. 11 CONSOLIDATED STATEMENT OF CASH FLOWS ...................................................................................................................................... 13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY........................................................................................................................ 14 NOTES TO THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ......................................................................................... 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................. 17 1 ABOUT THE GROUP ................................................................................................................................................................................... 17 2 BASIS OF PREPARATION AND SUMMARY OF MATERIAL ACCOUNTING POLICIES .............................................................. 19 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS............................................................................................................ 25 4 FINANCIAL INSTRUMENTS...................................................................................................................................................................... 29 5 FINANCIAL RISK MANAGEMENT ........................................................................................................................................................... 51 6 INCOME TAX ................................................................................................................................................................................................ 62 7 INVENTORIES .............................................................................................................................................................................................. 66 8 ASSETS HELD FOR SALE AND LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE ................................................... 66 9 PROPERTY, PLANT AND EQUIPMENT ................................................................................................................................................. 67 10 INTANGIBLE ASSETS .............................................................................................................................................................................. 71 11 INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS ................................................................................................ 76 12 OTHER ASSETS ......................................................................................................................................................................................... 77 13 PROVISIONS .............................................................................................................................................................................................. 77 14 OTHER CURRENT LIABILITIES.............................................................................................................................................................. 79 15 OTHER NON-CURRENT LIABILITIES................................................................................................................................................... 79 16 NON-CONTROLLING INTERESTS ........................................................................................................................................................ 80 17 LEASES ........................................................................................................................................................................................................ 82 18 REVENUE .................................................................................................................................................................................................... 88 19 DIRECT COSTS.......................................................................................................................................................................................... 92 20 EMPLOYEE-RELATED EXPENSES ....................................................................................................................................................... 93 21 OTHER OPERATING EXPENSES ........................................................................................................................................................... 95 22 OTHER OPERATING INCOME ............................................................................................................................................................... 96 23 INTEREST INCOME .................................................................................................................................................................................. 96 24 INTEREST EXPENSE ................................................................................................................................................................................ 97 25 OTHER FINANCE EXPENSE – NET ...................................................................................................................................................... 97 26 CHANGES IN THE GROUP ..................................................................................................................................................................... 98 27 EARNINGS PER SHARE........................................................................................................................................................................... 98
6 28 PURCHASES OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS ........................................................... 99 29 CASH-FLOW FROM PURCHASES AND DISPOSALS OF SUBSIDIARIES AND BUSINESS UNITS ....................................... 99 30 CONTINGENT ASSETS AND LIABILITIES .........................................................................................................................................100 31 PURCHASE COMMITMENTS ..............................................................................................................................................................100 32 RELATED-PARTY TRANSACTIONS ...................................................................................................................................................101 33 REPORTABLE SEGMENTS AND INFORMATION ABOUT GEOGRAPHICAL AREAS .............................................................103 34 REGULATED MARKETS AND PROCEDURES ..................................................................................................................................108 35 EVENTS AFTER THE REPORTING PERIOD ......................................................................................................................................113 CONSOLIDATED BUSINESS / MANAGEMENT REPORT ........................................................................................................ 114 INTRODUCTION............................................................................................................................................................................................115 SUMMARY ON 2023 OPERATIONS ........................................................................................................................................................116 1 THE GROUP’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES ...................................................................117 2 CORPORATE GOVERNANCE .................................................................................................................................................................117 3 SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS .............................................................................................121 4 COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT .....130 5 RESEARCH AND DEVELOPMENT ........................................................................................................................................................131 6 REAL ESTATE, SITES OF OPERATION .................................................................................................................................................133 7 SUSTAINABILITY AND ENVIRONMENT PROTECTION ..................................................................................................................134 8 CORPORATE COMPLIANCE ..................................................................................................................................................................140 9 ECONOMIC ENVIRONMENTS, OUTLOOK AND TARGETS ............................................................................................................141 10 INTERNAL CONTROLS, RISKS AND UNCERTAINTIES .................................................................................................................142 11 ANALYSIS OF FINANCIAL RESULTS FOR 2023 .............................................................................................................................148 12 EVENTS AFTER THE REPORTING PERIOD ......................................................................................................................................152 Declaration.....................................................................................................................................................................................................153
7 CONSOLIDATED FINANCIAL STATEMENTS OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION (EU IFRS)
8 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT The Group complies with the requirements of European Securities and Markets Authority (ESMA) and publishes its consolidated annual report in XHTML format from January 1, 2021 and provide the consolidated financial statements prepared in accordance with IFRS as adopted by the European Union (EU) with Inline XBRL to make data machine- readable. The independent auditor’s report is a separate document. Due to the technical limitations inherent to the block-tagging of the consolidated financial statements according to the European single electronic format, the content of certain tags of the notes may not be rendered identically to the accompanying consolidated financial statements.
9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – ASSETS At December 31, At December 31, (in HUF millions) Note 2022 2023 ASSETS Cash and cash equivalents .................................................................... 4.2.1 12,861 13,514 Trade receivables within one year.......................................................... 4.2.2.1 171,583 199,249 Other current assets .............................................................................. 12.1 11,025 8,455 Derivative financial instruments contracted with related parties .............................................................................. 4.2.3 - 7,663 Other current financial assets ................................................................ 4.2.4 1,789 6,132 Contract assets ....................................................................................... 4.2.2.3, 18.4 18,586 17,358 Current income tax receivable ............................................................... 6 137 131 Inventories .............................................................................................. 7 25,344 32,428 241,325 284,930 Assets held for sale ................................................................................. 8 2 346 Total current assets ............................................................................... 241,327 285,276 Property, plant and equipment .............................................................. 9 475,708 476,892 Right-of-use assets................................................................................. 9, 17 123,739 121,960 Goodwill .................................................................................................. 10.4, 26.1 212,713 212,713 Other intangible assets........................................................................... 10 332,185 314,659 Deferred tax assets ................................................................................. 6.3.2 742 123 Trade receivables over one year ............................................................ 4.2.2.1 22,806 25,060 Derivative financial instruments contracted with related parties .............................................................................. 4.2.3 31,723 9,632 Other non-current financial assets......................................................... 4.2.4 3,796 4,381 Contract assets ....................................................................................... 4.2.2.3, 18.4 3,960 3,697 Other non-current assets ....................................................................... 12.2 7,718 9,438 Total non-current assets ....................................................................... 1,215,090 1,178,555 Total assets ............................................................................................ 1,456,417 1,463,831 Budapest, February 22, 2024 The accompanying Notes form an integral part of these consolidated financial statements.
10 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – LIABILITIES & EQUITY At December 31, At December 31, (in HUF millions) Note 2022 2023 LIABILITIES Financial liabilities to related parties ..................................................... 4.4.1 65,700 93,648 Derivative financial instruments contracted with related parties .............................................................................. 4.4.3 2,035 120 Lease liabilities........................................................................................ 4.5.1.2, 17.2.2 26,738 26,940 Trade payables ....................................................................................... 4.4.5 158,786 166,413 Other financial liabilities ......................................................................... 4.4.4.1 11,720 12,250 Current income tax payable ................................................................... 6 1,478 2,753 Provisions ................................................................................................ 13 2,959 2,808 Contract liabilities................................................................................... 18.4 13,153 13,818 Other current liabilities ........................................................................... 14 24,355 28,434 306,924 347,184 Liabilities held for sale ............................................................................ - - Total current liabilities........................................................................... 306,924 347,184 Financial liabilities to related parties ..................................................... 4.4.1 98,061 47,847 Lease liabilities........................................................................................ 4.5.1.2, 17.2.2 114,865 109,623 Corporate bonds ..................................................................................... 4.4.2 68,531 68,854 Other financial liabilities ......................................................................... 4.4.4.1 103,918 98,667 Deferred tax liabilities............................................................................. 6.3.2 14,299 11,714 Provisions ................................................................................................ 13 12,604 12,329 Contract liabilities................................................................................... 18.4 405 358 Other non-current liabilities ................................................................... 15 2,034 1,586 Total non-current liabilities ................................................................... 414,717 350,978 Total liabilities ........................................................................................ 721,641 698,162 EQUITY Common stock ........................................................................................ 100,580 97,156 Capital reserves ...................................................................................... 26,409 25,509 Treasury stock......................................................................................... (18,600) (18,600) Retained earnings ................................................................................... 546,659 585,866 Accumulated other comprehensive income .......................................... 36,691 33,536 Total equity of the owners of the parent .............................................. 691,739 723,467 Non-controlling interests ....................................................................... 16 43,037 42,202 Total equity ............................................................................................ 734,776 765,669 Total liabilities and equity ..................................................................... 1,456,417 1,463,831 Budapest, February 22, 2024 The accompanying Notes form an integral part of these Consolidated Financial Statements.
11 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended December 31, (in HUF millions, except per share amounts) Note 2022 2023 Mobile revenue ............................................................................................ 18 433,178 491,322 Fixed line revenue ....................................................................................... 18 237,019 271,915 SI/IT revenue................................................................................................ 18.2.2 76,472 86,135 Revenue ....................................................................................................... 746,669 849,372 Interconnect costs ...................................................................................... (23,973) (22,930) SI/IT service related costs .......................................................................... (54,336) (62,990) Impairment losses and gains on financial assets and contract assets.. 4.2.2.2 (9,210) (14,033) Telecom tax ................................................................................................. 19.1 (26,247) (25,460) Other direct costs ....................................................................................... 19.2 (210,385) (230,906) Direct costs ................................................................................................. (324,151) (356,319) Employee-related expenses ...................................................................... 20 (77,289) (83,688) Depreciation and amortization .................................................................. 9, 10 (138,768) (139,168) Other operating expenses .......................................................................... 21.1 (80,921) (97,296) Supplementary telecommunication tax ................................................... 21.2 (24,583) (29,963) Operating expenses ................................................................................... (645,712) (706,434) Other operating income ............................................................................. 22 8,221 5,058 Operating profit .......................................................................................... 109,178 147,996 Interest income ........................................................................................... 23 1,588 4,128 Interest expense .......................................................................................... 24 (17,596) (25,002) Other finance expense - net ....................................................................... 25 (8,801) (23,166) Net financial result ..................................................................................... (24,809) (44,040) Share of associates' and joint ventures' results ....................................... 11 26 - Profit before income tax ............................................................................ 84,395 103,956 Income tax ................................................................................................... 6.2 (17,321) (19,552) Profit for the period.................................................................................... 67,074 84,404 Other comprehensive income: Items to be reclassified to profit or loss in subsequent periods: Exchange differences on translating foreign operations ..................... 8,785 (5,261) Items not to be reclassified to profit or loss in subsequent periods: Revaluation of financial assets at FV OCI .............................................. 43 292 Other comprehensive income for the year, net of tax........................... 8,828 (4,969) Total comprehensive income for the period........................................... 75,902 79,435 Profit attributable to: Owners of the parent .................................................................................. 62,954 78,951 Non-controlling interests ........................................................................... 4,120 5,453 67,074 84,404
12 For the year ended December 31, (in HUF millions, except per share amounts) Note 2022 2023 Total comprehensive income attributable to: Owners of the parent ................................................................................. 68,453 75,796 Non-controlling interests .......................................................................... 7,449 3,639 75,902 79,435 Earnings per share (EPS) information: 27 Owners of the parent ................................................................................. 62,954 78,951 Weighted average number of common stock outstanding used for basic/diluted EPS ..................................................................... 975,575,178 942,867,447 Basic / diluted earnings per share (HUF) 64.53 83.73 Budapest, February 22, 2024 The accompanying Notes form an integral part of these Consolidated Financial Statements.
13 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31, (in HUF millions) Note 2022 2023 Cash flows from operating activities Profit for the period ...................................................................................................... 67,074 84,404 Depreciation and amortization ..................................................................................... 9, 10 138,768 139,168 Income tax expense ...................................................................................................... 6.2 17,321 19,552 Net financial result........................................................................................................ 24,809 44,040 Share of associates’ and joint ventures’ result............................................................. (26) - Change in assets carried as working capital ................................................................ (25,987) (34,318) Change in provisions..................................................................................................... (2,240) (825) Change in liabilities carried as working capital ............................................................ 19,498 14,157 Income tax paid ............................................................................................................ 6.4 (18,615) (17,817) Dividend received ......................................................................................................... 76 113 Interest and other financial charges paid* ................................................................... (21,229) (31,232) Interest received ........................................................................................................... 1,499 3,229 Other non-cash items ................................................................................................... (5,185) 2,279 Net cash generated from operating activities ........................................................... 195,763 222,750 Cash flows from investing activities Payments for property plant and equipment (PPE) and intangible assets................. 28 (121,217) (100,115) Proceeds from disposal of PPE and intangible assets ................................................. 1,121 570 Payments for subsidiaries and business units ............................................................. 29.1 - (67) Proceeds from disposal of subsidiaries and business units ........................................ 29.2 5,500 - Payments for other financial assets ............................................................................. (2,488) (15,264) Proceeds from other financial assets ........................................................................... 11,828 39 Net cash used in investing activities ........................................................................... (105,256) (114,837) Cash flows from financing activities Dividends paid to Owners of the parent and Non-controlling interests ..................... 4.4.4.3 (19,486) (33,942) Proceeds from loans and other borrowings ................................................................. 4.4.4.3 157,824 123,667 Repayment of loans and other borrowings .................................................................. 4.4.4.3 (137,980) (145,292) Proceeds from corporate bonds .................................................................................. 4.4.4.3 - - Repayment of lease and other financial liabilities ....................................................... 4.4.4.3 (77,608) (36,622) Treasury share purchase .............................................................................................. 4.4.4.3 (14,609) (14,609) Net cash used in financing activities .......................................................................... (91,859) (106,798) Exchange differences on cash and cash equivalents .................................................. 750 (462) Change in cash and cash equivalents ......................................................................... (602) 653 Cash and cash equivalents, beginning of period ......................................................... 13,463 12,861 Cash and cash equivalents, end of period .................................................................. 4.2.1. 12,861 13,514 *The amount of other financial charges paid is HUF 6,214 million in 2023 (in 2022 HUF 4,800 million). The accompanying Notes form an integral part of these Consolidated Financial Statements.
14 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY pieces in HUF millions Accumulated Other Comprehensive Income Shares of common stock Common stock Capital reserves Treasury stock Retained earnings Cumulative translation adjustment Revaluation reserve for FVOCI financial assets – net of tax Equity of the owners of the parent Non- controlling interests Total Equity (a) (a) (b) (c) (d) (e) (f) (g) Balance at January 1, 2022 ................................................. 1,042,742,543 104,275 27,379 (19,424) 509,473 30,759 433 652,895 40,080 692,975 Dividend declared to Owners of the parent (h) .................. - - - - (15,000) - - (15,000) - (15,000) Dividend declared to Non-controlling interests (i) ............ - - - - - - - - (4,492) (4,492) Treasury share purchase (j)................................................... - - - (14,609) - - - (14,609) - (14,609) Capital decrease with cancellation of treasury share (k) .. (36,941,191) (3,695) (970) 15,433 (10,768) - - - - - Transactions with owners in their capacity as owners..... (36,941,191) (3,695) (970) 824 (25,768) - - (29,609) (4,492) (34,101) Other comprehensive income .............................................. - - - - - 5,477 22 5,499 3,329 8,828 Profit or loss ............................................................................ - - - - 62,954 - - 62,954 4,120 67,074 Total comprehensive income............................................... - - - - 62,954 5,477 22 68,453 7,449 75,902 Balance at December 31, 2022 ........................................... 1,005,801,352 100,580 26,409 (18,600) 546,659 36,236 455 691,739 43,037 734,776 Dividend declared to Owners of the parent (h) .................. - - - - (29,459) - - (29,459) - (29,459) Dividend declared to Non-controlling interests (i) ............ - - - - - - - - (4,474) (4,474) Treasury share purchase (j)................................................... - - - (14,609) - - - (14,609) - (14,609) Capital decrease with cancellation of treasury share (k) .. (34,242,485) (3,424) (900) 14,609 (10,285) - - - - - Transactions with owners in their capacity as owners..... (34,242,485) (3,424) (900) - (39,744) - - (44,068) (4,474) (48,542) Other comprehensive income .............................................. - - - - - (3,318) 163 (3,155) (1,814) (4,969) Profit or loss ............................................................................ - - - - 78,951 - - 78,951 5,453 84,404 Total comprehensive income............................................... - - - - 78,951 (3,318) 163 75,796 3,639 79,435 Balance at December 31, 2023 ........................................... 971,558,867 97,156 25,509 (18,600) 585,866 32,918 618 723,467 42,202 765,669 Of which treasury stock ......................................................... (41,777,718) Shares of common stock outstanding ................................ 929,781,149 The accompanying Notes form an integral part of these Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(a) The total amount of issued shares of common stock of 971,558,867 (each with nominal value of HUF 100) is fully paid as at December 31, 2023. The number of authorized ordinary shares on December 31, 2023 is 971,558,867. Voting Rights and Voting The holder of each Series “A” ordinary share shall be entitled to one vote at the General Meeting of the Magyar Telekom Telecommunications Public Limited Company (the Company or Magyar Telekom Plc.). The names of shareholders and nominees who intend to participate at the General Meeting shall be registered in the Share Register on the second working day prior to the starting date of the General Meeting. The General Meeting shall adopt its resolutions by a simple majority vote except for resolutions on issues listed in the Articles of Association, which shall require at least a three-quarters majority of the votes cast. There is no limitation on the rights of non- resident or foreign shareholders to hold or exercise voting rights on the ordinary shares. There is no limitation of voting rights for ordinary shares in the Articles of Association. The Company has no shares assigned with special management rights. Transfer of Shares In order to transfer dematerialized shares, there must be a contract for transfer or other legal title and, in that context, the transferor’s securities account must be debited and the new holder’s securities account must be credited with the transferred dematerialized shares. The holder of dematerialized share shall be considered the holder of the securities account on which the dematerialized shares are recorded. The transfer of any Series “A” ordinary shares is not bound to any restriction or attainment of agreement.
(b) Additional paid-in capital represents the amount exceeding the nominal value of the shares that was received by the Company during capital increases.
(c) Treasury stock represents the cost of the Company’s own shares repurchased. When the Company or its subsidiaries purchase the Company’s equity shares, the consideration transferred, including any attributable incremental external costs, are deducted from the Equity of the owners of the parent as Treasury stock until they are re-sold or cancelled. When such shares are subsequently sold, the treasury share balance decreases by the original cost of the shares, thereby increasing equity, while any gains or losses are also recognized in equity (Retained earnings). Treasury stock transactions are recorded on the transaction date. The number of Treasury stock was 41,777,718 on December 31, 2023 and 43,078,833 on December 31, 2022.
(d) Retained earnings include the accumulated and undistributed profit of the Group. The distributable reserves of the Company under Hungarian law (Section 5 (b) 114/B of Act C of 2000 on Accounting relating to untied retained earnings available for the payment of dividends) at December 31, 2023 amounted to approximately HUF 592 billion (HUF 557 billion at December 31, 2022).
(e) Cumulative translation adjustment represents the foreign exchange differences arising on the consolidation of foreign subsidiaries. (f) Revaluation reserve for financial assets at FVOCI includes the unrealized gains and losses net of tax on equity instruments measured at Fair Value through other comprehensive income (see also Note 4.5.1).
(g) Non-controlling interests represent the Non-controlling shareholders’ share of the net assets of subsidiaries in which the Group has less than 100% ownership (Note 16).
(h) Dividends payable to the Company’s shareholders and to Non-controlling shareholders of the Group’s subsidiaries are recorded as a liability and debited against equity (Retained earnings or Non-controlling interests) in the Group’s financial statements in the period in which the dividends are approved by the shareholders.
(i) The amount of dividends declared to Non-controlling interests includes predominantly the dividends declared to the Non-controlling owners of Makedonski Telekom (MKT) and the Group’s other subsidiaries.
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(j) The Company repurchased own shares for HUF 14.6 billion through a share buyback auction on May 25, 2023 for the purpose of shareholders’ remuneration as approved on the Annual General Meeting on April 19, 2023 (in 2022 HUF 14.6 billion own shares were repurchased). The Company concluded repurchase transactions for 34,242,485 Magyar Telekom ordinary shares at an average price of HUF 443 per share.
(k) The Company’s common stock was decreased from HUF 100,580,135,200 to HUF 97,155,886,700 with the cancellation of 34,242,485 pieces of dematerialized series “A” ordinary shares (treasury shares) owned by the Company, each with the face value of HUF 100. The transaction amounted to HUF 14.6 billion decreased Common stock at nominal value and Capital reserves on pro-rata basis and Retained Earnings. The cancellation thus resulted in a rearrangement between the elements of the total Equity, but there was no change in total Equity. The decrease of share capital as part of shareholders’ remuneration was approved on the Annual General Meeting on April 19, 2023 and registered by the Court of Registry on June 28, 2023. Following the transaction the Company’s share capital consists of 971,558,867 pieces of dematerialized series “A” ordinary shares including treasury shares of 41,777,718 pieces, each with the face value of HUF 100.
Together with the approval of these financial statements for issue, the Board of Directors of the Company proposes a dividend distribution in total of HUF 41,561 million to be approved by the Annual General Meeting of the Company in April 2024. In 2023 the Annual General Meeting of Magyar Telekom Plc. approved HUF 29,459 million dividend. The actual amount of gross dividend per ordinary Magyar Telekom share for the business year 2022 was HUF 30.60. Dividend payment started on May 19, 2023.
The accompanying Notes form an integral part of these Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 ABOUT THE GROUP
1.1 About the Company Magyar Telekom Plc. with its subsidiaries form Magyar Telekom Group (Magyar Telekom or the Group). Magyar Telekom Plc. is the leading provider of telecommunications services in Hungary and Republic of North Macedonia and alternative service provider in Bulgaria and Romania. These services are subject to various telecommunications regulations depending on the countries of operations (Note 34). The Company was incorporated in Hungary on December 31, 1991 and commenced business on January 1, 1992. The Company’s registered seat is Könyves Kálmán krt. 36., 1097 Budapest, Hungary since November 1, 2018. Name of the Court of Registration and the registration number of the Company: Registry Court of the Budapest-Capital Regional Court, Cg. 01-10-041928. Magyar Telekom Plc. is listed on the Budapest Stock Exchange and its shares are traded on the Budapest Stock Exchange. Magyar Telekom’s American Depository Shares (ADSs) each representing five ordinary shares were also traded on the New York Stock Exchange until November 12, 2010, when the ADSs were delisted. Magyar Telekom terminated the registration of its shares and ADSs in the US in February 2012. The Company maintains its American Depositary Receipt program on a Level I basis. The ultimate controlling parent of Magyar Telekom is Deutsche Telekom AG (DT or DT AG) who fully consolidates Magyar Telekom Group. Deutsche Telekom Europe B.V. (Stationsplein 8, 6221 BT Maastricht, the Netherlands), a member of the Deutsche Telekom Group, is the direct owner of 63.55% of the Company’s issued shares. The consolidated financial statements of DT AG are available at DT AG’s website ( www.telekom.com/en). The Consolidated Financial Statements are prepared and presented in millions of Hungarian Forints (HUF), unless stated otherwise.
The Company’s Board of Directors (the Board) accepted the submission of these consolidated financial statements of the Company on February 22, 2024 to the Annual General Meeting (AGM) of the owners, which is authorized to approve these financial statements, but also has the right to require amendments before approval. As the controlling shareholders are represented in the Board of the Company that accepted the submission of these financial statements, the probability of any potential change required by the AGM is remote, and has never happened in the past. Persons authorized to sign the annual report: Tibor Rékasi - Chief Executive Officer, member of the Board (residence: Szentendre) Daria Aleksandrovna Dodonova - Chief Financial Officer, member of the Board (residence: Budapest)
In Magyar Telekom Plc., the accounting services are coordinated by Melinda Modok (certificate number: 18128. Area of speciality: IFRS entrepreneurial activity. Status: registered. Registration number: MK 199521. Residence: Budapest). The Company is subject to compulsory audit. The Company’s auditor is Deloitte Könyvvizsgáló és Tanácsadó Kft. (its register number is 01-09-071057, its taxation number is 10443785-2-42), the responsible person for carrying out the audit is Kornél Bodor (membership number at Chamber of Hungarian Auditors: 005343). The Group complies with the requirements of European Securities and Markets Authority (ESMA) and publishes its consolidated annual report in XHTML format from January 1, 2021 and provide the consolidated financial statements prepared in accordance with IFRS as adopted by the European Union (EU) with Inline XBRL to make data machine- readable. The Separate Financial Statements of Magyar Telekom Plc. and the Consolidated Financial Statements of Magyar Telekom Group are available at the Company’s registered office and on its corporate website. Magyar Telekom Plc.’s corporate website is: www.telekom.hu
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1.2 Composition of the Group At December 31, 2022 and 2023 the major operating subsidiaries of the Group were as follows:
Subsidiaries Functional Group interest in Activity
currency capital as at December
31, 2022 2023
Incorporated in Hungary: Telekom Rendszerintegráció Zrt., Budapest ............ HUF 100.00% 100.00% System integration and IT services KalászNet Kft., Budapest ............................................ HUF 100.00% 100.00% Telecom service provider Telekom New Media Zrt., Budapest ........................... HUF 100.00% 100.00% Interactive service provider of telecommunications applications Incorporated in North Macedonia: Makedonski Telekom A.D., Skopje (MKT) ................. MKD 56.67% 56.67% Telecom service provider Incorporated in Romania: Combridge S.R.L., Bucharest ...................................... RON 100.00% 100.00% Wholesale telecom service provider Incorporated in Bulgaria: Novatel EOOD, Sofia ..................................................... BGN 100.00% 100.00% Wholesale telecom service provider The Group’s interest in the capital of the above subsidiaries equals the voting rights therein. There is no significant entity in the Group that is not controlled even though more than half of the voting rights are held. All subsidiary undertakings are included in the consolidation.
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2 BASIS OF PREPARATION AND SUMMARY OF MATERIAL ACCOUNTING POLICIES
2.1 Basis of preparation
The consolidated financial statements of Magyar Telekom have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). All standards and interpretations adopted by the EU effective as at December 31, 2023 and applicable to Magyar Telekom had been adopted. These consolidated financial statements also comply with the Hungarian Accounting Act on consolidated financial statements, which refers to the IFRS as adopted by the EU. These consolidated financial statements were approved by the Company’s Board of Directors on February 22, 2024. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas in which assumptions and estimates are material to the consolidated financial statements, are disclosed in Note 3.
Financial statements are prepared under going concern assumptions, which means it is assumed the Company will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities.
2.1.1 Initial application of standards, interpretations, and amendments in the financial year The table below summarizes the Standards amended and the subject of the amendments effective on or after January 1, 2023 that could have an impact on Magyar Telekom’s accounting policies.
Pronouncement Title Applied by Changes Impact on the
Magyar presentation of
Telekom Magyar Telekom's
from results of
operations and
financial position
IFRS 17 and Insurance Jan 1, 2023 IFRS 17 governs the accounting for No material
Amendments to Contracts insurance contracts and replaces IFRS 4. impact.
IFRS 17 Deferral of first-time application of IFRS 17
to January 1, 2023. The amendments refer
to specific topics helping entities to
implement the standard and avoiding a
significant loss of useful information.
Amendments to Presentation of Jan 1, 2023 Disclosure of material accounting policy No material
IAS 1 Financial information instead of significant impact.
Statements accounting policies. In addition, IFRS
Practice Statement 2 has been amended.
Amendments to Accounting Jan 1, 2023 Introduced a definition of ‘accounting No material
IAS 8 policies, estimates’ and included other amendments impact.
Changes in to help entities distinguish changes in
Accounting accounting policies from changes in
Estimates and accounting estimates.
Errors
Amendments to Income Taxes Jan 1, 2023 Deferred Tax related to Assets and No material
IAS 12 Liabilities arising from a Single Transaction impact.
Amendments to Initial Jan 1, 2023 Transition option relating to comparative Not applicable.
IFRS 17 Application of information about financial assets
Insurance IFRS 17 and presented on initial application of IFRS 17,
contracts IFRS 9 – helping entities to avoid temporary
Comparative accounting mismatches between financial
Information assets and insurance contract liabilities, and
therefore improve the usefulness of
comparative information for users of
financial statements.
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Pronouncement Title Applied by Changes Impact on the
Magyar presentation of
Telekom Magyar Telekom's
from results of
operations and
financial position
Amendments to
IAS 12 Income Tax Reform – and exception to the accounting requirements continuing to assess
taxes Pillar Two Jan 1, 2023 for deferred taxes in IAS 12, so that an the impact of the
Model Rules entity would neither recognize nor disclose Pillar Two income
information about deferred tax assets and taxes legislation on
liabilities related to Pillar Two income its future financial
taxes. Magyar Telekom has applied the performance. See
exception not to recognize and disclose Note 6.1.2.
information about deferred tax assets and
liabilities related to the OECD pillar two
income taxes.
International Immediately The amendments introduce a temporary Magyar Telekom is 2.1.2 Standards, amendments and interpretations that are not yet effective as of December 31, 2023 and have not been adopted early by the Group and other expected changes for 2024 and 2025
Pronouncement Title To be Changes Expected impact on
applied by the presentation of
Magyar Magyar Telekom's
Telekom results of operations
from and financial
position
Standards adopted by the EU
Amendments to Presentation of Jan 1, Classification of Liabilities as Current or No material impact
IAS 1 Financial 2024 Non-current and Deferral of Effective Date. is expected.
Statements
Amendments to Lease Liability Jan 1, The amendments add subsequent No material impact
IFRS 16 Leases in a Sale and 2024 measurement requirements for sale and is expected.
Leaseback leaseback transactions that
satisfy the requirements in IFRS 15
Revenue from Contracts with Customers to
be accounted for as a sale.
Standards not yet adopted by the EU*
Amendments to Supplier Finance Jan 1, The amendments add a disclosure No material impact
IAS 7 Statement 2024 objective to IAS 7 stating that an entity is expected. Magyar
of Cash Flows and IFRS 7 required to disclose information about its supplier finance arrangements that enables Telekom is continuing to assess
Instruments: effects of those arrangements on the Supplier Finance
Disclosures entity’s liabilities and cash flows. In Arrangements.
addition, IFRS 7 was amended to add
supplier finance arrangements as an
example within the requirements to
disclose information about an entity’s
exposure to concentration of liquidity risk
Amendments to Lack of Exchangeability Jan 1, The IASB has issued amendments to IAS 21 Not applicable
IAS 21 The 2025 that will require companies to provide more
Effects of useful information in their financial
Changes in statements when a currency cannot be
Foreign exchanged into another currency.
Exchange Rates * For standards not yet adopted by the EU, the date of first-time adoption scheduled by the IASB is assumed for the time being as the likely date of first-time adoption.
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2.2 Consolidation
2.2.1 Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The existence and effect of potential voting rights that are presently exercisable or presently convertible are also considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are no longer consolidated from the date control ceases. The acquisition method of accounting is used to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition whereby costs directly attributable to the acquisition are expensed. The excess of the consideration transferred and the amount of any Non-controlling interest over the fair value of the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed is recorded as goodwill. If the consideration transferred and the amount of any Non-controlling interests is less than the fair value of the identifiable assets acquired and the liabilities assumed, the difference is recognized in the Profit for the period (Other operating income). The classification of transactions as a business combination must be made on a case-by-case basis. The Group may decide to apply or not to apply the concentration test separately for each transaction or event. A concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. In this case, the group of activities and assets is not a business. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group has maximum one year from the acquisition date to finalize the purchase price allocation. If applicable, the Group recognizes at the acquisition date a liability for any contingent purchase consideration. If the amount of contingent consideration accounted for as a liability changes as a result of a post-acquisition event (such as meeting an earnings target), the difference is recognized in accordance with other applicable IFRSs as appropriate rather than as an adjustment of goodwill. The Group attributes their share of losses to the Non-controlling interests even if this results in the Non-controlling interests having a deficit balance. In a step acquisition, the fair values of the acquired entity’s assets and liabilities, including goodwill, are measured on the date when control is obtained. Accordingly, goodwill is measured at the acquisition date as the difference between the fair value of any investment the business held before the acquisition, the consideration transferred and the fair value of the net asset acquired. In case of acquisitions where business combination takes place between companies under common control (i.e. with other Deutsche Telekom Group companies), the transaction is recorded either at fair value or at book value. In case of book value any gains, losses or differences between the book value and the sale-purchase price are recognized in equity. The consolidated financial statements include the results of subsidiaries acquired from parties under common control from the date of the closing of the transaction. A partial disposal of an investment in a subsidiary while control is retained is accounted for as an equity transaction with owners, therefore gain or loss is not recognized in profit or loss for such disposals. A partial disposal of an investment in a subsidiary that results in loss of control triggers re-measurement of the residual interest to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognized in Profit for the period (Other operating income). Inter-company transactions, balances and unrealized gains or losses on transactions between the Magyar Telekom Group companies are eliminated. Accounting policies of subsidiaries have been adjusted to ensure consistency with the policies adopted by the Group.
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2.3 Foreign currency translation
2.3.1 Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency), that is the Hungarian forint for Magyar Telekom Plc. and functional currencies for subsidiaries disclosed in Note 1.2. The consolidated financial statements are presented in millions of HUF, as the Group’s presentation currency is the Hungarian Forint.
2.3.2 Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Profit for the period (Other finance expense – net). 2.3.3 Group companies The income and financial position of all of the Group’s entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: ▪ For the initial consolidation of foreign subsidiaries acquired, their assets and liabilities at the acquisition date are incorporated into the consolidated financial statements after translating the balances into HUF using the exchange rate prevailing at the date of acquisition. The fair value adjustments resulting from the purchase price allocation and goodwill are accounted for in HUF for acquisitions before March 31, 2004, after which date these adjustments arising on consolidation are accounted for in the functional currency of the subsidiary. ▪ Assets and liabilities for each Statement of financial position presented are translated at the closing rate at the date of that Statement of financial position. ▪ Items of the Consolidated Statement of Profit or loss and other comprehensive income are translated at annual cumulated average exchange rates. ▪ All resulting exchange differences are recognized in the consolidated equity (Cumulative translation adjustment). When a foreign operation is fully or partially disposed of so that control is lost, exchange differences that were recorded in equity until the date of the sale are recognized in the other operating profit for the period as part of the gain or loss on sale.
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2.4 Macroeconomic environment Management continuously monitors the progress in the Hungarian economic environment and the effect of the wars, particularly the macroeconomic tendencies and current market conditions. The Russian-Ukrainian war has had a significant negative impact on the global economic outlook. Extensive sanctions have been imposed by the European Union on Russia in response to its aggression. In the previous financial year, Hungary faced high inflation and weakening of the forint above than the average rate in the Central European Region. During 2023, this showed a downward trend. The National Bank of Hungary introduced interventions during 2022 including gradual increase of base rate in Hungary to protect the forint and limit the inflation. In 2023, the inflation has decreased, however, it is still high in the European Union. The National Bank of Hungary started reducing the base rate. The Israel-Hamas war currently has no significant impact on the Group’s operations. However, this could cause disruption to current trade routes resulting in material and goods shortages. In May 2022 the government declared state of energy emergency and initiated additional corrective actions to keep the Central Budget in balance. In response to the consequences of the war, the energy shortage and dramatic increase in energy prices across Europe, in 2022, the government announced targeted measures such as fixing prices of basic consumption goods, cap on residential gasoline price, partial termination of caps on residential gas and electricity prices in case of usage above the average consumption level, further extension of loan moratorium and interest stop. Most of these actions have been phased out over the course of 2023. The cap on residential gasoline price was ceased in December 2022. The price fixing of basic consumption goods was cancelled from August 1, 2023 and changed to compulsory discounts. The interest stop has been extended in 2023 and expected to be terminated in the second quarter of 2024. In addition to the above, the introduction of the supplementary telecommunication tax in 2022 put significant pressure on the profitability of the Group. In September 2023, the Magyar Telekom Plc. signed a Memorandum of Understanding with the Hungarian Government for the Digital Transformation of Hungary. The Government of Hungary intends to support fixed line gigabit internet network, 5G coverage developments and ICT investments, among other things, through the review of sector specific tax rules and the abolition of utility tax payment obligation of electronic telecommunication providers from January 2024, and the abolition of the supplementary telecommunication tax from January 2025. The Company is committed to build gigabit-capable fixed network covering an additional 1 million homes and businesses in 4 years, making the fixed gigabit-capable network infrastructure available to 4.5 million Hungarian homes and businesses by the end of 2027. Besides, the Company will also accelerate the rollout of 5G coverage, resulting in an increase to close to 99% population-based outdoor 5G coverage by 2026. In order to fulfill the above commitments, the Company intends to spend an overall HUF 123 billion on its fixed and mobile network development within the period of 2024-2027. The rollout of the fibre network continued throughout 2023, resulting in 80% coverage of gigabit-capable access points within the fixed network. In Hungary, there is uncertainty regarding further future funds coming from the European Union and around the government’s actions to address the higher-than-expected government deficit. Additionally, the industrial output is falling. These can impact the economy and GDP growth going forward. The inflationary environment and the fluctuation of the forint put increasing pressure on the Group’s costs, while a potential economic downturn could negatively impact the Group’s topline performance. Yet the Group remains committed to focusing on the delivery of its strategic objectives. The management closely monitors the recoverability of assets; therefore the Company has conducted the goodwill impairment test quarterly during the year and paid more attention to monitor the solvency of customers, taking into account the emerging macroeconomic impacts. See details in Notes 3.2 and 3.3. Altogether, the management has not identified any events which would threaten the going concern of the Group’s operations, and no major adverse changes are expected in the long term.
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2.5 Climate disclosures The main objective of the new ten-year sustainability strategy launched in 2021 is to enable Magyar Telekom Plc. to remain the country’s leading sustainable company by bringing digitalization to the service of the development of people, families and businesses, and the protection of the environment. The climate-related key performance indicators (KPIs) are incorporated into the remuneration system for CEOs and deputy CEOs and certain senior management categories. As part of its sustainability strategy, the Group focuses on technological modernization, such as optical transition and 3G network retirement. These development plans are included in the annual useful life review, therefore no significant impairment recognition has been made. The asset retirement obligation (ARO) is part of the operational activity, which is defined in line with the asset retirement plans and is reviewed annually, and evaluated in respect of any additional regulatory requirement, if any, see Note 13.2. Magyar Telekom's new climate strategy focuses on reduction of fossil fuel based energy sources, which is in line with the European Green Deal. Therefore, Magyar Telekom Plc., Telekom Rendszerintegráció Zrt. and Makedonski Telekom A.D. have already covered fully its electricity consumption from renewable energy since 2021. In 2022, the European economic environment changed significantly, as a result of which the procurement of renewable energy from the domestic market became a priority task, for this purpose a short-term physical power purchase agreement (PPA) was concluded in 2022, which, from 2023, partially replaces the purchase of renewable energy certificates that were previously considered a sole source. The PPA is a 3-year, fixed-price contract with a Hungarian solar park for an expected electrical output of approximately 13.2 GWh per annum. Magyar Telekom applies the ‘own use’ exemption in paragraph 2.4 of IFRS 9 and therefore accounts for the PPA and the guarantees of origins as an executory contract. Both the purchase of renewable energy under the PPA and guarantees of origins are recognized in Other operating expenses as energy costs. Magyar Telekom Plc.’s emission reduction commitment pledged in 2018, approved by the Science Based Target initiative (SBTi), which were replaced by more ambitious targets in 2019 in response to the IPCC 1.5°C report, have become the main focus of the Group's strategy. These commitments until 2030 were kept as follows: ▪ reduction of Scope 1-2 emissions by 84 % compared to 2015; ▪ reduction of Scope 3 emissions by 30 % compared to 2017. The Group can only maintain its market leadership if it can react promptly to external market, geopolitical and environmental changes. Due to external factors (fuel price and availability of fossil fuels) and internal transformation processes, as well as detailed mapping of emission sources (e.g. emergency power generation, fugitive emissions from refrigerants), the scope 1-2 strategy of Hungarian member companies has been rebuilt, with a base year harmonized with the SBT commitment. Detailed feasibility studies have been started to implement the new strategy. Market-based emission reduction of 80% seems feasible by 2030 with the extended resources for Magyar Telekom Plc. and Telekom Rendszerintegráció Zrt. in total. Risks The Group is exposed to the risk of future energy price uncertainty. The growing demand for green energy in the market, combined with the current macroeconomic situation, could lead to an increase in energy prices and renewable energy certificate prices. The Group remains committed to its environmental strategy and will continue its work by seeking new opportunities, such as concluding long-term power purchase agreements (PPAs). Within the framework of the Business Continuity Management System (BCM), the Group has identified critical climate risks (flooding, heatwaves) for which it has developed an action plan. All incidents that occurred were investigated and analyzed, but network damage did not reach significant levels. This analysis could help Magyar Telekom become more adaptable by modernizing its infrastructure. To meet emission reduction targets, including the Intergovernmental Panel on Climate Change (IPCC) target of 1.5°C, regulators may set stricter emission reduction targets in the future, which could result in higher spending for the Group. Thanks to Magyar Telekom's forward-looking climate strategy, it enjoys an advantage over its competitors, even with stricter regulations. Based on these analyses, Magyar Telekom does not expect a significant impact on its business model or on the presentation of its operating profit or financial position. For more information, see Magyar Telekom's Sustainability Report (https://www.telekom.hu/about_us/society_and_environment/sustainability_reports )
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3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the prevailing circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are outlined below.
3.1 Useful lives of assets The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. Management believes that this is a critical accounting estimate since it involves assumptions about technological development in an innovative industry and heavily dependent on the investment plans of the Group. Further, due to the significant weight of depreciable assets in total assets, the impact of any changes in these assumptions can be material to the financial position, and results of operations. See Notes 9.3 and 10.3 for the changes made to useful lives in 2023. The Group is constantly introducing a number of new services or platforms. In the frame of that, Magyar Telekom focuses on investment into fixed (optical) and mobile networks to meet continued strong demand for mobile data, broadband and TV services. Continued the development of 5G platforms, the network modernization (fix and mobile) program and investments into the customer premise equipment (CPE). In case of the introduction of such new services or platforms, the Group conducts a revision of useful lives of the already existing platforms, but in the vast majority of the cases these new services or assets are designed to co-exist with the existing platforms, not necessarily resulting in changing over to the new technology. Consequently, the useful lives of the existing platforms usually do not require shortening.
3.2 Estimated impairment of goodwill Goodwill is not amortized, but tested for impairment annually in the last quarter of the year and in the other quarters quick tests are executed. During the preparation of the financial statement of 2023 the management updated its goodwill impairment test by considering updated internal and external information such as book values, foreign exchange rates, weighted average cost of capital and the possible effects of macroeconomic tendencies. Similarly to 2022, no impairment needed to be recognized in 2023. Goodwill is allocated to the operating segments of the Group: MT-Hungary and North Macedonia. For additional information of operating segments, see Note 33. The recoverable amounts of the operating segments are calculated based on fair value less cost of disposal determined by the discounted projected cash flows of the operating segments over the next ten years with a terminal value, as the payback period of investments in the telecommunications industry covers longer period. The impairment test is based on reasonable and supportable assumptions that present the management’s best estimate incorporating market participants’ assumptions and expectations. This is highly judgmental, which carries the inherent risk of arriving at materially different recoverable amounts if estimates used in the calculations proved to be inappropriate. In the calculations, Magyar Telekom uses different weighted average cost of capital (WACC) and estimated perpetual growth rate (PGR) depending on the country of operations and the characteristics of the markets the Group’s segments operate in. Costs of certain central functions that are not cross charged are also considered in the fair value calculations when conducting the goodwill impairment tests. The costs of these central functions are allocated to the operating segments based on the segments’ revenue share of the Group’s total revenue. Details of the carrying amounts of goodwill allocated to the segments are presented in Note 10.4.
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In 2023 and 2022 the following WACC and PGR rates have been applied in the fair value calculations for the goodwill impairment test. 2022 2023
WACC
MT-Hungary ................................................................................................ 11.20% 8.46%
North Macedonia ........................................................................................ 8.55% 8.68%
PGR
MT-Hungary ................................................................................................ 1.0% 1.0%
North Macedonia ........................................................................................ 1.0% 1.0%
Sensitivity test During the sensitivity analysis the management assessed the effects of reasonable change in the main factors to the impairment calculation based on forward-looking projections, including financial projections for inflation and base rate whether it would result in an impairment of the goodwill allocated to either operating segment. The following factors are considered: WACC, PGR, Free Cash flow and CAPEX, each analyzed separately. Variation in WACC rate generate major impact for the fair value less cost of disposal of the segments. The WACCs are determined by ▪ the capital asset pricing model (CAPM) using ▪ the average of the peer group’s betas ▪ 10-year zero-coupon government bond yields ▪ debt ratio in line with the usual indebtedness of listed peer telecommunications companies WACC rate is determined basically by the 10-year-zero-coupon government bond yield. Estimation of the potential change of a 10-year zero-coupon yield is difficult. Contrary to last year it has decreased by 2.75 points in MT-Hungary segment and increased by 0.12 points in North Macedonia segment in 2023 (2022: increase by 3.26 point and 3.41 points respectively) due to the recent economic environment explained in Note 2.4. Assessment of possible tendency of WACC indicators is highly judgmental, still considering 1-2% variation no additional impairment should be recognized. PGRs used are in line with the long-term average growth rate for the segments. Significant variation in PGR is not projected to be reasonable therefore no sensitivity is performed on this parameter. Projecting fluctuation of future cash flows is a challenging task in the current macroeconomic surroundings which may cause solvency issues at residential and business customers. 5% fluctuation in free cash flow had been investigated and concluded with no indication to any impairment recognition. CAPEX budget is defined and closely monitored by the Group, the future CAPEX spending can be higher, therefore 5% variation has been used in the sensitivity test which has not resulted in any need for recognition of impairment on goodwill allocated to any of the segments. Altogether, the management believes that any reasonably possible change in the above tested key assumptions on which the recoverable amount of the CGU’s is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the related CGUs.
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3.3 Estimated impairment of trade and other receivables
Impairment is calculated for accounts receivable based on estimated losses resulting from the inability of customers to make required payments. For the largest customers and other telecommunications service providers, impairment is calculated on an individual basis, while for other customers it is estimated on a portfolio basis – see classification in Note 4.1.2 –, for which the base of estimate is the aging of accounts receivable balance and historical write-off experience, customer credit-worthiness and recent and expected changes in customer payment terms and forward-looking information (e.g. unemployment rates, credit crisis, inflation, national and international statistics, macroeconomic surroundings and publications of the National Bank of Hungary). In addition, the nature of the business (residential, business, fixed line, mobile, internet, cable TV, etc.) is also considered and the environment in which the Group’s entities operate in the various markets. The above factors of impairment calculation are reviewed annually, and changes are made to the calculations when necessary. The assessment of the correlation between historically observed default rates, forecasted economic conditions, and expected impairment is considered as a critical estimate.
According to the best estimation based on the annual reassessment the management concluded that there is no reason to modify the bad debt ratios used previously for the portfolios. Furthermore, the management assessed the modification of the bad debt ratio for the undue installment receivables based on historical data and forward-looking information. In this context, the management evaluated the effects of the rising uncertainties of the international environment (e.g. the prolonged Russian-Ukrainian war) on the Hungarian economy, the termination of the previously introduced interest stop, the Hungarian energy dependency and the decreasing but still high inflation which may have a negative impact on the solvency of the households and the monetization of installment receivables. The management concluded that HUF 3.5 billion additional impairment loss was required on this sub-group of debtors. The annual revision also revealed that no other asset classes have been impacted materially. A sensitivity analysis has also been prepared that shows how much impairment would have been recognized on the undue installment receivables as at December 31, 2023 if the estimated non-payment rate would change. According to this, the financial effect of 1% and 2% improvement (-) and deterioration (+) of the estimated non-payment rate would increase or decrease by HUF 0.9 billion and by HUF 1.9 billion the calculated impairment of these trade receivables (current and non- current part). If the financial condition of customers were to deteriorate, actual write-offs of currently existing receivables may be higher than expected and may exceed the level of the impairment losses recognized so far. The management pays particular attention to the continuous monitoring of the solvency of the customers in the future and would take additional corrective actions if it is necessary. Please see further information Notes 4.1.1, 4.2.2.2 and 5.1.2.
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3.4 Contracts with customers The Group applies the guidance to a group of contracts with similar characteristics instead of to a single contract with a customer. The characteristics considered include mainly the business segment of the customer, business model of the contract, and whether the contract is committed or not. Contract assets are recognized for unbilled amounts typically resulting from sales under long-term contracts when revenue recognized exceeds the amount billed to the customer in that period. This is a temporary difference so that revenue recognized and revenue billed are the same by the end of the commitment term. The amount of the contract assets is determined considering the estimated churn rate, average contract cancellation rates (in first 14 days), estimated penalty rates of the relevant group of contracts and effective interest rate. Contract assets are released monthly – in line with revenue from invoiced services to customers – during the minimum contract term of the relevant group of contracts. Furthermore, the Group recognizes assets for costs incurred in connection with the signing of customer contracts which would not have been incurred if the customer contract had not been concluded, along with costs to fulfill a contract. Capitalization is subject to the expectation that those costs will be recovered by future revenue resulting from the contract. Costs of obtaining a contract with a customer generally include sales commissions in both direct and indirect distribution channels (selling and marketing costs, bid and proposal costs, sales commissions, and legal fees). Capitalizing incremental costs of obtaining a contract does not only refer to contracts concluded with a new customer but also to contract renewals. Costs of obtaining a contract with a customer recognized on fix and mobile telecommunication services, are amortized on a portfolio basis over the period that the related goods or services are transferred to the customer which is ▪ in case of uncommitted contracts – without loyalty period – based on historical customer retention period (e. g. average period of usage of prepaid cards, postpaid, broadband and IT services) and ▪ in case of committed contracts – with a loyalty period of 12-24 months – the commitment period is considered as amortization period (e.g. postpaid, broadband, IT services and bundled sales of equipment and services). The Group decided not to use the practical expedient of expensing the incremental costs of obtaining a contract immediately, which are amortized over a period of one year or less. Costs to fulfill a contract with a customer may include installation costs that are not distinct from other services provided in the contract, e.g. cabling activities, materials for internet and TV services. The Group has decided to apply IFRS 15.95 and should capitalize these costs as cost to fulfill a contract which are amortized in direct cost over the useful life of the contracts.
See Notes 4.2.2.3, 12.2 and 18.4 for the amount of contract assets, contract liabilities and contract costs.
3.5 Leases – estimating the incremental borrowing rate and assessment of extension and termination options At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate. The incremental borrowing rate reflects the main risks of the lease arrangements in a specific country and is provided for each year up to a maturity of 30 years. A change in the interest rate is only applicable when after initial recognition the contract is modified, or a reassessment is necessary which causes a change in the interest rate. Generally, Magyar Telekom uses the lessee’s incremental borrowing rate. Magyar Telekom never uses negative interest rates. Any negative interest rates will be capped at an amount of zero. The Group has several lease contracts that include extension and termination options. These options are negotiated by management to provide flexibility in managing the leased-asset portfolio and align with the Group’s business needs. Management exercises significant judgement in determining whether these extension and termination options are reasonably certain to be exercised. Extension options (or periods after termination options) are only included in the lease term if The Group is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The threshold for a “reasonably certain” exercise is lower than “virtually certain” and higher than “more likely than not.” For further information see Note 17.2.2.
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4 FINANCIAL INSTRUMENTS A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets of the Group include:
▪ cash and cash equivalents,
▪ equity instruments of another entity and
▪ to receive cash (trade receivables) or another financial asset from another entity or ▪ to exchange financial assets or financial liabilities with another entity under conditions that are potentially
▪
favorable to the entity (derivatives)
▪ a contract that will or may be settled in the entity’s own equity instruments and is a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own
▪
equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another
▪ financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
Financial liabilities of the Group include liabilities that ▪ originate from contractual obligations ▪ to deliver cash or another financial asset to another entity (non-derivatives); or ▪ to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity (derivatives) or ▪ a contract that will or may be settled in the entity’s own equity instruments and is ▪ a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; ▪ or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
IFRS 9 also applies to those contracts to buy or sell non-financial items which may be settled net in cash or other financial instruments (net settlement), except if those contracts were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Group's expected purchase, sale or usage requirements (i.e. own use contracts). The provisions of other Standards such as IAS 2 and IAS 37 apply to own use contracts. Contracts originally entered into in accordance with the Group's expected purchase, sale or usage requirements, which do not fulfill the own use requirements during the term of the contract also fall within the scope of IFRS 9 from that date. Relevant cases of application at Magyar Telekom Group are contracts for the physical purchase of electricity and renewable energy certificates. Sales of purchased electricity or renewable energy certificates and economically comparable transactions (e.g. close outs) generally result in the contracts in question being classified as derivatives and recognized at fair value through profit or loss. This applies accordingly if unusual contractual clauses are to be agreed that could lead to the separation of derivatives (e.g. embedded derivatives), such as complex price formulas or volume options in favor of the contractual partner.
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4.1 Financial assets – accounting policies Group classifies its financial assets on the basis of both: ▪ the entity's business model for managing the financial assets and ▪ the contractual cash flow characteristics of the financial asset in the following categories: ▪ at amortized cost if both of the following conditions are met: ▪ the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and ▪ the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. ▪ at fair value through other comprehensive income (FVOCI) if both of the following conditions are met: ▪ the financial asset is held within a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets and the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the
▪
principal amount outstanding.
▪ at fair value through profit or loss (FVTPL) unless it is classified in the previous categories. Also IFRS 9 4.1.4 provides the option to measure particular investments in equity instruments at fair value through other comprehensive income (OCI option). Changes in value are then recognized immediately and in full in other comprehensive income. For the purpose of the above classification: ▪ principal is the fair value of the financial asset at initial recognition ▪ interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. Standard purchases and sales of financial assets are recognized on the settlement-date, on the date when the financial asset is actually settled ('settlement date accounting'). Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the Profit for the period.
Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred. Financial assets have been transferred when the contractual rights to receive cash flows of the financial assets have been transferred or the contractual rights to receive cash flows of the financial assets have been retained but there is a contractual obligation to pay the cash flows to one or more recipients in an arrangement compliant with the conditions set out by IFRS 9. Any gains or losses on derecognition are recognized in Profit for the period and are calculated as the difference between (a) the sum of the consideration received and any cumulative gain or loss that had been recognized in other comprehensive income and (b) the carrying amount derecognized with an exception for equity instruments for which the Group exercises the option of measurement at Fair Value through other comprehensive income in which case gains or losses are recognized directly to retained earnings.
4.1.1 Impairment of financial assets Depending on the business model of the Group and the characteristics of the contractual cash flows of the financial assets, financial assets are subsequently measured at amortized cost, at fair value through other comprehensive income or at fair value through profit or loss. A loss allowance must be recognized for financial assets measured at amortized cost and at fair value through other comprehensive income except when the OCI option was applied. The loss allowance must be recognized through profit or loss and reduces the carrying amount of the relevant financial asset measured at amortized cost; while in the case of financial assets measured at fair value through other comprehensive income where applicable, the corresponding offsetting entry is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset. Loss allowances must also be recognized for lease receivables as defined in IFRS 16, contract assets as defined in IFRS 15, financial guarantee contracts and loan commitments relating to loans bearing an off-market interest rate.
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If the credit risk arising from the financial asset has increased significantly since initial recognition, the loss allowance must be measured at an amount equal to the lifetime expected credit losses. Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of a financial instrument. If the credit risk arising from the financial asset has not increased significantly since initial recognition, the loss allowance must be measured at an amount equal to the 12-month expected credit losses. The 12-month expected credit losses represent the total expected credit losses that result from default events on a financial instrument that are possible within 12 months after the reporting date, weighted by the likelihood that a default event will occur during that period. Based on the changes in credit risk, it must be assessed at each reporting date whether the current loss allowance must be measured at an amount equal to the lifetime expected credit losses based on historical data and forward-looking considerations driven by the expected macroeconomic tendencies (unemployment rates, credit crisis, inflation, national and international statistics, governmental intervention, publications of the National Bank of Hungary ) or at an amount equal to the 12-month expected credit losses in accordance with the criteria above. Indicators that may sign a significant increase in the credit risk: ▪ Contractual payments are more than 30 days past due ▪ Change in external/internal rating ▪ Changes in market conditions that could influence payment obligations ▪ Financial difficulties of the borrower that significantly alter its creditworthiness ▪ Adverse changes in business, financial, or economic conditions, i.e. increase in interest rates or unemployment rates Indicators for default event support the uncollectible classification in credit risk: ▪ The financial asset is more than 90 days overdue ▪ The counterparty repeatedly fails to meet payment obligations and the service is blocked (contract was not yet terminated) ▪ The counterparty is over the credit limit with unpaid invoices and fails to pay despite repeated demands ▪ The counterparty applies for insolvency protection proceedings ▪ In addition to the above quantitative aspects, qualitative aspects should also be taken into account in the evaluation, such as e.g. non-compliance with covenants The simplified and the general approaches are to be applied to assess and account for credit losses. ▪ Simplified approach All financial instruments underlying simplified approach are measured with lifetime expected credit loss based on historical data and forward-looking considerations driven by the expected macroeconomic tendencies. Therefore, except for insolvency, neither any indicators for increase in credit risk nor any default events are relevant within the simplified approach. The simplified approach is applicable for trade receivables, contract assets and lease receivables without a significant financial component. The Group has chosen to use the simplified approach for these receivables with a significant financial component as well. ▪ General approach According to the expected credit loss model the financial instruments are classified into three buckets. The classification into the three buckets is based upon the changes of the credit risk for the financial asset. A relative credit risk model is used for the evaluation of an increased credit risk. The significant increase of credit risk in comparison to the initial recognition is reflected in the transfer of the financial instrument between the buckets. According to the expected credit risk model the impairment is determined differently for the three buckets. The impairment for financial instruments in bucket 1 is calculated based upon the 12-months expected credit loss. The impairment for financial instruments in bucket 2 and 3 is calculated based upon the lifetime expected credit losses. The general approach is applied for bank accounts, factoring receivables, other financial receivables and employee loans, which financial instruments are classified into bucket 1. Factoring of trade receivables is generally without recourse that results in derecognition of trade receivables and recognition of other receivables from factoring. For further information see Note 4.2.2.1
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4.1.2 Financial assets measured at amortized cost The following items are assigned to this category:
▪ cash and cash equivalents;
▪ bank deposits over three months;
▪ trade receivables;
▪ other receivables.
Financial assets at amortized cost are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method, relevant only for the receivables with long-term maturity, considered to be not material for financial assets within one year. Cash and cash equivalents Cash and cash equivalents include cash on hand and in banks, and all highly liquid deposits and securities with original maturities of three months or less and exclude all overdrafts. Bank deposits with original maturities over 3 months Bank deposits with original maturities over 3 months include bank deposits and other liquid deposits and securities with original maturities over three months.
Trade receivables Receivables with similar credit risk characteristics assessed collectively for impairment, based on business segments (residential, business, wholesale and other category), type of service delivered (telco and SI/IT services), installment receivables and governmental institutions including local governments. Impairment and subsequent recoveries of amounts previously written off are accounted for against the period’s as Impairment losses and gains on financial assets and contract assets as part of Direct costs in the statement of Profit or loss statement.
4.1.3 Financial assets at fair value through other comprehensive income (FVOCI) The “financial assets at fair value through other comprehensive income” measurement category includes the following financial assets: ▪ listed and unlisted equity instruments that are neither fully consolidated nor included using the equity method in the consolidated financial statements, not held for trading and OCI option has been applied; ▪ debt instruments within a business model whose objective is achieved by both collecting contractual cash flows that are solely payments of principals and interests and selling financial assets. Equity instruments at fair value through other comprehensive income where OCI option was applied The OCI option may only be applied for the equity instrument in its entirety, and only at initial recognition of the equity instrument in question. In the event of exercise, measurement does not give rise to effects on profit or loss. However, dividends are recognized in profit or loss. Equity instruments at fair value through other comprehensive income are initially recognized at fair value and are also subsequently carried at fair value. The unrealized changes in the fair value of financial assets at fair value through other comprehensive income are recognized in equity, in the Revaluation reserve for FVOCI financial assets. When equity instruments classified as financial assets at fair value through other comprehensive income are sold, the accumulated fair value adjustments recognized in equity before are recognized directly to retained earnings. Debt instruments at fair value through other comprehensive income The Group does not classify any financial assets as a debt instruments at fair value through other comprehensive income based on the SPPI test.
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4.1.4 Financial assets at fair value through profit or loss (FVTPL) Financial instruments which do not meet the conditions set out to be initially classified either at amortized cost or at fair value through other comprehensive income must be measured at fair value through profit or loss. The “financial assets at fair value through profit or loss” measurement category includes the following financial assets: ▪ Debt instruments that are designated as “at fair value through profit or loss” using the fair value option. ▪ Equity instruments acquired for the purpose of selling immediately or in the near term and thus classified as “held for trading” and equity instruments not held for trading where the OCI option has not been applied. ▪ Derivative financial assets. ▪ Debt instruments not fulfilling conditions of either financial assets at amortized cost or financial assets at fair value through other comprehensive income. Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are recognized in the profit or loss in the period in which they arise.
4.2 Financial assets in the statement of financial position
4.2.1 Cash and cash equivalents Cash and cash equivalents include cash on hand and in banks, and all highly liquid deposits and securities with original maturities of three months or less and exclude all overdrafts. These financial assets are exposed to credit risks, for which see more details in Note 5.1.2. Based on the impairment test no impairment had to be recognized for any of these balances in the reported years. 12.31.2022 12.31.2023 Cash on hand ............................................................................................................... 296 340 Cash in bank (demand deposits) ............................................................................. 12,356 12,829 Bank deposits with original maturities less than 3 months................................ 209 345 Cash and cash equivalents .............................................................................. 12,861 13,514 Average interest rates 12.31.2022 12.31.2023 Cash on hand ............................................................................................................... 0.00% 0.00% Cash in bank (demand deposits) ............................................................................. 0.52% 0.22% Bank deposits with original maturities less than 3 months................................ 0.05% 0.00% Average interest rate ...................................................................................... 0.50% 0.20% Cash and cash equivalents by currency 12.31.2022 12.31.2023 EUR................................................................................................................................ 6,495 5,574 MKD .............................................................................................................................. 2,335 4,938 HUF ............................................................................................................................... 2,261 2,136 RON ............................................................................................................................... 1,278 772 USD ............................................................................................................................... 296 21 Other ............................................................................................................................. 196 73 Total ................................................................................................................. 12,861 13,514 Cash and cash equivalents by country of location 12.31.2022 12.31.2023 North Macedonia ........................................................................................................ 7,980 9,990 Hungary ........................................................................................................................ 3,274 2,458 Other countries ........................................................................................................... 1,607 1,066 12,861 13,514
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4.2.2 Trade receivables and contract assets 4.2.2.1 Trade receivables – carrying amounts The carrying amounts of trade receivables are shown net of impairment losses charged as of the financial statement dates. 12.31.2022 12.31.2023 Trade receivables from third parties ...................................................................... 163,590 191,446 Trade receivables from Deutsche Telekom Group companies ......................... 7,993 7,803 Trade receivables within one year .................................................................. 171,583 199,249 Trade receivables over one year.............................................................................. 22,806 25,060 Total trade receivables .................................................................................... 194,389 224,309 Age profile of Trade receivables The following tables show the age profile of the Group’s gross trade receivables by country of operation by days
outstanding.
12.31.2023 Hungary North- Other Total
Macedonia countries
- of which not past due ........................... 190,856 17,272 2,371 210,499
within one year ........................... 164,230 14,773 2,371 181,374
over one year .............................. 26,626 2,499 - 29,125
- of which past due by
less than 30 days ....................... 20,071 2,399 289 22,759
30–60 days ................................. 4,632 590 26 5,248
61–90 days ................................. 2,025 327 31 2,383
91–180 days .............................. 3,469 732 36 4,237
181–360 days ............................ 3,286 762 1 4,049
over 360 days ............................. 3,901 11,321 41 15,263
- customers under bankruptcy ............. 946 476 - 1,422
Gross amount .......................................... 229,186 33,879 2,795 265,860
12.31.2022 Hungary North- Other countries Total
Macedonia
- of which not past due ............................ 163,674 18,793 1,756 184,223
within one year ........................... 141,721 15,204 1,756 158,681
over one year .............................. 21,953 3,589 - 25,542
- of which past due by
less than 30 days ....................... 14,067 2,418 59 16,544
30–60 days ................................. 3,347 470 48 3,865
61–90 days ................................. 1,078 229 56 1,363
91–180 days .............................. 1,759 390 21 2,170
181–360 days ............................ 1,627 539 28 2,194
over 360 days ............................. 4,348 11,987 279 16,614
- customers under bankruptcy .............. 662 516 - 1,178
Gross amount .......................................... 190,562 35,342 2,247 228,151
The vast majority of trade receivables is impaired on a portfolio basis. The vast majority of past due trade receivables is partly or fully impaired depending on the period of delay of payments.
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4.2.2.2 Impairment losses of trade receivables and contract assets The table below shows the impairment losses and changes of trade receivables based on the lifetime expected credit losses therein for 2022 and 2023. 12.31.2022 12.31.2023 Impairment loss, beginning of period .................................................................... 31,335 33,762 Charged to expense – net (included in Direct costs) .......................................... 7,031 13,611 Translation difference ............................................................................................... 1,052 (593) Utilized (a) .................................................................................................................... (5,656) (5,229) Impairment loss, end of period ....................................................................... 33,762 41,551 (a) Utilized means reversed on derecognition (settlement, write-off or factoring). The tables below show the age profile of trade receivables allowances based on lifetime expected credit losses by country of operation by days outstanding.
12.31.2023 Hungary North- Other Total
Macedonia countries
- of which not past due .............................. 15,804 245 175 16,224
within one year .............................. 11,739 245 175 12,159
over one year ................................. 4,065 - - 4,065
- of which past due by
less than 30 days .......................... 1,297 70 - 1,367
30–60 days .................................... 1,318 71 - 1,389
61–90 days .................................... 897 50 - 947
91–180 days ................................. 2,413 231 12 2,656
181–360 days ............................... 2,523 369 - 2,892
over 360 days ................................ 3,745 10,879 41 14,665
- customers under bankruptcy ................ 935 476 - 1,411
Allowances ................................................. 28,932 12,391 228 41,551
12.31.2022 Hungary North- Other Total
Macedonia countries
- of which not past due ............................... 10,811 253 - 11,064
within one year............................... 8,075 253 - 8,328
over one year .................................. 2,736 - - 2,736
- of which past due by
less than 30 days ........................... 988 73 - 1,061
30–60 days ..................................... 956 73 4 1,033
61–90 days ..................................... 461 57 5 523
91–180 days .................................. 1,111 196 8 1,315
181–360 days ................................ 1,307 312 17 1,636
over 360 days ................................. 4,369 11,345 238 15,952
- customers under of bankruptcy ............. 662 516 - 1,178
Allowances ................................................ 20,665 12,825 272 33,762
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The tables below show the average impairment rates by country of operation by days outstanding.
12.31.2023 Hungary North- Other Total
Macedonia countries
- of which not past due .............................. 8% 1% 7% 8%
within one year .............................. 7% 2% 7% 7%
over one year ................................. 15% - - 14%
- of which past due by
less than 30 days .......................... 6% 3% - 6%
30–60 days .................................... 28% 12% - 26%
61–90 days .................................... 44% 15% - 40%
91–180 days ................................. 70% 32% 33% 63%
181–360 days ............................... 77% 48% - 71%
over 360 days ................................ 96% 96% 100% 96%
- customers under bankruptcy ................ 99% 100% - 99%
Total average impairment rate ................. 13% 37% 8% 16%
12.31.2022 Hungary North- Other Total
Macedonia countries
- of which not past due ............................... 7% 1% - 6%
within one year .............................. 6% 2% - 5%
over one year ................................. 12% - - 11%
- of which past due by
less than 30 days ........................... 7% 3% - 6%
30–60 days ..................................... 29% 16% 8% 27%
61–90 days ..................................... 43% 25% 9% 38%
91–180 days .................................. 63% 50% 38% 61%
181–360 days ................................ 80% 58% 61% 75%
over 360 days ................................. 100% 95% 85% 96%
- customers under of bankruptcy ............. 100% 100% - 100%
Total average impairment rate ................. 11% 36% 12% 15%
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The tables below includes the impairment losses based on the lifetime expected credit losses and the changes therein in 2022 and 2023 for the countries of operation of the Group.
Translation
Charged to difference Utilized
01.01.2023 expense (and rounding) (a) 12.31.2023
Hungary ................................................... 22,514 12,799 (7) (5,024) 30,282
North Macedonia ................................... 13,464 1,266 (601) (1,095) 13,034
Other countries ...................................... 272 (32) (12) - 228
Group ................................................. 36,250 14,033 (620) (6,119) 43,544
Translation
Charged to difference Utilized
01.01.2022 expense (and rounding) (a) 12.31.2022
Hungary ................................................... 20,915 7,897 10 (6,308) 22,514
North Macedonia ................................... 12,416 1,257 1,078 (1,287) 13,464
Other countries ...................................... 212 56 17 (13) 272
Group .................................................. 33,543 9,210 1,105 (7,608) 36,250
(a) Utilized means reversed on derecognition (settlement, write-off or factoring). See also Note 5.1.2 for further analysis of credit risks related to Trade receivables. 4.2.2.3 Contract assets The carrying amounts of contract assets are shown net of impairment losses charged as of the financial statement dates. 12.31.2022 12.31.2023 Contract asset (current)............................................................................................ 18,586 17,358 Contract asset (non-current) ................................................................................... 3,960 3,697 Total contract asset......................................................................................... 22,546 21,055 The table below shows the impairment losses and changes of contract assets based on the lifetime expected credit losses therein for 2022 and 2023. 12.31.2022 12.31.2023 Impairment loss, beginning of period..................................................................... 2,208 2,488 Charged to expense – net (included in Direct costs) .......................................... 2,179 422 Translation difference ............................................................................................... 53 (27) Utilized (a) .................................................................................................................... (1,952) (890) Impairment loss, end of period ....................................................................... 2,488 1,993
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4.2.3 Derivative financial instruments contracted with related parties Derivatives contracted with related parties include cross-currency interest rate swaps and FX forwards concluded with DT AG to change the Group’s exposure to HUF in the case of the EUR-denominated loans and to cover FX needs of expected future foreign currency outflows (see more details in Note 4.5.1.1, 5.1.1.1 and 5.1.1.2). The table below show the class breakdown: 12.31.2022 12.31.2023 Cross currency and interest rate swaps (non-current) ............................................ 31,723 9,632 Cross currency and interest rate swaps (current) ..................................................... - 7,499 Forward deals (current) .................................................................................................. - 164 Total derivative financial instruments contracted with related parties ........... 31,723 17,295
4.2.4 Other financial assets Other financial assets include receivables due within 12 months (current) and due after 12 months (non-current) from the end of the reporting period. These financial assets are exposed to credit risks, for which see more details in Note 5.1.2. The impairment loss recognized or reversed for other current and non-current financial assets is not material.
4.2.4.1 Other current financial assets 12.31.2022 12.31.2023
Cashpool receivables with related party ........................................................ (a) - 4,969
Finance lease receivable .................................................................................... (b) 286 86
Receivables from asset-related grants ........................................................... (c) 838 -
Other ...................................................................................................................... 665 1,077
Total............................................................................................................ 1,789 6,132
For the explanations of (a)-(c) points see Note 4.2.4.2.
4.2.4.2 Other non-current financial assets 12.31.2022 12.31.2023 Equity instruments .............................................................................................. (d) 2,740 3,112 Finance lease receivable .................................................................................... (b) 481 869 Other ...................................................................................................................... 575 400 Total............................................................................................................ 3,796 4,381 (a) The aggregate balance of the cashpool was a receivable (HUF 4 969 million) as at December 31, 2023, which also included cashpool liabilities (HUF 823 million). The table below shows the currency breakdown:
Carrying Effective
31.12.2023 amount Borrower Currency interest rate Fixed / floating
4,204 DT AG EUR 3.90% floating
1,588 DT AG HUF 12.03% floating
(823) DT AG USD 5.61% floating
Due within 1 year ....................... 4,969
The aggregate balance of the cashpool was a liability (HUF 11,863 million) as at December 31, 2022. For further information see note 4.4.1.
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(b) See Note 17.2.1 for more information on Finance lease receivable.
(c) Starting from 2016 HUF 11.6 billion of EU funds were utilized by Magyar Telekom. The first and second rounds of the tender aimed to develop digital networks nationwide to cover households in Western and Eastern parts of Hungary with a fixed network capable of reaching a speed of at least 30 Mbps. Magyar Telekom Plc. received HUF 11.6 billion grant related to EU fund in advance from which HUF 1 million has not been used yet. Magyar Telekom Plc. accomplished a number of investments which complied with the condition of the related EU Funding Contracts. With respect to these completed investments the amount of the grant which has not been financially settled yet is presented as receivable. For those investments where the conditions have not been satisfied yet, the advances received are shown as part of Other current liabilities (Unused advance payments for asset related grants). 12.31.2022 12.31.2023 Accumulated grant recognized in PPE ................................................................... 11,635 11,598 Accumulated advance payments received ........................................................... 10,802 11,599 Unused advance payments for asset-related grants........................................... 5 1 Asset-related grants receivables ............................................................................. 838 -
(d) The Group has got a 50% ownership in E2 Hungary Zrt, the former Joint Venture of the Group, meanwhile has no significant influence over the company due to the agreement with the other investor MET Holding AG (MET) (from January 2023 the other owner is MET Sales and Trading Holding AG). Based on the terms of the agreement the equity instrument was designated as a financial asset measured at fair value through profit or loss amounting to HUF 1,400 million in 2023 (HUF 1,288 million in 2022). Due to that particular agreement MET also has got a call option on E2 Hungary Zrt, which was recognized as a financial liability measured at fair value through profit or loss accordingly. Following the contractual Lock-up period the value of the call option became zero. See Note 4.5.1.3 Maktel has some other insignificant investments in equity securities measured at fair value through other comprehensive income amounting to HUF 1,711 million in 2023 (HUF 1,451 million in 2022). The estimated expected credit loss on other current and non-current financial assets considered to be not material and not recognized.
4.3 Financial liabilities – accounting policies There are two measurement categories for financial liabilities used by the Group: ▪ Financial liabilities carried at amortized cost ▪ Financial liabilities at fair value through profit or loss Both types of financial liabilities are initially recognized at fair value, while subsequent measurements are different (see below). A financial liability except lease liabilities (see Note 17) is derecognized (or a part of a financial liability) from the statement of financial position when, and only when, it is extinguished– i.e. when the obligation specified in the contract is discharged, cancelled or expired.
4.3.1 Financial liabilities carried at amortized cost The measurement category for “financial liabilities measured at amortized cost” includes all financial liabilities not classified as “at fair value through profit or loss”. Loans and other financial liabilities Loans and other financial liabilities are recognized initially at fair value less transaction costs, and subsequently measured at amortized costs using the effective interest rate method. The effective interest is recognized in the Profit for the period (Interest expense) over the period of the liabilities. Trade and other payables Trade and other payables (including accruals) are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Bonds Bonds are recognized initially at fair value less transaction cost and subsequently measured at amortized cost using the effective interest rate method.
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4.3.2 Financial liabilities at fair value through profit or loss Derivative financial instruments and contingent considerations are measured under at fair value through profit or loss model. The Group currently has no intention of measuring non-derivative financial liabilities at fair value. Contingent consideration recognized by the Group as acquirer in a business combination to which IFRS 3 applies will subsequently be measured at fair value through profit or loss. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and their fair values are re- measured at subsequent balance sheet dates. The Group does not apply hedge accounting for its financial instruments therefore all gains and losses are recognized in the Profit for the period (Other finance expense – net).
4.4 Financial liabilities in the statement of financial position
4.4.1 Financial liabilities to related parties Financial liabilities to related parties include HUF and EUR-denominated loans taken from DT Group and cashpool liabilities. In addition, for the whole nominal amount and interest payment of loans denominated in EUR granted by DT AG, the Group have cross-currency interest rate swap agreements in place (with DT AG) so that Magyar Telekom’s exposure in fact remains in HUF. Swapped HUF interest rates are fixed. For further information please see Note 32.1.1. The tables below show the details of the financial liabilities towards Deutsche Telekom Group members as at December
31, 2023 and 2022.
Carrying Lender Contract Effective Interest-formula Fixed / Maturity Original
amount ed currency interest rate (%) floating term
12.31.2023
45,934 DT AG EUR 4.89% 6 m EURIBOR +0.826333% floating May 2024 5 years
45,934 DT AG EUR 5.24% 3 m EURIBOR +1.286% floating Dec 2024 2 years
Due within 1 year ............. 91,868
Accrued interest* .............. 1,577
Other financial liabilities .. 203
Total current .................... 93,648
47,847 DT AG EUR 4.92% 6 m EURIBOR +1.02879% floating Jan 2025 5 years
Total non-current............. 47,947
*Accrued interest shows the aggregated discount value of DT loans’s amortized cost while the loans separately show the principals of that particular loan. The whole amount of all DT loans is due on the expiry date. As at December 31, 2023 current liabilities exceed current assets by HUF 61,908 million, primarily due to the short-term loan facilities received from DT AG that were taken to finance working capital and daily ongoing activities. Management believes that short-term liabilities from DT AG will be refinanced in a similar manner to previous years. Financing needs will also be covered by cash flows generated by operating activities and third party credit line facilities (see Note 5.1.3).
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Carrying Lender Contract Effective Interest-formula Fixed / Maturity Original
amount ed currency interest rate (%) floating term
12.31.2022
20,000 DT AG HUF 13.27% fix: 13.27% fixed July 2023 1 year
20,012 DT AG EUR 3.01% 1 m EURIBOR +1.11% floating Nov 2023 1 year
12,008 DT AG EUR 3.06% 3 m EURIBOR +1.09% floating Dec 2023 1 year
11,085 DT AG HUF 18.28%** * Cashpool N/A
1,510 DT AG USD 4.02%** * Cashpool N/A
(732) DT AG EUR 1.65%** * Cashpool N/A
Due within 1 year .......... 63,883
Accrued interest* ........... 1,699
Other financial liabilities 118
Total current ................. 65,700
48,030 DT AG EUR 3.17% 6 m EURIBOR +0.826333% floating May 2024 5 years
50,031 DT AG EUR 1.25% 6 m EURIBOR +1.02879% floating Jan 2025 5 years
Total non-current.......... 98,061
*Accrued interest shows the aggregated discount value of DT loans’s amortized cost while the loans separately show the principals of the particular loan. The whole amount of all DT loans is due on the expiring date. **Interest rates are defined by DT AG on monthly basis. The table below shows the carrying amounts and fair values of the related-party loans.
12.31.2022 12.31.2023
Book value Fair value Book value Fair value
HUF denominated loans
At fixed rate ......................................................... 20,000 20,000 - -
At floating rate .................................................... 11,085 11,085 - -
31,085 31,085 - -
EUR denominated loans
At fixed rate ......................................................... - - - -
At floating rate .................................................... 129,349 130,825 139,715 140,195
129,349 130,825 139,715 140,195
USD denominated loans
At fixed rate ......................................................... - - - -
At floating rate .................................................... 1,510 1,510 - -
1,510 1,510 - -
Accrued interest ..................................................... 1,699 1,699 1,577 1,577
Other financial liabilities ....................................... 118 118 203 203
Total related-party financial liabilities............ 163,761 165,237 141,495 141,975
The weighted-average interest rate on related-party loans was 5.02% in 2023 (4.85% in 2022). There were no defaults or breaches in connection with the financial liabilities to related parties.
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4.4.2 Bonds In 2020 Magyar Telekom has initiated a review of its external funding framework in order to diversify and enhance the maturity profile of the Company’s debt portfolio. Accordingly, the Company participated in the Bond Funding for Growth Scheme (“Scheme” or “BGS”) of the National Bank of Hungary and obtained funding sources with competitive pricing. In order to increase the liquidity of the corporate bond market, the MNB launched Scheme from July 1, 2019, supplementing its unconventional monetary policy tools and the fixed Growth Loan Program. The proceeds of the bonds are used to fund investments into the fixed and mobile network roll-out and modernization (including the acquisition of new frequencies). The issued bonds amounted to HUF 70 billion at face value were purchased for a total purchase price of HUF 70.83 billion by the attendees at the closed auction on November 24, 2020. The total purchase price was transferred to the Company by the attendees on November 26, 2020. Subsequently Magyar Telekom 2027 HUF Bonds were listed on the BSE XBond multilateral trading platform on December 17, 2020 and are available for trading in the XBond platform from December 21, 2020 (first trading day). The table below shows the main parameters: Bond code Magyar Telekom 2027 HUF Bond Bond expiries: HUF 35 billion.................................................................. November 26, 2026 HUF 35 billion.................................................................. November 26, 2027 Interest type....................................................................... Fixed interest Coupon (Nominal interest rate) ..................................... 1.45% Yield ..................................................................................... 1.26% Effective interest rate ...................................................... 1.95% At December 31, 2023 the carrying amount of bonds is HUF 68,854 million (at December 31, 2022 HUF 68,531 million). For further information please see Note 4.4.4.3 and 15.
4.4.3 Derivative financial liabilities contracted with related parties Derivatives contracted with related parties include FX forwards concluded with DT AG to cover FX needs of expected future foreign currency outflows (see more details in Notes 4.5.1.2, 5.1.1.1 and 5.1.1.2). At December 31, 2023 the carrying amount of derivative financial liabilities contracted with related parties is HUF 120 million (at December 31, 2022 HUF 2,035 million).
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4.4.4 Other financial liabilities 4.4.4.1 Other financial liabilities - Balances The tables below show the current and non-current balances of Other financial liabilities. 12.31.2022 12.31.2023 Frequency fees payable ..................................................................................... (a) 5,420 4,942 Trade payables with extended payment period............................................ (b) - 1,467 Debtor overpayment .......................................................................................... 1,277 1,357 Other ...................................................................................................................... 5,023 4,484 Total other financial liabilities – current .................................................. 11,720 12,250 12.31.2022 12.31.2023 Frequency fees payable ..................................................................................... (a) 101,242 96,577 Other ...................................................................................................................... 2,676 2,090 Total other financial liabilities – non-current .......................................... 103,918 98,667 There were no defaults or breaches in connection with other financial liabilities. (a) The present value of the future annual band fees payable is recognized as part of the carrying amount of the licenses as intangible assets, with corresponding current and non-current financial liabilities. (b) In 2023 Magyar Telekom made individual arrangements with certain partners under which the payments for trade payables become due at a later point in time than the customary payment terms in the industry practice. Consequently, these individual arrangements have been reclassified from Trade payables to Other financial liabilities (HUF 1,467 million in 2023). See Note 4.4.4.3 4.4.4.2 Proceeds/repayments of loans and other borrowings Cash proceeds/payments for related-party loans are included in the Proceeds from loans and other borrowings/Repayment of loans and other borrowings line of the Statement of cash flows.
4.4.4.3 Additional disclosure about changes in liabilities arising from financing activities The following table includes changes in net debt reconciled with their effects on the Consolidated statement of cash flows in order to enable users of financial statements to evaluate changes in liabilities arising from financing activities. Changes in financial liabilities without cash movement are mainly due to the increase in liabilities related to lease liabilities and the FX effects of financial liabilities denominated mainly in EUR and transactions where future cash flows are recognized at the present value of the annual fees payable. In 2023, Magyar Telekom chose financing options totaling HUF 5,270 million under which extended the period of payment for trade payables beyond the customary market payment terms from investing activities without cash movement in the Consolidated statement of cash flows. As soon as the payments have been made, they are disclosed under net cash used in financing activities. See Note 4.4.4.1. (b)
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Changes Changes Changes affecting cash flows from financing activities
Opening affecting cash flows Changes in financial affecting cash flows Repayment Closing
Balance at Changes in from liabilities from Proceeds from Repayment of of other Balance at
January 1, 2023 cash and cash equivalents operating activities without cash movement investing activities loans and borrowings loans and other borrowings Proceeds from bonds financial liabilities Other December 31, 2023
Related-party loans .................... 163,761 - (8,398) 2,788 - 128,635 (145,291) - - - 141,495
Derivatives from related parties 2,035 - - 11,520 (13,435) - - - - - 120
Frequency fees payable............. 106,662 - (4,923) 4,385 - - - - (4,606) - 101,518
Bonds ........................................... 68,531 - (1,140) 1,463 - - - - - - 68,854
Lease liabilities............................ 141,603 - (6,964) 26,655 - - - - (24,731) - 136,563
Debtors overpayment ................ 1,277 - 80 - - - - - - - 1,357
Contingent consideration .......... - - - - - - - - - - -
Other financial liabilities ............ 7,699 - (2,434) 10,062 - - - - (7,285) - 8,042
- Less cash and cash equivalents ........................ (12,861) (653) - - - - - - - - (13,514)
- Less other current financial
assets ................................. (1,789) - (1,052) (4,921) (1,064) (4,969) - - - - (13,795)
Net debt .................................... 476,918 (653) (24,831) 51,952 (14,499) 123,666 (145,291) - (36,622) - 430,640
Treasury share purchase ...................................................................................................................................................................................................................................................... (14,609) Dividends paid to Owners of the parent and Non-controlling interest ........................................................................................................................................................................... (33,942) Net cash used in financing activities ..................................................................................................................................................................................................................... (106,798)
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Changes Changes Changes affecting cash flows from financing activities
Opening affecting cash flows Changes in financial affecting cash flows Repayment Closing
Balance at Changes in from liabilities from Proceeds from Repayment of of other Balance at
January 1, 2022 cash and cash equivalents operating activities without cash movement investing activities loans and borrowings loans and other borrowings Proceeds from bonds financial liabilities Other December 31, 2022
Related-party loans .................... 128,472 - (606) 16,051 - 157,824 (137,980) - - - 163,761
Derivatives from related parties 20 - - 2,243 (228) - - - - - 2,035
Frequency fees payable............. 156,082 - (6,071) 4,630 - - - - (47,979) - 106,662
Bonds ........................................... 68,215 - (1,015) 1,331 - - - - - - 68,531
Lease liabilities............................ 134,404 - (6,114) 39,222 - - - - (25,909) - 141,603
Debtors overpayment ................ 1,394 - (117) - - - - - - - 1,277
Contingent consideration .......... 150 - - - - - - (150) - -
Other financial liabilities ............ 7,031 - (2,200) 6,438 - - - - (3,570) - 7,699
- Less cash and cash equivalents ........................ (13,463) 602 - - - - - - - - (12,861)
- Less other current financial
assets ................................. (9,419) - (2,065) (6,122) 15,817 - - - - - (1,789)
Net debt .................................... 472,886 602 (18,188) 63,793 15,589 157,824 (137,980) - (77,608) - 476,918
Treasury share purchase ........................................................................................................................................................................................................................................................... (14,609) Dividends paid to Owners of the parent and Non-controlling interest ................................................................................................................................................................................ (19,486) Net cash used in financing activities ......................................................................................................................................................................................................................... (91,859)
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4.4.5 Trade payables 12.31.2022 12.31.2023 Payables to DT Group companies ........................................................................... 13,241 9,951 Payables to associates and joint ventures ............................................................ - 24 Other trade payables ................................................................................................. 145,545 156,438 Total.................................................................................................................. 158,786 166,413
4.5 Additional disclosures on financial instruments 4.5.1 Financial assets and liabilities The Group classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: ▪ quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) ▪ inputs other than quoted prices included within Level 1 observable for the asset or liability, either directly or indirectly (Level 2) ▪ inputs for the asset or liability that are not based on observable market data (Level 3) The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The significance of an input is assessed against the fair value measurement in its entirety. There was no transfer between Level 1 and Level 2 financial instruments. Most of the financial assets and financial liabilities are measured at amortized cost, but fair value information is also provided for these. The initial fair value of the MT2027 bond was calculated based on Level 2 information as the bonds did not have an active market. The discount rate was determined based on relevant BIRS rates (Budapest Interest Rate Swap) and a margin estimation based on commercial bank offers during the auction. The fair value of financial instruments that are not traded on an active market is determined by using valuation techniques, mainly by applying the discounted cash flow method. The cash flow estimations are based on the relevant underlying contracts and the discount rates are calculated based on the interest rate benchmarks applicable for the relevant maturities and currencies (BUBOR, BIRS, EURIBOR, EUR IRS). Foreign exchange conversion is made based on central bank FX fixings (preferably that of the National Bank of Hungary). Level 1 information is used for determining fair value of equity instruments designated as financial assets at fair value through other comprehensive income. Level 2 information is available to determine derivatives assets and liabilities. Level 3 information was used for any contingent consideration liabilities based on the terms set up in the agreements. Also level 3 type information is used for valuation of equity instruments designated as financial assets at fair value through profit or loss, and the corresponding liabilities designated as financial liability at fair value through profit or loss. The fair value was determined by applying a Black Scholes model using estimation on the terms and conditions of underlying contracts, peer group WACC and risk free interest rate during the contractual Lock-up period. Following the Lock-up period the value is based on the prevailing exit price of the financial asset as of the reporting date (see Note 4.2.4.2 for more information). The following tables include the carrying amounts and fair values of the Group’s financial assets and liabilities as at December 31, 2023 and 2022.
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4.5.1.1 Financial assets – Carrying amounts and fair values
Carrying amount
Amortized FVOCI FVTPL FVTPL
12.31.2023 cost (Level 1) (Level 2) (Level 3) Total Fair value
Cash and cash equivalents ......................... 13,514 - - - 13,514 13,514
Cash pool receivables .................................. 4,969 - - - 4,969 4,969
Trade receivables within one year ............ 199,249 - - - 199,249 199,249
Trade receivables over one year ................ 25,060 - - - 25,060 23,110
Derivative financial instruments
contracted with related parties ................. - - 17,295 - 17,295 17,295
Receivables from group companies ......... - - - - - -
Finance lease receivable ............................. 955 - - - 955 803
Equity instruments ....................................... - 1,712 - 1,400 3,112 3,112
Receivables from asset-related grants .... - - - - - -
Other current receivables ........................... 1,077 - - - 1,077 1,077
Other non-current receivables................... 400 - - - 400 385
Total .......................................................... 245,224 1,712 17,295 1,400 265,631 263,514
Carrying amount
Amortized FVOCI FVTPL FVTPL
12.31.2022 cost (Level 1) (Level 2) (Level 3) Total Fair value
Cash and cash equivalents ......................... 12,861 - - - 12,861 12,861
Cash pool receivables .................................. - - - - - -
Trade receivables within one year ............ 171,583 - - - 171,583 171,583
Trade receivables over one year ................ 22,806 - - - 22,806 19,619
Derivative financial instruments
contracted with related parties ................. - - 31,723 - 31,723 31,723
Receivables from group companies ......... 1 - - - 1 1
Finance lease receivable ............................. 767 - - - 767 685
Equity instruments ....................................... - 1,452 - 1,288 2,740 2,740
Receivables from asset-related grants .... 838 - - - 838 838
Other current receivables ........................... 664 - - - 664 664
Other non-current receivables................... 575 - - - 575 494
Total ......................................................... 210,095 1,452 31,723 1,288 244,558 241,208
Fair value through profit or loss assets (Level 2) include derivatives, for further information see Note 4.2.3. The fair values of those instruments are based on a discounted cash flow method. The calculation is prepared by Magyar Telekom Plc. based on money market interest rate curves, basis swap points and spot FX rates from Reuters database published on the last working day of the reporting period. The present value of the expected future cash flows is discounted to the reporting date using money market interest rates and basis swap points in the specific currency from Reuters and exchanged to HUF using the spot FX rate. The difference between the HUF present value of the payable and receivable is accounted for as assets or liabilities. Fair value through profit or loss financial assets (Level 3) includes the investment in E2 Hungary Zrt. in 2022 and 2023. Equity instruments designated as financial assets at fair value through other comprehensive income (Level 1) include insignificant investments in equity instruments, all measured at fair value, which is the North Macedonian stock exchange price of the equity instruments. The carrying values of assets measured at amortized cost with short times to maturity approximate their fair values.
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4.5.1.2 Financial liabilities – Carrying amounts and fair values
Carrying amount
Measured at FVTPL FVTPL Total Fair value
12.31.2023 amortized cost (Level 2) (Level 3)
Financial liabilities to related parties ..................... 141,495 - - 141,495 141,976
Derivative financial instruments contracted with
related parties ............................................................. - 120 - 120 120
Trade payables ........................................................... 166,413 - - 166,413 166,413
Frequency fees payable ........................................... 101,518 - - 101,518 80,858
Bonds ........................................................................... 68,854 - - 68,854 59,379
Lease liabilities ........................................................... 136,563 - - 136,563 125,973
Debtors’ overpayment .............................................. 1,357 - - 1,357 1,357
Other current liabilities............................................. 5,952 - - 5,952 5,952
Other non-current liabilities .................................... 2,090 - - 2,090 2,000
Total ...................................................................... 624,242 120 - 624,362 584,028
Carrying amount
Measured at FVTPL FVTPL Total Fair value
12.31.2022 amortized cost (Level 2) (Level 3)
Financial liabilities to related parties ...................... 163,761 - - 163,761 165,237
Derivative financial instruments contracted with
related parties ............................................................. - 2,035 - 2,035 2,035
Trade payables ............................................................ 158,786 - - 158,786 158,786
Frequency fees payable ............................................ 106,662 - - 106,662 67,122
Bonds ............................................................................ 68,531 - - 68,531 45,622
Lease liabilities ............................................................ 141,603 - - 141,603 116,539
Debtors’ overpayment ............................................... 1,277 - - 1,277 1,277
Other current liabilities.............................................. 4,888 - 135 5,023 5,023
Other non-current liabilities ..................................... 2,676 - - 2,676 2,412
Total ...................................................................... 648,184 2,035 135 650,354 564,053
Derivatives and liabilities from contingent consideration of a business combination and a liability on a call option where it is applicable are measured at fair value, while all other financial liabilities are measured at amortized cost. Additional fair value information on the loans and other borrowings is provided in Note 4.4.1. The carrying values of the current financial liabilities measured at amortized cost approximate their fair values.
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4.5.1.3 Financial liabilities carried at fair value determined using level 3 type information Financial instruments which are carried at fair value where the fair value was determined using Level 3 type information are the contingent consideration liabilities and the liability pertaining to the call option under IFRS 9 (see Notes 4.2.4.2 and 4.5.1). The table below includes the movements of these liabilities. 2022 2023
Opening balance at January 1. ........................................................................... 294 135
Remeasurement
- recognized in profit or loss (net financial result)............................................ (9) (135)
- recognized in statement of financial position ................................................ - -
Payment ................................................................................................................... (150) -
Closing balance at December 31. ............................................................... 135 -
4.5.2 Items of net gains and losses arising on financial instruments The tables below include net gains and losses arising on financial instruments in 2023 and 2022.
Subsequent measurement Total net gain /
Change in FX gain / Impairment Expenses/
2023 Interest fair value (loss) loss fees (loss)
Equity instruments (Level 1) ................................ - 324 - - - 324
Equity instruments (Level 3) ................................ - 112 - - - 112
Financial assets measured at amortized cost ... 3,228 - (370) (14,033) (6,214) (17,389)
Financial liabilities measured at amortized
cost ............................................................................ (24,390) - 10,668 - (34) (13,756)
FVTPL financial instruments (Level 2) ................ - (27,467) - - - (27,467)
FVTPL financial instruments (Level 3) ................ - 135 - - - 135
Net gain/(loss) on financial instruments ......... (21,162) (26,896) 10,298 (14,033) (6,248) (58,041)
Subsequent measurement Total net gain /
Change in FX gain / Impairment Expenses/
2022 Interest fair value (loss) loss fees (loss)
Equity instruments (Level 1) ................................ - 48 - - - 48
Equity instruments (Level 3) ................................ - 106 - - - 106
Financial assets measured at amortized cost ... 1,495 - (2,211) (9,210) (5,057) (14,983)
Financial liabilities measured at amortized
cost ............................................................................ (16,611) - (22,426) - (29) (39,066)
FVTPL financial instruments (Level 2) ................ - 20,450 - - - 20,450
FVTPL financial instruments (Level 3) ................ - 9 - - - 9
Net gain/(loss) on financial instruments ......... (15,116) 20,613 (24,637) (9,210) (5,086) (33,436)
The tables above include the amounts before capitalization of borrowing costs (see Note 24). Impairment losses on Financial assets measured at amortized cost includes all expenses incurred or expected to be incurred in relation to the default of customers and presented as a direct cost in the Statement of profit or loss and other comprehensive income. The amount of Expenses/fees mainly contains transactional fees on financial realization of income (like white check acceptance fee of Hungarian Post, online payments’ cost and other various commissions) and other bank charges type fees.
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4.5.3 Offsetting financial assets and financial liabilities For the financial assets and liabilities subject to enforceable netting arrangements, each agreement between the Group and the counterparty (typically roaming and interconnect partners) allows for net settlement of the relevant trade receivable and payable. The following trade receivables and trade payables are subject to offsetting agreements and are presented after netting in the Consolidated statement of financial position.
12.31.2022 12.31.2023
Trade Trade Trade Trade
receivables payables receivables payables
Gross amounts of recognized financial instruments ....................... 175,123 162,326 203,929 171,093 Gross amounts of financial instruments set off ................................ (3,540) (3,540) (4,680) (4,680) Net amounts of recognized financial instruments presented in the statement of financial position .............................................. 171,583 158,786 199,249 166,413
4.5.4 Other disclosures about financial instruments Magyar Telekom is also exposed to risks that arise from the possible drawdown of guarantees that in aggregation amounted to a nominal amount of HUF 16.1 billion as at December 31, 2023 (2022: HUF 16.4 billion). The guarantees are issued by banks on behalf of Magyar Telekom as collateral to secure the fulfilment of the Group’s certain contractual or tender related obligations. The Group has been doing its best to deliver on its contractual obligations and expects to continue to do so in the future. Even so disputes may emerge from time to time with partners and sometimes these can result in the drawdown of the guarantees. The utilization of these bank guarantees are not related and has no significant effect on the solvency of the Group. For more information see note 4.4.4.1. Magyar Telekom does not hold any material collateral of its financial assets. All financial assets transferred met the criteria of derecognition. The Group does not have compound financial instruments with multiple embedded derivatives.
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5 FINANCIAL RISK MANAGEMENT
5.1 Financial risk factors Magyar Telekom Plc. is primarily exposed to credit risks related to its financial assets. In addition, the Group is also exposed to risks from movements in exchange rates, interest rates that affect the fair value and/or the cash flows arising from financial assets and liabilities. Financial risk management aims to limit these risks through ongoing operational and finance activities. Selected derivative and non-derivative hedging instruments are also used for this purpose, depending on the risk assessment. Magyar Telekom only hedges the risks that affect the Group’s cash flows, no hedges are concluded to hedge fair values. Derivatives are exclusively used as hedging instruments, i.e., not for trading or other speculative purposes. To reduce the counterparty risk, derivatives are generally only concluded with leading Hungarian or international financial institutions or Deutsche Telekom. Nevertheless, hedge accounting is not applied to such transactions. The detailed descriptions of risks, the management thereof as well as sensitivity analyses are provided below. These sensitivity analyses calculate with reasonably possible changes in the relevant risk variables and their impact on profit before tax. The impacts disclosed below for the reported periods are subject to an average effective income tax rate of approximately 20%, i.e. the impact on Profit for the period would be approximately 80% of the pre tax amount in a year that is free from significant one-off non-deductible pre-tax impacts and significant changes in tax legislations. The potential impacts disclosed (less tax) would be the same on the Group’s Equity. There were no major changes in these risks compared to the previous reporting period.
5.1.1 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: ▪ foreign currency risk; ▪ interest rate risk; ▪ price risk. The fundamentals of Magyar Telekom’s financing strategy are established each year by the Board of Directors. The Group’s policy is to borrow centrally using a balanced combination of medium-term and short-term loans and bonds, and fixed and floating interest rates on those liabilities. The Board of Directors has approved two debt protection ratio KPIs, and monitors their fulfillment annually. At the end of 2023 Magyar Telekom fulfilled both criteria; Total Debt to EBITDA ratio of 1.59 in 2023 (2022: 1.98), while the allowed maximum can be 2.8 and EBITDA to Net financial result ratio of 6.52 in 2023, (2022: 9.99), while the allowed minimum can be 3.0. The Group during the implementation of the finance policy and the financial risk management, determine and continuously monitor the foreign exchange, liquidity and counterparty risk management guidelines. Magyar Telekom is exposed to interest and foreign exchange (FX) rate risk associated with its interest-bearing assets and liabilities and anticipated transactions. As the vast majority of the revenue and expenses of the Hungarian entities arise in HUF, the functional currency of the Hungarian entities of Magyar Telekom is HUF. Consequently, Magyar Telekom's objective is to minimize the level of its financial risk applying HUF terms. For the presentation of market risks, sensitivity analyses were also preformed that show the effects of hypothetical changes of relevant risk variables on Profit before tax. These hypothetical changes were modelled to present a reasonably possible change in the relevant risk variables. The periodic effects are determined by relating the hypothetical changes in the risk variables to the balance of financial instruments at the end of the latest reporting period (2023) and the preceding reporting period (2022). The balances at the end of the reporting period are usually representative for the year as a whole; therefore, the impacts are calculated using the year end balances. The methods and assumptions used in the sensitivity calculations did not change significantly compared to the previous period. As a result of a volatile international capital and securities markets, higher fluctuations of the FX and interest rates are also possible.
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5.1.1.1 Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in FX rates. Currency risks primarily arise on financial instruments denominated in a currency that is not the functional currency of the given operating segment of the Group. Differences resulting from the translation of the foreign subsidiaries’ financial statements into the Group’s presentation currency are not taken into consideration. Relevant risk variables are generally all non-functional currencies in which Magyar Telekom has financial instruments. The Hungarian Forint appreciated by approx. 4% against the euro in 2023. In 2020 and 2021 the forint was fluctuating in a 7-12% range against the EUR, in 2022 this range widened significantly to approx. 23% while in 2023 narrowed to 10%. In order to mitigate FX risk in the case of FX denominated financial instruments, Magyar Telekom minimized its foreign currency borrowings in the past years or covered them with derivative instruments to substantially reduce FX risk. The corporate bond is HUF denominated and thus no foreign currency exposure arises related to this instrument. FX risks arising on loans and related swaps with DT AG Several related party loans taken to finance general needs of the Group from Deutsche Telekom AG (DT AG) are denominated in EUR, while, at the same time, cross-currency interest rate swaps or FX swaps are concluded with Deutsche Telekom AG to fix the actual cash flows of Magyar Telekom in HUF. Even though the Group does not apply hedge accounting, the change in the HUF/EUR exchange rate has limited (net) impact on profit or loss and equity related to the hedged loans and the hedging transactions together. The table below shows the breakdown by currency of loans taken from DT AG: 12.31.2022 12.31.2023 HUF ................................................................................................. 20,000 - EUR ................................................................................................. 130,082 139,715 Total ....................................................................................... 150,082 139,715 Sensitivity analysis A reasonably possible strengthening or weakening of the EUR in the table below against HUF as at the end of the reporting period would have affected the measurement of loans denominated in a foreign currency and increased (+) / decreased (-) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. As the profit or loss effect would be the same as the equity effect, only the former is disclosed. Profit or loss Strengthening Weakening 12.31.2023 EUR/HUF (10% movement) Loan ................................................................................................................................... (13,971) 13,971 Swap agreements........................................................................................................... 14,156 (14,156) Net effect ............................................................................................................ 185 (185) 12.31.2022 EUR/HUF (20% movement) Loan ................................................................................................................................... (26,016) 26,016 Swap agreements........................................................................................................... 26,399 (26,399) Net effect ............................................................................................................ 383 (383)
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Other FX exposure The remaining FX exposure of Magyar Telekom is mostly related to (i) holding foreign currency cash balances in its subsidiaries in the Southern and Eastern Europe region, and (ii) operating activities through revenue from, and payments to, international telecommunications operators as well as (iii) capital and operating expenditure contracted with vendors in foreign currency. In line with currency hedging policy, the Company holds sufficient amounts of foreign currencies on its bank accounts or buys foreign currencies through FX forward transactions, the amounts of which are determined considering the balance of short-term FX denominated trade and lease payables and trade receivables in the next period in order to hedge the currency risk arising in connection with those assets and liabilities. The Group’s foreign currency denominated liabilities (other than the above described loans) exceed the Group’s foreign currency denominated assets, therefore changes in the functional currencies’ exchange rates would have the following impact on the profit or loss of the Group. The following tables show the breakdown by currency of finance lease receivables, lease liabilities, trade payables and cashpool receivables and liabilities:
12.31.2023
in HUF million EUR USD MKD RON BGN GBP HUF Other
Total finance lease receivables .............. 51 - - - 124 - 780 -
Total lease liabilities................................. (49,044) (6) (162) - (830) - (86,521) -
Trade payables .......................................... (57,535) (6,731) (14,812) (1,184) (813) (4) (85,279) (56)
Aggregate balance of cashpool,
receivables/(liabilities) ............................ 4,204 (823) - - - - 1,588 -
12.31.2022
in HUF million EUR USD MKD RON BGN GBP HUF Other
Total finance lease receivables ............. 60 - - - 177 - 530 -
Total lease liabilities................................ (56,756) (8) (197) - (1,502) - (83,140) -
Trade payables ......................................... (60,344) (5,392) (9,258) (1,640) (535) (11) (81,549) (57)
Aggregate balance of cashpool,
receivables/(liabilities) ........................... 732 (1,510) - - - - (11,085) -
In 2023 82% of trade receivables (current and non-current part) is denominated in HUF, 9% in MKD, 6% in EUR and 3% in other currencies (in 2022 80% in HUF, 12% in MKD, 6% in EUR and 2% in other currencies). In order to reduce the above exposure, Magyar Telekom occasionally enters into derivative contracts. The negative fair value of the related open short-term forward positions was HUF 0.1 billion liability as of December 31, 2023 (2022: HUF 0.9 billion liability). These positions were opened to mitigate the FX risks of future FX payments exceeding FX income.
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Sensitivity analysis A reasonably possible strengthening or weakening of the currencies in the table below against HUF and MKD as at the end of the reporting period would have affected the measurement of financial instruments denominated in a foreign currency and increased (+) / decreased (-) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. As the profit or loss effect would be the same as the equity effect, only the former is disclosed.
Profit or loss
12.31.2023 Strengthening Weakening
EUR/HUF (10% movement) Net balance of FX denominated trade and lease payables, trade and financial receivables plus bank balances ................................................................................... (3,700) 3,700 Related forward agreements ....................................................................................... 3,179 (3,179) Net effect ............................................................................................................ (521) 521 USD/HUF (15% movement) Net balance of FX denominated trade and lease payables, trade and financial receivables plus bank balances ................................................................................... (677) 677 Related forward agreements ....................................................................................... 238 (238) Net effect ............................................................................................................ (439) 439
EUR/MKD (10% movement)
Net balance of FX denominated trade and lease payables, trade and financial
receivables plus bank balances ................................................................................... (42) 42
Related forward agreements ....................................................................................... - -
Net effect ............................................................................................................ (42) 42
USD/MKD (10% movement)
Net balance of FX denominated trade and lease payables, trade and financial
receivables plus bank balances ................................................................................... (93) 93
Related forward agreements ....................................................................................... - -
Net effect ............................................................................................................ (93) 93
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Profit or loss
12.31.2022 Strengthening Weakening
EUR/HUF (20% movement) Net balance of FX denominated trade and lease payables, trade and financial receivables plus bank balances ................................................................................... (10,510) 10,510 Related forward agreements ....................................................................................... 5,524 (5,524) Net effect ............................................................................................................ (4,986) 4,986 USD/HUF (40% movement) Net balance of FX denominated trade and lease payables, trade and financial receivables plus bank balances ................................................................................... (959) 959 Related forward agreements ....................................................................................... 1,553 (1,553) Net effect ............................................................................................................ 594 (594) EUR/MKD (20% movement) Net balance of FX denominated trade and lease payables, trade and financial receivables plus bank balances ................................................................................... (292) 292 Related forward agreements ....................................................................................... - - Net effect ............................................................................................................ (292) 292
USD/MKD (20% movement)
Net balance of FX denominated trade and lease payables, trade and financial
receivables plus bank balances ................................................................................... (84) 84
Related forward agreements ....................................................................................... - -
Net effect ............................................................................................................ (84) 84
As a result of the volatile international money markets, even a more than 10% fluctuation of the functional currency HUF against EUR and a more than 15% against USD is possible while a more than 10% fluctuation of the functional currency MKD against the EUR and more than 10% against USD is possible as extraordinary market conditions may cause extreme volatility on FX markets.
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5.1.1.2 Interest rate risk Magyar Telekom is also exposed to interest rate fluctuations: BUBOR, ESTR, EURIBOR, SOFR and USD LIBOR. This is due to the fact that changing interest rates affect the fair value of the fixed rate instruments and also affect the cash flows through the floating rate instruments. Changes in the market interest rates of non-derivative financial instruments with fixed interest rates only affect income if these are measured at their fair value. On the other hand, all financial instruments with fixed interest rates which are carried at amortized cost are not subject to cash flow interest rate risk as defined in IFRS 7. Changes in the market interest rate of interest rate derivatives (interest rate swaps, cross-currency swaps) that are not part of a hedging relationship as set out in IFRS 9 affect Other finance expense - net (net gain/loss from re-measurement of the financial assets and liabilities to fair value). Changes in market interest rates affect the interest income or expense of non-derivative floating-interest financial instruments for which no cash flow hedges are in place. Financial assets Excess cash of the Group’s Hungarian operations is primarily used to repay loans, however, significant amount of cash of the Group’s Macedonian subsidiary is mostly held in local banks. These amounts are deposited primarily on fixed interest rate terms in order to minimize exposure to market changes that would potentially adversely affect the cash flows from these instruments. Due to the extremely low interest rates, even a reasonably possible change in the interest rates would not have a significant impact on the Group’s interest income. Financial liabilities Financial liabilities exposed to interest rate risk are primarily the related-party (DT AG) and the related swap agreements in place. These loans are almost exclusively taken by Magyar Telekom Plc as the financing of the Group is managed centrally. The analysis below describes the Group’s net exposure to the net interest rate risks related to the loans and the related swap agreements. As the vast majority of the debt portfolio is denominated in HUF, or swap agreements are in place so that the loans payable are exposed to changes in HUF interest rates, the Group is mostly exposed to the HUF interest rate fluctuations for its financial liabilities. To control this interest rate risk, a combination of fixed and floating rate debt is used. Fixed interest-bearing debts (including loans swapped to fixed interest and excluding loans swapped to floating interest) made up 78% of the Group’s total debt as of December 31, 2023 (2022: 81%).
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Cash flow sensitivity analysis for variable rate instruments Floating interest-bearing debts (including loans swapped to floating interest and excluding loans swapped to fixed interest) made up 22% of the Group’s total debt as of December 31, 2023 (2022: 19%). A reasonably possible change of 200 basis points in interest rates (200 bp in 2022) during the reporting period (assuming the year-end balance throughout the reporting period) would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. As the profit or loss effect would be the same as the equity effect, only the former is disclosed.
Profit or loss
200 bp increase 200 bp decrease
12.31.2023
Floating rate instruments ............................................................................ (2,811) 2,811
IR swap ............................................................................................................ 1,876 (1,876)
Cash flow sensitivity (net) ................................................................... (935) 935
Profit or loss
200 bp increase 200 bp decrease
12.31.2022
Floating rate instruments ............................................................................ (2,853) 2,853
IR swap ............................................................................................................ 1,961 (1,961)
Cash flow sensitivity (net) ................................................................... (892) 892
The Group’s exposures to interest rates on financial liabilities:
12.31.2022 12.31.2023
Loans from DT AG, Swaps Loans from DT AG, Swaps
Cash pool liabilities Cash pool liabilities
BUBOR .............................................. 11,085 - - -
EURIBOR/ESTR ............................... 130,081 (98,061) 139,715 (93,781)
USD LIBOR/SOFR............................ 1,510 - 823 -
Total ............................................. 142,676 (98,061) 140,538 (93,781)
For further information on loans see Note 4.4.1.
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5.1.2 Credit risk Credit risk is the risk that one party to a financial instruments will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk as at the end of the reporting period are represented by the carrying amounts of the financial assets in the Statement of financial position. The vast majority of credit risks may arise in respect of Cash and cash equivalents, Bank deposits with original maturities over three months and Trade receivables, most of which have short-term maturities. To decrease counterparty risk and optimize financing costs Magyar Telekom uses the generated cash for repayment of the loans and borrowings and in this way, it does not hold significant bank deposits. The cash held on the bank account is primarily related to daily liquidity needs and not to investment purposes. Additionally, Magyar Telekom keeps bank accounts only with substantial credit institutions to further limit counterparty risk. Maktel does not have loans, the excess cash can be deposited for few months term diversified among the soundest local banks until it can be utilized. Cash and cash equivalents and Bank deposits with maturities over three months held in North Macedonia are primarily denominated in MKD and EUR. Cash and cash equivalents and Bank deposits with maturities over three months deposited in North Macedonia run higher counterparty risk, due to the small amount of internationally substantial financial institutions in that country. In this way excess cash is diversified among the biggest and financially strongest local financial institutions and decrease the maturity to a reasonable level. The total cash kept with North Macedonian banks amounted to HUF 9.8 billion at December 31, 2023 (at December 31, 2022: HUF 7.7 billion). Concentrations of credit risk relating to trade receivables are limited due to the large number of customers comprising the Group's customer base and their dispersion across many different geographic areas and industries. Credit risks are taken into account through individual allowances and allowances calculated at portfolio level. The following table contains the carrying amount of trade receivables broken down by country of operation (Note 4.2.2.1). The vast majority of these balances are denominated in the functional currency of the countries of operations (HUF in Hungary and MKD in North Macedonia). At December 31, 2022 2023 Hungary ............................................................................................................................ 150,678 177,693 North Macedonia ............................................................................................................ 18,928 18,989 Other ................................................................................................................................. 1,977 2,567 171,583 199,249 The amounts in the table above are shown in net balance including impairment losses. The annual impairment losses of the Group in 2023 was 1.7% (2022: 1.2%) of the consolidated revenue. For further information see Notes 3.3. and 4.2.2.2. There are varying credit checking practices applied across the members of the Group as described below.
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Hungary Credit checking at the time of the service request is carried out automatically by the credit checking application. A variety of checks including checking the bankruptcy list, the internal database of risky installation locations, the collection history of the past six months, the outstanding debt and the joint database of debtors of the Hungarian mobile operators are performed depending on the service to be used. The Fraud Detecting System monitors extreme usage and fraudulent behaviour of customers for mobile, fixed-line and Internet services. In the case of business customers, account managers check if the customer has outstanding debts. Dunning procedures are run automatically by the billing systems and include various reminder tools like SMS, reminder message via Telekom APP, telephone calls, reminder letters, reminder emails, restricted service, termination letters and disconnections. In the case of medium and large enterprises the dunning process starts manually (first reminder letter). After the first step, this process is also automated. Based on the effective laws and regulations and over a minimum overdue amount we apply varying and customized reminder procedures with specific deadlines to the different customer groups. After the termination of the contract and depending on the expected success of the process, we combine the different collection steps of selling the outstanding debt or initiating legal proceedings. All parts of the process are regulated by internal directives. North Macedonia The process of managing the credit risk from operating activities includes preventive measures such as creditability checking and prevention barring, corrective measures during legal relationship for example reminding and disconnection activities, collaboration with collection agencies and collection after legal relationship as litigation process and court proceedings. The overdue payments are monitored based on customer type, amount of debt, average invoiced amount and number of disconnections. The credit risk is controlled through credibility checking – which determines that the customer is not indebted and the customers’ credit worthiness and through preventive barring – which determines the credit limit based on the usual level of the customer’s previous traffic revenue. There is no concentration of risk in North Macedonia either with any single customer or group of customers with similar characteristics. The procedures in North Macedonia ensure on a permanent basis that sales are made to customers with an appropriate credit history and that an acceptable level of credit exposure is not exceeded. For further information see Note 4.1.1.
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5.1.3 Liquidity risk Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial liabilities. Prudent liquidity risk management implies maintaining sufficient Cash and cash equivalents and Bank deposits as well as available funding through an adequate amount of committed credit lines. The Group finance management aims to maintain flexibility in funding by keeping committed credit lines available. The undrawn credit lines amounted to HUF 44.5 billion as at December 31, 2023 (2022: HUF 45.5 billion). The following two tables summarize the maturity structure of Magyar Telekom’s financial liabilities including the interest payable on those liabilities as of December 31, 2023 and 2022. The majority of the financial liabilities are financed from the short-term loan facilities received from DT AG that were taken to finance working capital and daily ongoing activities. Management believes that short-term liabilities from DT AG will be refinanced in a similar manner to previous years. Financing needs will also be covered by cash flows generated by operating activities and third party credit line facilities. Therefore the maturity analysis of the financial assets as at the end of the reporting periods (in comparison with the financial liabilities) would not be useful, therefore, is not included in the tables below. 12.31.2023 Total within 1 year 1 to 5 years after 5 years
Trade payables to third parties ............................................................. 156,437 156,437 - -
Trade payables to related parties ........................................................ 9,976 9,976 - -
Financial liabilities to related parties ................................................... 146,557 97,702 48,855 -
Derivative financial liabilities contracted with related parties ....... 120 120 - -
Lease liabilities ......................................................................................... 165,291 33,041 75,728 56,522
Bonds ......................................................................................................... 72,407 1,015 71,392 -
Frequency fee payable ........................................................................... 135,973 8,886 34,583 92,504
Other financial liabilities......................................................................... 9,706 7,388 2,318 -
Total cash outflows ....................................................................... 696,467 314,565 232,876 149,026
Open swap positions’ cash flows
Gross cash inflow in EUR million........................................................... 257 129 128 -
Gross cash inflow in HUF million (at spot rate) ................................. 98,374 49,379 48,996 -
Gross cash outflow in HUF million........................................................ 83,155 41,047 42,108 -
Net cash inflow (+) / outflow (-) in HUF million ........................... 15,219 8,332 6,888 -
Open forward positions’ cash flows
Gross cash inflow in EUR million........................................................... 203 203 - -
Gross cash inflow in USD million .......................................................... 5 5 - -
Total gross cash inflow in HUF million (at spot rate) ........................
79,437
79,437
-
-
Gross cash outflow in HUF million........................................................
79,996
79,996
-
-
Net cash inflow (+) / outflow (-) in HUF million ...........................
(559)
(559)
- -
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12.31.2022 Total within 1 year 1 to 5 years after 5 years
Trade payables to third parties ............................................................. 145,544 145,544 - -
Trade payables to related parties ........................................................ 13,242 13,242 - -
Financial liabilities to related parties ................................................... 173,647 71,141 102,506 -
Derivative financial liabilities contracted with related parties ....... 2,035 2,035 - -
Lease liabilities ......................................................................................... 169,340 32,653 75,507 61,180
Bonds ......................................................................................................... 73,099 1,015 72,084 -
Frequency fee payable ........................................................................... 144,995 9,588 35,153 100,254
Other financial liabilities......................................................................... 9,424 6,418 3,006 -
Total cash outflows ....................................................................... 731,326 281,636 288,256 161,434
Open swap positions’ cash flows
Gross cash inflow in EUR million........................................................... 264 8 256 -
Gross cash inflow in HUF million (at spot rate) ................................. 105,666 3,202 102,464 -
Gross cash outflow in HUF million........................................................ 85,064 1,910 83,154 -
Net cash inflow (+) / outflow (-) in HUF million ........................... 20,602 1,292 19,310 -
Open forward positions’ cash flows
Gross cash inflow in EUR million........................................................... 150 150 - -
Gross cash inflow in USD million .......................................................... 11 11 - -
Total gross cash inflow in HUF million (at spot rate) ........................ 64,170 64,170 - -
Gross cash outflow in HUF million........................................................ 67,805 67,805 - -
Net cash inflow (+) / outflow (-) in HUF million ........................... (3,635) (3,635) - -
The average maturity of Magyar Telekom’s debt portfolio was 1.65 years as at December 31, 2023 (2022: 2.41 years). The floating interest payments arising from the financial instruments were calculated using the last interest rates fixed before December 31, 2023 and 2022. For further information see Note 4.4.1.
5.2 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. The Company’s management proposes to the owners (through the Board) of the Company to approve dividend payments or adopt other changes in the Company’s equity capital in order to optimize the capital structure of the Group. This can be achieved primarily by adjusting the amount of dividends paid to shareholders, or alternatively, by returning capital to shareholders by capital reductions, selling or buying own shares. In 2023 the Board of Directors of Magyar Telekom approved HUF 29,459 million dividend (HUF 15,000 million dividend in 2022), and the Company’s Board recommends to declare a HUF 41,561 million dividend at the April 2024 Annual General Meeting. In addition to the above, according to Hungarian Civil Code, Magyar Telekom Plc. has to ensure that the Company’s Equity in the separate financial statements does not fall below two thirds of its Common stock. The Company is in compliance with this regulation, and no such statutory regulation exists for the consolidated equity. The equity capital, which the Group manages, amounted to HUF 766 billion on December 31, 2023 (2022: HUF 735 billion).
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6 INCOME TAX 6.1 Income taxes – accounting policies Income tax expense comprises current and deferred tax. It is recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. 6.1.1 Current taxes Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. Current tax assets and liabilities are offset only if certain criteria are met. Income taxes are comprised of corporate income taxes, trade tax and other income taxes. 6.1.1.1 Corporate income taxes Corporate income taxes are payable to the central tax authorities of the countries in which the Group’s consolidated entities operate. The basis of the tax is the taxable entities’ accounting profit adjusted for non-deductible and non-taxable items. The nominal tax rates and the determination of the tax bases vary among the countries in which the Group operates. 6.1.1.2 Trade tax and other income tax Trade taxes is a local tax levied in Hungary on the companies’ net margins, usually determined at a substantially higher level than the corporate tax base, but applying a significantly lower tax rate. Other income taxes include innovation fee calculated similarly to trade tax but with a lower rate and it is to be paid to the state budget. 6.1.2 Global minimum tax Hungary has implemented a legislation that shall ensure a global minimum taxation according to the OECD’s Pillar-II regulations and the corresponding EU directive. However, the legislation process has not been completed yet as further regulations are expected to be announced in 2024. Nevertheless, the legislation would be applicable for the Group from 2024 onwards. Hence, no minimum tax is due at the reporting date. Furthermore, Magyar Telekom does apply the exception to recognizing and disclosing information about deferred taxes related to global minimum taxes in line with IAS 12. 88A and 4A. Due to the complexity of the provisions and the fact that the legislative process is not completed yet, it is not possible to give a reliable estimate of the future tax burden being related to this minimum tax legislation. Therefore, the potential tax burden has been assessed based on information available at the reporting date (historical information, planning data). Based on this assessment, Magyar Telekom expects that it would not be subject to minimum taxation in Hungary itself in 2024. However, the Group does also operate in jurisdictions in which the local corporate income tax rate is lower than the global 15% minimum tax rate (e.g. North-Macedonia). Hence, Magyar Telekom expects that there will be an additional minimum tax burden to be borne in 2024, however it is assumed this tax burden to be smaller than HUF 100 million.
6.1.3 Deferred taxes Deferred tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated statement of financial position. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit. Deferred tax is determined using income tax rates that have been enacted or substantively enacted by the financial statement date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit (or reversing deferred tax liabilities) will be available against which the temporary differences can be utilized.
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6.2 Income taxes in the Consolidated Statement of profit or loss and other comprehensive income The table below shows the income tax expenses charged in the Profit for the period. Income tax expense 2022 2023 Corporate income tax .................................................................................... 4,517 5,111 Trade tax……………………………………………………………………………………………….. 8,615 9,223 Other income tax ............................................................................................ 1,360 1,457 Deferred income taxes .................................................................................. 2,829 3,761 Total ........................................................................................................ 17,321 19,552 The income tax expenses charged to other comprehensive income are related to the changes in the fair value of equity investments measured at fair value through other comprehensive income, and are immaterial for both 2022 and 2023. 6.2.1 Tax expense reconciliation The reconciliation between the reported income tax expense and the theoretical amount arising from applying the statutory income tax rates is as follows: 2022 2023 Consolidated IFRS profit before income tax .............................................. 84,395 103,956 Tax at 9% ........................................................................................................... (a) (7,596) (9,356) Impact of different tax rates ......................................................................... (b) (239) (255) Tax shield of items not subject to income tax ........................................... (c) 797 305 Tax impact of non-deductible items............................................................ (d) (1,232) (1,120) Trade tax ........................................................................................................... (e) (8,615) (9,223) Other income tax ............................................................................................. (e) (1,360) (1,457) Impact of tax deductibility of trade and other income taxes ................. (f) 898 961 Investment tax credit accretion ................................................................... (g) 26 593 Income tax expense ............................................................................... (17,321) (19,552) Effective tax rate ............................................................................................. 20.52% 18.81% For explanations (a)-(g) see as follows. (a) The applicable tax rate used in the above reconciliation is the domestic standard rate of corporate tax in Hungary 9% in 2023 (2022: 9%). (b) This line of the reconciliation includes the tax impacts of the different tax rates of the foreign countries where the Group is also present through its subsidiaries. The corporate tax rate is 10% in North Macedonia, 16% in Romania and 10% in Bulgaria in the reported years. This line of the reconciliation includes the tax impacts of the above differences compared to the 9% general tax rate of Hungary applied to the profit before tax of the Group. (c) This line of the reconciliation primarily includes the tax shield impact of expenses, which are not included in the consolidated profit before tax, but deductible when determining the standalone corporate income tax base. These items include the depreciation of assets (or additional values of assets) which are not included in the assets of the consolidated statement of financial position, and which are not considered in the deferred tax calculation. (d) This line of the reconciliation includes the negative tax impact of the expenses included in the consolidated profit and loss, but non-deductible when determining the standalone corporate income tax base. These items primarily include the non-deductible receivable impairment and write-downs and penalties. (e) Trade tax and other income tax include certain local and central taxes levied in Hungary on the companies’ net margins, determined usually at a substantially higher level than the corporate tax base, but with substantially lower tax rates (max 2%). As the first line of the reconciliation calculates theoretical tax expense calculated using the general corporate tax rate, trade tax and the innovation fee (other income tax) impose additional income tax expenses on the Hungarian entities of the Group, included in this line of the reconciliation.
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(f) Trade tax and innovation fee are deductible expenses for corporate tax purposes, the positive tax impact of which is included in this line of the reconciliation. (g) Investment tax credit accretion includes the increase of the net present value of the investment tax credit deriving from the utilization of the tax credits in periods subsequent to the year of recognition. For further information see Note 6.3.2.1. 6.3 Income taxes in the Statement of financial position 6.3.1 Current taxes in the Statement of financial position Current income tax receivable and payable balances in the Statement of financial position represent the amount of corporate and other income taxes receivable from, and payable to, the tax authorities of the countries in which the Group operates.
6.3.2 Deferred taxes in the Statement of financial position The Group's deferred tax balances and the movements therein are as follows:
Balance at Other Balance at Other Balance at
December Effect on profit move- December Effect on profit move- December
31, 2021 ments 31, 2022 ments 31, 2023
0
Deferred tax assets and (liabilities)
Investment tax credits (Note 6.3.2.1) 886 (3,207) 6,052 3,731 (3,429) 5,721 6,023
Net operating loss carry-forward ....... - - - - - - -
Other financial assets ........................... (356) (17) (17) (390) 35 5 (350)
Impairment of receivables and
inventory ................................................. 1,348 88 - 1,436 626 - 2,062
Property, plant and equipment and
intangible assets .................................... (5,425) (402) - (5,827) (388) - (6,215)
Goodwill .................................................. (14,481) - - (14,481) - - (14,481)
Trade and other payables .................... 265 12 - 277 (30) - 247
Loans and other borrowings ................ (644) 688 - 44 (404) - (360)
Provisions for liabilities and charges 1,644 9 - 1,653 (171) - 1,482
Total net deferred tax liability ......... (16,763) (2,829) 6,035 (13,557) (3,761) 5,726 (11,592)
Of which deferred tax liabilities after
netting by legal entity .......................... (16,888) (14,299) (11,758)
Of which deferred tax assets after
netting by legal entity .......................... 125 742 166
Items included in other movements:
Relating to exchange rate effect ............................ (17) 5
Investment tax credit earned .................................. 6,052 5,721
The Other movements column includes mainly the increase in investment tax credit relating to energy efficiency improvement recognized in 2023 and 2022, while in minor part the exchange rate effect. The Group consists of a number of legal entities, most of which have deferred tax assets and liabilities. The assets and liabilities are netted by legal entity so that one legal entity has either a deferred tax asset or a liability and the consolidated Statement of financial position includes these balances accordingly. Deferred tax assets arising from investment tax credits are recognized against the capitalized cost of the related asset acquisition. Temporary differences associated with investments in subsidiaries for which deferred tax liabilities or assets have not been recognized amounted to a net liability of HUF 22,356 million at December 31, 2023 (HUF 23,427 million at December 31, 2022).
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Deferred tax liability on goodwill is related to the goodwill arising from the acquisition of subsidiaries (Emitel and T- Mobile) in the Company’s financial statements, which had merged into Magyar Telekom Plc. The amortization of goodwill is a tax deductible expense in corporate income tax, while under IFRSs no amortization is accounted for in relation to goodwill. The difference deriving from the two types of accounting is represented by the deferred tax liability.
6.3.2.1 Investment tax credits Since 2020 Magyar Telekom Plc. and Telekom Rendszerintegráció Zrt have accomplished a new tax credit program in order to increase energy effectiveness. In order to utilize these tax credits, both Companies had to meet certain audit requirements set out in the relevant tax regulations and independent external auditors stated that the investments fulfill the criteria of energy effectiveness. This investment tax credit is accounted for as a decrease from the investment costs of the assets, as well as a deferred tax asset of the whole tax credit amount is accounted for accordingly. Magyar Telekom utilizes HUF 3,940 million tax credit in the 2023 corporate tax return (Telekom Rendszerintegráció Zrt. utilizes HUF 83 million), while the remaining HUF 6,023 million tax credit remains as deferred tax asset in the Company’s records. The Company expects that the tax credit carried forward can be utilized in the 2024 corporate tax return. The following table shows the details of the energy saving investment tax credits in HUF millions as of 31 December, 2023:
Amount of Amount of Accretion Tax credit
qualifying tax credit recognized in Tax credit carried forward at Expires in
Earned in year investment earned tax expense utilized 12.31.2023 year
2020 ...................................... 7,885 2,823 9 (2,832) - 2025
2021 ...................................... 12,671 4,661 26 (4,687) - 2026
2022 ...................................... 17,384 6,003 593 (6,259) 337 2027
2023 ...................................... 17,627 5,768 - (82) 5,686 2028
Total .................................. 55,567 19,255 628 (13,860) 6,023
In order to utilize the tax credits and certain tax deductibility opportunities earned by the Group’s entities, they had to comply with strict requirements as set out in the relevant tax regulations. The Group fulfilled all requirements connecting energy effective investment programs.
6.4 Income taxes in the Statement of cash flows The Company classifies its tax settlement of energy saving investment tax credit as an investing activity in the Statement of cash flows. The table below shows how the total cash flows from income tax are allocated over the activities: Activities in the Statement of Cash Flows 2022 2023 Cash flows from operating activities (presented on the line income tax paid) .................. (18,615) (17,817) Cash flows from investing activities (investment tax credit utilized in the tax report) .... 4,283 3,316 Cash flows from financing activities ........................................................................................... - - Total cash flows from income tax .................................................................................... (14,332) (14,501) Magyar Telekom has been doing investments relating to energy saving since 2020, based on this the payment of the reduced income tax was settled in 2022 and in 2023.
6.5 Tax reviews The tax authorities may at any time inspect the books and records within five years from the end of the year when tax declarations were submitted and may impose additional tax assessments with penalties and penalty interest. Management is not aware of any circumstances which may give rise to a potential material liability in this respect. 6.6 Dividends paid by Magyar Telekom Plc. The dividends paid and payable by Magyar Telekom Plc. to its owners may be subject to withholding or income taxes of the owners, which do not have an impact on the amount of the dividend declared or on the Company’s tax expense as these taxes – if any – are levied on the owners.
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7 INVENTORIES 7.1 Inventories – accounting policies Inventories are stated at the lower of cost or net realizable value using the historical cost method of accounting and are valued on a weighted average basis. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Impairment losses on Inventories are recognized as Other operating expenses in the Statement of profit or loss and comprehensive income.
7.2 Inventories in the statement of financial position 12.31.2022 12.31.2023 Inventory for resale ................................................................................................... 22,764 30,128 Other inventory .......................................................................................................... 2,842 2,433 Subtotal ........................................................................................................... 25,606 32,561 Less allowances ......................................................................................................... (262) (133) 25,344 32,428 The impairment loss accounted or reversed for inventories is not material therefore no separate table of movements is disclosed. The Group has no inventory pledged as security as at December 31, 2022 or December 31, 2023.
8 ASSETS HELD FOR SALE AND LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE
8.1 Non-current assets held for sale – accounting policies An asset (typically properties and closely related other assets) is classified as held for sale if it is no longer needed for the future operations of the Group, and has been identified for sale, which is highly probable to take place within 12 months. These assets are accounted for at the lower of carrying value or fair value less costs of disposal. Depreciation is discontinued from the date of designation to the held-for-sale status. When an item of PPE or intangible assets is designated for sale, and the fair value is determined to be lower than the carrying amount, the difference is recognized in the Profit for the period (Depreciation and amortization) as an impairment loss. If the requirements for the classification of assets as held for sale are no longer met, the assets may no longer be shown as held for sale. The assets are to be measured at the lower of the carrying amount that would have applied if the asset had not been classified as held for sale, and the recoverable amount at the date at which the requirements for the classification as held for sale are no longer met.
8.2 Assets and liabilities held for sale in the statement of financial position The assets classified as held for sale are disclosed below. 12.31.2022 12.31.2023 Property, plant and equipment ............................................................................... 2 346 Total assets held for sale ................................................................................. 2 346 At the end of 2023 assets held for sale included some non-current assets that are expected to be sold within 12 months.
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9 PROPERTY, PLANT AND EQUIPMENT 9.1 Property, plant and equipment (PPE) – accounting policies Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. The cost of an item of PPE comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located is also included in the costs if the obligation incurred has to be recognized as a provision according to IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.
Government grants relating to the purchase of PPE are deducted from the original cost of the items and are recognized in the Profit for the period through the reduced amount of depreciation of the related assets over their useful lives. Investment tax credits relating to qualifying investment projects (Note 6.3.2.1) are also recognized in this manner.
Cost, in the case of telecommunications equipment, comprises the borrowing costs of related loans and corporate bonds.
Subsequent expenditure on an asset that meets the recognition criteria to be recognized as an asset or an addition to an asset is capitalized, while maintenance and repairs are charged to expense when incurred.
When assets are scrapped, the cost and accumulated depreciation are removed from the accounts and the loss is recognized in the Profit for the period (Depreciation and amortization). When assets are sold, the cost and accumulated depreciation are removed from the accounts and any related gain or loss is recognized in the Profit for the period (Other operating income/expense).
Depreciation is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. On an annual basis, Magyar Telekom reviews the useful lives and residual values for consistency with current development plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 9.3. In addition to the regular revisions, any investment decisions made throughout the year may also result in a change of useful life of a group of assets in any period of the year. The useful lives assigned to different types of property, plant and equipment Years Buildings ..................................................................................................................................................... 5–50 Duct, cable and other outside plant ..................................................................................................... 3–38 Other telecommunications equipment ................................................................................................ 2–25 Other equipment ...................................................................................................................................... 2–50 Useful lives of property, plant and equipment in operation may increase if the asset is refurbished. Useful life change is not automatic, only if it is significantly increased as a result of the investment, which is based on well-founded technical experts’ decision performed on individual basis.
Tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the assets’ fair value less costs of disposal (FVLCD) and its value in use (VIU). The recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount determined on the cash-generating unit (CGU) to which the asset belongs, those assets are grouped at the lowest level for which there are separately identifiable cash flow. Fair value less costs of disposal may be determined using various valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. If the FVLCD exceeds the carrying amount of an asset or CGU then the asset or CGU is not impaired and it is not necessary to calculate the VIU. The impairment losses of PPE are accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income.
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9.2 Property, plant and equipment in the statement of financial position Land and buildings Telecom equipment Other equipment Total 01.01.2022 Gross value ............................................................................................ 135,605 1,149,359 89,446 1,374,410 Accumulated depreciation ................................................................. (66,658) (793,985) (76,174) (936,817)
Carrying amount .......................................................................... 68,947 355,374 13,272 437,593
Of which held for sale .......................................................................... (133) (17) (11) (161)
68,814 355,357 13,261 437,432
Carrying amount – January 1, 2022................................................. 68,947 355,374 13,272 437,593
Investments ........................................................................................... 1,040 91,757 2,740 95,537
Additions due to business combinations ........................................ 6 422 37 465
Disposals due to business combinations ......................................... (23) (1,573) (49) (1,645)
Changes due to revisions of asset retirement obligations ........... 516 - - 516
Disposals ................................................................................................ (151) (558) (252) (961)
Depreciation charge ............................................................................ (4,104) (60,074) (5,046) (69,224)
Reclassifications ................................................................................... (70) 7,292 409 7,631
Exchange differences .......................................................................... 1,436 4,133 229 5,798
Carrying amount – December 31, 2022 ..................................... 67,597 396,773 11,340 475,710
12.31.2022 Gross value ............................................................................................ 138,719 1,209,659 85,630 1,434,008 Accumulated depreciation ................................................................. (71,122) (812,886) (74,290) (958,298)
Carrying amount .......................................................................... 67,597 396,773 11,340 475,710
Of which held for sale .......................................................................... - (2) - (2)
67,597 396,771 11,340 475,708
Carrying amount – January 1, 2023................................................. 67,597 396,771 11,340 475,708
Investments ........................................................................................... 1,903 66,439 5,014 73,356
Additions due to business combinations ........................................ - - - -
Disposals due to business combinations ......................................... - - - -
Changes due to revisions of asset retirement obligations ........... 508 - - 508
Disposals ................................................................................................ (146) (689) (151) (986)
Depreciation charge ............................................................................ (4,183) (60,294) (4,745) (69,222)
Reclassifications ................................................................................... (185) 587 884 1,286
Exchange differences .......................................................................... (781) (2,516) (115) (3,412)
Carrying amount – December 31, 2023 ..................................... 64,713 400,298 12,227 477,238
12.31.2023 Gross value ............................................................................................ 139,033 1,189,416 87,242 1,415,691 Accumulated depreciation ................................................................. (74,320) (789,118) (75,015) (938,453)
Carrying amount .......................................................................... 64,713 400,298 12,227 477,238
Of which held for sale .......................................................................... (252) (94) - (346)
64,461 400,204 12,227 476,892
This table contains property, plant and equipment assets subject to operating leases, for further information see Note 17.3.
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The right-of-use assets by class of underlying asset are listed in the table below. For further information, please see Note
17.
Land and Telecom Other
buildings equipment equipment Total
01.01.2022
Gross value ........................................................................................... 111,290 50,855 8,732 170,877
Accumulated depreciation ................................................................ (33,873) (10,548) (4,101) (48,522) Carrying amount ......................................................................... 77,417 40,307 4,631 122,355
Carrying amount – January 1, 2022................................................ 77,417 40,307 4,631 122,355
Investments .......................................................................................... 10,256 14,261 5,644 30,161
Disposals ............................................................................................... (873) (228) (140) (1,241)
Depreciation charge ........................................................................... (12,674) (4,925) (2,720) (20,319)
Reclassifications .................................................................................. (609) (7,022) - (7,631)
Exchange differences ......................................................................... 292 75 47 414
Carrying amount – December 31, 2022 .................................... 73,809 42,468 7,462 123,739
12.31.2022
Gross value ........................................................................................... 118,617 55,861 12,803 187,281
Accumulated depreciation ................................................................ (44,808) (13,393) (5,341) (63,542) Carrying amount ......................................................................... 73,809 42,468 7,462 123,739
Carrying amount – January 1, 2023................................................ 73,809 42,468 7,462 123,739
Investments .......................................................................................... 10,543 11,446 1,100 23,089
Disposals ............................................................................................... (725) (154) (170) (1,049)
Depreciation charge ........................................................................... (13,969) (5,231) (3,059) (22,259)
Reclassifications .................................................................................. - (1,286) - (1,286)
Exchange differences ......................................................................... (155) (93) (26) (274)
Carrying amount – December 31, 2023 .................................... 69,503 47,150 5,307 121,960
12.31.2023
Gross value ........................................................................................... 127,204 64,908 11,939 204,051
Accumulated depreciation ................................................................ (57,701) (17,758) (6,632) (82,091) Carrying amount ......................................................................... 69,503 47,150 5,307 121,960 The closing balance of Property, plant and equipment (PPE) includes assets under construction in an amount of HUF 45,306 million as at December 31, 2023 (2022: HUF 63,095 million). In the table above, the assets under construction are shown in the categories where the asset is expected to be classified when placed into service. Exchange differences include the translation impact arising on the consolidation of foreign subsidiaries of the Group. Additions due to business combinations include the fair value or carrying value of the assets acquired by Magyar Telekom Plc. through business combinations at the time of the acquisition. Differences between the preliminary and the final purchase price allocations are also included in this line. Changes due to revisions of asset retirement obligations represent the adjustments of the carrying amounts of the assets against a provision for asset retirement obligation (see also Note 13.2.4). No material impairment was identified in 2023 and 2022. The Group has no PPE with restricted titles or pledged as security as at December 31, 2023 or December 31, 2022.
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9.3 Review of useful lives Reviews of the useful lives (and residual values) of property, plant and equipment based on the strategic directions and accepted annual development plans conducted in 2023 affected the useful lives of a large number of assets. The revisions resulted in the following change in the original trend of depreciation in the current and future years. 2023 2024 2025 2026 After 2026 Increase / (decrease) in depreciation expense .............................. 364 (1,469) 535 536 34 During 2022 reviews of the useful lives (and residual values) of property, plant and equipment based on the strategic directions and accepted annual development plans affected the useful lives of a large number of assets. The revisions resulted in the following change in the original trend of depreciation in the current and future years. 2022 2023 2024 2025 After 2025 Increase / (decrease) in depreciation expense .................................. 1,036 (1,520) 447 292 (255)
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10 INTANGIBLE ASSETS
10.1 Intangible assets – accounting policies Intangible assets are stated at historical cost less accumulated amortization and impairment losses. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use. Costs associated with developing or maintaining computer software programs are generally recognized as an expense as incurred. Costs directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee related costs and an appropriate portion of relevant overhead and borrowing costs. Most computer software capitalized include acquired elements representing the majority of the cost and own costs incurred to a lesser extent. These are considered non self-developed software. Computer software fully developed by own resources represent an immaterial portion of all software, therefore these are not disclosed separately.
Costs associated with the acquisition of long-term frequency licenses are capitalized as an intangible asset when the Company receives a right to charge users of the service provided under the license. The present value of the future annual payments for the use of the frequencies are also capitalized if these payments can be estimated reliably, or otherwise recognized as Other operating expenses in the year the payment obligation refers to. The useful lives of concessions and licenses are determined based on the underlying agreements and are amortized on a straight-line basis over the period from availability of the frequency for commercial use until the end of the initial concession or license term.
Amortization is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. Other than goodwill, the Group has no intangible assets with indefinite useful life. The amortization expense is presented in the depreciation and amortization line of the Statement of profit or loss. Intangible assets with a useful life of exactly one year are recognized if, and only if, the intangible asset was acquired before the beginning of the useful life (e.g. before the beginning of the license period of an acquired license.) On an annual basis, Magyar Telekom reviews the useful lives for consistency with current development and replacement plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 10.3. In addition to the regular revisions, any investment decisions made throughout the year may also result in a change of useful life of a group of assets.
The estimated useful lives of intangible assets other than goodwill are as follows: Years Software ..................................................................................................................................................... 1–24 Concessions and licenses ....................................................................................................................... 3–25 Other intangible assets ........................................................................................................................... 3–10
In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 – Property, Plant and Equipment or as an intangible asset under IAS 38 – Intangible Assets, management uses judgment to assess which element is more significant and recognizes the assets accordingly.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the assets’ fair value less costs of disposal and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units – CGUs). The recoverable amount of the individual intangible assets of the Group in most cases cannot be determined as individual assets and do not generate cash flows. Instead, the Group determines CGUs to which the individual assets are allocated and the fair values can only be determined at CGU level. Corporate assets which have the distinctive characteristics of not generating cash inflows independently of other assets or groups of assets are allocated to CGUs when conducting impairment tests.
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Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill allocated to the entity or business sold. Goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred. When conducting the impairment tests, Magyar Telekom allocates goodwill to its cash generating units determined at operating segment level. See also Note 3.2. Operating segments may include one clearly identifiable company or a group of companies, or certain components of one company and other companies as well. The Group establishes the segments’ recoverable amounts by determining their fair value less cost of disposal by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The fair values determined as described above are used as a basis when establishing the need for an impairment of any goodwill allocated to the operating segments. As long as the FVLCD exceeds the carrying amount of a CGU, in this case an operating segment, then the CGU is not impaired and it is not necessary to calculate the VIU. Calculation of VIU is performed only if FVLCD does not exceed the carrying amount of an operating segment. If the calculated recoverable value is lower than the carrying amount of the operating segment, goodwill is impaired.
The impairment losses of intangible assets, including that of goodwill are accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income.
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10.2 Intangible assets in the statement of financial position
Concessions
Goodwill and licenses Software Other Total
01.01.2022
Gross value ................................................................. 212,513 354,334 343,761 35,257 945,865
Accumulated amortization ...................................... - (106,618) (260,512) (20,073) (387,203)
Carrying amount .................................................. 212,513 247,716 83,249 15,184 558,662
Carrying amount – January 1, 2022...................... 212,513 247,716 83,249 15,184 558,662
Investments ................................................................ - 3,491 20,567 9,634 33,692
Additions due to business combinations .............. 266 - - 868 1,134
Disposals due to business combinations .............. (66) - 43 - (23)
Disposals ..................................................................... - - (967) (3) (970)
Amortization charge ................................................. - (17,326) (24,705) (7,194) (49,225)
Reclassifications ........................................................ - (438) 472 (34) -
Exchange differences ............................................... - 381 674 573 1,628
Carrying amount – December 31, 2022 ............. 212,713 233,824 79,333 19,028 544,898
12.31.2022
Gross value ................................................................. 212,713 277,681 342,238 42,378 875,010
Accumulated amortization ...................................... - (43,857) (262,905) (23,350) (330,112)
Carrying amount .................................................. 212,713 233,824 79,333 19,028 544,898
Carrying amount – January 1, 2023...................... 212,713 233,824 79,333 19,028 544,898
Investment .................................................................. - 586 24,384 6,866 31,836
Additions due to business combinations .............. - - - - -
Disposals due to business combinations .............. - - - - -
Disposals ..................................................................... - - (597) (4) (601)
Amortization charge ................................................. - (16,614) (24,088) (6,985) (47,687)
Reclassifications ........................................................ - - - - -
Exchange differences ............................................... - (303) (360) (411) (1,074)
Carrying amount – December 31, 2023 ............. 212,713 217,493 78,672 18,494 527,372
12.31.2023
Gross value ................................................................. 212,713 277,626 350,186 45,678 886,203
Accumulated amortization ...................................... - (60,133) (271,514) (27,184) (358,831)
Carrying amount .................................................. 212,713 217,493 78,672 18,494 527,372
Additions due to business combinations include the fair value of assets acquired by Magyar Telekom through business combinations in the reported years and the goodwill arising on these business combinations. Differences between the preliminary and the final purchase price allocations are also included in this line. Exchange differences include the translation impact arising on the consolidation of foreign subsidiaries of the Group. Investments represent the regular investing activity in intangible assets. The book value of Concessions and licenses represents the frequencies initially recognized consisting of a one-time spectrum fee and the present value of annual band fees related to spectrums band. The useful life of these frequencies and the present value calculations are based on the term of rights of use for these frequencies. For further information see Notes 4.4.4.1, 10.5, 28 and 34.2.
The amortization expense, as well as the impairment losses of intangible assets, including also goodwill, is accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income.
The Group has no intangible assets with restricted title or pledged as security as at December 31, 2023 or December 31, 2022.
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10.3 Useful lives The reviews of the useful lives of intangible assets based on the strategic direction and accepted annual development plans during 2023 and 2022 affected the useful lives of a large number of assets primarily software. The revisions resulted in the following change in the original trend of amortization in the current and future years. 2023 2024 2025 2026 After 2026 Increase / (decrease) in depreciation expense ........................... (468) (1,709) (773) 17 2,933 2022 2023 2024 2025 After 2025 Increase / (decrease) in depreciation expense ........................... (2,562) (115) 724 622 1,330
10.4 Goodwill For the goodwill impairment tests, the total amount of goodwill was allocated to the operating segments of the Group and the recoverable amounts of the operating segments were determined based on fair values less costs of disposal based on Level 3 inputs in the fair value calculations (Note 4.5.1). The recoverable amounts of the segments disclosed in the table below exclude net debts (Note 5.2), which are not allocated to the segments. For further information, please also see Note 3.2 and 10.1. 12.31.2022 12.31.2023
Carrying amount of Recoverable amount of Carrying amount of Recoverable amount of
Operating Operating
Goodwill segment operating Goodwill segment operating
allocated (incl. goodwill) segment allocated (incl. goodwill) segment
MT-Hungary .............. 192,514 1,052,686 1,368,990 192,514 1,063,601 2,486,970
North Macedonia ..... 20,199 142,200 183,863 20,199 137,119 201,401
Total .......................... 212,713 1,194,886 1,552,853 212,713 1,200,720 2,688,371
The Group regularly carries out the annual impairment test on goodwill in the last quarter of the financial years, while a quick goodwill impairment test is conducted quarterly based on the main input changes. During the impairment tests conducted in 2022 and 2023 no goodwill impairment was established for any goodwill of the Group.
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10.5 Significant individual other intangible assets The Group’s most significant individual other intangible assets are the mobile licenses. The carrying values and remaining amortization periods of the significant licenses are listed in the table below. For further information on these assets, please see Note 34.
12.31.2022 12.31.2023
Remaining Remaining
Carrying amortization Carrying amortization
amount period (years) amount period (years)
Hungary
700 MHz ...................................................................................... 36,340 17 34,234 16
800 MHz ...................................................................................... 25,266 11 23,069 10
900 MHz ...................................................................................... 37,047 11-20 35,034 10-19
1800 MHz .................................................................................... 63,845 11-20 59,894 10-19
2100 MHz .................................................................................... 26,019 4-17 22,991 3-16
2600 MHz .................................................................................... 11,370 11 10,381 10
26 GHz.......................................................................................... 145 1-4 48 3
32 GHz.......................................................................................... - - 563 14
3600 MHz .................................................................................... 26,905 17 25,346 16
Macedonia
100 MHz ...................................................................................... 1,126 15 1,002 14
700 MHz ...................................................................................... 2,038 15 1,813 14
800 MHz/1800 MHz .................................................................. 2,253 11 1,955 10
1800 MHz .................................................................................... 25 6 20 5
2100 MHz .................................................................................... 1,248 5-6 991 4-5
Other ...................................................................................... 197 4 152 3
Total concessions and licenses ............................................. 233,824 217,493
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11 INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS
11.1 Associates and joint arrangements – accounting policies Associates are entities over which the Group has significant influence but not control, generally reflecting a voting right between 20% and 50%. Joint arrangements are arrangements where the parties are bound by a contractual arrangement of which two or more parties have joint control and which exist only when decisions about the relevant activities require the unanimous consent of the parties sharing the control. If the parties that have joint control of the arrangement have rights to the net assets of the arrangement, it is a joint venture. If the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement, it is a joint operation. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates and joint ventures includes goodwill arising on acquisitions, and net of any accumulated impairment loss. The Group’s share of its associates’ and joint ventures’ post-acquisition profits or losses is recognized in the Profit for the period (Share of associates’ and joint ventures’ profits). The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the company, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the company. Accounting policies of associates and joint ventures are adjusted where necessary to ensure consistency with the policies adopted by the Group. In case of a joint operation, the assets, liabilities, revenue and expenses relating to the joint operation are recognized to the extent of the Group’s interest in the joint operation.
11.2 Associates The Group had no significant associates at December 31, 2022 and 2023. The Group had no contingent liabilities or commitments related to its associates at December 31, 2022 and 2023.
11.3 Joint ventures The Group had no joint venture at December 31, 2022 and 2023.
11.4 Joint operations Magyar Telekom and Yettel Hungary (formerly: Telenor Hungary) agreed in 2015 to jointly operate and develop their 800 MHz 4G mobile networks in all parts of Hungary except Budapest. The primary goal of the agreement was to accelerate 4G mobile broadband coverage rollout in the countryside and to offer higher bandwidth to the 4G customers, in line with the coverage obligations of the 800 MHz spectrum contract signed in 2014 with the NRA. Based on the agreement, Yettel Hungary maintains sites in West Hungary and Magyar Telekom operates base stations in the eastern region of the country. The Company assessed the agreement as joint operation as strategic decisions are made jointly by Magyar Telekom and Yettel, and there is no separate vehicle to control the operation of the arrangement. The Company does not share the obligations for liabilities and any returns or expenses beyond the assets included in the agreement. Therefore only the assets owned by the Company are recognized while there is no need to present the partner’s assets, liabilities, or revenue and expenses. The charges from Magyar Telekom to Yettel and from Yettel to Magyar Telekom are almost equal and settled on a net basis and accounted for in the statement of profit or loss on a gross basis and the effect of this settlement is not significant. If any of the parties initiates the termination of this contract, in order to ensure the continuous service for the customers the Company might be exposed to additional capital expenditure. The probability is estimated remote by the Management currently.
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12 OTHER ASSETS Other assets usually include current and non-current receivables considered as non-financial instruments.
12.1 Other current assets 12.31.2022 12.31.2023
Prepayments and advance payments ............................................................. 10,042 7,623
Other taxes receivable........................................................................................ 718 640
Other ...................................................................................................................... 265 192
Total............................................................................................................ 11,025 8,455
12.2 Other non-current assets 12.31.2022 12.31.2023 Asset recognized from the costs of obtaining a contract with customers (Notes 3.4, 18.1.1 and 18.4) .......................................................................................................................... 7 402 7 437 Asset recognized from the costs to fulfill a contract with customers (Notes 3.4, 18.1.1 and 18.4) .......................................................................................................................... - 1 712 Other .............................................................................................................................................. 316 289 Total................................................................................................................................. 7 718 9 438
13 PROVISIONS 13.1 Provisions – accounting policies Provisions are recognized when Magyar Telekom has a present legal or constructive obligation (excluding executory contracts) as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured and recorded as the best estimate of the economic outflow required to settle the present obligation at the financial statement date. The estimate can be calculated as the weighted average of estimated potential outcomes or can also be the single most likely outcome. Provisions for obligations expected to fall due after 12 months are generally recognized at their present value and are accreted (against Interest expense) until utilization or reversal. Expenses for provisions are recognized in the line item of the Consolidated statement of profit or loss and other comprehensive income where the actual expense is expected to be incurred. When a provision is released unused, it is released typically to the same line item of the Statement of profit or loss and other comprehensive income where it was originally provided for.
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13.2 Provisions in the statement of financial position
Share- Other Total
Severance based employee employee Legal
payment payments related related cases ARO Other Total
01.01.2022 ................................................. 702 2,799 660 4,161 1,713 8,597 1,610 16,081
Amounts reversed ..................................... (114) (129) - (243) (20) (12) (1,358) (1,633)
Additions ..................................................... 1,502 1,687 547 3,736 299 516 715 5,266
Interest ........................................................ - (32) - (32) 627 505 - 1,100
Exchange rate difference ......................... - 29 55 84 14 (1) - 97
Amounts utilized (incl. interest
component) ................................................ (1,291) (1,937) (528) (3,756) (1,070) (58) (464) (5,348)
12.31.2022 ............................................ 799 2,417 734 3,950 1,563 9,547 503 15,563
Of which current ........................................ 732 1,359 497 2,588 86 19 266 2,959
Of which non-current ................................ 67 1,058 237 1,362 1,477 9,528 237 12,604
01.01.2023 ................................................. 799 2,417 734 3,950 1,563 9,547 503 15,563
Amounts reversed ..................................... (172) (157) (19) (348) (644) (194) (312) (1,498)
Additions ..................................................... 1,356 1,513 546 3,415 50 508 490 4,463
Interest ........................................................ - 18 - 18 (688) 766 - 96
Exchange rate difference ......................... 3 (24) (32) (53) (4) - - (57)
Amounts utilized (incl. interest
component) ................................................ (1,193) (1,345) (468) (3,006) (187) (44) (193) (3,430)
12.31.2023 ............................................ 793 2,422 761 3,976 90 10,583 488 15,137
Of which current ........................................ 743 1,186 526 2,455 90 36 227 2,808
Of which non-current ................................ 50 1,236 235 1,521 - 10,547 261 12,329
The Interest lines in the table above include the subsequent unwinding of the discount applied at initial recognition and the interest element of any provision recognized, as well as the release of the interest / accretion element in case of reversal of provisions. Magyar Telekom does not expect any reimbursement with regards to the provisions recognized, therefore no related assets have been recognized in the financial statements.
13.2.1 Severance payment The majority of the provision for severance as at December 31, 2023 relates to the stand-by-pool and the employee terminations payable in 2024 in relation to the efficiency improvement in Magyar Telekom Plc. The stand-by-pool of employees includes people whose legal status is an employee, however, these people do not provide services to the Company any more, but the Company provides a reduced amount of compensation and pays social security expenses for them. This is a manner of severance that is not paid in one lump sum but in monthly installments following the discontinuation of services. The majority of the provision for severance as at December 31, 2022 also related to the stand- by-pool and the employee terminations paid in 2023 in relation to the efficiency improvement in Magyar Telekom Plc. 462 employees left the Group in 2023 (2022: 491), related to which termination payments were made. The balance of provision as at December 31, 2023 relates to 100 employees and employees in the stand-by-pool (2022: 131). The total payments made in relation to employee termination in 2023 amounted to HUF 2,199 million (2022: HUF 2,402 million).
13.2.2 Share-based payments Share-based payments are detailed in Note 20.1.2.
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13.2.3 Legal cases Provisions for legal cases mainly include amounts expected to be paid to regulatory and competition authorities as well as to ex-employees and trading partners as a result of legal disputes. There are numerous legal cases for which provisions were recognized, which are individually not material.
13.2.4 Asset retirement obligations (ARO) Asset retirement obligations primarily exist in case of the telecommunications structures constructed on third parties’ properties. The Group carries out a revision of the necessary provisions every year. The revisions did not result in material changes neither in 2023, nor in 2022.
13.2.5 Other provisions Other provisions include guarantee obligations, onerous contracts and further other individually small items.
14 OTHER CURRENT LIABILITIES 12.31.2022 12.31.2023 Other taxes and social security......................................................................... 11,805 12,816 Salaries and wages .............................................................................................. 8,198 7,722 Supplementary telecommunication tax ......................................................... (a) 2,120 5,539 Deferred revenue and advances received ...................................................... 2,103 2,289 Unused advance payments for asset-related grants ................................... 5 21 Other liabilities ..................................................................................................... 124 47 Total............................................................................................................ 24,355 28,434 (a) On June 4, 2022 the Government of Hungary issued a decree (Government Decree of 197/2022. (VI.4.)) imposing a new type of tax on a number of industries, including telecommunications. For further information see Note 21.2.
15 OTHER NON-CURRENT LIABILITIES The table below shows the balances of Other non-current liabilities . 12.31.2022 12.31.2023 Other non-current liabilities ..................................................................................... 2,034 1,586 Bonds are initially recognized in 2020 at fair value (HUF 67,875 million) net of transaction costs (HUF 12 million) incurred and increased by premium received (HUF 2,948 million), which resulted in a 1.26% yield. The bond is subsequently measured at amortized cost under IFRS 9. Any difference between the proceeds (net of transaction cost) and the redemption amount are recognized in profit or loss over the period of the liability using the effective interest method. For further information please see Note 4.4.2.
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16 NON-CONTROLLING INTERESTS Non-controlling interests includes the minority shareholders in Makedonski Telekom (MKT). MKT Other Total Balance at January 1, 2022 ........................................................................ 41,172 (1,092) 40,080 Dividend declared ......................................................................................... (4,492) - (4,492) Total comprehensive income ...................................................................... 7,449 - 7,449 Balance at December 31, 2022 ........................................................... 44,129 (1,092) 43,037 Dividend declared ......................................................................................... (4,474) - (4,474) Total comprehensive income ...................................................................... 3,639 - 3,639 Balance at December 31, 2023 ........................................................... 43,294 (1,092) 42,202 16.1 Summarized financial information on subsidiaries with material Non-controlling interests The information below includes the amounts as included in the consolidation, before inter-company eliminations. a) Summarized balance sheets
MKT
12.31.2022 12.31.2023
Current assets ...................................................................................................... 29,551 30,858 Current liabilities ................................................................................................. (25,884) (24,022) Non-current assets.............................................................................................. 123,981 117,766 Non-current liabilities ......................................................................................... (5,272) (4,242) Net assets ................................................................................................... 122,376 120,360 b) Summarized income statements
MKT
2022 2023
Revenue ................................................................................................................. 75,329 74,117 Profit before income tax .................................................................................... 10,765 14,187 Profit for the period ................................................................................... 9,458 12,539
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c) Summarized cash flows
MKT
12.31.2022 12.31.2023
Net cash generated from operating activities ............................................... 27,494 29,715 Net cash used in investing activities................................................................ (16,312) (12,631) Dividends/capital reduction paid to Controlling interests .......................... (5,868) (5,851) Dividends/capital reduction paid to Non-controlling interests ................. (4,492) (4,474) Other cash flows from financing activities ..................................................... (4,288) (4,562) Net cash used in financing activities ........................................................ (14,648) (14,887)
16.2 Transactions with Non-controlling interests There were no material transactions with Non-controlling interests in 2023 or 2022 other than the dividend payments. The only significant Non-controlling interest of the Group is the Republic of North Macedonia, holding shares in MKT. MKT and Magyar Telekom did not execute as part of their normal business activities any transactions that were individually material in the 2023 or 2022 financial year with companies controlled by the Republic of North Macedonia or companies over which the Republic of North Macedonia can exercise a significant influence.
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17 LEASES 17.1 Leases – Accounting policies A contract is a lease (or contains a lease) if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Recognition exemptions Short-term leases, low value leases IFRS 16 includes recognition exemptions available to lessees for short-term leases and leases of low-value items and specifies alternative requirements. ▪ In the Group, a decision was made not to apply the short-term recognition exemptions to lease contracts, except for some minor and insignificant lease arrangements with a lease term of one month or less. Such very short-term leases and related asset classes are expensed as incurred and no additional quantitative disclosure is required. ▪ The Group has made the decision not to apply the practical expedient with respect to low value items. Hence they have to be recognized, measured and presented as lease arrangements in the scope of IFRS 16. Lease term The lease term assessment at the commencement date refers to the period for which the Group is reasonably certain to maintain the contract under the terms and conditions as originally negotiated. The initial lease term assessment is made at commencement of the lease. When determining the lease term, the shortest reasonably possible, i.e. justifiable, term is always to be used in case of doubt. The lease term assessment is largely based on management judgement and the Group usually use estimates or assumptions (especially in the case of options and indefinite contracts) on asset cluster level. The commencement date of the lease (commencement date) is the date on which a lessor makes an underlying asset (i.e., the property, plant or equipment that is subject to the lease) available for use to the lessee. At the commencement date, the lease term begins, and lease liability and the right-of-use asset are initially recognized and measured. Options - “Reasonably certain criteria” In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, lessees and lessors shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease. Lease payments Lease payments are defined as payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term. The Group decided to apply the practical expedient not to separate lease from non-lease components on the lessee side (except data centers; car fleet). As a result, lease and non-lease components will be considered a single lease component. In accordance with the recognition and measurement requirements in IFRS 16, the initial measurement of the lease liability includes variable lease payments that depend on an index or rate, e.g. the consumer price index (CPI) or a market interest rate, such as the Budapest Interbank Offered Rate (BUBOR). In contrast, variable lease payments that are not based on an index or rate (e.g. for example, variable lease payments linked to performance or usage of the underlying asset) and which are not in-substance fixed payments are not included in lease payments and recognized in profit or loss in the period in which the event or condition occurs that triggers those payments. Reassessment of the lease liability IFRS 16 specifies when the lease liability has to be reassessed. It is important to note that, in terms of IFRS 16, a reassessment of the lease liability only takes place if the change is based on already existing contractual clauses, i.e. those that have been part of the contract since commencement.
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A lessee reassesses the lease term, i.e. whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that: is within the control of the lessee; and affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term. Accounting for lease modifications A lease modification is defined as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term)”. Modification can result from a change in consideration only. The effective date of the modification is defined as the date when both parties agree to a lease modification. A lessee accounts for a lease modification as a separate lease if both of the following conditions are fulfilled: ▪ the modification increases the scope of the lease by adding the right to use one or more underlying assets; and ▪ the consideration for the lease increases by an amount equivalent to the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. When these conditions are met, the modification is considered to result in the creation of a new lease that is separate from the original lease. The agreement for the right to use one or more additional assets is accounted for as a separate lease (or leases) to which the requirements of IFRS 16 are applied independently of the original lease. For a lease modification that is not a separate lease, i.e. that does not meet the conditions outlined above, at the effective date of the modification, the lessee accounts for the lease modification by remeasuring the lease liability using a discount rate determined at that date and: ▪ for lease modifications that decrease the scope of the lease, the lessee decreases the carrying amount of the right- of-use asset to reflect the partial or full termination of the lease, and recognizes a gain or loss that reflects the proportionate decrease in scope; and ▪ for all other lease modifications, the lessee makes a corresponding adjustment to the right-of-use asset. When a lease arrangement is modified, then the revised lease payments will always be discounted with a revised discount rate. This is different from the requirements for a reassessment of the lease, where only in specific cases a revised discount rate is required. Presentation and disclosures for the Group as lessee Statement of financial position The Group decided to present the right-of-use assets (separately from other assets) as well the lease liabilities as separate line items on the face of the statement of financial position. Statement of profit or loss and other comprehensive income In the statement of profit or loss and other comprehensive income the Group presents separately interest expense on the lease liability from depreciation for the right-of-use asset. Statement of cash flows The following items are presented within operating activities in the statement of cash flows: ▪ cash payments for the interest portion of the lease liability, according to the Group accounting policy to present interest payments in operating cash flows and; ▪ variable lease payments not included in the lease liability Cash payments for the principal portion of lease liability are presented within financing activities in the statement of cash flows.
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Presentation and disclosures for the Group as lessor Presentation of leases in Statement of profit or loss and other comprehensive income and in Statement of financial position In the MT Group consolidated Statement of profit or loss and other comprehensive income, operating lease revenue is not disclosed separately from other revenue. There is only one-line item titled “Revenue”. In the Notes to the Financial Statements there is a further breakdown of Revenue provided including a breakdown of operating lease revenue by the Group segments. The operating lease revenue line item in the Note 18.3 is titled “Other sources”. The Group as a Lessor presents assets subject to operating leases in its statement of financial position according to the nature of the underlying asset. In the Group, portions of assets that are physically distinct and are identified as underlying assets (leases) are not presented separately from the whole asset in the statement of financial position. Other lease topics Sale and leaseback transactions Assessing whether the transfer of the asset qualifies as a sale. In the Group, both the short-term and the low value recognition exception have not been elected for any asset class. As a result, the Group seller-lessee will always recognize (materiality considered) sale-and-leaseback transactions on-balance sheet. To determine how to account for a sale-and-leaseback transaction, the Group first considers whether the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale. The Group then applies IFRS 15 to determine whether a sale has taken place. This assessment determines the accounting by both the seller-lessee and the buyer-lessor, as follows. Accounting for sale and leaseback − Transfer of an asset is not a sale If the transfer of an asset is not a sale, the seller-lessee and the buyer-lessor account for the transaction as financing. Accounting for sale and leaseback − Transfer of an asset is a sale If control passes as defined in IFRS 15 (sale), the seller-lessee must recognize an asset at an amount equaling the pro-rata carrying amount arising from the pro-rata right-of-use retained. Any gains or losses from this transaction are also only recognized proportionately. Hence, the seller-lessee restricts the gain that it recognizes on the sale to the amount that relates to the portion of the underlying asset that has been transferred, i.e. to the buyer-lessor’s residual interest in the underlying asset. Sale and leaseback transactions had no material effect on financial statements of the Group. Subleases A sublease is defined as a transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect. In classifying a sublease, the Group, as the intermediate lessor, should classify the sublease as a finance lease or an operating lease in the same manner as any other lease using the criteria discussed in IFRS 16.61. At the commencement date of the sublease, if the Group cannot readily determine the rate implicit in the sublease, then it uses the discount rate that it uses for the head lease to account for the sublease, adjusted for any initial direct costs associated with the sublease. Subleases had no material effect on financial statements of the Group.
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Presentation and disclosures for subleases No sublease specific balance sheet and income statement presentation rules apply to subleases. The Group applies the respective presentation rules that apply to other finance and operating leases. The Group does not offset assets and liabilities arising from a head lease and a sublease of the same underlying asset, unless the financial instruments requirements for offsetting are met. The same applies to lease income and lease expenses relating to a head lease and a sublease of the same underlying asset, unless the requirements for offsetting in IAS 1 are met. Under IFRS 16 the head lease and a sublease are two separate contracts that are accounted for under the lessee and lessor models, respectively. The general disclosure rules equally apply for the head lease and for subleases, either disclosures for finance sub-lessors or operating sub-lessors. Lessor accounting Finance lease – Definition A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee. The nature of finance lease arrangement is akin to financing the sale of an asset. The presentation in the financial statements departs from the legal lease form of the transaction and is based on the economic substance (i.e. as if the underlying lease asset was sold by the lessor to the lessee). Operating lease – Definition An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. There is a typically simple short-term hire arrangement (an operating lease), whereby rental payments received are dealt with in profit or loss with the primary impact on the balance sheet relating to the timing of lease payments.
17.2 Finance leases 17.2.1 Finance lease – Group as lessor Finance leases mainly include equipment – offices, dark fibres, broadband network, sites – provided to business customers as part of IT service contracts where the Group is the service provider. Future lease receivables under finance leases at December 31, 2022 and 2023 are as follows:
12.31.2022 12.31.2023
Present Interest Minimum Present Interest Minimum
value component lease receipt value component lease receipt
Within 1 year ........................................... 287 36 323 247 75 322
1–2 years ................................................. 137 26 163 234 54 288
2–3 years ................................................. 100 19 119 226 32 258
3–4 years ................................................. 77 14 91 128 12 140
4–5 years ................................................. 42 10 52 44 7 51
After 5 years ............................................ 124 13 137 76 6 82
Total.................................................... 767 118 885 955 186 1,141
The interest component represents the unearned finance income. The present value due within one year is included in Other current financial assets, while the present value after one year is included in Other non-current financial assets. The finance income accruing to the company over the lease term is recognized in the Profit for the period (Interest income) see Note 23. The unguaranteed residual values accruing to the benefit of the company are insignificant.
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17.2.2 Lease – Group as lessee Leases are mainly in respect of the rental of the new headquarters, mobile cell sites and sale and lease back of spaces in buildings accommodating telephone exchanges, and to a lesser extent, related to other buildings, network and other telecommunications facilities, equipment and vehicle. In most cases the contracts are denominated in HUF and EUR, the term of the leases is 1–15 years, considering the renewal options but no purchase options. Leases of buildings generally have lease terms between 1 and 12 years, in the case of telecom equipment 3 and 15 years, while these terms are between 1 and 4 years in relation for motor vehicles and other equipment. The Group’s obligations under its leases are secured by the lessor’s title to the leased assets. Generally, the Group is restricted from assigning and subleasing the leased assets and some contracts require the Group to maintain certain financial ratios. The maturity analysis of lease liabilities is disclosed in Note 5.1.3. The following are the amounts recognized in profit or loss: 2022 2023 Depreciation expense of right-of-use assets ........................................................ 20,319 22,259 Interest expense on lease liabilities ........................................................................ 6,114 6,964 Foreign exchange loss on lease liabilities .............................................................. 4,232 (2,538) Income from subleasing right-of-use assets ........................................................ 73 614 Gains or losses arising from sale and leaseback transactions ........................... - - The Group had total cash outflows for leases of HUF 24,731 million in 2023 (HUF 25,909 million in 2022). The Company has various lease contracts that have not yet commenced as at December 31, 2023. The future lease payments for these non-cancellable lease contracts are HUF 9,967 million in 2023 (HUF 9,676 million in 2022). The amount of undiscounted potential future rental payments relating to periods following the exercise date of extension and termination options that are not included in the lease term is HUF 16,112 million in 2023 (HUF 17,316 million in 2022). The Group initially estimates and recognizes amounts expected to be payable under residual value guarantees as part of the lease liability. Typically, the expected residual value at lease commencement is equal to or higher than the guaranteed amount, and so the Group does not expect to pay anything under the guarantees. At the end of each reporting period, the expected residual value is reviewed to reflect actual residual values achieved on comparable assets and expectations about future prices. As at December 31, 2023, there is no amount of residual value guarantees to which the Company is potentially exposed that are not reflected in the measurement of lease liabilities (zero in 2022).
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17.3 Operating leases – Group as lessor The following table includes the future minimum lease payments receivable by the Group for the operating leases of mobile tower sections, network, dark fiber, buildings and customer premise equipments. 12.31. 2022 12.31.2023 Within 1 year ............................................................................................................... 4,413 4,362 1–2 years ..................................................................................................................... 3,802 3,851 2–3 years ..................................................................................................................... 3,554 3,596 3–4 years ..................................................................................................................... 3,400 3,211 4–5 years ..................................................................................................................... 2,955 2,742 After 5 years ................................................................................................................ 1,321 1,431 Total................................................................................................................. 19,445 19,193 The lease income from operating leases is HUF 9,185 million in 2023 (HUF 7,842 million in 2022). The Group has no lease income relating to variable lease payments that do not depend on an index or rate. The estimated expected credit loss on operating lease receivables considered to be not material and not recognized. The following table disaggregates class of property, plant and equipment into assets subject to operating leases:
Land and Telecom
buildings equipment Total
01.01.2022
Gross value ........................................................................................ 3,995 2,754 6,749
Accumulated depreciation ............................................................. (1,946) (1,519) (3,465)
Carrying amount 01.01.2022 .................................................. 2,049 1,235 3,284
Carrying amount - 01.01.2022 ...................................................... 2,049 1,235 3,284
Additions ............................................................................................ 79 6,991 7,070
Disposal .............................................................................................. (57) (77) (134)
Depreciation charge ........................................................................ (122) (1,171) (1,293)
Exchange differences ...................................................................... 6 4 10
Carrying amount - 12.31.2022 ................................................ 1,955 6,982 8,937
12.31.2022
Gross value ........................................................................................ 4,003 9,664 13,667
Accumulated depreciation ............................................................. (2,048) (2,682) (4,730)
Carrying amount 31.12.2022 .................................................. 1,955 6,982 8,937
Carrying amount - 01.01.2023 ...................................................... 1,955 6,982 8,937
Additions ............................................................................................ 154 4,271 4,425
Disposal .............................................................................................. (357) (147) (504)
Depreciation charge ........................................................................ (114) (2,044) (2,158)
Exchange differences (5) (2) (7)
Carrying amount - 12.31.2023 ................................................ 1,633 9,060 10,693
12.31.2023
Gross value ........................................................................................ 3,369 13,422 16,791
Accumulated depreciation ............................................................. (1,736) (4,362) (6,098)
Carrying amount 31.12.2023 .................................................. 1,633 9,060 10,693
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18 REVENUE 18.1 Revenue – accounting policies 18.1.1 Sale of goods and Rendering of services The core principle of IFRS 15 is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. Revenue should be recognized if it is probable that the Group will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. If the Group determines that collectability is no longer ensured (e.g. because subsequently the customer’s ability or intent to pay significantly deteriorates), the Group must apply cash accounting for the remainder of the contract, i.e. for the outstanding goods and services to be provided. This reassessment does not affect recorded assets and revenue relating to performance obligations already satisfied. Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control either transfers over time or at a point in time, which affects when revenue is recorded. As a practical expedient, the Group applies the guidance to a group of contracts with similar characteristics instead of to a single contract with a customer. A portfolio approach is acceptable if the Group can reasonably expect that the effect of applying a portfolio approach to a group of contracts or group of performance obligations would not differ materially from considering each contract or performance obligation separately. This implies that a portfolio of contracts with similar characteristics does not necessarily need to refer to homogenous products being included in these contracts. Main principles ▪ If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the Group shall present the contract as a Contract asset, excluding any amounts presented as a receivable. A contract asset is the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer. ▪ In the case of multiple-element arrangements (e.g., mobile contract plus handset) with subsidized products delivered in advance, a larger portion of the total remuneration is attributable to the component delivered in advance (mobile handset), requiring earlier recognition of revenue. This leads to the recognition of what is known as a contract asset in the Consolidated Statement of Financial Position. See Note 3.4 for more details. ▪ Incremental expenses for sales commissions (customer acquisition costs or costs of obtaining a contract) and costs to fulfill a contract with a customer must be capitalized and presented on the Other current and non-current assets lines of the Consolidated Statement of Financial Position and recognized over the estimated customer retention period or over the useful life of the contracts, see Notes 3.4, 12.2 and 18.4 for more details. ▪ Later recognition of revenue in cases where “material rights” are granted, such as offering additional discounts for future purchases of further products. ▪ Contract liabilities are netted off against the contract assets for each customer contract. ▪ The Group presents the revenue on gross basis (as principal) when it controls the specified goods or services before they are transferred to the customer, and it must be transferred by the Group. ▪ When the Group is a reseller of a supplier’s branded digital products and is the legal seller of these products, it should generally be considered primarily responsible towards the customer for providing the promised goods or services when both of the following conditions are fulfilled: ▪ The Group is the only party which the customer enters into a contract with; ▪ The Group must be the only party that is responsible towards the customer for product acceptability, providing support, handling complaints and rectifying product issues. ▪ A significant financing component is not considered for the amount and timing of revenue recognition if the period between when a promised good or service is transferred to the customer and when the customer pays for that good or service will be one year or less. For service contracts covering period over one year, consisting specifically trade receivables over one year and contract assets, revenue is recognized using the effective interest method described in notes 3.4 and 4.1.2, respectively. ▪ If the promise to grant a license is distinct from the other promised goods or services in the contract then the promise to grant the license is a separate performance obligation and the Group shall determine whether the license transfers to a customer is either at a point in time or over time.
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18.1.2 Revenue from operating leases Revenue from operating leases is recognized as revenue on a straight line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income, over the term of the lease. For further information, please see Note 17.3. 18.2 Revenue from major service lines 18.2.1 Mobile and Fixed line telecommunications revenue Revenue is primarily derived from services provided to Magyar Telekom’s customer subscribers and other third parties using Magyar Telekom’s telecommunications network and equipment sales. Customer subscriber arrangements typically include an equipment sale, subscription fee and charge for the actual voice, internet, data or multimedia services used. Subscription fees and flat rate revenue is recognized on over time basis in the period they relate to. Revenue for airtime services is recognized over-time. Revenue from fixed, mobile and TV services provided through narrow and broadband accesses are recognized over-time basis at post-paid contracts, while on usage basis at pre-paid contracts. Streaming TV service revenue is recognized on net basis, for further information see Note 18.2.2. Revenue from premium rate services typically include intermediated services (e.g. lottery, parking and public transport tickets, motorway toll) is generally recognized on net basis. Advertising revenue is recognized in the period that the advertisements are exhibited. Customers may also purchase prepaid mobile, public phone and internet credits (cards) which allow those customers to use Magyar Telekom’s telecommunications network for a selected amount of time. Customers must pay for such services at the date when the card is purchased. Revenue from the sale of cards is recognized when they are used by the customers or when the credits expire with unused traffic. Third parties using Magyar Telekom’s telecommunications network include roaming customers of other service providers and other telecommunications providers which terminate or transit calls on Magyar Telekom’s network. These wholesale (incoming) traffic revenue is recognized in the period of related usage. A proportion of the revenue received is often paid to other operators (interconnect) for the use of their networks, where applicable. The revenue and costs of these transit calls are stated gross in the Financial statements as the Group is the principal supplier of these services using its own network freely defining the pricing of the services and recognized in the period of related usage. Contracts are frequently sold to customers containing a cross subsidy between two or more components. A typical example is where a mobile phone is sold at a price significantly below its market value in a bundle with a service contract for a period of 12 or 24 months. From a commercial point of view, the subsidy on the mobile phone is compensated via the service fee. See also Note 3.4. With this adjustment requirement (also termed as "basic adjustment") a cross-subsidy or an overall bundle discount must be allocated to the individual components of the bundle consequently revenue reflects the standalone selling price of the good and/or service.
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18.2.2 System integration and Information Technology revenue (SI/IT) Contracts for network services, which consist of the installation and operation of communication networks for customers, have an average duration of 2-3 years. Revenue from systems integration or installation contracts requiring the delivery of customized products and/or services is generally performed in projects and covered by fixed-price or time and material-based contracts. For fixed-price contracts, revenue is measured based on the input method that determined on the progress of performance. In this case revenue recognition is based on the efforts or inputs to the satisfaction of a performance obligation (resources consumed, labour hours expended, cost incurred, time elapsed or machine hours used) relative to the total expected inputs. In case of contracts billed on the basis of time and material, revenue is recognized over time. Ongoing operation of IT system – outsourcing contracts – reflects the extent of actual services delivered in the period in accordance with the terms of the contract, could be performed either on the equipment of the client or the Group’s (e.g. cloud, running, monitoring and maintenance services) related revenue invoiced on monthly basis (over-time). Revenue IT services delivered in the period in accordance with the terms of the contract are analyzed based on the IFRS 16 requirements – determining whether an arrangement contains a lease, and if they include embedded lease elements, the revenue attributable to these is recognized according to IFRS 16 – Leases as described in Note 17. Magyar Telekom transfers control of goods and services over time, therefore satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: ▪ a customer simultaneously receives and consumes the benefit provided by Magyar Telekom’s performance as Magyar Telekom performs, containing services provided continuously during the contracted period (desktop services, database management services, operational and maintenance services). ▪ Magyar Telekom’s performance creates or enhances assets that the customer controls as the asset is created or enhanced or Magyar Telekom’s performance does not create an asset with an alternative use to Magyar Telekom and Magyar Telekom has an enforceable right to payment for performance completed to date, include project works covering a longer period whose measured based on input method and related revenue recognized accordingly. This kind of project works could contain e.g.: Information and communications Technology (ICT) network planning and related construction works with one or more milestones during of project period from revenue recognition point of view. If the performance obligation is not satisfied over time, Magyar Telekom satisfies the performance obligation at a point in time. Revenue from hardware sales or sales-type leases is recognized when the customer obtains the control over the product. Equipment revenue is recognized at a point in time. When the Group is a reseller of a supplier’s branded digital products and is the legal seller of these products, it should generally be considered primarily responsible towards the customer for providing the promised goods or services when both of the following conditions are fulfilled: ▪ The Group is the only party which the customer enters into a contract with; ▪ The Group must be the only party that is responsible towards the customer for product acceptability, providing support, handling complaints and rectifying product issues. With (rights to) another party’s intangible goods or services with a (virtually) unlimited supply (e.g. software licenses, cloud services, streaming services), there is a rebuttable presumption that inventory risk is not a relevant indicator for control. If the good or service provided by the other party is a branded product by this other party, and the MT Group is not the legal seller of this good or service or of a right to the other party’s good or service, the Group will be considered an agent thus revenues recognized on a net basis. Revenue from software license sales provided by the Group to customers based on the principle-agent accounting method.
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18.3 Revenue in the Statement of profit or loss and other comprehensive income 18.3.1 Disaggregation of revenue from contracts with customers 2022 2023 Mobile revenue Voice retail ................................................................................................................... 115,203 125,307 Voice wholesale .......................................................................................................... 12,282 11,600 Data ............................................................................................................................... 147,060 184,698 SMS ............................................................................................................................... 24,482 26,669 Equipment.................................................................................................................... 118,171 121,323 Other mobile revenue ................................................................................................ 15,980 21,725 Total Mobile revenue ....................................................................................... 433,178 491,322 Fixed line revenue Voice retail ................................................................................................................... 34,946 35,533 Broadband retail ......................................................................................................... 73,545 91,813 TV* ................................................................................................................................ 63,145 71,962 Equipment.................................................................................................................... 16,900 19,953 Data retail..................................................................................................................... 13,226 14,099 Wholesale .................................................................................................................... 20,971 21,434 Other fixed-line revenue*.......................................................................................... 14,286 17,121 Total Fixed-line revenue .................................................................................. 237,019 271,915 System integration and IT revenue ......................................................................... 76,472 86,135 Total revenue ................................................................................................... 746,669 849,372 Of which: Revenue from contracts with customers............................................................... 738,827 840,187 Other sources .............................................................................................................. 7,842 9,185 *2022 values are represented as revenue from video-on-demand services is now included in TV revenue instead of fixed other revenue to better reflect operational performance. Other sources of revenue include real estate and network rental fees which is presented above in the Fixed-line wholesale and Fixed-line other revenue lines. None of the Group’s customers represent a significant source of revenue individually. Revenue from transactions with a single external customer (or group of entities that – knowingly to us – is under common control of a third party or government) does not exceed 10% of the Group’s revenue. Regarding geographical segmentation of revenue please see Note 33.
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18.4 Assets and liabilities related to contracts with customers Contract assets of the Group consist of unbilled amounts typically resulting from sales under long-term contracts when revenue recognized exceeds the amount billed to the customer. See Notes 3.4, 4.2.2.3, 12.2 and 18.1.1. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. Impairment losses recognized on contract assets amounted to HUF 1,993 million as at December 31, 2023 (in 2022 HUF 2,488 million). As of December 31, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligation is HUF 228,018 million and the Group will recognize this revenue as services are rendered, which is expected to occur over the next 1-102 months.
19 DIRECT COSTS
19.1 Telecom tax Telecom tax was introduced in Hungary for fixed and mobile voice and mobile SMS/MMS services, effective from July 1, 2012. The tax imposed on fixed and mobile usage amounts to HUF 2 per minute and HUF 2 per SMS/MMS for private individual subscribers’ subscriptions and to HUF 3 per minute and HUF 3 per SMS/MMS for non-private individual subscribers’ subscriptions. The tax is capped at HUF 700 and HUF 5,000 per month per calling number for private and non-private individuals’ subscriptions, respectively.
19.2 Other direct costs Other direct costs include costs of mobile and fixed devices, accessories and other equipment, agent commissions and non-voice direct costs.
12.31.2022 12.31.2023 Contract assets – current ................................................................................................ 18,586 17,358 Contract assets – non-current........................................................................................ 3,960 3,697 Contract liabilities – current ........................................................................................... (13,153) (13,818) Contract liabilities – non-current ................................................................................... (405) (358) Net contract assets (liabilities) ............................................................................. 8,988 6,879 Revenue recognized in the reporting period from amounts included in contract liability at the beginning of the period .......................................................................... 9,723 10,512 Asset recognized from the costs of obtaining a contract with customers ............ 7,402 7,437 Asset recognized from the costs to fulfill a contract with customers .................... - 1,712 Amortisation recognized as cost of obtaining a contract during the period ......... (6,470) (8,526) Amortisation recognized as cost to fulfill a contract during the period ................. - (325)
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20 EMPLOYEE-RELATED EXPENSES 20.1 Employee-related expenses – accounting policies 20.1.1 Short-term employee benefits Short-term employee benefits are recognized as a current expense in the period when employees render their services. These include wages, social security contributions, bonuses, paid holidays, discounted telephone bills, meal and holiday contributions and other fringe benefits and the tax charges thereon. Payments to defined contribution pension and other welfare plans are recognized as an expense in the period in which they are earned by the employees.
20.1.2 Share-based compensation Magyar Telekom recognizes the costs of services received from its employees in a share-based payment transaction when services are received. Magyar Telekom recognizes a corresponding increase in its equity reserves (Reserve for equity settled share based transactions) if the services are received in an equity-settled share-based payment transaction. When the share-based compensation program is completed, i.e. the shares are transferred to the employees’ ownership or the share options have forfeited, the respective reserve is transferred to Retained earnings. If the services are received in a cash-settled share-based payment transaction, the Group recognizes the expense against a liability, re-measured to fair value at each financial statement date. Bonuses tied to the long-term performance of the Magyar Telekom and Deutsche Telekom shares are recognized in the Profit for the period at their time-proportioned fair value against an accumulating balance in Provisions. 20.1.2.1 Share Matching Plan of Deutsche Telekom Group (SMP) As of July 1, 2015, Magyar Telekom implemented a Share Matching Plan. The participant can invest a minimum of 10% of his/her gross annual bonus in Deutsche Telekom shares, with an option to voluntarily increase this amount to a maximum of 50% (personal investment). These shares must be kept for at least four years (the lock-up period), the participant is granted matching shares upon expiry of the lock-up period. The share allocation ratio of the program (1:1 or 1:2) depends on the participant’s individual Management Group (MG). Deutsche Telekom grants the matching shares to the participant based on the Deutsche Telekom shares acquired by the participant within the framework of the program. The program starts annually if the free cash flow target of Deutsche Telekom Group was met in the previous year. The program initiated by DT is settled in DT shares with the participants, meanwhile Magyar Telekom has to settle it with DT AG in cash at the same time participants are granted the DT shares therefore the actual closing balance of the program is presented as a related-party financial liability in the consolidated statement of financial positions as it is settled in cash from the perspective of Magyar Telekom and is due to be paid to DT AG. In 2023 HUF 47 million was recognized as expense for the program (2022: HUF 45 million). 20.1.2.2 Long-term incentive program (LTI) As of January 1, 2015 Magyar Telekom changed its existing LTI program, turning it into a share-based compensation program. The 2022 LTI program is a global, Deutsche Telekom Group-wide incentive program. Commencing on January 1, 2023 the prerequisite of participating in LTI is the participation in the Share Matching Plan (SMP) and making a complying personal investment accordingly. Approximately 30 executives may participate in the program. The CEO’s participation is unconditional, while other executives may participate only if the evaluation of the participant's performance in the previous year meets the requirements. LTI is payable in cash tied to the achievement of four key strategic indicators. In the framework of the program, in each year a new four-year tranche is to be launched. Payment is due after the end of the program term depending on the evaluation of the achievement of the pre-set targets (0 to 150%). At the beginning of the program, the relevant incentive amount is converted into a number of virtual shares of DT AG and awarded to the plan participant in the form of virtual shares (basic number). The annual level of target achievement is determined at the end of each year. This target achievement level is multiplied on a pro rata basis by the basic number of virtual shares awarded. The number of virtual shares calculated using this method shall then be "fixed" for the plan participant as the binding result for that specific year ("annual result"). At the end of the plan term, the four binding annual results shall be added together. The resulting total number of virtual shares shall be converted into cash applying the prevailing price of DT AG shares at that time, which is paid to the plan participants. For dividend payments during the plan term, the virtual shares shall be treated as real shares. The dividends shall be taken into account as follows:
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The first,second and third dividend payments shall be “reinvested” into virtual shares when the actual dividends are paid on real shares. The fourth (last) dividend payment shall not be “reinvested” but paid in cash together with the plan payment following the DT AG shareholders' meeting at which a decision is made regarding this dividend payment. The plan currency is euro. In 2023 HUF 801 million was recognized as expenses for the program (2022: HUF 1,064 million).
20.1.3 Game Changer Incentive (GCI) Game Changer Incentive is a long-term incentive program paid in cash that is linked to the performance of two equally weighted indicators (50% financial and 50% customer centricity). The program is a four-year program, from January 1, 2022 to December 31, 2025. For each program-year different base amount, rising in sequence, has been determined. Payment condition for the given program-year is that the target achievement level of the two performance indicators are each at least 50%. The base amount payable for the program- years depend on how many times in uninterrupted succession the necessary condition has been met (sequence of payment). If the necessary condition for payment is not met in a program-year, the payment sequence will recommence with the base amount determined for the first program year. The program currency is euro. Payment is always made after the program-year’s expiry and the evaluation of the targets’ performance levels on a scale of 0-150%. The detailed rules are determined by the Remuneration and Nomination Committee. The rules of participation in the program are included in the regulation adopted by the Remuneration and Nomination Committee. After payment is made, the incentive may not be reclaimed. In 2023 HUF 422 million was recognized as expense for the program in (2022: HUF 323 million).
20.1.4 Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the nominal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without the possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.
20.2 Employee-related balances in the Statement of financial position Liabilities payable on incentive plans and termination benefits recognized as provision in the consolidated statement of financial position and annual movements for 2023 and 2022 disclosed in Note 13.2. Short-term liabilities on employee benefits (Salaries and wages) as of 2023 and 2022 presented in Note 14. 20.3 Employee-related expenses in the Statement of profit or loss and other comprehensive income 2022 2023 Short-term benefits (Note 20.1.1) .................................................................... 77,938 84,135 Termination benefits (Note 20.1.4) .................................................................. 2,487 2,239 Cash-settled share-based compensations (LTI) (Note 20.1.2.2) ............... 1,064 801 Cash-settled compensation (GCI) (Note 20.1.3) ........................................... 323 422 Equity-settled share-based compensations (SMP) (Note 20.1.2.1) .......... 45 47 Total before capitalization ........................................................................ 81,857 87,644 Expenses capitalized............................................................................................ (4,568) (3,956) Total............................................................................................................ 77,289 83,688 Total costs expensed in relation to defined contribution plans (including social security contribution)............................................................................... 10,527 11,091 Average number of employees (full time equivalent) .................................. 6,737 6,722 Closing number of employees (full time equivalent) .................................... 6,711 6,797 Capitalized expenses represents the employee related costs incurred in connection with developments and recognized as a cost of an intangible or tangible assets.
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21 OTHER OPERATING EXPENSES
21.1 Other operating expenses 2022 2023 Cost of other purchased services ........................................................................ (a) 42,327 44,764 Energy costs ............................................................................................................ 10,514 25,264 Marketing expenses ............................................................................................... 9,537 10,045 Utility tax .................................................................................................................. 7,447 7,667 Other ......................................................................................................................... 11,096 9,556 Total .............................................................................................................. 80,921 97,296 Research costs recognized by the Group were not material in the presented years.
(a) Audit costs included in Cost of other purchased services Cost of other purchased services, among others, include expenses incurred in relation to the audit of the separate and consolidated financial statements of the Group and its certain subsidiaries as well as other services which were settled with PricewaterhouseCoopers Könyvvizsgáló Kft. (PwC) and Deloitte Könyvvizsgáló és Tanácsadó Kft. (Deloitte) as follows. 2022 2023 Audit of the financial statements .............................................................................. 429 470 Other audit-related fees .............................................................................................. 6 13 Other non-audit-related fees* ................................................................................... 27 - Total expenses paid to PwC and Deloitte ......................................................... 462 483 *Services provided by PwC in the first quarter of 2022 and their fees Audit of the financial statements is the aggregate fees of Deloitte in connection with the audit of the annual financial statements and services performed in relation to legal obligations and submissions required by regulatory provisions. Review of the quarterly financial statements is also included, as well as information systems and procedural reviews and testing to understand and place reliance on the systems of internal control. Other audit-related services mainly include costs of other professional auditing services provided by the Auditor beyond the audit of the financial statements, as well as fees of other audit procedure necessary for meeting the reporting requirements arising from relevant legislation and internal regulations applicable to the Group. Other non-audit related fees are fees primarily related to consulting services and services like participation by Magyar Telekom employees in conferences and training sessions.
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21.2 Supplementary telecommunication tax On June 4, 2022 the Government of Hungary issued a decree (Government Decree of 197/2022. (VI.4.)) imposing new tax on a number of industries, including telecommunications. The supplementary telecommunication tax is levied on the actual business year’s annual net sales of telecommunication services as defined by the law on local taxes using progressive rates, appropriately weighted based on the expected full year revenue and is payable for the years 2022, 2023 and 2024. The applicable tax rate is progressive: 0% for turnover below HUF 1 billion; 1% for turnover exceeding HUF 1 billion and below HUF 50 billion; 3% for turnover exceeding HUF 50 billion and below HUF 100 billion; and 7% for turnover exceeding HUF 100 billion. The major proportion of Magyar Telekom’s telecommunication revenue is subject to 7% tax rate. The supplementary telecommunication tax classification requires judgment. Management believes that this tax is not a tax on consumption of services by end customers but rather a tax on entities operating in selected industries and its fundamental aim is to support the corrective actions in relation to the economic downturn that Hungary is facing. The calculation of supplementary telecommunication tax ignores whether revenue is invoiced to and collected from customers or not. Altogether, management classified this tax as indirect operating expense and for transparency it is disclosed on a separate line of Consolidated Statement of Profit or Loss and Other Comprehensive Income. In 2023 the supplementary telecommunication tax expense is amounted to HUF 30 billion (2022: HUF 24.6 billion).
22 OTHER OPERATING INCOME 2022 2023 Income received for the relocation and reconstruction of own network ........ 914 843 Brand license fee ........................................................................................................ 600 600 Gain on the sale of PPE, Intangible assets and assets held for sale - net ........ 594 237 Gain on the disposal of Pan-Inform (Note 29.2)................................................... 3,289 - Other ............................................................................................................................. 2,824 3,378 Total.................................................................................................................. 8,221 5,058
23 INTEREST INCOME 2022 2023 Interest income on receivables and loans ............................................................. 1,484 3,219 Unwinding of interest component of provisions .................................................. 17 787 Dividend income ......................................................................................................... 76 113 Interest income from finance leases ...................................................................... 11 9 Total.................................................................................................................. 1,588 4,128
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24 INTEREST EXPENSE
2022 2023 Interest expense payable to DT ............................................................................... 2,616 9,352 Interest expense on lease liabilities ........................................................................ 6,114 6,964 Interest expense on frequency fee liabilities ........................................................ 4,687 4,183 Other interest expense .............................................................................................. 3,329 4,146 Interest component of provisions ........................................................................... 1,117 883 Borrowing costs capitalized ..................................................................................... (267) (526) Total.................................................................................................................. 17,596 25,002
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense. Borrowing costs include interest and other costs that the Group incurs in connection with the borrowing of funds. The borrowing costs eligible for capitalization are capitalized applying the weighted average of the borrowing costs applicable to the general borrowings of the Group that are outstanding during the period. For further information see Note 9.1. and 10.1 A qualifying asset is an asset that necessarily takes a substantial period of time, in general over 12 months, to get ready for its intended use.
Total Interest expense is shown net of borrowing costs capitalized using average borrowing rates of 3.75%-4.74% in 2023 (2022: 0.67%-2.34%). When calculating the borrowing rates, Other finance expenses (included in Note 25) are also considered.
25 OTHER FINANCE EXPENSE – NET 2022 2023 Fee expense ................................................................................................................. 5,086 6,248 Net foreign exchange losses / (gains) on financial instruments ....................... 24,637 (10,298) Other net foreign exchange losses / (gains) ......................................................... (357) (4) Losses / (gains) on the subsequent measurement of financial assets at fair value through profit or loss (other than derivatives) ........................................... (106) (112) Losses / (gains) on the subsequent measurement of financial liabilities at fair value through profit or loss (other than derivatives) .................................... (9) (135) Losses / (gains) on the subsequent measurement of derivatives contracted with related parties .................................................................................................... (20,450) 27,467 Total................................................................................................................ 8,801 23,166 The significant foreign exchange loss on financial instruments in 2022 is due to the dramatical weakening of HUF exchange rates. In 2023 due to the strengthening of the Hungarian forint this turned into significant amount of gains. Significant part of the foreign exchange exposure is covered by derivatives, therefore the negative foreign exchange impact of the HUF movement is partially offset. The high amount of gains on the subsequent measurement of derivatives contracted with related parties in 2022, beyond the foreign exchange movement effect, was due to the considerable increasing of HUF interest environment. During 2023 the significant losses on derivatives contracted with related parties are partly due to the decreasing forint interest rate environment and approaching maturity of affected derivatives reversing significant gains from the previous years and partly due to strengthening of the Hungarian forint, which is a compensation effect related to the gains on financial instruments above.
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26 CHANGES IN THE GROUP 26.1 Business combinations In 2022 and 2023 there was not any new acquisition. The goodwill recognized in 2022 is related to a 2021 Cable TV acquisition where the initial accounting for one of the business combinations has been determined only provisionally. The measurement of the net assets was finalized in 2022 and the fair value of the net assets acquired has been decreased by HUF 266 million, with a corresponding increase in goodwill. The table below shows the summary of the transactions. 2022 2023
Consideration transferred................................................................................................... - -
Less: Fair value of the net assets acquired ...................................................................... 266 -
Total difference between consideration transferred and net asset acquired ...... 266 -
- thereof goodwill ................................................................................................... 266 -
- thereof gain on bargain purchase..................................................................... - -
27 EARNINGS PER SHARE
Basic earnings per share is calculated by dividing profit attributable to the owners of the Company for the period by the weighted average number of common stocks outstanding. Furthermore, the weighted average number of common stock outstanding is determined by deducting the weighted average number of treasury shares held by Magyar Telekom Plc. All figures are presented in the Consolidated statement of profit or loss and other comprehensive income.
There was no transaction resulting dilutive shares in the reported periods therefore the presented basic and diluted EPS are equal in 2022 and 2023.
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28 PURCHASES OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS The table below shows the reconciliation of investments in property, plant and equipment and intangible assets and the cash payments made for these investments from continuing operations. Capitalized borrowing costs are included in the Investments in PPE and intangible assets, where applicable. 12.31.2022 12.31.2023 Investments in property, plant and equipment (Note 9.2) .......................... 95,537 73,356 Investments in Right-of-use assets (Note 9.2) ............................................... 30,161 23,089 Investments in intangible assets (Note 10.2) ................................................. 33,692 31,836 Total investments in PPE and intangible assets ..................................... 159,390 128,281 Capitalized asset-related grant ......................................................................... (a) (2,675) (854) Change in Right-of-use assets ........................................................................... (30,161) (23,089) Change in trade payables relating to capital expenditures ......................... (b) (7,106) (6,629) Recognition / (Derecognition) of investment tax credit ............................... (c) 1,769 2,406 Cash payments for purchases of PPE and intangible assets ................... 121,217 100,115 (a) In 2023 HUF 838 million is paid by the government. It is presented in Notes 4.2.4.2 and see also Notes 9 and 14 for government grants relating to the purchase of PPE. (b) Change in payables relating to capital expenditures includes the effect that the actual cash settlement of the vendor invoices is made subsequent to the recognition of the investment. (c) For further information of Recognition / (Derecognition) of investment tax credit see also Notes 6.
29 CASH-FLOW FROM PURCHASES AND DISPOSALS OF SUBSIDIARIES AND BUSINESS UNITS 29.1 Cash-Flow form purchases of subsidiaries and business units Cash payments related to the purchases of subsidiaries and business units include advance payments made before the closing of the transaction, the initial purchase price paid on the closing of the transaction as well as amounts paid as additional contingent purchase prices disbursed in years following the year of the business combination. 12.31.2022 12.31.2023 Cable TV businesses (Note 26.1) ......................................................................... - (67) Cash payments for purchases of subsidiaries and business units ............. - (67) In 2023 HUF 67 million retention was transferred in relation to a Cable TV acquisition in 2021. 29.2 Disposal of Pan-Inform Kft In December 2021 Telekom Rendszerintegráció Zrt. signed a sales purchase agreement with the Hungarian State on the sale of its subsidiary Pan-Inform Kft., the scope of the agreement covers the support and development operations provided for central healthcare services in Hungary and the related hospital information system. The closing of the transaction and the settlement of the HUF 5.5 billion purchase price took place at the end of January 2022. This subsidiary was not considered a separate cash generating unit, therefore it did not constitute a discontinued operation.
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30 CONTINGENT ASSETS AND LIABILITIES 30.1 Contingent assets A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of uncertain future events not within the control of the Group. These assets are not recognized in the statement of financial position. The Group has no contingencies where the inflow of economic benefits would be probable and material.
30.2 Contingent liabilities No provision is recognized for contingent liabilities. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events (excluding executory contracts) not wholly within the control of the entity; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. The most significant contingent liabilities of the Group are described below. No provisions have been recognized for these cases, as management estimates that it is unlikely that these claims originating from past events would result in any material economic outflows from the Group, or the amount of the obligation cannot be measured with sufficient reliability. 30.2.1 Hungary 30.2.1.1 Guarantees Magyar Telekom Plc. is exposed to risks that arise from the possible drawdown of guarantees, for which see more details in Note 4.5.4. 30.2.2 Norh Macedonia 30.2.2.1 Contingent liabilities Makedonski Telekom has a contingent liability in the claimed amount of MKD 240 million (HUF 1.5 billion) in respect of a court case for damage compensation against Makedonski Telekom for alleged abuse of the dominant position on the market for access to data transfer networks. Based on legal advice and strong legal arguments presented in the court procedure, management believes that it is not probable that the court procedure will result in liability of the claimed size.
31 PURCHASE COMMITMENTS 31.1 Purchase commitments for tangible and intangible assets The table below summarizes Magyar Telekom’s contractual purchase commitments for tangible and intangible assets with the majority falling due within two years. 12.31.2022 12.31.2023 Property, plant and equipment ............................................................................... 16,290 11,411 Intangible assets......................................................................................................... 2,307 6,719 Total.................................................................................................................. 18,597 18,130 31.2 Purchase commitments for businesses As at December 31, 2023 and 2022 the Group had no significant committed business combinations.
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32 RELATED-PARTY TRANSACTIONS Related-parties of the Group include legal entities and persons that are related to the Group. A person or a close member of that person's family is related to the Group if that person: ▪ has control or joint control of the reporting entity; ▪ has significant influence over the reporting entity; or ▪ is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. An entity is related to a reporting entity if any of the following conditions apply: ▪ The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ▪ One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). ▪ Both entities are joint ventures of the same third party. ▪ One entity is a joint venture of a third entity and the other entity is an associate of the third entity. ▪ The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. ▪ The entity is controlled or jointly controlled by a person related to the entity or such a person holds a key position in the reporting entity. ▪ The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. The transactions with related parties are priced at arm’s lengths basis. Based on the impairment test no impairment was recognized for receivables from related-parties in the reported years.
32.1 Deutsche Telekom Group and the Federal Republic of Germany 32.1.1 Deutsche Telekom Group Deutsche Telekom AG is the ultimate (indirect) controlling owner of Magyar Telekom Plc., holding 63.55% of the Company’s shares. Deutsche Telekom Group has a number of fixed-line, mobile and IT service provider subsidiaries worldwide, with whom the Group has regular transactions. The table below summarizes the significant transactions and balances with DT Group. 12.31.2022 12.31.2023
Revenue from services provided to DT Group ................................................... 24,629 25,898
Costs of services provided by DT Group ............................................................. (21,297) (22,725)
Income from support services provided to DT Group ...................................... 379 85
Interest expense to DT Group ............................................................................... 23 (2,616) (9,352)
Dividend paid to parent company ........................................................................ (9,290) (18,894)
Trade receivables from DT Group ........................................................................ 4.2.2.1 7,993 7,803
Trade payables to DT Group ................................................................................. 4.4.5 (13,241) (9,951)
Loans payable to DT Group ................................................................................... 4.4.1 (161,944) (141,495)
Derivative financial instruments contracted with DT Group – asset ............ 4.2.3 31,723 17,295
Derivative financial instruments contracted with DT Group – liability ........ 4.4.3 (2,035) (120)
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32.1.2 The Federal Republic of Germany The Federal Republic of Germany is both a direct and an indirect shareholder and holds approximately 30.5% of the share capital of DT AG. Due to the average attendance at the shareholders’ meetings in previous years, the Federal Republic of Germany represents a solid majority at the shareholders’ meetings of DT AG, although it only has a minority shareholding, making DT AG a dependent company of the Federal Republic. Therefore, the Federal Republic and the companies controlled or jointly controlled by the Federal Republic are classified as related parties of DT AG, and consequently of Magyar Telekom as well. DT AG and Magyar Telekom did not execute, as part of its normal business activities, any transactions that were individually material in the 2023 or 2022 financial year with companies controlled or jointly controlled by the Federal Republic.
32.2 Board and Supervisory Board members 2022 2023 Remuneration of the members of the Board of Directors* ................................ 26 19 Remuneration of the members of the Supervisory Board .................................. 37 37 Loans granted to the members of the Board of Directors.................................. - - Loans granted to the members of the Supervisory Board ................................. - - * Exemption for the independent members, members of the Board of Directors waived their remuneration or offered their remuneration for charity. The honorarium offered for charitable purposes is HUF 6 million in 2023 (HUF 8.4 million in 2022). 32.3 Key management Key management has been identified as the members of the Company’s Chief Officers. The Chief Executive Officer (CEO) and the other Chief Officers (Chief Officers) together fulfill the Chief Operating Decision Maker (CODM) function in the Group. The table below shows, in total, the compensation expenses (including social security and other payroll-related taxes) incurred by the Group in relation to the key management. 2022 2023
Salaries and other employee benefits ............................................................. 1,264 1,440
Contractual termination expense .................................................................... 1 -
Share-based compensation (Note 20.1) ........................................................ 32 27
1,297 1,467
Of which costs expensed in relation to defined contribution plans (including social security contribution) .......................................................... 162 210 Detailed information on the remuneration of the Board of Management and the Supervisory Board is published in the separate remuneration report. The Group does not provide loans to its key management.
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33 REPORTABLE SEGMENTS AND INFORMATION ABOUT GEOGRAPHICAL AREAS
33.1 Segment information The Group’s segments are reported in a manner consistent with the internal reporting provided to the CODM, the key management of Magyar Telekom Plc. The CODM of Magyar Telekom Plc. is responsible for allocating resources to, and assessing the performance of, the operating segments on a monthly basis. The Chief Officers assess the performance of the Group and make their decisions. The accounting policies and measurement principles of the operating segments are very similar to those applied for the Group described in Note 2. The differences primarily originate from the fact that the operating segments’ annual results are determined and closed at an earlier stage, around January 8–10 each year, than these Financial statements. Any items discovered and requiring adjustment between the closing date of the segment results and the approval date of the Financial statements are reflected in the next year’s segment results. The operating segments’ revenue includes revenue from external customers as well as the internal revenue generated from inter-segment support services. The operating segments’ results are monitored by the Company’s management down to EBITDA AL (Earnings before interest, tax, depreciation and amortization but including the depreciation and interest of Right-of-Use assets) level. The Company’s management does not monitor the assets and liabilities at segment level. Another important KPI monitored at segment level is capital expenditure (CAPEX) and CAPEX AL (after lease, excluding the Capex of Right-of-Use assets and spectrum licenses) which is determined as the annual investments in PPE and Intangible assets.
33.2 Reportable segments Magyar Telekom’s operating segments are: MT-Hungary and North Macedonia. The MT-Hungary segment operates in Hungary, providing mobile and fixed line telecommunications, TV distribution, information communication and system integration services to millions of residential and business customers under the Telekom brand (as the earlier used T-Systems brand was ceased to be used in November 2022). Residential, Small and Medium sized business as well as business customers (corporate and public sector customers) are now served by the unified Telekom brand. The MT-Hungary segment is also responsible for the wholesale of mobile and fixed line services within Hungary, and performs strategic and cross-divisional management, as well as support functions on behalf of the Group including Procurement, Treasury, Real Estate, Accounting, Tax, Legal and Internal Audit. This segment is also responsible for the Group’s points of presence in Bulgaria and Romania, where it primarily provides wholesale services to local companies and operators. The North Macedonia segment is responsible for the Group’s full-scale mobile and fixed line telecommunications operations in North Macedonia.
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33.2.1 Information regularly provided to the CODM The following tables present the segment information by reportable segment regularly provided to the CODM, reconciled to the corresponding Group numbers. This includes several key indicators of profitability that are considered for the purposes of assessing performance and allocating resources. Management believes that Revenue, EBITDA, EBITDA AL and Capex, Capex AL are the most appropriate indicators for monitoring each segment’s performance and are the most consistent with how the Group’s results are reported in these financial statements.
Revenue 2022 2023
Total MT-Hungary revenue .............................................................................. 670,510 774,817 Less: MT-Hungary revenue from other segments....................................... (119) (93) MT-Hungary revenue from external customers ....................................... 670,391 774,724 Total North Macedonia revenue ..................................................................... 75,329 74,117 Less: North Macedonia revenue from other segments .............................. (60) (59) North Macedonia revenue from external customers ............................... 75,269 74,058 Total consolidated revenue of the segments ........................................... 745,660 848,782 Measurement differences / rounding between segment and Group revenue ................................................................................................................... 1,009 590 Total revenue of the Group ....................................................................... 746,669 849,372
MT-Hungary revenue 2022 2023
Voice ....................................................................................................................... 112,596 122,815 Non-voice ............................................................................................................... 153,959 193,620 Equipment.............................................................................................................. 106,438 109,414 Other ....................................................................................................................... 13,295 18,559 Total mobile revenue ................................................................................. 386,288 444,408 Voice retail ............................................................................................................. 29,688 30,431 Broadband - retail................................................................................................. 67,716 85,405 TV* ........................................................................................................................... 57,129 66,476 Equipment.............................................................................................................. 16,717 19,828 Other* ..................................................................................................................... 40,402 43,986 Total fixed-line revenue ............................................................................ 211,652 246,126 SI/IT revenue ......................................................................................................... 72,570 84,283 Total revenue of the MT-Hungary segment ............................................. 670,510 774,817 *2022 values are represented as revenue from video-on-demand services is now included in TV revenue instead of fixed other revenue to better reflect operational performance.
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North Macedonia revenue 2022 2023 Voice ....................................................................................................................... 14,889 14,815 Non-voice ............................................................................................................... 17,583 17,747 Equipment.............................................................................................................. 11,733 11,909 Other ....................................................................................................................... 2,692 3,170 Total mobile revenue ................................................................................. 46,897 47,641 Voice retail ............................................................................................................. 5,258 5,113 Broadband - retail................................................................................................. 5,829 6,453 TV ............................................................................................................................. 6,016 5,518 Equipment.............................................................................................................. 183 125 Other ....................................................................................................................... 7,244 7,415 Total fixed-line revenue ............................................................................ 24,530 24,624 SI/IT revenue ......................................................................................................... 3,902 1,852 Total revenue of the North Macedonia segment ..................................... 75,329 74,117 As other sources of revenue represent an insignificant part of total revenue, we assumed regarding segment revenue that total revenue is revenue from contracts with customers.
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2022 2023 Segment results MT-Hungary .............................................................................................................. 218,974 255,253 North Macedonia ...................................................................................................... 29,312 31,489 Total EBITDA of the segments .............................................................................. 248,286 286,742 Measurement differences / rounding between segment and Group EBITDA ........................................................................................................................ (340) 423 Total EBITDA of the Group ..................................................................................... 247,946 287,165 Depreciation of Right-of-Use Assets of MT-Hungary ....................................... (19,415) (21,336) Depreciation of Right-of-Use Assets of North Macedonia ............................... (904) (923) Unallocated items .................................................................................................... (118,449) (116,909) Total Depreciation and amortization of the Group ...................................... (138,768) (139,168) Interest expense of Right-of-Use Assets of MT-Hungary ................................ (5,981) (6,817) Interest expense of Right-of-Use Assets of North Macedonia ........................ (133) (147) Unallocated items .................................................................................................... (18,695) (37,077) Total Net financial result of the Group ......................................................... (24,809) (44,041) MT-Hungary .............................................................................................................. 193,578 227,100 North Macedonia ...................................................................................................... 28,275 30,419 Total EBITDA AL of the segments ................................................................. 221,853 257,519 Measurement differences / rounding between segment and Group EBITDA AL .................................................................................................................. (340) 423 Total EBITDA AL of the Group ....................................................................... 221,513 257,942 Unallocated items .................................................................................................... 26 - Share of associates’ and joint ventures’ results ........................................... 26 - Unallocated items .................................................................................................... (17,321) (19,552) Total Income tax of the Group....................................................................... (17,321) (19,552) Total Profit for the period .............................................................................. 67,074 84,404
Capital expenditure (Capex) on PPE, Intangible assets and Right-of-use 12.31.2022 12.31.2023
assets
MT-Hungary ................................................................................................................ 133,419 111,898 North Macedonia ........................................................................................................ 23,395 16,268 Total capital expenditure of the segments .................................................... 156,814 128,166 Acquisition of mobile licenses (Note 10) ............................................................... 3,092 586 Other measurement differences between segment and Group Capex ........... - 37 Total investments of the Group in PPE and Intangible assets ...................... 159,906 128,789
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Capex AL 12.31.2022 12.31.2023 MT-Hungary ................................................................................................................. 104,123 90,222 North Macedonia ......................................................................................................... 25,622 15,441 Total Capex AL of the segments ..................................................................... 129,745 105,663 Measurement differences to Capex AL of the Group ........................................... - 37 Total Capex AL of the Group ........................................................................... 129,745 105,700 The acquisition of mobile licenses is not considered part of the Capex measure of the segments. Total investments of the Group in PPE and Intangible assets correspond to the “Investments” lines disclosed in Notes 9, 10 and 28. 33.3 Information about geographical areas The table below shows the revenue generated from external customers in the countries where the Group operates, using the same measurement principles as for the corresponding Group numbers. As other sources of revenue represent an insignificant part of total revenue, we assumed regarding geographical areas of revenue that total revenue is revenue from contracts with customers. Revenue 2022 2023 Hungary ......................................................................................................................... 659,473 761,234 North Macedonia ......................................................................................................... 75,269 74,058 Romania......................................................................................................................... 7,514 8,750 Bulgaria ......................................................................................................................... 4,413 5,330 Total revenue of the Group ............................................................................. 746,669 849,372 The table below shows the Non-current assets of the Group located in the countries of operations (including goodwill allocated to operating segments operating in these countries) and the reconciliation to the total Non-current assets of the Group, using the same measurement principles as for the corresponding Group numbers. Non-current assets 12.31.2022 12.31.2023 Hungary ......................................................................................................................... 1,027,963 1,016,642 North Macedonia ......................................................................................................... 118,841 113,473 Romania......................................................................................................................... 4,125 4,447 Bulgaria ......................................................................................................................... 5,094 4,797 Total excluding Other non-current financial assets, Trade receivables over one year, Derivative financial instruments contracted with related parties and Deferred tax assets ...................................................................... 1,156,023 1,139,359 Other non-current financial assets (Note 4.2.4.2) ................................................ 3,796 4,381 Trade receivables over one year (Note 4.2.2.1) .................................................... 22,806 25,060 Derivative financial instruments contracted with related parties (Not 4.2.3) 31,723 9,632 Deferred tax assets (Note 6.3.2) .............................................................................. 742 123 Total Non-current assets of the Group ........................................................... 1,215,090 1,178,555
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34 REGULATED MARKETS AND PROCEDURES Magyar Telekom’s primary activities are the fixed-line and mobile operations in Hungary. These services are regulated by European and Hungarian legislation. The most important features of the regulation of these services are described below. The regulation of the Hungarian telecommunications markets is primarily based on Act C of 2003 on Electronic Communications (Eht.) and the decrees issued by the President of the National Media and Communications Authority (NRA). The NRA is an independent regulatory body which, in addition to its law enforcement activities, also legislates on the basis of legal authority. Hungary implemented Directive 1972/2018 / EU (EECC) partially by December 21, 2020 (with Section 16 of the Electronic Communications Act being applicable June 30, 2021). The EECC regulates fix and mobile call termination rates in the whole EU/EEA by a Delegated Act, but the legal framework for formerly regulated markets remains largely unaffected by the EECC. 34.1 Access regulation Regulated markets are governed by EU Commission’s recommendations. Parallel to the EECC, the Commission produced a new recommendation replacing Recommendation 2014/710 / EU: 2020/2245/EU. The new recommendation only covers two markets: ▪ Wholesale access for mass-market products (M1) ▪ Wholesale high-quality access at a fixed location (M2) National NRA’s, nonetheless, have the power to diverge from this recommendation. The former Hungarian regulation designates 4 regulated markets, Magyar Telekom is currently designated as an SMP operator (a service provider with significant market power) on all of these. M1: With regards the fix networks’ regulated interconnection (M1) the NRA published its fifth-round market analysis procedure’s resolution on May 15, 2018, according to which, the obligations were extended to a total of 144 telephone service providers. After that, from July 1, 2021, the fixed voice termination rate - regardless of the rate in the effective market decision - is determined by Commission Regulation (EU) 2021/654 on the basis of the EECC, which was HUF 0.2880/minute converted for the year 2023.The latest MARIO and supplementary interconnection service fees came into force on January 1, 2020. M2: The Company is designated as an SMP operator (a service provider with significant market power) in the mobile wholesale call termination market and subject to the Commission Regulation (EU) 2021/654 regarding the termination charge of calls into its network, mobile termination rate (MTR). The rate of the MTR for the year 2023 was HUF 1.6461/minute. The last mobile market resolution was published on January 13, 2021 in two folds: one resolution only contains the SMP designation, while with regards to obligations, the NRA delivered a separate resolution. M3: Magyar Telekom is Hungary’s leading fixed-line broadband service provider in the wholesale market and one of the leading ones in the retail market. In accordance with the effective 3a (M3a) and 3b (M3b) resolution, all retail fixed products shall be ‘reproducible’ by competitors based on the wholesale service. Consequently, the full retail portfolio shall have a wholesale equivalent. Previous regulation defined a retail minus price setting. The NRA published the latest resolutions with regards to markets 3a (M3a) and 3b (M3b) on December 15, 2017. SMP operators are obliged to prepare reference unbundling offer for access to (physical) passive network infrastructure (RUO) and to provide these services when there is a request for them by other telecommunications service providers. The reference offer of each SMP operator must be approved by the NRA. The latest market resolution introduced the geographical segmentation, thus relieving the company of obligations in certain competing settlements. Magyar Telekom was designated as an SMP in both 3a and 3b markets. Service fee calculation for all relevant regulated services – both markets 3a (resolution PC/17915-66/2017.) and 3b (resolution PC/17920-66/2017.) - are with a BU-LRIC+ model. New fees had to be applied as of January 1, 2019.
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As a novelty the geographically segmented regulation was implemented with the last resolution. As a result, in those settlements where competition bases, Magyar Telekom’s SMP was withdrawn. In the M3a resolution a new service obligation has been introduced, the L2-WAP (Layer 2 Wholesale Access Service) obligation. The NRA has published the latest reference unbundling offer – containing the L2WAP service – through its resolution PC/16593-31/2018. on November 6, 2019. The revised reference offer entered into force on December 1, 2019. The L2-WAP service is to be offered sixth months after the entry into force of the revised reference offer, i.e. June 1, 2020. M4: In the high-quality broadband market (M4) the NRA published its resolution (PC/12186-44/2018.) on February 27, 2019. Magyar Telekom has been designated as the SMP for the “Ethernet leased line termination segment service”. According to the resolution Magyar Telekom is subject to SMP obligations throughout Hungary, providing high-quality access at a regulated cost-based price. 34.2 Spectrum procedures In June 2012, the Hungarian Parliament adopted the modification of the Electronic Communications Law extending the scope of competence and tasks of the NRA. Pursuant to the amendment, all spectrum-related issues are dealt with by the NRA. On December 7, 2004, the Company obtained the spectrum usage right of certain frequency blocks in the 2100 MHz band for the deployment and operation of an IMT2000/UMTS mobile telecommunications system (3G system). The duration of the spectrum license was 15 years (until December 7, 2019) that was extended for another 7.5 years in December 2018 for a one-time fee of HUF 11 billion. The Company won a tender for a spectrum usage right for a 26 GHz block on April 30, 2009. On May 14, 2012 the NRA granted spectrum license to Magyar Telekom for four pieces of basic spectrum blocks (4 x 2 x 28 MHz each) in the 26 GHz band. Furthermore, Telekom acquired GTS Hungary Ltd’s two blocks in the 26 GHz band for HUF 114.6 million HUF net, and has a usage right for it from November 1, 2016. Blocks purchased in 2009 were extended in 2018. The Company filed an auction bid in December 2011 with the NRA for the right of use of unused spectrum in the 900 MHz frequency band, related to the provision of mobile telecommunications services. The spectrum can be utilized in a technology-neutral manner. The NRA announced its first-instance decision on the result of the 900 MHz auction (Auction) on January 30, 2012. Magyar Telekom won the right of use of two duplex frequency blocks of 1 MHz each for a period of 15 years. On September 6, 2013 Magyar Telekom and the NRA signed the modification of the Authority Contract on the use of the 900 MHz and 1800 MHz frequency bands. The main stipulations of the modification are the following: On May 22, 2014, the NRA published the “Documentation for the tender announced in the subject of spectrum licenses for broadband services”. Blocks in 800 MHz / 900 MHz / 1800 MHz / 2600 MHz and 26 GHz frequency bands were auctioned. On September 29, 2014 the NRA published the tender results so that Magyar Telekom acquired the following frequencies for an aggregate amount of HUF 58,650 million: ▪ 2 x 10 MHz in 800 MHz ▪ 2 x 2 MHz in 900 MHz ▪ 2 x 30 MHz in 2600 MHz ▪ 2 x 10 MHz in 1800 MHz. On October 15, 2014 Magyar Telekom and the NRA signed the Authority Contract on the use of the 800 MHz, 900 MHz and 1800 MHz frequency bands that came into force right on that day. For the new bands the frequency license and radio permission were issued on October 17, 2014 to Magyar Telekom. As a result of the last tender Magyar Telekom acquired frequency usage rights in the above listed spectrums till June 15, 2029. The Authority Contract can be extended another five years if all requirements defined in the contract are met. On July 18, 2019, the NRA published the “Documentation for the auction announced in the subject of spectrum licenses for 5G services”. Blocks in the 700 MHz / 2100 MHz / 2600 MHz and 3600 MHz frequency bands were auctioned.
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On March 26, 2020 the NRA published the bidding results of the auction so that Magyar Telekom acquired the following frequencies for HUF 54,240 million: ▪ 2 x 10 MHz in 700 MHz ▪ 2 x 10 MHz in 2100 MHz ▪ 1 x 120 MHz in 3600 MHz. As a result of the auction Magyar Telekom acquired frequency usage rights in the above-listed spectrums till April 3, 2034. The usage rights can be extended another five years if all requirements defined in the documentation are met. On October 16, 2020, the NRA published the “Documentation for the auction announced in the subject of spectrum licenses for 900 MHz and 1800 MHz bands”. Usage rights shall be valid for 15 years starting from April 2022 and might be extended another five years if all requirements defined in the documentation are met. Magyar Telekom submitted its participation request on November 10, 2020. Six lots of 2 x 5 MHz blocks were sold in the 900 MHz band, and 12 lots of 2 x 5 MHz blocks were sold in the 1800 MHz band. Magyar Telekom acquired 2 x 8 MHz in the 900 MHz spectrum band while 2 x 20 MHz in the 1800 MHz spectrum band. On November 8, 2022 the NRA published the draft documentation of the planned auction procedure to be announced for the entitlements to the radio spectrum use of the 32 GHz frequency band and a call for consultation that was held on November 22, 2022. According to the NRA resolution published on May 23, 2023, Magyar Telekom has successfully secured the usage of 6 frequency blocks. 34.3 Universal services Universal services are basic communications services (including access to communication services at a fixed location, public payphones, directory and directory enquiry services) that should be available to all customers at an affordable price. The NRA published its request for voluntary universal service provisioning on January 19, 2018. Magyar Telekom did not bid on any parts of the universal services, so the NRA designated Magyar Telekom to offer the following universal services from January 1, 2019: public payphones, access on fixed location and for national directory enquiry service. As a result of the procedure Magyar Telekom lost two primary areas to serve (Szekszárd – nr74 and Paks – nr75) and received a new one (Szeged - nr62). The EECC brings a new framework in universal services as well – Magyar Telekom was able to let go of some of the obscure obligations of the past (printed directory), while Hungary will have to ensure affordable and available internet access to consumers. The NRA has published its resolution on available and affordable internet on December 19, 2022. As a result of the NRA decision, Magyar Telekom is obligated to offer affordable and available internet as a universal service from July 1, 2023. 34.4 End-user rights Since June 30, 2007, an EU regulation has been regulating international roaming tariffs for wholesale and retail customers on the basis of a price cap system. The first EU roaming regulation prescribed a glide-path that mandated annual reductions of wholesale and retail prices. (EU Roaming Regulation I.) As of July 2009. the EU also introduced regulated tariffs for SMS and data roaming similarly to the regulation of voice roaming. (EU Roaming Regulation II.) As of July 1, 2012. the EU further broadened the European roaming regulation with a new regulatory measure: separate sales of regulated roaming services. As a result, Magyar Telekom had to implement the technical possibility to host an Alternative Roaming Provider in its network and also it allows its own customers to use Local Break-out solutions within the EU offered by a foreign EU member country’s mobile operator from July 1, 2014. (EU Roaming Regulation III.) The actual EU roaming regulation - “Full Roam Like At Home With Fair Use Policy Possibility” - is applied from June 15, 2017. (EU Roaming Regulation IV.). As a result, European retail roaming price levels for voice, SMS and data are equal to domestic prices since summer 2017. The Commission implementing regulation (EU) 2016/2286 of December 15, 2016 laid down detailed rules on the application of fair use policy and on the methodology for assessing the sustainability of the abolition of retail roaming surcharges and on the application to be submitted by a roaming provider for the purposes of that assessment.
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In addition, the Company has implemented, by the required deadline of May 15, 2019, Regulation (EC) No 2018/1971 of the European Parliament and of the Council supported by BEREC and BEREC Office, and according to the modified Regulation (EU) 2015/2120, taking into account the withdrawal decision of regulation 1211/2009/EC regulation, the reduction of charges for international calls and SMSs to member states of the European Union. The EECC affected all customer relations of Magyar Telekom and it is prepared for compliance with serious IT- developments as well as changes in the processes. 34.5 Macedonian Mobile The Group is also present in the North Macedonian mobile market through its subsidiary, Makedonski Telekom AD Skopje (MKT, previously T-Mobile). The North Macedonian telecommunications sector is regulated by the Electronic Communications Law (ECL) enacted in March 2014 as primary legislation and rulebooks as secondary legislation. On September 5, 2008, Agency for Electronic Communications (NRA), ex officio, issued a notification to T-Mobile for those public electronic communication networks and/or services which has been allocated thereto under the Concession Contracts. The license for radiofrequencies used by T-Mobile in the GSM 900, bad was issued also in a form regulated in the ECL with a validity period until September 5, 2018, which was renewed in 2018 for additional 10 years until 2028. Due to the changes in the bylaws, the 900 MHz band is opened for UMTS technology and based on MKT’s request the radiofrequency license is changed so that these frequencies are now technology neutral. Decision for granting 2x15 MHz license on 2100 MHz was announced in 2008. The validity of the license was 10 years i.e. until December 17, 2018. The license was renewed in 2018 for 10 years, until 2028 in accordance with the ECL. An auction procedure concluded in August 2013 awarded the whole 790 – 862 MHz band together with the unassigned spectrum in the 1740–1880 MHz band for Long Term Evolution (LTE) technology in a public tender. Each of the 3 North Macedonian mobile operators, at that time, obtained an LTE radiofrequency license of 1x10 MHz in the 800 MHz band and 2x15 MHz in the 1800 MHz band. Each license was acquired for a one-off fee of EUR 10.3 million (approximately HUF 3.2 billion). The license is for 20 years, until December 1, 2033, with an extension option for additional 20 years, in accordance with the ECL. After the merger of One and VIP, A1 Macedonia (former one.VIP) submitted a request on November 18, 2016 to NRA for change of the licenses for using radio frequencies in land mobile service with record numbers 108269/1, 108271/1, 104068, 104069, 104711, 108269/2 and 108267/2. NRA brought resolution not to approve the reshuffling request of One.VIP. In tender procedure, new license in 2100 MHz (2x15 MHz) was issued to MKT. New license in 2100 MHz (2x10 MHz) was issued also to A1 Macedonia. License validity is until end of 2028. In direct awarding procedure on 11 th July 2022 NRA issued new license in 700 MHz and 3.x GHz (5G) to MKT (2x10 MHz on 700 MHz and 100 MHz on 3.x GHz). License validity is 15 years. Same amount of spectrum was also issued to A1 Macedonia. On December 19, 2014, amendments of the ECL were enacted. Many significant changes were made to the ECL, with the Balkan Roaming Regulation being one of the most important changes made in line with EU Roaming III regulation. The glide path for roaming prices reduction finished on July 1, 2017. In 2019, regulatory bodies of the West Balkan countries (WB6) (North Macedonia, Montenegro, Serbia, Bosnia, Albania, Kosovo) introduce roaming regulation, starting with RLAH+ surcharge model from July 1,.2019 until June 30, 2021. From July 1, 2021 RLAH – (Roam Like At Home) model regulation shall be in place. With this regulation, the international termination rates between the WB6 countries were also decreased. Both mobile operators on the market, Makedonski Telekom and A1 Macedonia are designated as operators with SMP status on the relevant wholesale market “Access and call origination on public mobile networks”. NRA imposed same regulatory remedies for both operators: ▪ mobile access obligation for all MVNO hybrid types (including Reseller), ▪ cost based price for Full MVNO, ▪ retail minus (-35%) for the Reseller, ▪ obligation for access to MMS services and mobile data based on technology neutrality.
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An MVNO, Lyca Mobile hosted on A1 network entered the Macedonian market and started retail operations in July 2016 under regulated wholesale conditions. Also, from October 2020, new MVNO (Green Mobile) started operating, hosted on A1 network as reseller. As latest MVNO emerged in October 2022 is MTel (Telekom Srbija subsidiary) also hosted on A1 network. All three MVNO’s are designated as operators with SMP status on the relevant market for mobile calls termination. The cable operator Telekabel which on the market is already present by offering fixed services (voice, broadband and TV), in January 2019 started operating as an MVNO hosted on Makedonski Telekom mobile network under regulated wholesale conditions. The license duration of two licenses previously owned by VIP was until 2017, 10 MHz from 900 MHz band and 10 MHz from 1800 MHz band expired on March 23, 2017, positioned in the lower parts of the bands. At the request from A1 Macedonia (former one.VIP) for license prolongation, the NRA adopted resolution No. 0804-974 from November 2, 2016 not to prolong these two licenses. At the moment these radiofrequencies are not allocated and these are not available for sale, they are saved for a third entrant. On May 26, 2017 A1 Macedonia submitted a request to the NRA for change of the license for using radio frequencies in land mobile service with registered number 108267/2, whereby the following radiofrequency block was allocated: 1770- 1785/1865-1880 MHz. On October 9, 2017, the NRA issued resolution for refusal of A1 Macedonia’s request for reshuffling on 1800 MHz. Based on the appeal submitted by A1 Macedonia, in September 2019 the reshuffling request on 1800 MHz was finally approved by the NRA, due to a court decision in favor of A1 Macedonia. In the 1800 MHz range A1 Macedonia will get huge continuous block of 35 MHz effective October 15, 2019. Based on MKT request, NRA prolonged the licenses on 900 (2x12.5 MHz), 1800 (2x10 MHz) and 2100 (2x15 MHz) for additional 10 years validity (until 2028-2029) without onetime fee. License 2x10 MHz on 1800 MHz owned by A1 Macedonia was prolonged in March 2022. In April 2019, Ministry of Information Society and Administration issued National Broadband Strategy which sets the following targets: ▪ By the end of 2023 at least one major city should be covered with 5G signal; ▪ By the end of 2025 the regional highways and state highways set NRA should be covered by a continuous 5G signal; ▪ By the end of 2027 all urban areas will be covered by a continuous 5G signal; ▪ By the end of 2029 everyone will have access to 5G internet with a minimum internet speed of at least 100 Mbps; ▪ By the end of 2029, at least 50% of the total number of subscriber contracts of households across the country should have internet access of at least 100 Mbps; ▪ By the end of 2029 all households in the Republic of North Macedonia will have affordable access to a network that provides download speeds of at least 100 Mbps with the possibility of upgrading to gigabit speed; ▪ By the end of 2029, all public institutions (schools, universities, research centers and other educational institutions, health institutions, ministries, courts, local governments and other public authorities and bodies,) should have symmetric access to the Internet of at least 1Gb/s; Based on public debate at the beginning of 2021 NRA adopted changes in the Rulebook on Radiofrequencies fees: ▪ Decrease of RF fees from 3.x GHz for 50% (from 4,000 EUR/MHz to 2,000 EUR/MHz) ▪ Decrease of RF fees for 700 MHz for 50% (from 11,480 EUR/MHz to 5,740 EUR/MHz) ▪ Decrease of RF fees above 55 GHz (E band RF links) for 50% (from 4,000 EUR/250 MHz to 2,000 EUR/250 MHz)
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34.6 Macedonian Fixed line Makedonski Telekom has SMP obligations in several regulated markets for fixed services. At the beginning of 2015, the regulation for access to fiber was implemented, with Local Bitstream Access over NGA on level 3 and 4 and VULA (Virtual Unbundled Local Access) regulation on level 2. The introduction of new technologies (VDSL Vectoring technology in 2017) announced by MKT for the retail customers led to the introduction of new wholesale access products and reshaping of the regulatory obligations. The final document for the wholesale central access for mass-market products provided at a fixed location market analyses (Market 6) was published in April 2017. For the first time NRA imposed a regulation on the access to Hybrid Fiber Coaxial Access (HFC). All existing obligations for the copper and fiber network remain unchanged after the new analysis in 2022. All obligations apply to the MKT and to the A1 Macedonia operator as SMP on the broadband market. The amendments from September 2016 with a new obligation to register the new and existing electronic networks (ATLAS), refer to the joint building and use of networks and a new obligation for NRA to publish the received reports on the optic backbone segment measurements by all operators. NRA published tender for USO provider in October 2021, for the period 2022 to 2026, and one of the main criteria is the required amount for a refund. According to the results from the tender, Makedonski Telekom is designated for universal service provider until 2026 for Fixed access and access for disabled users (voice and internet of minimum 12Mbit/s download) A1 Macedonia was designated for Public payphones. R3 Infomedia signed contract with the NRA for the Telephone Directory and Directory Inquiry universal services. Following the market trends and the EU regulation, the NRA made decisions for deregulation on several markets: trunk segment of leased lines and avoiding regulation of the Ethernet leased line services; minimal set of leased lines (retail); WLR (Wholesale Line Rental) market; traditional retail fixed voice services (access and traffic). MKT has a cost-based price obligation for the regulated wholesale services, using Long Run Incremental Costs methodology (LRIC). In the middle of 2019 NRA implemented ERT testing (margin squeeze methodology) to NGA based broadband wholesale services supplied by the two dominant operators (MKT and A1Macedonia). The developed ERT model will test the economic replicability of the retail bundles including broadband services with access speed higher than 30 Mb/s.
35 EVENTS AFTER THE REPORTING PERIOD There were no material events after the reporting period.
Budapest, February 22, 2024
v 114 CONSOLIDATED BUSINESS / MANAGEMENT REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
v 115 INTRODUCTION Magyar Telekom Plc. with its subsidiaries form Magyar Telekom Group (hereinafter: Magyar Telekom or the Group). The Group’s activities are described in Note 34 of the Consolidated Financial Statements, while the Consolidated Business / Management Report provides additional information on the following topics: ▪ SUMMARY ON 2023 OPERATIONS ▪ THE GROUP’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES ▪ CORPORATE GOVERNANCE ▪ SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS ▪ COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT ▪ RESEARCH AND DEVELOPMENT ▪ REAL ESTATE, SITES OF OPERATION ▪ SUSTAINABILITY AND ENVIRONMENT PROTECTION ▪ CORPORATE COMPLIANCE ▪ ECONOMIC ENVIRONMENT, OUTLOOK AND TARGETS ▪ INTERNAL CONTROLS, RISKS AND UNCERTAINTIES ▪ ANALYSIS OF FINANCIAL RESULTS FOR 2023 ▪ EVENTS AFTER THE REPORTING PERIOD
v 116 SUMMARY ON 2023 OPERATIONS Financials Despite challenging economic environment, Magyar Telekom delivered its public guidance communicated for 2023. Group revenue rose by 13.8% year-on-year to HUF 849.4 billion and EBITDA AL reached HUF 257.9 billion representing a 16.4% increase year-on-year. Furthermore, adjusted net income reached HUF 93.6 billion and the free cash flow excluding spectrum licenses amounted to HUF 86.8 billion for the year 2023. These results are equally attributable to the successful monetization of the Group’s quality networks, the introduction of the inflation-based fee adjustment, the appealing service offerings and the excellent customer servicing. Network In 2023, Magyar Telekom continued its flagship network investments in both country of operation which aim to provide its customers with an outstanding network that they require and appreciate, whether they are at home or on the move. In the frame of the fiber roll-out program in Hungary ca 200 thousand further access points were added to the Group’s gigabit network, thus making the Group able to provide gigabit speed at around 3.6 million access points in Hungary by the end of the year. This translates to over 80% of its fixed infrastructure. Fiber roll-out progressed in North Macedonia as well, by the end of the year over 300 thousand access points became gigabit capable. The Group also made progress in the comprehensive mobile radio network modernization project in Hungary, allowing it to meet the surging mobile data demand as well as to steadily expand 5G. Thanks to the developments implemented throughout the year, 80% of the Hungarian mobile network undergone modernization and by the end of the year, the population-based outdoor 5G coverage has reached 65%. Besides, in North Macedonia, where the RAN modernization was already fully completed in 2022, population based outdoor 5G coverage surpassed 80% by the end of 2023. Customers The success of the Group’s efforts to provide outstanding infrastructure, excellent service and tailor-made solutions to its customers were again reflected in the further expansion of its customer base: fixed broadband subscriber base in Hungary expanded by 5% with TV subscriber number growing by 3% whilst mobile SIM base rose by 5% against last year. At the same time, increasing number of the customers has opted to connect via a gigabit capable technology to Magyar Telekom’s fixed network, reaching 1.3 million by the end of the year. On the mobile side, data consumption continued to rise sharply; the average monthly mobile data usage per customer rose by over 20% year-on-year to close to 12 GB. Resilience The above positive commercial developments, were however accompanied by unfavorable external developments including supplementary telecommunication tax payment obligation, rise in energy costs and cost pressure stemming from the high level of the inflation in the economy. Consequently, the Group’s efficiency measures played a vital role in protecting its profitability. In this context, the Group introduced inflation-based fee adjustment, first implemented as of March 1, 2023 at the Hungarian operation. The success of the Group’s efforts is reflected in that Scope Ratings GmbH improved the outlook on Magyar Telekom’s issuer credit rating to positive, following its annual credit rating review, and affirmed the Group’s issuer credit rating and senior unsecured debt rating at BBB+. The Group also received further recognitions for its sustainability achievements during 2023; MSCI kept Magyar Telekom’s ESG rating to ‘AAA’, whilst Carbon Disclosure Project upgraded its climate change rating to A-, and ISS Corporate Solutions ranked the Group among the best performers of the telecom sector globally with respect to its sustainability credentials.
v 117 1 THE GROUP’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES As of December 31, 2023, the share capital of Magyar Telekom Plc. was HUF 97,155,886,700, consisting of 971,558,867 Series “A” dematerialized ordinary shares. All Series “A” ordinary shares have a nominal value of HUF 100. Rights and obligations related to Series “A” ordinary shares are described in detail in Section 4 of the Articles of Association (http://www.telekom.hu/about_us/investor_relations/corporate_governance/corporate_governance_documents ). On June 28, 2023, the Court of Registry registered the Group’s capital decrease that was decided upon at its Annual General Meeting held on April 19, 2023. The Group’s share capital consequently was decreased from HUF 100,580,135,200 to HUF 97,155,886,700 with the cancellation of 34,242,485 pieces of dematerialized series “A” ordinary shares, owned by the Group (treasury shares), each with the face value of HUF 100. Information concerning its ownership structure as of December 31, 2023 is described in the following table: Shareholder Number of shares Percentage of share capital Deutsche Telekom Europe B.V. ............................................................... 617,436,759 63.55 Publicly traded ............................................................................................ 312,344,390 32.15 Treasury shares ........................................................................................... 41,777,718 4.30 971,558,867 100.00 Deutsche Telekom Europe B.V. owning 66.41% of Magyar Telekom’s voting rights is a member of the Deutsche Telekom Group. The ultimate controlling parent of Magyar Telekom is Deutsche Telekom AG (DT or DT AG). Deutsche Telekom Europe B.V. does not have different voting rights than our other shareholders and, as with our other shareholders, Deutsche Telekom Europe B.V. is entitled to one vote per each ordinary share that it owns. 1.1 Voting Rights and Voting The holder of each Series “A” ordinary share shall be entitled to one vote at the General Meeting of Magyar Telekom. The names of shareholders and nominees who intend to participate at the General Meeting shall be registered in the Share Register on the second working day prior to the starting date of the General Meeting. The General Meeting shall adopt its resolutions by a simple majority vote except for resolutions on issues listed in the Articles of Association, which shall require at least a three-quarters majority of the votes cast. There is no limitation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the ordinary shares. There is no limitation of voting rights for ordinary shares in the Articles of Association. Magyar Telekom has no shares assigned with special management rights. 1.2 Transfer of Shares For the transfer of dematerialized shares, a contract for transfer or other legal title is required and, in that context, the transferor’s securities account shall be debited, and the new holder’s securities account shall be credited with the transferred dematerialized shares. The holder of dematerialized shares shall be considered the holder of the securities account on which the dematerialized shares are recorded. The transfer of any Series “A” ordinary shares is not bound to any restriction or attainment of agreement. 2 CORPORATE GOVERNANCE 2.1 Annual General Meeting The General Meeting has the exclusive right to approve and amend the Articles of Association (section 5.2. (a)) unless otherwise provided by law or the Articles of Association. According to the Articles of Association, the Board of Directors is entitled to make decisions regarding any change in the registered seat, sites, branch offices and – except for the main activity – the scope of activities of the Group and in relation to this, to modify the Articles of Association (section 6.4.(p)).
v 118 2.2 Board of Directors The Board of Directors operates based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/board_of_directors ). The Board of Directors is responsible for all matters relating to the Group’s management and course of business not otherwise reserved to the General Meeting or to other corporate bodies by the Articles of Association or by the laws. The Board of Directors draws up, at the end of each business year, a report for the General Meeting and quarterly to the Supervisory Board on the management of the Group, the assets of the Group, the financial situation of the Group and the business policy of the Group. The rules of competence regarding the capital increase and purchase of treasury shares are detailed in Sections 5.2 (b) and (p) as well as 6.4. (l) and (m) of the Articles of Association. The General Meeting with its Resolution No. 8/2023 (IV.19.) authorized the Board of Director to purchase Magyar Telekom ordinary shares for 18 months starting from the date of approval of the resolution. The relevant resolution is available on the General Meetings section of the Group’s website. Pursuant to the Articles of Association, the Board of Directors consists of a minimum of five and a maximum of eleven members elected by the General Meeting for a term of three years, unless otherwise provided by the General Meeting. On December 31, 2023, the Board of Directors had eight members. Meetings of the Board of Directors are held at least four times a year. Meetings of the Board of Directors require the presence of at least the majority of the members for a quorum. Each member of the Board of Directors has one vote. The Board of Directors passes resolutions by a simple majority vote. On December 31, 2023, members of the Board of Directors, their principal occupation and the years of their original election were as follows: Name Born Principal Occupation Member since Daniel Daub ......................................... 1976 Senior Vice President Finance and Performance Management Europe, Deutsche Telekom AG, Chairperson of the Board of Directors of Magyar Telekom Plc. 2023 Daria Aleksandrovna Dodonova ...... 1976 Chief Financial Officer of Magyar Telekom Plc. 2020 Gábor Fekete ...................................... 1950 Consultant 2020 Elvira Gonzalez ................................... 1975 Senior Vice President B2B Europe, Deutsche Telekom AG 2022 Frank Odzuck ...................................... 1959 Chief Executive Officer of Zwack Unicum Plc. 2006 Péter Ratatics ..................................... 1982 Consumer Services Executive Vice President of MOL Group 2019 Tibor Rékasi ......................................... 1973 Chief Executive Officer of Magyar Telekom Plc. 2018 Melinda Szabó .................................... 1971 Senior Vice President B2C Europe, Deutsche Telekom AG 2022 The members’ assignment lasts until May 31, 2025.
v 119 2.3 Management As part of the corporate governance simplification initiative, the Board of Directors of Magyar Telekom resolved to cease the activity of the Management Committee established in 2000 as a formal corporate decision-making body with effect from January 1, 2020. The tasks and responsibilities of the Management Committee have been re-allocated to the Chief Officers and to the Board of Directors of the Group. As a result of this change, the Management Committee transformed into an agile „Leadership Squad”. On December 31, 2023, the members of the Management and the years of their original election were as follows: Name Born Current position Member since Tibor Rékasi ......................................... 1973 Chief Executive Officer of Magyar Telekom Plc. 2013 Daria Aleksandrovna Dodonova ...... 1976 Chief Financial Officer 2020 Zoltán Pereszlényi .............................. 1978 Chief Commercial Officer 2022 Zsuzsanna Friedl ................................. 1977 Chief People Officer 2017 Gábor Gonda ....................................... 1976 Chief Commercial Officer Enterprise, Chief Executive Officer of Telekom Rendszerintegráció Zrt. 2020 Lubor Zatko .......................................... 1974 Chief Technology and IT Officer 2019 2.4 Supervisory Board The Supervisory Board carries out its activities based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/supervisory_board). The Supervisory Board shall examine all submissions to be submitted to the General Meeting and present its opinion thereof at the General Meeting. The General Meeting may pass a resolution on a report pursuant to the Accounting Act and the use of the profit after income tax only upon receipt of the written report of the Supervisory Board. The Supervisory Board makes a proposal directly to the General Meeting regarding the election, remuneration and removal of the Statutory Auditor. Pursuant to Magyar Telekom’s Articles of Association, the Supervisory Board consists of five members (three independent members and two employee representatives) elected by the General Meeting for a term of three years, unless otherwise provided by the General Meeting. The employee representatives in the Supervisory Board shall be nominated by the Central Workers’ Council. Meetings of the Supervisory Board have a quorum if two-thirds of the elected members but at least three members are present. On December 31, 2023, the members of the Supervisory Board, their principal occupation and the years of their original election were as follows: Name Born Principal Occupation Member since Prof. Dr. Attila Borbély....................... 1951 Professor Emeritus of University of Debrecen, Faculty of Economics and Business, Chairperson of the Supervisory Board of Magyar Telekom Plc. 2020 Gyula Bereznai .................................... 1978 Chairman of the Central Workers’ Council, Magyar Telekom Plc. 2022 Krisztina Dorogházi............................. 1972 Senior Vice President Chief Accounting Officer and Controller, TechnipFMC 1 2020 András Szakonyi .................................. 1973 Senior Vice President – Global Data Centers, Iron Mountain 2020 Endre Szepesi ...................................... 1966 Member of the Workers Council, Magyar Telekom Plc. 2022 The members’ assignment lasts until May 31, 2025. 1 She held the position until December 21, 2023.
v 120 2.5 Audit Committee The Audit Committee operates based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/audit_committee). The members of the Audit Committee have been elected by the General Meeting from the independent members of the Supervisory Board for the same period as their membership in the Supervisory Board. On December 31, 2023, the members of the Audit Committee were as follows: ▪ Prof. Dr. Attila Borbély ▪ Krisztina Dorogházi ▪ András Szakonyi 2.6 Remuneration and Nomination Committee The Remuneration and Nomination Committee is established by the Board of Directors of the Group to support the Board of Directors of the Group regarding the remuneration and certain nomination related issues of the members of the corporate bodies and the top executives of the Group in accordance with its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/compensation). The Remuneration and Nomination Committee, among others, makes recommendations to the Board of Directors on the establishment and/or termination of employment, and the modification of the employment contract of the Chief Executive Officer and the Chief Officers, and defines the remuneration of the Chief Executive Officer and the Chief Officers of the Group. The Remuneration and Nomination Committee consists of three members. The members are elected by the Board of Directors from among its members. The Remuneration and Nomination Committee holds at least two meetings each year. On December 31, 2023, the members of the Remuneration and Nomination Committee were as follows: ▪ Daniel Daub ▪ Elvira Gonzalez ▪ Frank Odzuck 2.7 Corporate Governance and Management Report Magyar Telekom Plc. is a public limited company listed on the Budapest Stock Exchange. In 2004, the Budapest Stock Exchange issued its Corporate Governance Recommendations (the Recommendations) containing recommendations related to the corporate governance practice of companies listed on the Budapest Stock Exchange, taking account of the most commonly used international principles, of experiences gathered in Hungary, and of the characteristics of the Hungarian market as well as the Companies Act. The Recommendations were updated in 2007, 2008, 2012, 2018 and in 2021. The Recommendations effective from time to time is available at the website of the Budapest Stock Exchange: https://bse.hu/Issuers/corporate-governance-recommendations/Corporate-Governance-Recommendations In line with the current regulations, the Board of Directors of Magyar Telekom with the approval of the Supervisory Board submitted to the General Meeting the Corporate Governance and Management Report of the Company (report) prepared in accordance with the Corporate Governance Recommendations. The report – along with other corporate governance related documents - is published in the Corporate Governance section of the website of Magyar Telekom: http://www.telekom.hu/about_us/investor_relations/corporate_governance/corporate_governance_documents Companies listed on the stock exchange are required to express their views on their corporate governance practices in two ways. In the first part of the report, they have to give account of the corporate governance practices applied by their company in the given business year, including their corporate governance policy, and a description of any unusual circumstances. In the second part of the report, the issuers should give an account on their compliance with each point of the Recommendations in accordance with the "comply or explain" principle, including any reasons for derogating from a specific recommendation and/or proposal. When an issuer does not apply a recommendation or applies it in a different way, they should explain where the differences are and offer a reason for such derogation (‘comply or explain’ principle).
v 121 This method allows issuers to consider their unique, industry-specific etc. idiosyncrasies and to inform shareholders and market players about their derogations from general corporate governance principles and to provide an explanation. Operating on the same principle, issuers can also explain any derogations from the proposals. Sections 1 to 5 of the above report include the description and operation of the Board of Directors, the Supervisory Board, the relevant committees and executive management. Section 6 of the report includes a description of the internal controls and risk management procedures, Section 7 gives information on whether the auditor has carried out any activities not related to auditing, while Section 8 of the report describes the disclosure policies and insider trading guidelines. In Sections 9 to 10 the method of exercising shareholders’ right and the rules on conducting the General Meeting is summarized, while Section 11 contains the Remuneration Policy. The company complies with the vast majority of the 72 recommendations and proposals, however in the business year of 2023 in case of 1 proposal it has not or not completely complied with due to the organizational structure or processes of Magyar Telekom. In 2023, the Magyar Telekom’s disclosure processes were evaluated in the ICS (Internal Control System) by the relevant organizational units and were tested by the internal audit area. The disclosure controls and procedures of Magyar Telekom were effective and designed to ensure a proper basis for the timely and accurate disclosures to the market participants required under the respective accounting, capital markets and company law regulations. 3 SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS Some of the key challenges of the sustainability strategy comes from the area of human resources management. That is why human resources management has a crucial part in the achievement of the company’s sustainability targets. The Group’s vision is to operate in a corporate environment that is livable, likeable and successful. This set of values strengthens the commitment and satisfaction of its employees and is also attractive on the job market. 3.1 People focus The business strategy of Magyar Telekom is centered around the realization of a digital business model that is based on utilizing new technologies in service of consumer relationship management in order to build trust and drive value creation. To achieve this goal, the human resources organization has been transformed to an even more efficient, agile, customer- focused People Unit in support of the corporate business strategy. Key objectives and key results of people services in 2023: We are becoming an inspiring community for all generations We pay particular attention to ensuring that all our colleagues - currently spanning 5 generations - all find the specific objectives they have set themselves to achieve their professional goals. Everyone should aim to grow and learn, because today's world is changing rapidly and we need to be able to adapt, to improve ourselves or to revisit our skills, as to which are the ones we need most. We can do this not only by attending training courses, vocational courses or even skills development training, but more importantly by using the knowledge we already have in-house, sharing our existing knowledge, experience and teaching each other. Attracting and retaining young people is an important aspect, but we also need to focus on ensuring that our existing colleagues - if they are thinking about a career move - do it in-house, find their next development opportunity, their next career move, within the company. In addition to professional knowledge, mental balance is also important, so we also aim to create mental balance for our colleagues, to make them feel cared for by Telekom, to be a safe haven for all our colleagues. With a STABLE background, we dare to change Change is a regular feature of Telekom's life, as we not only have to adapt to the needs of our customers on the professional side, but we also have to constantly rethink how and with what organizations we can support this in the most effective way. Telekom is a learning, self-reflective, flexible and evolving organization, where we listen to each other, build mutual trust, create a community of strong empowerment and personal growth, based on an agile culture. In support of this, we are constantly evolving our organization, experimenting with new ways of working, testing the 4 day working week and bravely exploring ways to better support our business areas in delivering the best possible service to our customers.
v 122 The People Unit acts as a role model We have a common goal to develop together, to collectively influence the whole Telekom organization. We change, we automate, we experiment, and we are frontrunners in how a change helps our operations. This includes making the best use of our resources, communicating effectively and creating a stimulating and supportive environment for our colleagues. Our organizational structure and processes are aligned and adapted to achieve our goals. Innovation and flexibility are key as the organization is able to adapt to ever-changing circumstances. We operate in the way we expect others in Telekom to operate, People Unit is a role model organization for Telekom as a whole. We have the coolest leaders We pride ourselves on our focus on developing our management. By valuing their commitment and leadership qualities, we are confident that their successful development, engagement and collaboration will deliver results. We are constantly creating opportunities for our managers to share their experiences, their pride and their dilemmas in this circle, helping each other to develop. This is essential if they are to be outstanding leaders who motivate, develop and effectively manage their teams. Both our passion for innovation and our inspiring leadership team contribute to the growth and development of our company. In addition to the above, the following people management perspectives continued to be emphasized in 2023 Employer brand building – the Group creates a livable and likeable workplace, which is satisfactory for its employees and offers an attractive perspective in the labor market through its future oriented methods of work. The Group puts greater emphasis on using social media solutions in building the brand. Recruitment-selection – The Group uses segment-based online recruitment channels and means to select the best candidate for the specific positions. During the selection process, Magyar Telekom seeks the inclusive attitude and personal traits defined as requirements for future Telekom employees. Remuneration – the Group has a transparent, simpler and consistent job grading model, which reflects primarily the respective values of jobs, and provides for market comparison, as a basis for a competitive remuneration policy. Digital solutions – the interface of its employee app (MagentApp) was renewed, the login was simplified and new technology was introduced to pave the way for further improvements and to increase the number of regular users. Quarterly, the Group has worked on employee and manager experience point/process/tool improvements to improve the internal customer experience, which are largely IT system and process improvements. This has included the introduction of a new e-learning system to support self-development, and a revamp of its Reflex employee self-service interface. 3.1.1 Headcount The following table provides information on the number of employees, including full-time equivalents, of Magyar Telekom Plc. and its consolidated subsidiaries: 2022 2023 Magyar Telekom Plc. (full-time equivalent)................................................................. 4,868 5,392 Magyar Telekom Plc. and its consolidated subsidiaries (full-time equivalent) .... 6,711 6,797 2022 2023 MT-Hungary /Telekom Hungary (full-time equivalent) ............................................. 5,848 5,828 North Macedonia (full-time equivalent) ....................................................................... 863 969 Total (full-time equivalent) ................................................................................... 6,711 6,797 The operating segments of the Group are MT-Hungary and North-Macedonia. For further details see Note 33 of the Consolidated financial statements.
v 123 3.2 Policies 3.2.1 Policies and agreements Code of Conduct https://www.telekom.hu/static-tr/sw/file/Code_of_conduct.pdf The Code of Conduct provides the framework of orientation for all employees of Deutsche Telekom Group and Magyar Telekom Group. Additionally, it applies to people to who are viewed as equivalent to employees in functional terms, e. g. to temporary agency employees. It combines the joint requirement of compliance with legal obligations and acting with integrity and thus ensures that Deutsche Telekom and Magyar Telekom remain transparent and traceable enterprises for everybody. Deutsche Telekom and Magyar Telekom expect their suppliers and consultants to comply with the rules of behavior manifested in this Code of Conduct and to endeavor them to ensure that they are also obliged to abide to its regulation by contract. Code of Human Rights and Social Principles https://www.telekom.hu/static-tr/sw/file/code-of-human-rights-social-principles-eng.pdf The Code of Human Rights and Social Principles as well as the company groups Equal Opportunities Plan in force defines the groups general human rights principles and the provisions for the implementation of these principles. Decision makers of Magyar Telekom Group are aware that employee diversity is the prerequisite of sustainable and equitable operations enhancing business efficiency and contributing to competitive advantage. Group Diversity, Equity and Inclusion Policy https://www.telekom.hu/static-tr/sw/file/Telekom_diversity__equity_and_inclusion_group_policy.pdf As part of the Deutsche Telekom Group, Magyar Telekom Group has renewed its Diversity, Equity and Inclusion (DE&I) Policy in December 2021. The renewed policy defines its global understanding of what characterizes the approach to diversity, equity and inclusion in its interactions with employees. It aims to ensure a consistent work experience, learning and development for every member of the company group, strengthening the sense of belonging and involvement. The framework of the renewed policy details and clarifies the company’s understanding of DE&I through a set of key elements and covers aspects of the work-life cycle that are relevant to the company culture. It addresses social and business responsibility in providing an equitable and inclusive workplace locally within its global framework but respecting local legislation of diverse cultures and local needs. Group Policy on Employee Relations Telekom_Group_policy_on_employee_relations.pdf The opening up of markets, digitalization and globalization have led to an increasingly knowledge-based working world. New forms of networking are changing communication, public impact, reputation and compliance challenges and other key elements of company management. Thus, the company realized a need to renew its definition of how they understand the shared characteristics of employee relations to ensure consistent working experience for every employee. As part of the Deutsche Telekom Group, Magyar Telekom Group has renewed its Group Policy on Employee Relations in December 2021. It specifies the key elements of its people policy and describes what the company stand for in its relationships with employees, that are characterized by its shared values and derive from a set of values as well as from other group policies. The policy covers all aspects of work life that are relevant to industrial relations and informed by sustainability as a key driver. Suppliers’ Compliance Magyar Telekom Group is committed to respect and protect human rights and it expects its suppliers to comply with these rules of behavior. Prior to becoming authorized suppliers of Magyar Telekom and Telekom Rendszerintegráció Zrt., the company’s suppliers must register their enterprises at its vendors’ registration site. https://beszerzes.telekom.hu/beszerzes/portal_en?appid=beszerzes&page=english/registration_vendor.vm As an obligatory part of the registration process vendors are obliged to understand and accept its Suppliers Code of Conduct that among other policies, entails its Code of Conduct, Social Charter and Diversity Policy. The company’s suppliers must understand and accept these policies and obligatory frameworks for their behaviors as well.
v 124 Equal Opportunities Plan https://www.telekom.hu/about_us/society_and_environment/society/equal_opportunities Anti-discrimination and the safeguarding of equal opportunities is a key priority to Magyar Telekom Group. According to the act CXXV of 2003 on Equal Treatment and Promotion of Equal Opportunities, and the corporate protocol in place since 2010 Magyar Telekom Group has accepted its 5 th Equal Opportunities Plan in order to secure the practices of equal treatment, the advancement of equal opportunities and the monitoring an improvement of the labor positions of particular disadvantaged employee groups. The Equal Opportunities plan currently in force is valid between 2021 and 2025 and has been developed in close cooperation with the employee representative bodies. The Diversity Charter of the European Union – Hungary has joined the Diversity Charter of the European Union in 2016 and, among 50 signatory companies Magyar Telekom has also underscored its dedication to safeguard diversity as a fundamental value. Magyar Telekom has been among the signatory companies in in the forthcoming years as well as in 2023. UN Guiding Principles on Business and Human Rights – According to the dedication of Magyar Telekom Group to safeguard and protect human rights along its operations as stated in the UN Guiding Principles of Business and Human Rights, the company considers the rights and guidelines stated in the Universal Declaration of Human Rights and in the ILO’s Declaration on Fundamental Principles and Rights at Work to be mandatory in its own practices. UN Human Rights Treaties ratified by Hungary – Magyar Telekom Group as a corporation legally registered in Hungary is carrying out its entire operations and business practices in full accordance with the nationally ratified UN Human Rights Treaties. http://tbinternet.ohchr.org/_layouts/TreatyBodyExternal/Treaty.aspx?CountryID=77&Lang=EN 3.2.2 Monitoring and auditing practices The group-level coordination of corporate sustainability operations that also incorporate labor standards, social issues and the protection of human rights has been led by an ESG Squad (formerly Sustainability Squad) from 2023. From 2020 to 2022, the Chief People Officer (CPO) was the senior manager responsible for sustainability. As of January 1, 2023, the Chief Financial Officer (CFO) has become the responsible for sustainability, and sustainability coordination has been transferred to the Capital Market Relations Hub, where a dedicated ESG expert has led the group-wide coordination and ESG Squad governance. ESG Squad reviews and assists the area responsible in strategy formulation and management. According to group instructions, the ESG squad meets regularly, at least quarterly, to effectively coordinate corporate and group sustainability tasks. Each strategy topic has a CxO level manager and a dedicated sponsor from the Leadership Team. The sponsors are also members of the ESG Squad. Operative implementation is carried out by cross-cutting working groups whose task is to clarify goals, develop a business plan and timing, and implement it. Magyar Telekom Group’s Code of Conduct covers the requirements of corporate compliance and states its collective set of values, and thus stands as an affirmation of the Group’s strong reputation, solid position and future success. The Code of Conduct applies to all board members of Magyar Telekom Group from employees to managing directors, executives and board members. Furthermore, Magyar Telekom Group expects its suppliers and consultants to comply with the rules of behavior manifested in this Code of Conduct and to endeavor them to ensure that they are also obliged to abide to its regulation by contract. Magyar Telekom Group’s Corporate Compliance Program has been elaborated with the aim to ensure that Magyar Telekom Group conducts its business with maximum consciousness and commitment, in accordance with relevant laws and regulations, in harmony with the strictest possible business ethics standards. The Compliance Program involves the Group Compliance Manager and compliance representatives of particular functional areas of operation, who are working together as members of the Group Compliance Committee. The Compliance Program has been designed to ensure that the Group conducts its business to the highest standards of awareness, transparency, accountability, commitment, and adherence to applicable laws and regulations. External audits could be conducted as part of the control process carried out by the Hungarian Labor Inspectorate. The Inspectorate has the right to issue such an auditing process in case of public complaints or issued requests. The Inspectorate also provides counseling to the corporations in support of legal compliance.
v 125 3.3 Results of Policies 3.3.1 Diversity and Equal Opportunities As one of the largest employers in the Hungarian ICT sector Magyar Telekom believes that diversity contributes to the success of businesses and all kinds of organizations to a large extent. This value is also at the core when it comes to the increase of creativity and innovation, to the involvement of new partners, experts and clients, to the quick adaptation to changes and most of all, to the compliance with the legal obligations of non-discrimination in all corporate operations. Magyar Telekom and the employee representative bodies have accepted the 5th Equal Opportunities Plan of Magyar Telekom Group in 2021 for the period 2021-2025. The corporate Equal Opportunities Plan addresses actions and procedures to improve the labor conditions and career perspectives of vulnerable employee groups such as women, employees with families, employees on child-care leave, employees living with disabilities, recent graduates and 50+ employees. The corporate diversity and inclusion expert and the employee representatives discuss the conducts and results of the action plan annually. Several employee surveys contribute to the development and the adjustment of the actions each year, allowing the rollout of the equal opportunities plan to adapt to employee needs. The principles of justice and equal treatment of Magyar Telekom are being defined by its Code of Conduct. Ways of non- typical employment such as Telework, flexible working hours, part-time work, employment of people living with disabilities allow the Group to realize the principle of equal treatment in practice. These measures are further assisted by several measures implemented in corporate day-to-day operations, such as the large office spaces that are designed to support Teleworking in the new headquarters of Magyar Telekom. In accordance with Hungarian labor legislations the Group provides its employees with extra days off after their children, and after blood donation. In case of more than 40% health damage Magyar Telekom provides its employees with extra five days off annually for rehabilitation. One of the key objectives of the new group level corporate sustainability strategy 2021-2030 among climate protection and digital inclusion is the improvement of diversity and inclusion experience on both customer and employee side. It was launched in 2021 and is in effect until the end of 2030. The details of the Sustainability strategy 2021-2030 were presented in detail in the Sustainability report published in first half of 2022. In 2023, Magyar Telekom continued with practices securing equal opportunities for all employee groups. Following the process developed in 2020 the Group continued to monitor its gender pay gap along 9 indicators identifying multilayered action plan to tackle the detected inequalities and further reduce the overall gap between male and female general workforce. In 2021, Magyar Telekom has joined the „One step closer” initiative of Amnesty International with its commitment to reduce its gender wage gap by at least one percent annually. Similarly to the previous years, in 2023 Magyar Telekom opened its on-site childcare facility in the summer and fall school holiday season thus supporting parents in the difficult family management periods. On the first day of the vacation, as part of the #Showmewhere you work (#mutiholdolgozol) Day, nearly 400 children visited the headquarters and got to know the Group's digital products and what their parents who work here do. In 2023, the distribution of its very own children’s book "My Mummy/Daddy works at Telekom" for parent colleagues raising children between the ages of 3-10 was continued. The storybook offers a playful introduction to the magical world of telecommunication for the preschool and elementary school aged children and offers examples on how to develop family rules for conscious screen time and internet use. In 2023 – as in every year since 2018 -, the Group was rewarded with the Family Friendly Mentor Company certificate based on its family-friendly initiatives implemented. 3.3.2 Anti-discrimination and labor-market integration actions As an employer, Magyar Telekom has issued the following actions in 2021 to improve the conditions of the employee groups marked in the 2021–2025 Equal Opportunities plan. As a mentor company Magyar Telekom supports roma workforce integration program Integrom to contribute to the equal labor market opportunities. The program participants are being supported with job application counselling, job interview- practices, CV writing and editing skill practices. Its inclusive recruitment practices include dedicated recruiter tracking support for program participants throughout their application process, providing detailed evaluation and feedback, and
v 126 company mentoring upon request. Starting from the fall of 2021 Magyar Telekom joined the HBLF Romaster initiative supporting two talented roma students for 4 years with scholarship funding and mentoring. In 2023 the LGBTQ & allies employee group of Magyar Telekom and Deutsche Telekom IT Solutions Hungary have attended the Budapest Pride March again. The Group in cooperation with Magenta Pride Employee Resource Group (ERG) has continued to work on and improve its LGBTQ inclusive workplace initiatives as well. Flagship events of 2023 were a Living Library event in May and the celebration of World Coming-Out Day in October. In 2023, its headquarters in Budapest hosted the Women's Day Conference of the Egyenlítő Foundation. The event focused on women leadership. In the various round table discussions, 3 of its female leaders represented Magyar Telekom and shared their thoughts on the topic. In March 2023, the Women in Telekom ERG was established. Among others, their goals include a dedicated female career program and the support of the workplace reintegration of colleagues returning from long-term absence (maternity leave Dedicated working groups were formed and started to work on these topics. In order to secure the equal opportunities of current and future colleagues living with disabilities, the Group is using a special module on its online job-application site (https://www.telekom.hu/about_us/career) since 2010, where its applicants are encouraged to state any accessibility requests they might have in order to attend the selection process. In May 2023, the Accessible Telecom employee resource group was established to facilitate the integration of the employees with altered work ability or disabilities, and better understanding and acceptance of different groups with disabilities. Organized by the ERG, in cooperation with Deutsche Telekom IT Solutions, Magyar Telekom organized the Accessibility Day at the Magyar Telekom’s headquarters. Via gamification, presentations, round table discussions, inclusive brunch, and the involvement of NGOs, Magyar Telekom brought the world and everyday challenges of people with disabilities closer to the colleagues. Fourth in line at the Group, in May 2023, the Telekom Family ERG was established, aiming to support the colleagues with families – parents, grandparents, caregivers. Their first event was a Christmas arts&crafts program for children and adults held at the headquarters. At the MagentaLand event in September, Magyar Telekom dedicated a special section to the introduction and promotion of its employee resource groups. The Chief People Officer represented the Group in the advertising spot of We Are Open association’s (of which Magyar Telekom is a member) media campaign which aimed to promote workplace diversity, openness, and acceptance in companies. 3.3.3 Respect of Human Rights, actions against child labor and all kinds of forced labor As disclosed in the Code of Human Rights and Social Principles the Group rejects child labor and all kinds of forced or compulsory labor and fights against all kinds of human trafficking and modern-day slavery by all means at its disposal. As the parent company of Magyar Telekom Deutsche Telekom Group is responsible for supply chain compliance auditing and management on a global level. More detailed information about the methodology and results of the global supply chain management at https://www.telekom.com/en/corporate-responsibility/assume-responsibility/assume- responsibility/supply-chain-management-355304 New employees of Magyar Telekom Group as part of their orientation process in their first two months receive compulsory education about the company principles, guidelines and practices concerning social issues, labor standards and human rights. All employees must understand and accept these guidelines as the fundaments of their own professional behavior and operations and they are also obliged to complete the Telekom unconscious bias e-Learning course during the onboarding period. In line with the Code of Human Rights and Social Principles, in 2018 all Magyar Telekom Group employees and all partners closely related to its brand representation attended compulsory trainings regarding human rights. From the end of 2018 the training is part of the compulsory trainings of Magyar Telekom. Moreover, the Group is aware of the fact that there could be situations in which it is harder to tell appropriate from inappropriate. In order to assist employees in making the right choices in these situations, all employees participate in the Group’s digital mandatory annual compliance training, and Magyar Telekom offers secure internal whistleblower channels, operated by the Corporate Compliance Department. “Kérdezz!” (“Ask me!”) advice portal has been set up to help resolve uncertainties as far as compliance-relevant behavior is concerned. Serious misconduct must be announced for prevention purposes and for appropriate sanctions. For this reason, the “Tell me!” whistleblower portal has been
v 127 established. The main principles and the detailed description of the internal inspection process is detailed in employee directives available on all employees on the shared intranet platform. Throughout the inspection process the whistleblowers’ anonymity, personal and data privacy are guaranteed and handled with utmost discretion. 3.3.4 Relationship of management and employees At present two unions (Telecommunications Trade Union (TÁVSZAK) and T-Net Trade Union) and workers’ council operate at Magyar Telekom, communication with them runs on two levels. Central decisions concerning the whole Group, when the employee representation bodies need to be consulted, are deliberated with the Central Workers Council and the representatives delegated by the trade unions, either in the frame of joint consultation (Interest Reconciliation Council), or separately, depending on the nature of the matter discussed. Central communication is managed both verbally (negotiation) and in writing. The Chief People Officer, the Competitive Workforce HUB Lead and the accredited HR Business Partner Lead are responsible for central level communication with the employee representation bodies. Interest enforcement issues concerning a given governance area are also discussed locally with the representatives of the trade unions and the local workers’ council. The HR Business Partner Leads of the governance area are responsible for communication with the local employee representation bodies. Trade union and the workers’ council (Central Workers Council) must be consulted and their opinion solicited on significant decisions resulting in organizational changes or changes affecting a large group of employees. In organization restructuring decisions the collective bargaining bodies have 15 days to submit their comments. The measure in question may not be implemented during this 15-day period. Trade unions and workers’ councils (Central Workers Council) must be consulted with regard to draft resolutions, aiming at organizational changes without regard to the number of employees concerned. Under the Act V of 2013 on the Civil Code one third of the Supervisory Board shall consist of employee representatives. The employee representatives in the Supervisory Board are nominated by the Central Workers’ Council considering the opinion of the trade unions operating at the Group. Persons nominated by the Central Workers’ Council shall be elected by the General Meeting to the member of the Supervisory Board, except if disqualifications exist in respect of the nominated persons. On December 31, 2023, there were two members of the Supervisory Board were employee representatives. These members were Gyula Bereznai and Endre Szepesi. 3.3.5 Freedom of organization and collective bargaining Magyar Telekom Group acknowledges the basic rights to freedom of organization and collective agreement in its Social Charter. In line with an openness and trust that relies on a constructive social dialogue, Magyar Telekom Group declares its support to cooperation with the legitimate representatives of the employees in order to establish a balance of interests. The Social Charter together with the long history of mutual respect and cooperation of the management and employee representative councils are the guarantees that these rights are being fully and thoroughly respected. 100% of the employment contracts of Magyar Telekom Group employees operating in Hungary fall under collective bargaining agreements developed with the Hungarian Telecommunications Trade Unions (Távközlési Szakszervezet, TÁVSZAK and Magyar Távközlési Ágazati Szakszervezet, MATÁSZ). The agreement, which can be terminated by either party with three months’ notice, applies to all Magyar Telekom Plc. employees except the CEO, regardless of their union membership status. Wage terms in the collective bargaining agreement must be renegotiated annually. If the employment is terminated due to reasons related to the employer’s operation, employees are entitled to a specific amount of severance pay surplus, which depends on the tenure of the employee. In addition to the collective bargaining agreement, employees of Hungarian operations are generally covered by the Act I of 2012 on the Labor Code, which imposes various restrictions on the involuntary termination of employment. The Labor Code protects employee interests through two different labor organizations: the Trade Union and the Workers’ Council. The Trade Union, as the official representative of employee interests in negotiations relating to the terms of employment, has the right to be informed of all corporate measures that may significantly affect the interests of employees and to commence legal action against Magyar Telekom for employment-related conduct that infringes an employment rule. In addition, the Workers’ Council directly represents employee interests in dealings with management and decides jointly with management on matters involving employee welfare funds and institutions. The Workers’ Council must be informed semi-annually on issues affecting the economic performance and changes in wages, employment conditions and working hours. The Workers’ Council must also be consulted on corporate measures affecting employees.
v 128 Magyar Telekom believes that its relations with its employees are good and has not experienced any labor strikes or disruptions since the Group’s formation. 3.3.6 Workforce Reduction and Redeployment Magyar Telekom – in order to ensure the resources related to the Group’s strategic objectives – has reached an agreement with the trade unions in 2023 on headcount plans and wage increase measures for 2024. According to the terms of the agreement, there will be no company-initiated downsizing in 2024, however, the Group’s goal is still continuous efficiency improvement and process optimization, which is continuous but does not bring significant changes. 3.3.7 Benefit Programs Magyar Telekom’s welfare and social benefits constitute an exceedingly wide-ranging pool. A part of them is granted to every employee, while others are available on certain conditions or are of an insurance nature. In case of certain benefits, employee’s individual contribution is a prerequisite of the employer’s contribution. The way social benefits and discretionary benefits are granted is set out in the Collective Agreement and related regulations. Magyar Telekom provides employees with telecommunication allowances, fringe benefits life and health insurance benefits and health screening packages. 3.4 Risk management 3.4.1 Providing educational and professional background The educational pillar of Magyar Telekom’s Sustainability Strategy aims to improve the digital competencies of the clients and the wider public. It also aims to contribute to the development of industrial succession knowing that a potential throwback in the amount of available highly qualified professionals in the industry could mean a serious risk to maintaining, improvement and development of the quality of its services. In order to secure the highest quality service to the company’s clients, Magyar Telekom needs work with the best professionals. To be able to have them a competitive industrial educational background is necessary. Upon the initiative and by funding of T-Labs (Telekom Innovation Laboratories, Berlin) the faculty Data Science and Engineering began to operate at Eötvös Loránd University from September 2016 as the first pillar of the EU Labs researcher network. The role of Magyar Telekom is in the support of the teaching and research capacities. Magyar Telekom’s colleagues are in close relationship with several higher education institutes and help the universities with consultancy for writing theses, expert education and giving lectures. Within the Group’s strategic partnership started in 2021, Magyar Telekom continued the cooperation with the Miskolc EC Kandó Kálmán Technical School for IT Technology. The aim of the partnership is to offer professional support in keeping the curriculum up-to-date with the latest technological realities of the industry. In addition, Magyar Telekom offered internship opportunities for students. The Group continued its partnership with Szent István University, in order to offer the training practice pillar of the electric engineer dual major. 2 students started this dual major in 2023. The joint education platform of Deutsche Telekom IT Solutions and Magyar Telekom, the “Deutsche Telekom Group remote IT Faculty” at Óbuda University formed in 2021 continued its operation in 2023. The courses are run mainly by DT- ITS specialists, and Magyar Telekom colleagues also contribute. In the fall of 2022, the Group signed a cooperation agreement with the Faculty of Electrical Engineering and Informatics of the Budapest University of Technology and Economics on the participation in the Plant Engineering-Informatics cooperative training, to provide opportunity for students to get familiar with the practical aspects of their future profession, based on the guidelines of experienced professionals. This cooperation was continued in 2023 as well. Almost 80% of the third Kickstart-class, has continued to work in junior positions at Magyar Telekom following their trainee year. In September of 2023 30 senior year university students joined Magyar Telekom Plc. as the fourth, extended numbered generation of Kickstart trainees. During the one-year program, the trainees received professional, soft-skill and design thinking trainings. Kickstart trainees who work in a variety of areas throughout the Group gather up for a half term agile project assignment strengthening their ability to work in a cross-functional team. The joint project task is based on
v 129 real business needs, thus strengthening the importance of the program in parallel with the development of Magyar Telekom. Launched in March 2020, MagentaKraft helps young visionaries with trainings and events on their journey to develop their inventions and projects. The KraftRoad program supports young talents with workshops and events in the development, elaboration and improvement of their innovation projects. Via Kraft Agency, which is Magyar Telekom’s own, internal creative team of young people, whose aim is to renew the content production in Hungary and create a new kind of content production model, talented young people are involved in building and shaping the brand. Throughout the year, the KraftLab in Debrecen was also available to the young people, where they could use various tools, from a video studio to a podcast studio to a programmable robot arm. Almost 3,500 youngster took advantage of this opportunity and boosted their various projects with the help of the site. At Zyntern Jobportal Big Beginner Survey which evaluate the most popular employers among young people (aged 16-28), Magyar Telekom was the #1 choice for youngsters and ranked first as the Most attractive employer among IT and human studies students. Based on the survey, Telekom Kickstart Program was the most popular intern program in Hungary. 3.4.2 Employee expectations and equal opportunities The pillars of People Focus in Magyar Telekom are based on the aim to meet the needs of the company’s employees, and to live up to the challenges of maintaining the company status as a highly competitive and future oriented employer. Employees of Magyar Telekom require security, stability, opportunities for advancement and competitive compensations. Magyar Telekom, as a company committed to provide equal opportunities to its employees, finds it especially important to harmonize wages and to terminate unjust wage gaps. Magyar Telekom’s remuneration system is fully transparent thus its base wage tables and the relevant policies are available for all employees. The dimensions of the position system are being developed at the intersections of the Hay-system and the competence-based position levels of its agile organizations. Magyar Telekom pays extraordinary attention not to differ unreasonably the wages of the employees performing the same tasks and that the wage differences between the employees reflect real work differences. As a responsible company, the Group is aware of the social phenomenon of the gender pay gap and are committed to eliminating its root causes within its own business environment. Since July 2020, the Group conducts twice a year regular and complex gender pay gap analysis, during which the Group defines its equal opportunities action plan to reduce the possibilities of inequalities such as the ’motherhood penalty’ and the female career gap. As an employer dedicated to diversity as a core value, Magyar Telekom finds it important to raise the number of women in leadership positions. One of the key objectives of the Diversity pillar of the Sustainability strategy is to reach at least 35% of female leadership by 2025. From May 2020, for the first time in Magyar Telekom’s history, the Group has achieved a balanced 33.33% gender ratio in the senior management which Magyar Telekom continued to maintain in 2023. The proportion of female leadership in the overall management was 29.15%. Magyar Telekom considers stress, overload and burnout related risk-reduction as its priority duty in relation to its employees. In order to take charge of these risks by securing an empowering environment to develop and maintain a healthy lifestyle, employees are also provided with coaching and training opportunities and the availability of the Employee Assistance Program all of which help in maintaining a sustainable life balance. Efficient work-life balance of employees with families is further supported by Magyar Telekom’s on-site childcare facility supporting parents in the difficult family management period its child-friendly offices and the available, tax-free nursery and/or kindergarten support that could be selected from its cafeteria benefit scheme, thus contributing to the reduction of expenses. Taking notice of the special conditions of employees (ex. illness or the longer-term domestic care of a relative) a longer period of unpaid leave is also available. 3.5 Performance indicators Non-typical employment at Magyar Telekom Group: ▪ No. of Part-time employees in 2023: 156 ▪ No. of Flexi-time employees in 2023: 1,260 ▪ No. of Teleworking employees in 2023: 4,205 More women in leadership positions at Magyar Telekom Plc.: ▪ Percentage of women in overall workforce: 34.76% ▪ Percentage of women in senior management (Leadership Team): 31.37% ▪ Percentage of women in Leadership Squad: 33.33%
v 130 Volunteer work benefits at Magyar Telekom Group: ▪ No. of volunteer working hours (blood donation): 3,146 ▪ No. of volunteer employees (blood donation): 416 4 COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT The aggregate compensation of the members of the Board of Directors in their capacity as Board members was HUF 19 million in 2023. The aggregate compensation of the members of the Supervisory Board in their capacity as Supervisory Board members was HUF 37 million in 2023. The total compensation expenses (including social security and other payroll-related taxes as well as contractual termination expenses) of the members of the Leadership Squad (LS) was HUF 1,677 million in 2023. On December 31, 2023, four members of the LS have an employment contract with indefinite and two members with definite duration. The notice period is two months for two of the indefinite contracts. The severance payment usually is in accordance with the Labor Code and the Collective Agreement, for the contracts the severance payment is usually between 3 and 16 months. In addition to the above, the affected persons are bound by the non-compete clause, under which the employee is barred from entering into employment with any Hungarian or international competitor of Magyar Telekom and is required to refrain from providing direct or indirect services or activities of any kind to such companies for a definite period (not longer than one year) upon termination of his/her employment. Furthermore, such employee is barred from any action aimed to recruit employees of Magyar Telekom for any other company. This limitation entails certain compensation which is proportional with the above obligation. If the employee is in breach of the agreement, he/she will reimburse the net amount of compensation to the employer. In addition, the employee will be liable for a payment of compensation to the employer. LS members from foreign countries may be entitled to housing subsidies. There are two members affected by this entitlement. In line with the Group’s remuneration guidelines, the Group provides contribution-based personal pension scheme, personal insurance scheme and health insurance scheme for the LS members. In addition, the LS members are entitled to the use of company cars. For information about the Share Based Compensation programs, see Note 20.1.2 of the Consolidated Financial Statements.
v 131 5 RESEARCH AND DEVELOPMENT Hungary Research and development tasks are carried out by Magyar Telekom Group’s own researchers, product and service developers, with the involvement of innovative SMEs in Hungary. In addition, the Group exploits the synergies of its internal and external knowledge base and seeks partnerships with well-known innovation centers and higher education institutions. The Group’s main partners in this field are renowned Hungarian universities and research institutes. In addition to the R&D and 5G Campus cooperation, the Group has launched dual training courses together with Széchenyi István University, and a joint project with the university was the simulation of a Hungaroring competition in the 5G Campus framework. In 2023 keep going the „Deutsche Telekom Group IT” Off-site Department faculty at Óbuda University. Also proceed with the engineer educational programs with the universities and higher education institutions and expanded with further subjects. Magyar Telekom recently established partnerships with university science parks currently under construction. It is particularly important for Magyar Telekom Group to explore and exploit the opportunities offered by the latest technologies. Such technologies include the development of Cloud, Hybrid Cloud PaaS and SaaS services, convergent services. To leverage the business and technology data assets, a number of Artificial Intelligence (AI), Data Science, Machine Learning (ML) based solutions are being developed, which, complemented with security services, create lasting value for the customers. In addition, the Group continues to research and develop the opportunities offered by the fifth generation mobile technology (5G). The Group’s strategic objective is to expand the portfolio of digital services already under development, which will further strengthen the Group’s cross-selling capability alongside traditional communications services. By developing AI/data- driven services, Magyar Telekom aims to become the market leader among companies developing these technologies. In addition, they will create sales potential for Magyar Telekom Group that will drive the digital transformation of the large enterprise ecosystem, thus strengthening the value proposition to the customers. For the customers, the latest data management solutions offer a range of opportunities to modernise, automate and improve the efficiency of the services and processes they provide to their internal stakeholders and customers. These solutions can address a number of challenges in the current market environment, such as a stronger presence in the virtual space or the increasingly apparent shortage of staff. Therefore, in 2023: ▪ Telekom Rendszerintegráció Zrt. is an active member of the Hungarian Drone Coalition and has successfully implemented product development projects in the areas of warehouse management (Dronify automated inventory solution) and agriculture (wildlife damage prevention) integrating IoT solutions. ▪ The Group's strategic product portfolios include AI-based chat/voice (Intelligent Digital Assistant) services, RPA, an automation platform and a modern data warehouse solution based on real-time data processing. ▪ In 2023, Magyar Telekom’s Enterprise Unit expanded its Artificial Intelligence (AI) development team specialised in large language models and digital business assistants, with the aim of exploring business opportunities using GPT and other large language models and creating solutions (voicebot, chatbot) based on cloud-based technologies. Magyar Telekom is the first in the domestic market to have a customisable GPT-4 large language model for business use, which can interpret questions in Hungarian, English and other languages and generate texts (summaries, analyses, etc.) based on the very large amount of knowledge it stored and learned about the task at hand. ▪ Magyar Telekom and Telekom Rendszerintegráció Zrt. have both built their own localised (private Azure Stack Hub) cloud services that enable the customers to use pay-per-use services (such as data analytics and machine learning) similar to the Public Cloud solutions, even within a country border. These services give the customers greater security as their data remains within country borders. In the framework of the 5G Campus automotive collaboration, the Group has carried out successful R&D projects with its partners, successfully testing DATA AI and MI solutions and product prototypes. ▪ Magenta Kraft is Magyar Telekom’s innovative youth platform, which aims at providing new value for the young generations. Magenta Kraft provides an opportunity for those who already have a big or little idea in their mind, but don’t have the necessary tools (infrastructure, environment, team). Further details in Note 3.4.1. As a member of the Group, Telekom Rendszerintegráció Zrt. continued to be an active participant in the MI Coalition established by the Ministry of Innovation and Technology in 2023.
v 132 Telekom Rendszerintegráció Zrt. also continued its multi-year collaboration with the 5G Coalition, also supported by the Ministry of Economic Development (GFM), and the Industry4.0 National Technology Platform Alliance. In addition to the above, Telekom Rendszerintegráció Zrt. was an active member of the Hungarian Association for Innovation and the Association of Digital Enterprises (IVSZ) in 2023. North Macedonia Makedonski Telekom continues with its determination and its work to be innovation and technology leader on the market. Special focus areas for development are Smart City, Smart Energy Metering, Telemedicine and Cybersecurity solutions. Makedonski Telekom has successfully implemented several projects by using their in-house solution for smart energy metering and management (SEMM). The solution includes hardware and software, and it provides cloud-based web and mobile applications through which consumption and quality of delivered electric energy is monitored in real time. The solution is connected in real time to the Hungarian stock power exchange (HUPX) for monitoring and comparing the price of electricity on the market. In 2023 Makedonski Telekom have implemented it in the data centers, one governmental and one commercial customer which have already achieved substantial energy savings. Furthermore, Makedonski Telekom is developing a solution which is providing real-time communication over 5G between medical devices in the ambulance car and the hospital. During the transportation of the patient by means of connected medical devices the vital signs of the patient are measured so he/she will be prepared according to the instructions received from the team of doctors in the hospital, and the intervention can start immediately after the patient's admission. This solution will be among the first in the region, which speaks of Makedonski Telekom commitment to improve citizens’ quality of the life. With continuous strategic investments, Makedonski Telekom managed in a record time to complete the final cycle of mobile network modernization. So far, 82% of the population throughout the country can use the 5G technology. At this moment, Telekom is the only one that delivers gigabit speeds of 5G mobile internet in most of the towns in Macedonia. The LTE network also continued to grow in 2023. More than 99.9% of the total sites provided LTE services and 72.5% of all BTSs are connected via optic. The data volume via 5G is also increasing month by month. To provide a more efficient spectrum usage and optimization of the complex 4RATs (2G/3G/4G/5G) mobile network, the activities for the retirement of 3G technology were boosted during 2023. The whole project is planned to be completed in H1 of 2024, which will result in the implementation of a new NT production model based on virtualized, cloudified and disaggregated RAN. Makedonski Telekom is Leader in the segment of fiber optic infrastructure. By the end of 2023, Makedonski Telekom increased the fiber reach to a total of 314,216 FTTH accesses passed, which means that around 37.64% of the households already have the option of booking a fiber-optic connection. Regarding the VDSL rollout, there are more than 230,000 VDSL accesses passed in the fixed copper network. At the end of 2023, the number of LTE box users was more than 13,000 and there were around 2,000 hybrid users. Makedonski Telekom’s TV Strategy vision is to continue to be on the #1 TV provider position on the Macedonian market, by providing the best TV service and most relevant content. In that regard, during 2023 the emphasis was placed on the deployment of the new cloud NGTV platform that provides seamless multi-screen (TV, Mobile, Web) experience with a new Client look and feel for the customers. Makedonski Telekom is dedicated to environmental protection and to reducing the harmful impact on nature and in this process, Makedonski Telekom is also using the technology. The greatest consumer of electric energy is the mobile network, which comprises approximately 55% of the entire consumption. To reduce this trend in the long run, Makedonski Telekom has already started working of artificial intelligence-based features.
v 133 6 REAL ESTATE, SITES OF OPERATION Magyar Telekom has one of the largest real estate holdings in Hungary and it is also a major real estate owner in North Macedonia. Magyar Telekom uses substantially all of these properties for telecommunications installations, offices, warehouses, garages and shops. Its equipment and machinery primarily consist of switches, communication towers and other telecommunications equipment. In order to increase the utilization of real estates and increase efficiency, also adapting to the recent changes in the energy sector, Magyar Telekom is committed to reduce the cost of its energy consumption (finding alternative methods in heating and cooling, and to rationalize the usage of offices) furthermore Magyar Telekom makes efforts to sublet or sell its surplus properties. Headquarters of major member companies of the Group: ▪ Magyar Telekom Plc.: Hungary, 1097 Budapest, Könyves Kálmán körút 36. ▪ Telekom Rendszerintegráció Zrt.: Hungary, 1097 Budapest, Könyves Kálmán körút 36. ▪ Makedonski Telekom A.D.: North Macedonia, 1000 Skopje, Kej 13 Noemvri, No. 6. ▪ Combridge S.R.L.: Romania, Municipiul Sfantu-Gheorghe, Strada 1 DECEMBRIE 1918, parter comercial, nr. VI, Bloc 6, Judet Covasna ▪ Novatel EOOD: Bulgaria, District Sofia (capital), Municipality Stolichna, Sofia 1756, Malinova dolina, 2 Donka Ushlinova str., Garitage Park complex, building 3, floor 1, number 312. Hungary Out of the 1,810 buildings on the 1,626 sites of Magyar Telekom, 48% are owned by the company, 4% are jointly owned and the rest 48% are leased. Magyar Telekom is managing more than 7,000 contracts for base stations, mobile sites and technology properties. The total area of buildings used by Magyar Telekom as of December 31, 2023 was 468,656 m 2 . The majority of sites used in its operations are smaller than 100 m 2 . The largest site is the company’s headquarters building (leased) located at Könyves Kálmán krt. 36 in Budapest, with floor space of over 39,207.53 m 2 , and including underground area with total space of 82,210 m 2 . North Macedonia At the end of December 2023, Makedonski Telekom radio access network consisted of 921 physical sites on which there are 919 2G base stations, 861 3G base stations, 921 4G base stations and 411 5G base stations. 90% of the site infrastructure (towers) is in possession of Makedonski Telekom and 10% is leased. The total area that is used by Makedonski Telekom is around 102,722 m 2 as of December 2023, out of which around 38,223 m 2 are in sole possession of Makedonski Telekom and in great part (53 %) is attributable to 2 major buildings, the headquarters and the main technical building. The remaining 64,499 m 2 are in joint possession with Macedonian Post.
v 134 7 SUSTAINABILITY AND ENVIRONMENT PROTECTION Unlike the rest of the Consolidated Business / Management Report, only the largest member companies (Magyar Telekom Plc., Telekom Rendszerintegráció Zrt. and Makedonski Telekom A.D.) are included in the sustainability activities. Hereafter, Magyar Telekom Plc. and Telekom Rendszerintegráció Zrt. are collectively referred to Magyar Telekom HU. Magyar Telekom HU has been dealing with sustainability issues for nearly twenty years and has been planning its goals and tasks strategically for more than 15 years. On this basis, its sustainability activities are characterized by a comprehensive, planned and long-term approach, and in 2021 it already defined its fifth long-term sustainability strategy up to 2030, with key objectives for 2025 and 2030. Magyar Telekom HU has been committed to support the 10 principles of the UN Global Compact in the fields of human rights, environment and anti-corruption since 2009, and reports on the progress made in this regard year after year in its sustainability report. In 2015, the UN adopted the 2030 Agenda for Sustainable Development, which is set out in 17 headline goals and a total of 169 sub-goals. These goals set out the directions for responsible action to solve the most pressing problems facing humanity and the planet. Magyar Telekom HU has defined its new sustainability strategy for the period 2021-2030 in line with these SDG goals. The Group's contribution to the primary objectives of its activities is presented annually in a separate sustainability report. Sustainability activities and results are presented in an integrated and comprehensive manner through the annual Sustainability Report, with which is aims to make it’s environmental, social and economic operation covering all topics transparent for everyone. Reports are based on Global Reporting Initiative (GRI) guidelines, adhering to the principle that reports should be the basis for transparency and comparability at an international level. The 2007 report was the first in Hungary to be prepared according to GRI G3 A+ compliance level, which meant the highest level of application of GRI G3 directives at that time. Since then, Magyar Telekom has prepared a report every year of the highest compliance with international guidelines. Independent testing and certification of compliance with GRI criteria was carried out by PricewaterhouseCoopers against the ISAE 3000 international standard. In this Consolidated Business / Management Report, covers only a few key themes of the overall sustainability approach, such as human rights, employees, climate protection and compliance topics. Further details on the company's sustainability performance can be found in the annual sustainability reports, which are available at: https://www.telekom.hu/about_us/society_and_environment/sustainability_reports 7.1 Sustainability governance at Magyar Telekom HU Coordination has been led by an ESG Squad (formerly Sustainability Squad) from 2023. From 2020 to 2022, the Chief People Officer (CPO) was the senior manager responsible for sustainability. As of January 1, 2023, the Chief Financial Officer (CFO) has become responsible for sustainability, and sustainability coordination has been transferred to the Capital Market Relations Hub, where a dedicated ESG expert has led the group-wide coordination and ESG Squad governance. The Chief People Officer (CPO) is still responsible for the social related topics. ESG Squad reviews and assists the area responsible in strategy formulation and management. Each strategy topic has a CxO level manager and a dedicated sponsor from the Leadership Team. Operative implementation is carried out by cross-cutting working groups whose tasks are to clarify goals, develop a business plan and timing, and implement it. Magyar Telekom HU upholds its commitment to sustainable development and environment protection first in the environmental policy. In addition to the policy, it has also issued environmental guidelines, which sets out in more detail the company's areas of commitment and expectations. Lastly, in 2022 Magyar Telekom HU has introduced it’s biodiversity policy.
v 135 7.2 Sustainability strategy Magyar Telekom started its fifth ten-year (2021-2030) sustainability strategy period in 2021. The sustainability strategy was defined along three pillars: 1) Climate protection, 2) Digitalization 3) Diversity and inclusion. At the beginning of 2023, it revised its strategic objectives in order to respond to changed external and internal circumstances and to define its objectives based on even more precise calculations. The strategic sub-targets are affected by the risk of fuel price and availability, as well as the faster scale energy demand of 5G services and data centers. In addition to external changes, there were also changes in Magyar Telekom's structure: T-Systems Magyarország Zrt. was transformed and partly merged into Magyar Telekom Plc. Despite the changes, Magyar Telekom Plc. still benefits from the emission reduction commitment renewed in 2019 – approved by the Science Based Target initiative (SBTi). The target is to reduce direct (scope 1) and scope 2 emissions by 84 % by 2030 compared to 2015 base year and by 30% compared to other indirect (and scope 3) emissions compared to 2017. 7.2.1 Climate protection In the field of climate protection, Magyar Telekom HU undertook to reduce greenhouse gas emissions by 80% in scope 1-2 compared to the base year of 2015. The scope of data has also been clarified and sources such as fugitive emissions of refrigerants, consumption of devices with operational control in data centers or consumption of aggregators providing emergency power sources. While direct and indirect emissions (scope 1+2) remain at net zero at Magyar Telekom HU and at Makedonski Telekom A.D., as well. To this end, Magyar Telekom HU takes the following steps: ▪ 55% electricity reduction in fixed network in Hungary by 2030 compared to 2015 due to modernization ▪ greening of data centers in Hungary according to the EU taxonomy recommendations, ▪ coverage of electricity from 100% renewable sources, ▪ increasing the share of local renewable energy, ▪ investment for more efficient buildings and infrastructure, ▪ greening the fleet. Reduction of additional indirect emissions (Scope 3) in Hungary is also an important goal: ▪ with reduction of suppliers' emissions by 30% ▪ with transition to circular economy by 2030. 7.2.2 Digitalization Under this pillar, Magyar Telekom HU aims to place digitalization at the service of people, families and businesses. By improving the infrastructure, these services will be available to everyone. In addition, with digital inclusion programs customers can maximize the opportunities offered by digitalization. 7.2.3 Commitments made in relation to the digitalization of Hungary ▪ By 2027, Magyar Telekom Plc. have committed to providing Gigabit network access to 4.5 million households and companies. ▪ By 2026, Magyar Telekom Plc. have committed to building 99% external 5G coverage proportional to the population. ▪ In connection with promoting digital maturity, Magyar Telekom HU works on various programs, where support clients through older generation to small and medium-sized enterprises. For example, with the „Hello Szülő”, „Hello biznisz”, „Netrevalók” programs.
v 136 7.2.4 Diversity and inclusion Magyar Telekom HU already paid special attention to ensuring diversity and equal opportunities for its employees in the previous strategy. In the new strategy (2021-2030), it has expanded its aim to create a 100% inclusive workplace and provide a 100% accessible service. Inclusive workplace (2025): ▪ 100% barrier-free workplace ▪ The proportion of female managers should be at least 35% ▪ 100% WCAG compliant Inclusive workplace (2030): ▪ The proportion of female managers should be at least 40% Magyar Telekom HU also advocates the introduction of a complete educational program promoting inclusion and awareness-raising. 7.3 Awards Magyar Telekom HU’s efforts have been recognized by many independent organizations. The list below is a list of the recognitions, awards and sustainability assessments, which the Company have won or continue to receive in 2023: ▪ FTSE4Good Index membership; FTSE Russell ESG Rating ▪ CECE SRI Sustainability Index membership ▪ MSCI ESG Rating AAA (scale: CCC-AAA) ▪ ISS ESG rating: B Prime (scale: D-A+) ▪ CDP assessment in the field of climate change: A- ▪ PwC Most attractive employer of the year 2023 - Most attractive empolyer in telecommunication sector (sixth time in a row) ▪ Randstad Employer Brand research 2023 - Most attractive employer in telecommunication sector (fifth time in a row) ▪ Zyntern Jobportal – Big Beginner Survey – Most attractive employer #2 place ▪ Family-friendly mentoring company –Three Princes, Three Princesses Movement 7.4 Climate and environment protection in 2023 In line with its strategic objectives, in 2023 Magyar Telekom HU and Makedonski Telekom A.D. purchased certified emission reduction units for the ninth year in a row to offset remaining emissions. Offsetting has resulted in significant risks in the case of corporate greening in recent years, so Magyar Telekom HU introduced a quality assurance process when purchasing emission reduction certificates in 2023. It uses a scoring system set up by the Carbon Credit Quality Initiative to select the most appropriate project to support and check whether it meets other quality requirements, such as the CDP questionnaire or the various safeguards formulated by CORSIA, based on the available documentation. In addition, Magyar Telekom HU considers it is important that the implementation of emission reduction projects and the period to be compensated be as close in time as possible, so an additional criterion during the selection was that the start date of the project should preferably be after 2020. In 2023, based on this, Magyar Telekom HU purchased 15,000 emission reduction units, namely verified emission units (VER) from the Ganzhou Swine Farm Animal Manure Management System GHG Mitigation Project. Makedonksi Telekom A.D. purchased 1,400 VERs from the same project. In addition to reducing emissions, the project also supports the UN Sustainable Development Goals (SDGs) through social contribution. In 2023, the Group's largest member companies continued to use 100% renewable electricity for its total consumption of 193.6 GWh to achieve the emission reduction targets, backed by Guarantees of Origin and short-term physical PPA (Power Purchase Agreement) for the purchase of renewable energy with associated guarantees of origins and, in the case of Makedonksi Telekom A.D., they are insured their larger part of their electricity consumption by direct contract, namely 20.7 GWh. The PPA is a 3-year, fixed-price contract with a Hungarian solar park for an expected electrical output of approximately 13.2 GWh per annum. Both the purchase of renewable energy under the PPA and guarantees of origins are recognized in Other operating expenses as energy costs.
v 137 The biggest contributors to Hungarian emission reduction targets in 2023 were the following measures, which can be read in more detail in the sustainability report: ▪ Energy savings in the building: a uniquely combined complex software solution was tested for energy efficiency and office space optimization. Real-time monitoring of space utilization and energy consumption in the office building enabled more efficient resource allocation and sustainable energy management. In 2023, the following emissions have been calculated according to the corporate standard guidance of the Greenhouse Gas Protocol. Cumulative GHG emission for Magyar Telekom HU and Makedonski Telekom A.D.: ▪ 81,062 tonnes of CO2 emissions (greenhouse gas emissions in CO2 equivalent) if purchased renewable energy is not taken into account (location-based emissions) ▪ 16,498 tonnes of CO2 emissions when purchased renewable energy is taken into account (so-called market-based emissions) Group GHG emissions by category ▪ Scope 1: 14,632 tons of CO2 emissions (currently local and market-based emissions are the same) ▪ Scope 2: 66,430 tons of CO2 emissions in case of location-based calculations ▪ Scope 2: 1,866 tons of CO2 emissions in case of market-based calculations Energy efficiency – bits transmitted/power consumption – 442 Gbit/kWh 7.5 Risks Within the framework of the Business Continuity Management System (BCM), the company identified critical climate risks (flooding, heat alert) and developed an action plan for them. The annual amount of climate damage in the networks did not reach the level of action (HUF 50 million per month). The total restoration cost was HUF 18.55 million. In 2023, 591 cases had to be investigated due to various problems caused by the weather. On hot days, the company gives colleagues the opportunity to work remotely, thus reducing the energy load of offices. The base temperature of engine rooms and base stations is also raised, thus reducing the energy consumption of air conditioners. The physical risks of climate change to infrastructure were analyzed for Hungarian member companies in 2022 – using different climate scenarios in terms of extreme temperatures (RCP4.5 and RCP8.5). Flash flooding was the riskiest weather event, and 19-24% of infrastructure (depending on scenarios) could be negatively affected by extreme hot weather in the coming decades. This analysis can help make infrastructure more resilient to expected changes when modernizing. The transition under the Paris Agreement could also entail a number of risks for companies. Magyar Telekom group's parent company, Deutsche Telekom, together with its largest subsidiaries, including Magyar Telekom, conducted a detailed analysis in 2023 of which changes in legislation, market environment, technology or even reputational risk are expected during the transition and to what extent they affect the company's situation. During the analysis, the Magyar Telekom Plc. identified the greatest risks in changes related to energy supply, and there is an extremely high risk that with the spread of 5G, users will generate more and more data traffic - and thus energy consumption – which the energy efficiency measures will not be able to compensate. However, it should be stressed that the increase in energy use in the ICT sector should not be seen as a clearly negative effect. This transition is similar to the transition from fossil fuels to electricity, except that digitalization can replace not only energy use, but also material use. Magyar Telekom HU and Makedonski Telekom A.D, of course, is continuously working to reduce its energy consumption, maintain security of supply while using renewable energies, and contribute to the domestic net zero-emission transition with its transition plan. Possibilities Energy efficiency investments and the use of renewable energies are considered by the company to be the most effective tools for mitigating climate change. Therefore, its long-term goal is to ensure the electricity supply of the network with renewable energy sources as much as possible. Magyar Telekom HU has embarked on two paths, one of which is the conclusion of long-term PPA contracts, the other way is the installation of solar cell systems on its own buildings in several stages. Its strategic goals include the further expansion of self-generated renewable energy, which is why in 2023 it piloted self-developed solutions at 8 base stations. More details can be found in the Sustainability Report. Magyar Telekom Plc. also provides an opportunity for its customers, who also consider the fight against climate change important, to choose a service that contributes to the protection of the climate. That's why in 2019 it created the world's
v 138 only ExtraNet Green 1GB extension option. Although measures taken during the pandemic reduced turnover in 2020 after its success in 2019, the company still retains the option for its customers. In 2023, this service has not lost its popularity. A change in customer preference creates not only high risk, but also an opportunity with early detection. In addition to enabling our customers to shop more consciously with Eco Rating initiated by Deutsche Telekom and other European mobile operators, Magyar Telekom Plc. entered the market with refurbished devices in 2023 so that residential and corporate customers who keep material consumption and circular economy in mind can also find an appealing option. Furthermore, Telekom's Smart Energy software, a smart approach to energy consumption and generation meets real-time data collection and efficient forecasts. The software not only provides simple data about equipment, but also collects realistic consumption and production information, enabling customers to accurately understand their energy use. More details can be found in annual Sustainability Report. 7.6 Stakeholder related initiatives Building strong relationships with your stakeholders is essential for a company to operate successfully. Some of Magyar Telekom’s most important activities, about which detailed information can be found at Sustainability Report related chapters: All stakeholders of the company have the option to express their expectations towards Magyar Telekom HU online. These are taken into account when implementing sustainability activities. 7.6.1 Investors During 2023, the CEO and the Chief Financial Officer presented the quarter's results to investors' representatives four times. Magyar Telekom's senior management and the staff of the Investor Relations Department, as well as investors and analysts hold about 80 meetings (virtual and face-to-face) annually at various conferences, roadshows and individual inquiries. Magyar Telekom HU also places great emphasis on satisfying the information needs of interested parties on its website. Under the Investors menu item, those interested can find up-to-date information about the financial situation of the Company (quarterly financial reports), general meetings, dividend payments, and they can also follow the current price of Magyar Telekom's shares and find all the information they need to contact the Company. In addition, the Company assesses the needs of investors on an annual, biennial basis, using a questionnaire method. Magyar Telekom HU commissions the preparation of the so-called perception study to a specialized, independent company, which assesses the opinions, needs and expectations of investors based on a representative sample with the help of a detailed list of questions. 7.6.2 Customers Magyar Telekom HU would also like to provide an opportunity for its customers so that those who, together with the company, consider the fight against climate change important can choose a service that contributes to climate protection, few examples are mentioned in chapter 7.5, under possibilities. Magyar Telekom HU has also created platforms to promote digital maturity. For instance, Hello parent (Hello Szülő) Digital Platform is created for families which was launched in mid-October 2023. This new brand and commercial asset aim to serve as a versatile, ever-expanding digital knowledge base for families. Hello Parent has had nearly 130,000 visitors since its launch until December 31. Within the framework of the Netrevalók program, in partnership with the Metropolitan Ervin Szabó Library, the digital skills development of the older generation takes place by connecting two generations: high school students and pensioners. Registration for the sessions in libraries is through the Hello Parent platform: https://helloszulo.hu/netrevalok. In the framework of library activities, secondary school students can introduce digital solutions that make everyday life easier for older people personally, based on their own level of knowledge and interests.
v 139 7.6.3 Employees In March 2023, the community solar program was announced again. During the program, employees had the opportunity to adopt a solar panel, and the 200 solar panels found a host in less than an hour. As an employer committed to diversity as a core value, Magyar Telekom HU considers it important to increase the number of women in management positions. One of the key goals of the Diversity Pillar of the Sustainability Strategy is to reach at least 35% female leaders by 2025. As of May 2020, the company achieved a balanced gender ratio of 33.33% in senior management for the first time in its history, which the company maintained in 2023. Monitoring of the gender pay gap has also continued, along which further improvements can be planned. In 2023, three more employee communities were formed at the company: Women in Telekom, Telekom Family Drivers, Obstacle-Menes Telekom, in addition to the already operating Magenta Pride employee community aimed at supporting colleagues belonging to the LGBTQI+ community. The Company reports in details on communities and its diversity and equal opportunities activities for its employees in Chapters 3.3.1 and 3.3.2 of the report. The Magenta Alliance Foundation was established in July 2020 on the initiative of Tibor Rékasi, CEO, and the members of Telekom's top management, the Leadership Squad, out of their personal responsibility and financial donations. Since the beginning of its operation, the Foundation has awarded grants in 399 cases until the end of 2023, totalling HUF 67,247,000, of which the amount of grants awarded in 2023 is HUF 11,300,000. Volunteering: In recent decades, it has become increasingly important for companies to prove themselves not only in the market, but also in the field of social responsibility. It is extremely important for Magyar Telekom HU that as a company and its employees as individuals set a good example. To encourage volunteering, the company organized a Volunteer Fair in April 2023, where 10 NGOs were given the opportunity to communicate their activities and goals to their employees and recruit volunteers. In 2023 Magyar Telekom employees have spent 3,146 hours on volunteering activities in 2023. 7.6.4 Non-governmental organizations Magyar Telekom HU’s cooperation with NGOs is implemented along the focus of sustainability and poppy seed strategy. Some of these collaborations span years, as is traditionally the case with SUHANJ! Foundation support, support for the Edison platform established by Bridge Budapest Association, which brings together and encourages cooperation between value-based actors related to children's skill development, or participation in the HBLF Romaster Program, which aims to educate talented Roma youth. In addition, Magyar Telekom HU has civil cooperation that aims to support initiatives to be implemented in a given year, but in connection with these, it also applies to the fact that given programs provide solutions to social and environmental issues that the company treats as a top priority. These include the representation of women in IT professions through the support of the Women in IT Security Association, or the support of the Hungarian Ethology Foundation program, which aims to provide parents with solutions based on scientific research related to the device use of their young children. 7.6.5 Suppliers Magyar Telekom HU examines the sustainability performance of its suppliers every year within the framework of its sustainable supply chain management process. Magyar Telekom does this independently for suppliers besides joint ones with Deutsche Telekom who are not evaluated in the EcoVadis system. Magyar Telekom HU invites strategically important suppliers with a high risk factor to comment on their operational practices based on EcoVadis' detailed criteria. Within this framework, 46 suppliers directly and 3,311 indirectly have valid assessments based on social, environmental, economic and sustainable sourcing criteria. These suppliers accounted for 34.28% of the annual order value, which was 40.59% in 2017, 45.06% in 2018, 44.40% in 2019, 38.30% in 2020, 36.56% in 2021 and 34.28% in 2022. In 2023, Magyar Telekom HU has contacted another 300 suppliers with the webaudit questionnaire. 7.6.6 Future generations Magyar Telekom HU is also supporting the future generation. KraftLab has been created as community creative space in Debrecen to help young people, provide opportunities and tools for their development. They can experiment risk-free and that they can use digital tools and the possibilities of the digital world for their own development, alone or in cooperation with each other. The community space continued to operate with a full house in 2023, with nearly 3,500 visitors.
v 140 8 CORPORATE COMPLIANCE When shaping the compliance program of Magyar Telekom Group, the goal was to ensure that Magyar Telekom Group pursues its business activity with maximum awareness of and commitment to compliance with the applicable laws and legal provisions, in accordance with the strictest norms of ethical business conduct. To this end, the company issued policy statements addressing the potentially arising compliance-related risks, and it applies the procedures set out in these policy statements and arrange continuous training courses for the company’s employees related to these procedures. The Group established clear concise processes to report, examine, follow up and correct suspected cases of non-compliance. The Corporate compliance program is supervised by the Group compliance officer. The Group compliance officer reports directly to the Audit Committee, and cooperates with the Board of Directors, the Supervisory Board and the management. The Corporate compliance program focuses on the Code of Conduct. The Code of Conduct of Magyar Telekom Group contains the summary of the compliance requirement within the company, sets common values of the Group and is a key to the strong position, reputation and successful future of Magyar Telekom. The Code of Conduct applies to everyone within the Magyar Telekom Group from the employees to the members of the Board. In addition, contracted partners of the Magyar Telekom Group also have to know and accept these values, when registering on the procurement website. In the year 2010, an external independent party audited the implementation of the Compliance program, and the company was awarded a certificate of compliance with the external expectations and of the implementation of the system. The program was revised in 2013, including other related areas as well – such as procurement, internal audit, HR, sales. The audit was not aimed only at the implementation and control of the system in the different areas, but it measured the operational efficiency of the control system. Magyar Telekom met the expectations and were awarded by a certificate issued by Ernst&Young as independent external party. In 2017, again an external auditor (KPMG) evaluated the effectiveness of the compliance management system of Magyar Telekom, and issued a certification that the program complies with the requirements of the new anti-corruption ISO standard. In 2021 an external advisor (KPMG Germany) reviewed the Compliance program. They found the operation of the program efficient. The first distance learning course addressing compliance was started in 2008 in the topic of “Conscious recognition of fraud and corruption”. Since then, the Group has been providing a general eLearning course for its new employees, mandatory for all colleagues joining to the company. The course is completed with the acceptance of the Code of Conduct. Since the start of the program, 107,673 distance learning courses were completed by the employees on group level, related to topics, such as compliance awareness, supplier due diligence, anti-corruption measures, incompatibility or insider trading. On the top of that, the company has arranged personal training sessions for employees working in professional areas exposed to compliance and abuse related risks – both within the parent company and Hungarian and international subsidiaries – in the topics of organized anti-corruption behavior, screening of contracted partners and rules of giving and accepting gifts. In 2023 – similarly to the practice of the previous years – risk analyses were conducted with the participation of organizations and subsidiaries of Magyar Telekom Plc. Based on the results of the survey, a comprehensive audit was prepared for the potential compliance and abuse risks, the result of which was submitted to the Audit Committee of the Company. During the year the Group checks the soundness of the reports submitted to its company in connection with unethical behavior, and if necessary, the Group acts on these reports. In case the company identifies actual abuses, it takes care of the necessary and adequate countermeasures. Magyar Telekom published all cases of corruption and the related countermeasures in accordance with the related applicable laws and legal provisions. 8.1 Fight against bribery and corruption 8.1.1 Policies Magyar Telekom does not tolerate any attempts of corruption, so numerous procedures and policies were introduced to prevent and fight corruption. Magyar Telekom complies with the anti-corruption rules of the Group, and expects its business partners not to engage in unlawful activities (including breaching the anti-corruption laws) such as utilize any money or other services provided by Magyar Telekom for unlawful purposes. This also includes direct or indirect payments to individual(s) to improve the perception of Magyar Telekom (or any parties acting for Magyar Telekom) or to
v 141 influence any business decision. Magyar Telekom strictly prohibits any form of corruption including (but not only), receiving personal advantages or monetary gains, accepting or providing bribes or promising facilitating payments. The Group also prohibits employees from making beneficial decisions towards family, friends or close or distant acquaintances. It is not allowed to provide any gift or invitation to an event to third parties if it could potentially influence any business transaction. Magyar Telekom Group does not support morally or financially any political parties, organizations or representatives of these. Magyar Telekom will not start business relations with third parties that violate the anti-corruption clauses of the Compliance Program or the basic principles of the Code of Conduct. Due Diligence procedures: There are no fixed procedures on how thorough due diligence should be to avoid legal responsibility or any investigation as per the anti-corruption laws. The aim of these procedures is to identify high-risk areas, and to provide indication when further due diligence or review is required. 8.1.2 Result of the policies During the year, the Group has verified the plausibility of any complaints it has received about unethical behavior and initiated internal investigations if necessary. If Magyar Telekom has identified any misconduct, it initiated the necessary measures and actions. Any complaints regarding breaches of internal or external rules can be sent to the Tell Me! portal of Magyar Telekom. Any questions regarding corporate compliance can be asked on the Ask Me! intranet portal. 8.1.3 Risk The basis and prerequisite of the efficient defense against breaches of laws and policies is the registering and analysis of compliance risks and identifying other compliance relevant cases at Magyar Telekom. The yearly Compliance Risk Assessment (CRA) handles active and passive corruption separately. The risk assessment always includes Magyar Telekom, Telekom Rendszerintegráció Zrt. and Makedonski Telekom. Other subsidiaries can be included on a case-by-case basis, based on information originating from internal investigations. The CRA fully covers the abovementioned companies. The Group Compliance Officer informs the Audit Committee, the Board of Directors, and the management about the result of the risk assessment and gives an update about the status of the measures in every quarter. 9 ECONOMIC ENVIRONMENTS, OUTLOOK AND TARGETS As a result of previous years’ economic developments, in 2023 economic growth slowed globally whilst inflation rates reached elevated levels, especially in the beginning of the year. At the same time, telecommunication industry has continued to play a critical role as the need for digitalization and possibilities provided through digitalization have been dynamically increasing, expanding. 9.1 Economic environments and outlooks Hungary During 2023, Hungarian GDP witnessed contraction, primarily due to lower household consumption and reduction in investment levels. Decline in household consumption was mostly driven by the high inflation environment, as the development of the spending level could not match the average 17.6% inflation rate. To limit rise in the inflation rate, the central bank raised the policy rate in several steps during 2022 which resulted in a downward inflationary path from the second quarter of 2023. As a result, central bank started monetary easing in the second half of 2023, which is to positively impact economic growth going forward. With regards to the Hungarian telecommunication sector, sustained strong demand for data mitigated unfavorable impacts of the cost pressure and thus the industry could keep its momentum in 2023. Looking ahead, there are further uncertainties related to the economic and business developments, as well related to the changes in the competitive environment. To ensure the reliability and security of its networks and its leading market position, Magyar Telekom remains committed to invest in its infrastructure and continue with the customer centric operational approach going forward.
v 142 North Macedonia North Macedonia recorded moderate economic growth in 2023, as high inflation rate limited household consumption whilst the global economic developments led to slowed down in foreign investment and export levels. To limit the inflationary pressure, the North Macedonian National Bank implemented monetary tightening measures, which helped to inflation to decrease. Pressure on household spending and high inflation rate impacted the profitability of the telecommunication sector as well, however sustained demand for telecommunication services and normalization of energy prices mitigated these impacts. 9.2 Revenue, EBITDA AL and free-cash flow targets Magyar Telekom could keep its commercial momentum throughout 2023. Thanks to its outstanding network quality, excellent service and tailor-made solutions, customer satisfaction remained strong, enabling the Group to successfully monetize strong market demand for its telecommunication services. As a result of these favorable developments and the implementation of the inflation-based fee adjustment, Magyar Telekom managed to meet its revenue, EBITA AL, adjusted net income and free cashflow targets for 2023, despite the increases in energy and other indirect costs. Looking ahead to 2024, Magyar Telekom expect some further pressure on profitability stemming from the challenging economic landscape. However, thanks to the strong commercial performance and the positive impacts of the previously communicated fee adjustments across the contracts, Magyar Telekom are targeting revenue growth of 5%-10%. Furthermore, with the termination of the utility tax in 2024 and more favorable energy costs, Magyar Telekom anticipate EBITDA AL to grow 20-25% in 2024. The guidance for adjusted net income is approximately HUF 130 billion, with a projected free cashflow generation of circa HUF 120 billion. 10 INTERNAL CONTROLS, RISKS AND UNCERTAINTIES 10.1 The presentation of the systems of internal controls and the evaluation of the activity in the relevant period Magyar Telekom’s management is committed to establishing and maintaining an adequate internal control system to ensure the reliability of the financial reports and minimize operating and compliance risks. Magyar Telekom’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union. For the business year 2023 control documentation and evaluation were accomplished in the IT supported ICS-Tool 2 system. Transaction Level Controls describe the controls built into the business processes of Magyar Telekom that have been designed and operated to ensure that material misstatements in each significant financial account and disclosure within the financial statements of the Copmany are prevented or detected in a timely manner. Complete evaluation of the internal control system of Magyar Telekom based on the method established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The operation of the internal control system is supported also by the independent internal audit function. It contributes to the improvement of the internal control processes and the reduction of existing risks by performing audits according to the risk based internal audit work plan and by testing ICS controls. The Internal Audit area follows up the implementation of the measures defined based on the audits. The Supervisory Board and the Audit Committee inter alia also receive regular reports on the findings of the audits and related measures, and on measure fulfilment. In line with the criteria of the adopted internal control framework, management evaluates the effectiveness of internal control system within each financial year. Management’s assessment for 2023 is finished and based on the collected information internal control system has been operating effectively to prevent potential material misstatements in the financial statements and minimize operating and compliance risks. Magyar Telekom’s shareholders are being informed about the operation of the internal control system through its public reports. 2 Internal Control System
v 143 The management and Board of Directors of Magyar Telekom are committed to conducting all business activities of Magyar Telekom Group according to the highest legal and ethical standards. Based on this commitment, the Board of Directors established the Corporate Compliance program of Magyar Telekom. The Corporate compliance program is applicable to all bodies, organizations, employees of Magyar Telekom Group, and advisors, agents, representatives as well as to all persons and organizations that work on behalf of the Company or its subsidiary. The Corporate compliance program of Magyar Telekom ensures that the business activities of the Group are conducted observing and in compliance with the relevant laws to the utmost extent, according to the highest standards of training and commitment. It requires the realization of guidelines and processes that manage potential compliance risks and implement specific processes in order to report, investigate, monitor and correct suspected or actual lack of compliance. 10.2 The utilization of financial instruments, risk management and hedging policies Introduction As Hungary's leading telecommunications provider Magyar Telekom is subject to uncertainties and changes of the telecommunications and IT industry. To operate successfully in this continuously changing environment risks have to be systematically identified, assessed and managed. Risk management system is not only needed from a business point of view, but as a company listed in the stock market, Magyar Telekom is obliged to operate a risk management system and prepare a risk report to inform its investors. Upon the establishment of the comprehensive risk management system Magyar Telekom acts in line with the relevant requirements of the Budapest Stock Exchange, as well as the rules laid down in the applicable international standards. The Group level risk management system covers strategic, operational, financial, compliance and legal risks, which is also applicable to the consolidated subsidiaries of the Company. The objective is to identify, monitor and manage these risks in an early phase. Risk management guidelines It is Magyar Telekom Plc.’s policy that disclosures to its shareholders and market participants should give an accurate and complete picture of Magyar Telekom Group and fairly present the financial condition and results of the Group in all material respects. Such disclosures are made on a timely basis as required by applicable laws, rules and regulations. The risk management organization and process To meet these objectives, Magyar Telekom continuously improves and regularly reviews the functionality and effectiveness of the elements of its risk management system. The risk management of Magyar Telekom includes the identification, assessment and evaluation of risks, the development of necessary action plans, as well as the monitoring of performance and results. Magyar Telekom performs its risk management activities in accordance with the risk management guidelines developed by the Group level risk management organization and approved by the Boards of Directors. The risk owners of the individual organizations are responsible for identifying, reporting, assessing and monitoring risks on a continuous basis, in line with the framework of the risk management process, under the governance of the central risk management organization. During the annual planning process, the management takes into account potential risks. The established risk management standard provides a process framework: ▪ The identification of risks through the involvement of all organizations. ▪ Following the identification of risks, they are analyzed, assessed and quantified in details (by estimating their probability of occurrence and potential impact) according to a predefined methodology. Risk assessment allows management to focus more effectively on those risks that have significant impact on the Group's strategic objectives. ▪ A decision is taken on the specific course of action to reduce the risks. ▪ The relevant risk owner implements, monitors and evaluates the relevant actions. ▪ These steps are repeated as necessary to reflect current developments and decisions.
v 144 To operate the risk management system effectively, Magyar Telekom needs to ensure that management makes business decisions based on knowledge of all relevant risks, supported by regular Magyar Telekom Group-wide risk reporting. At the same time, risks related to the business plans are continuously assessed and managed and considered in the risk management process. Risk factors that impact the operations of Magyar Telekom are reviewed regularly. All the subsidiaries and organisations are required to identify and report the risk to their operations. Once these risks have been evaluated, the results are communicated to the Board of Directors, the Audit Committee and Deutsche Telekom’s Risk management area in form of a group-level risk report. This regular reporting ensures that the most significant risks are monitored, that up-to-date risk mitigation measures are in place and that they are regularly followed up. Risk items affecting the operations of the Company are reviewed regularly and proactively throughout the Group. In this context, all the organisations and subsidiaries must immediately report any new facts, information or risks that come to their attention that meet the criteria for mandatory reporting. The risk management function evaluates the information communicated and notifies the Chief Financial Officer if significant new risks or information emerge. Responsibilities of employees on monitoring and managing risks are governed by internal regulations. The risk assessment is carried out for a three-year period by Magyar Telekom Group. If there are significant risks beyond the forecast period, such risks are monitored on a continuous basis. Besides the systematic management of risks the identification of opportunities and their strategic and financial assessment are also essential parts of the annual planning process of Magyar Telekom Group. This allows the Company to take these opportunities into account in its forecasts. 10.3 Main risk factors The Group’s financial condition, results of operations or the market prices of its securities could be materially adversely affected by any of the risks described below. These risks are not the only risks the Group faces. Additional risks not currently known to the Group, or risks that the company currently regard as low priority, could also have a material adverse effect on its financial condition, results of operations or security prices. Regulatory risks ▪ Magyar Telekom operates within a strictly regulated market environment. Most of the regulatory framework is the result of EU legislation. ▪ The regulatory environment in North Macedonia is expected to remain strict, since the regulatory body’s (AEK) aim is at widening the scope of wholesale regulation. Risk management activities: ▪ The Group cooperates and maintains an active dialogue with regulators. ▪ The Group maintains processes to ensure compliance and provide timely and accurate information to regulators. Legal risks ▪ Regulatory cases and legal disputes with parties could influence its results of operations. Risk management activities: ▪ Protecting its interest and values through legal representation, continuous management and monitoring of legal disputes. ▪ See also the compliance risk management activities.
v 145 Financial risks ▪ For details on financial risks and their management, see Note 5 of the Consolidated Financial Statements. ▪ Developments in the technology and telecommunications sectors may result in impairment of the book value of certain of Magyar Telekom’s assets. ▪ Unpredictable changes in the Hungarian tax regulations may have an adverse effect on its results. ▪ Fluctuations in the exchange rates could have an adverse effect on its results of operations. ▪ Economic trends in Hungary and in other countries could have an adverse impact on the value of Magyar Telekom’s investments, operating results or financial situation. ▪ The increasing trend of inflation could erode Magyar Telekom Group's results with limited predictability. ▪ In the future, as a direct consequence of the global energy crisis, the market prices of electrical energy and several crucial energy carriers (natural gas, oil, coal) may further increase. Risk management activities: ▪ The company continuously analyzes financial actual data and provide forecasts on financial indicators. ▪ The company monitors technological developments and its competitors’ activities. ▪ The company carries out sensitivity analyses (e.g. foreign exchange, free cash flow). ▪ The company tests all key controls on an annual basis. ▪ The company continuously improves its processes, systems for the purpose of automated accounting, reporting and auditing. ▪ The company constantly monitors energy prices to ensure that it purchases energy at a proper price level. Strategic risks ▪ The Group is subject to intense competition in the fixed business due to overlaps with its competitors on more and more locations as a result of the network roll-outs. ▪ The Group is subject to intense competition in SI/IT segment. ▪ The North Macedonian market could also be exposed to increased competition from new entrants. ▪ Adaption to new trends and technological changes in the telecommunications market (IoT, Big Data, AI, 5G) might be a serious challenge. ▪ Its business may be adversely affected by actual or perceived health risks associated with mobile communications technologies, and unsubstantiated and rapidly spreading news about new technologies. ▪ Sustainability: information on the Group's approach to sustainability risks and opportunities can be found in Note 7 of the Consolidated Business / Management Report. Risk management activities: ▪ The company continuously invests in the development of its network. ▪ The company transform its internal processes to be even better prepared for future challenges. ▪ The company monitors technological developments and its competitors' activities. ▪ The company pursues responsible and sustainable business activities. ▪ In order to maintain trust and reputation the company continuously informs its key stakeholders on its plans, risks and achievements. ▪ The company integrates digital initiatives into its long-term planning and align their technology and business strategies. ▪ The company continuously provides training for its employees to familiarize them with new technologies. Operational risks ▪ The future of its current operational model is subject to currently unforeseeable changes in the future business and technological environment. Risk management activities: ▪ The Group has a flexible business model. It closely monitors the competitive environment in all markets and respond accordingly to both consumer and business segment needs. ▪ Its price offers are competitive in the markets where they operate. ▪ The Group supports its business customers with its innovative products to increase efficiency. ▪ The Group transforms its internal processes to be even better prepared for future challenges.
v 146 ▪ The impact of a pandemic can affect its entire risk environment. Risk management activities: ▪ Experiences in reacting to effects of COVID-19 have become part of the Group’s everyday operation. Due to the nature of the telecom industry and the importance of communication services in a pandemic, the company continuously strengthen its digital strategy. ▪ The Group continuously invests in the development of its network to prepare for the challenges of the future and to successfully continue to ensure the operation and capacity of its network infrastructure. ▪ Magyar Telekom can ensure the health protection, productivity and efficient work of employees by creating and enabling conditions for teleworking. ▪ The effects of system errors may reduce user traffic, result in lower revenue, incur fines for the Group, and harm its reputation. Risk management activities: ▪ Magyar Telekom operates network monitoring systems and define recovery goals to minimize service outages. ▪ Magyar Telekom considers it of key importance to inform its customers in a timely manner about service problems thus the company operates an advanced information system. ▪ Loss of key personnel could weaken its business. Risk management activities: ▪ Operation of an advanced human resources strategy, for further details see Note 3 (“Social commitments, labor standards, human rights”) of the Consolidated Business / Management Report. ▪ The number of cyber-attacks has significantly increased worldwide in recent times. The cyber security risk has further worsened due to the global pandemic, as work, shopping, social interactions, and education have shifted significantly towards digitization. The rapid development of digitization has increased organizations' vulnerability to cyber-attacks. Also, teleworking may increase the risk of fraud and misuse of business information and data, as well as unauthorized access, theft and fraudulent use of data. Risk management activities: ▪ Magyar Telekom provides services with highest security-standards and constantly tests and updates its cyber security countermeasures. ▪ Magyar Telekom performs regular audits on key security risks affecting its business and maintains strategies to identify, prevent and respond to these challenges. ▪ Its cybersecurity approach focuses on minimizing the risk of cyber security incidents impacting its networks, systems and services. ▪ Magyar Telekom promotes conscious conduct among its colleagues via communication, campaigns and training. ▪ Data protection incidents are punishable with very high fines. Despite the appropriate technical and organizational measures adapted to the nature of data processing, purposes and risks of data protection and well-designed data protection management structures data protection incidents and compliance deficiencies cannot be entirely excluded. There may be problems that can have a negative impact on Magyar Telekom's reputation and may incur costs and other legal consequences (including fines). Risk management activities: ▪ In order to ensure data protection compliance and to avoid other legal consequences (fines) the company pays special attention to compliance with data protection principles (e.g. purpose limitation, data minimisation), to the definition of appropriate legal bases for data processing, to the assurance of privacy by design and by default in the design and operation of the services and processes, as well as to high-level data security measures to avoid system failures that may impact a large number of subscribers, employees or any other data subjects. ▪ The Groups provides regular data protection and data security trainings, privacy awareness communication and other tools (e.g. privacy aids on the corporate intranet) to help colleagues make better and risk-conscious decisions.
v 147 ▪ The increased penetration of artificial intelligence systems requires a high level of attention and can have serious legal consequences if not properly applied. Risk management activities: ▪ The Group incorporates related guidelines and requirements into its processes and provide regular legal and compliance support for business decisions in the use and development of artificial intelligence systems. ▪ In the course of use of artificial intelligence systems, if personal data processing is also involved, the company pays special attention to the compliance with the data protection requirements. ▪ Procurement and supply chain: the company cooperates with a wide range of vendors. High risk products and services include hardware, network technology components, and all products and services provided directly to end users. Supply risks cannot be entirely avoided. Epidemics, natural disasters, wars, transportation bottlenecks, price increases, changes in the economic or political environment or the suppliers' product strategies may have a negative impact on its business processes and results. Further risks may arise from dependencies on specific suppliers or from their default due to capacity or economic reasons. Risk management activities: ▪ In order to reduce the Group’s exposure to risks, it implements organizational, operational and profession-specific procurement strategies. Its procurement processes are planned and are monitored through regular internal and external controls. Key professional factors for managing procurement risks: proactive management of the supplier base, their frequent and ad-hoc due diligence, supplier segmentation, risk analysis of strategic and critical suppliers and continuous active contact keeping together with the business areas. Compliance risks ▪ Violation of laws may result in loss of trust, financial sanctions, impairment of the company’s shareholder value and further sanctions. Serious violation of laws may lead to criminal proceedings, litigation and regulatory actions. Risk management activities: ▪ Magyar Telekom operates a compliance framework program for the identification, regular assessment and mitigation of risks. ▪ Magyar Telekom trains its employees, run awareness raising programs that explain its ethical norms throughout the organization and help the employees to understand their role in ensuring compliance. ▪ Magyar Telekom supports a culture where its colleagues can voice their concerns, so the company can identify problems and prevent them from happening again. 10.4 Financial risk management The classification of the Group’s financial instruments is described in detail in Note 4 and the financial risk management of the Group is described in detail in Note 5 of the Consolidated Financial Statements.
v 148 11 ANALYSIS OF FINANCIAL RESULTS FOR 2023 Key Performance Indicators 31.12.2022 31.12.2023 Revenue (HUF million) .............................................................................. 746,669 849,372 Mobile revenue ..................................................................................... 433,178 491,322 Fixed line revenue ................................................................................ 237,019 271,915 System Integration/Information Technology revenue ................. 76,472 86,135 EBITDA (HUF million) ................................................................................ 247,946 287,164 EBITDA margin ........................................................................................... 33.2% 33.8% Profit attributable to owners of the Parent (HUF million) ................. 62,954 78,951 Capex after lease (HUF million) .............................................................. 129,745 105,700 Net debt (HUF million) ............................................................................. 476,918 430,640 Net debt to EBITDA ratio.......................................................................... 1.92 1.50 11.1 Revenues Total revenue increased from HUF 746.7 billion in 2022 to HUF 849.4 billion in 2023, reflecting continued strong growth in mobile data and fixed broadband as well as the impacts of the inflation-based fee adjustment implemented at the Hungarian operation. Mobile revenue increased to HUF 491.3 billion in 2023 compared to HUF 433.2 billion in 2022, reflecting the continued positive momentum in mobile data usage. ▪ Voice retail revenue grew by 8.8% to HUF 125.3 billion in 2023, as lower usage levels at both countries of operation were offset by the impacts of the inflation-based fee adjustment implemented at the Hungarian operation. ▪ Voice wholesale revenue was down by 5.6% to HUF 11.6 billion in 2023, as a result of lower incoming traffic. ▪ Data revenue grew by 25.6% to HUF 184.7 billion in 2023, driven by the continued growth in subscriber numbers and strong demand for mobile data usage. ▪ SMS revenue rose by 8.9% to HUF 26.7 billion in 2023, as broadly stable usage levels were coupled with the positive impacts of the fee adjustment. ▪ Mobile equipment revenue increased by 2.7% to HUF 121.3 billion in 2023, driven primarily by increase in the average handset prices. Fixed line revenue increased to HUF 271.9 billion in 2023, up from HUF 237.0 billion in 2022 primarily as a result of higher broadband and TV revenues at the Hungarian operation. ▪ Voice retail revenue was up by 1.7% at HUF 35.5 billion in 2023, as the further decline in the customer base and usage level in Hungary was mitigated by the fee adjustment impacts. ▪ Broadband retail revenues increased by 24.8% to HUF 91.8 billion in 2023, thanks to further growth of the customer bases in both countries that was coupled with continued strong demand for bandwidth upgrade transactions in Hungary and the impact of the inflation-based fee adjustment. ▪ TV revenues increased by 14.0% to HUF 72.0 billion in 2023, reflecting the continued expansion of the IPTV customer bases as well as fee adjustment measures. ▪ Fixed equipment revenues rose by 18.1% to HUF 20.0 billion in 2023, primarily driven by higher sales volumes and lower present value related discounts at the Hungarian operation. ▪ Data retail revenues rose by 6.6% to HUF 14.1 billion in 2023 thanks to higher revenue from leased line fixed internet services in Hungary. ▪ Wholesale revenues were up by 2.2% to HUF 21.4 billion in 2023 thanks to higher international transit and TV- content re-sale revenues at the North Macedonian operation.
v 149 System Integration (SI) and IT revenues were up at HUF 86.1 billion in 2023, compared to HUF 76.5 billion in 2022, primarily driven by increased revenues from high value projects in Hungary. 11.2 Direct costs Direct cost increased from HUF 324.2 billion in 2022 to HUF 356.3 billion in 2023, driven by higher SI/IT service related, bad debt and equipment sales expenses. ▪ Interconnect cost decreased by 4.4% to HUF 22.9 billion in 2023, reflecting lower usage levels at the Hungarian operation. ▪ SI/IT service-related costs increased by 15.9% to HUF 63.0 billion in 2023, reflecting higher volume of related projects during the year. ▪ Bad debt/Impairment losses and gains on financial assets and contract assets expenses were higher by HUF 4.8 billion at HUF 14.0 billion in 2023 reflecting partly the higher revenue base as well as HUF 3.5 billion forward- looking impairment recognized in relation to the outstanding instalment sales receivables due to the increased probability of deteriorating recovery rates. ▪ Telecom tax was lower by 3.0% at HUF 25.5 billion in 2023, reflecting mostly the lower mobile voice usage among business customers. ▪ Other direct costs increased by 9.8% to HUF 230.9 billion in 2023, driven primarily by higher equipment costs coupled with an increase in roaming and TV-content outpayments. 11.3 Gross profit Gross profit increased to HUF 493.1 billion in 2023, from HUF 422.5 billion in 2022, reflecting the increase in revenues. 11.4 Employee-related expenses Employee-related expenses rose by 8.3% year-on-year to HUF 83.7 billion in 2023, driven primarily by the wage increases implemented at the Hungarian operation. 11.5 Supplementary telecommunication tax Supplementary telecommunication tax, increased to HUF 30.0 billion in 2023 from HUF 24.6 billion in 2022 due to the higher relevant revenue base. 11.6 Other operating expenses Other operating expenses increased from HUF 80.9 billion in 2022 to HUF 97.3 billion in 2023 driven by higher energy costs and general inflationary pressure in Hungary. 11.7 Other operating income Other operating income decreased to HUF 5.1 billion in 2023 from HUF 8.2 billion 2022, primarily driven by the absence of the one-off profit realized in 2022, on the sale of a Hungarian IT subsidiary, Pan-Inform LLC. 11.8 EBITDA EBITDA grew to HUF 287.2 billion in 2023 versus HUF 247.9 billion in 2022, thanks to higher gross profit that could offset the increase in indirect costs. 11.9 Depreciation and amortization Depreciation and amortization (D&A) expenses remained broadly stable, amounting to HUF 139.2 billion in 2023. 11.10 Operating profit Operating profit rose to HUF 148.0 billion in 2023 from HUF 109.2 billion in 2022 thanks to the improvement in EBITDA.
v 150 11.11 Net financial result Net financial result declined from a loss of HUF 24.8 billion loss in 2022 to a loss of HUF 44.0 billion in 2023. Interest expense increased driven by higher interest related to lease liabilities and higher average interest costs whilst the unfavourable change in other finance expense reflects higher losses related to derivatives fair value measurements. 11.12 Income tax Income tax expense rose to HUF 19.6 billion in 2023 from HUF 17.3 billion in 2022 driven by the higher profit before tax. 11.13 Profit attributable to non-controlling interests Profit attributable to non-controlling interests increased from HUF 4.1 billion in 2022 to HUF 5.5 billion in 2023, thanks to improvement in gross profit coupled with a decline in other operating expenses. 11.14 Group Free Cash Flows Free cash flow (FCF) amounted to HUF 86.5 billion cash inflow in 2023 (2022: HUF 3.6 billion cash inflow) mainly due to the reasons described below. Operating cash flow Net cash generated from operating activities significantly improved to a cash inflow of HUF 222.8 billion in 2023, compared to cash inflow of HUF 195.8 billion in 2022, attributable to the reasons outlined as follows: ▪ HUF 39.2 billion positive impact due to higher EBITDA in 2023. ▪ HUF 8.3 billion negative change in active working capital , mainly as a result of: – unfavorable change in the balance of telecommunication customer related trade receivables in Hungary (negative impact: ca. HUF 19.9 billion) driven by overall higher sales volume and the impact of the inflation-based fee adjustment, implemented in March 2023, some deterioration in the ageing of receivables, – higher increase in net portfolio of installment receivables in 2023 compared to 2022 (negative impact ca. HUF 4.6 billion) as a result of higher handset related sales volume at year-end seasonality, – unfavorable change in handset inventory balances (negative impact: ca. HUF 2.4 billion) mainly due to different within-year procurement dynamics, – favorable change in the trade receivables balances in North Macedonia (positive impact: ca. HUF 6.6 billion) mainly caused by different SI/IT project seasonality, – different project seasonality led to favorable changes in SI/IT inventory and trade receivables balances in Hungary (positive impact: ca. HUF 5.8 billion), HUF millions 1-12 months 2022 1-12 months 2023 Change Net cash generated from operating activities 195,763 222,750 26,987 Net cash used in investing activities (105,256) (114,837) (9,581) Less: (Payments for) / Proceeds from other financial assets (9,340) 15,225 24,565 Investing cash flow excluding Payments for / Proceeds from other financial assets - net (114,596) (99,612) 14,984 Repayment of lease and other financial liabilities (77,608) (36,622) 40,986 Free cash flow 3,559 86,516 82,957 (Payments for) / Proceeds from other financial assets - net 9,340 (15,225) (24,565) Proceeds from / (Repayment of) loans and other borrowings - net 19,844 (21,625) (41,469) Dividends paid to Owners of the parent and Non-controlling interests (19,486) (33,942) (14,456) Treasury share purchase (14,609) (14,609) - Exchange differences on cash and cash equivalents 750 (462) (1,212) Change in cash and cash equivalents (602) 653 1,255
v 151 – improvement in prepaid expenses in 2023 compared to a deterioration in 2022 (positive impact: ca. 5.4 billion) due to change of different services related payments. ▪ HUF 1.4 billion positive change in provisions, mainly reflecting lower utilization of provisions for different incentives and the absence of reversal of provisions for risks arising from inaccuracies in tax calculations in 2023 compared to 2022. ▪ HUF 5.3 billion negative change in passive working capital, primarily driven by: – unfavorable change in the balances of invoiced and non-invoiced trade creditors in Hungary and in North Macedonia in 2023 compared to 2022 (negative impact: ca. HUF 8.2 billion) due to different outpayment timing, – unfavorable change of liabilities to employees (negative impact: ca. HUF 1.5 billion), – higher increase in handset suppliers (positive impact: ca. HUF 6.4 billion) in line with higher inventories. ▪ HUF 10.0 billion negative change in interest and other financial charges paid in 2023 compared to 2022, mainly reflecting the higher interest payment related to the loan portfolio due to change of interest rates and higher bank charges. ▪ HUF 1.7 billion positive change in interest received in 2023 compared to 2022 due to changing market environment. ▪ HUF 7.5 billion positive change in other non-cash items, mainly due to more significant foreign exchange rate movements leading to FX gains in 2023 versus losses in 2022, supplemented with the sale of Pan-Inform LLC in 2022. Investing cash flow excluding payments for / proceeds from other financial assets – net Net cash used in investing activities amounted to HUF 99.6 billion in 2023, compared to HUF 114.6 billion in 2022, with the lower cash outflow driven mainly by the following: ▪ HUF 21.1 billion positive change in payments for PPE and intangible assets mainly driven by the following: – HUF 2.8 billion positive change driven by HUF 3.1 billion spectrum fee payment in North Macedonia in 2022 versus HUF 0.3 billion spectrum payment at the Hungarian operation in 2023, – HUF 23.5 billion positive change mainly driven by lower investments in fixed access rollout in both Hungary and North Macedonia and mobile network modernization in the Hungarian operation, – HUF 1.7 billion negative change related to higher real estate investments, – HUF 2.9 billion negative change reflecting to higher outpayments to Capex creditors due to different seasonality. ▪ HUF 5.5 billion negative effect in proceeds from disposal of subsidiaries and business units reflecting the absence of the income realized on the sale of Pan-Inform LLC in 2022. Repayment of lease and other financial liabilities Repayment of lease and other financial liabilities improved to HUF 36.6 billion in 2023 from HUF 77.6 billion in 2022, primarily driven by HUF 3.8 billion higher outflow related to trade payables with extended payment term in 2023 and absence of HUF 44.3 billion outpayment in 2022 for the principal part of the frequency usage right acquired in 2021. Cash and cash equivalents improved by HUF 1.3 billion in 2023 compared to 2022. Besides the changes in FCF the improvement is attributable to the followings: ▪ Proceeds from loans and other borrowings deteriorated by HUF 34.2 billion due to combined effect of the lower drawdown of DT Group loans and the decrease of proceeds from inhouse DT Group funds in 2023 compared to 2022. ▪ Repayments of loans and other borrowings deteriorated by HUF 7.3 billion due the increase of repayments of DT Group loans and inhouse DT Group funds in 2023 compared to 2022. ▪ HUF 14.5 billion higher dividend was paid in 2023 versus 2022. ▪ Exchange differences on cash and cash equivalents deteriorated by HUF 1.2 billion due to the MKD/HUF foreign exchange rate movement during 2023.
v 152 The financial and operating statistics are available on the following website: http://www.telekom.hu/about_us/investor_relations/financial 11.15 Consolidated Statements of Financial Position The most significant changes in the balances of the Consolidated Statements of Financial Position from December 31, 2022 to December 31, 2023 can be observed in the following lines: ▪ Trade receivables within one year ▪ Derivative financial instruments contracted with related parties (current and non-current assets combined) ▪ Other intangible assets ▪ Financial liabilities to related parties (current and non-current liabilities combined) Trade receivables within one year increased by HUF 27.7 billion from December 31, 2022 to December 31, 2023 mainly driven by higher sales volume in addition to the impact of the inflation-based fee adjustment implemented in March 2023 and the increase of installment receivables reflecting the sales volume change and partially offset by the decrease of SI/IT receivables due to the different project seasonality. Derivative financial instruments contracted with related parties (current and non-current assets combined) decreased by HUF 14.4 billion from December 31, 2022 to December 31, 2023 mainly as a result of HUF 22.1 billion decrease of the fair value of long term derivative financial instruments contracted with related parties which was partially offset by HUF 7.7 billion increase of the fair value of short term derivative financial instruments contracted with related parties. Other intangible assets decreased by HUF 17.5 billion from December 31, 2022 to December 31, 2023 reflecting a change in concessions, licenses and software. Financial liabilities to related parties (current and non-current combined) decreased by HUF 22.3 billion from December 31, 2022 to December 31, 2023 due to the combined result of repayment of DT Group loans and the decrease in cash pool liabilities. There has not been any other material change in the items of the Consolidated Statement of Financial Position in the period from December 31, 2022 to December 31, 2023. The less significant changes in balances of the Consolidated Statements of Financial Position are largely explained by the items of the Consolidated Statement of Cash Flows for 2023 and the related explanations provided above in section 11.14 Group Cash Flows. 12 EVENTS AFTER THE REPORTING PERIOD There were not any events to be reported after the reporting period within the Group. Budapest, February 22, 2024
v 153 Declaration We the undersigned declare that ▪ the attached annual financial statements which have been prepared in accordance with the applicable set of accounting standards and to the best of our knowledge, gives a true and fair view of the assets, liabilities, financial position and profit or loss of Magyar Telekom Plc. and the undertakings included in the consolidation as a whole, and ▪ the Management report (Business report) gives a fair view of the position, development and performance of Magyar Telekom Plc. and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties of its business. Budapest, February 22, 2024
v 154 SEPARATE ANNUAL REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
v 155 SEPARATE FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
v 156 INDEX TO THE SEPARATE ANNUAL REPORT SEPARATE ANNUAL REPORT ................................................................................................................................................. 154 SEPARATE FINANCIAL STATEMENTS AND BUSINESS / MANAGEMENT REPORT .............................................................. 155 SEPARATE FINANCIAL STATEMENTS .................................................................................................................................... 158 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT ............................................................................................159 STATEMENT OF FINANCIAL POSITION - ASSETS .................................................................................................................................160 STATEMENT OF FINANCIAL POSITION – LIABILITIES AND EQUITY ..............................................................................................161 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ..............................................................................162 STATEMENT OF CASH FLOWS ....................................................................................................................................................................163 STATEMENT OF CHANGES IN EQUITY .....................................................................................................................................................164 NOTES TO THE SEPARATE STATEMENT OF CHANGES IN EQUITY ................................................................................................165 NOTES TO THE SEPARATE FINANCIAL STATEMENTS ........................................................................................................................167 1 ABOUT THE COMPANY ..........................................................................................................................................................................167 2 BASIS OF PREPARATION AND SUMMARY OF MATERIAL ACCOUNTING POLICIES ............................................................168 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS..........................................................................................................173 4 FINANCIAL INSTRUMENTS....................................................................................................................................................................179 5 FINANCIAL RISK MANAGEMENT .........................................................................................................................................................202 6 INCOME TAXES .........................................................................................................................................................................................210 7 INVENTORIES ............................................................................................................................................................................................214 8 ASSETS AND LIABILITIES HELD FOR SALE .......................................................................................................................................214 9 PROPERTY, PLANT AND EQUIPMENT (PPE) ....................................................................................................................................215 10 INTANGIBLE ASSETS ............................................................................................................................................................................219 11 INVESTMENTS ........................................................................................................................................................................................223 12 OTHER ASSETS .......................................................................................................................................................................................226 13 PROVISIONS ............................................................................................................................................................................................226 14 OTHER CURRENT LIABILITIES............................................................................................................................................................228 15 OTHER NON-CURRENT LIABILITIES.................................................................................................................................................228 16 EQUITY ......................................................................................................................................................................................................229 17 LEASES ......................................................................................................................................................................................................230 18 REVENUE ..................................................................................................................................................................................................237 19 DIRECT COSTS........................................................................................................................................................................................241 20 EMPLOYEE-RELATED EXPENSES .....................................................................................................................................................242 21 OTHER OPERATING EXPENSES .........................................................................................................................................................244 22 OTHER OPERATING INCOME .............................................................................................................................................................245 23 INTEREST INCOME ................................................................................................................................................................................245 24 INTEREST EXPENSES ............................................................................................................................................................................246 25 OTHER FINANCE EXPENSES – NET..................................................................................................................................................246
v 157 26 RESULTS OF INVESTMENTS ...............................................................................................................................................................247 27 EARNINGS PER SHARE (EPS) .............................................................................................................................................................247 28 PURCHASE OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS ............................................................248 29 PURCHASE OF SUBSIDIARIES............................................................................................................................................................248 30 CONTINGENT ASSETS AND LIABILITIES .........................................................................................................................................249 31 PURCHASE COMMITMENTS ..............................................................................................................................................................249 32 RELATED-PARTY TRANSACTIONS ...................................................................................................................................................250 33 REPORTABLE SEGMENTS AND INFORMATION ABOUT GEOGRAPHICAL AREAS .............................................................253 34 REGULATED MARKETS AND PROCEDURES ..................................................................................................................................253 35 EVENTS AFTER THE REPORTING PERIOD ......................................................................................................................................256 SEPARATE BUSINESS / MANAGEMENT REPORT .................................................................................................................. 257 INTRODUCTION............................................................................................................................................................................................258 SUMMARY ON 2023 OPERATIONS ........................................................................................................................................................259 1 THE COMPANY’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES ............................................................260 2 CORPORATE GOVERNANCE .................................................................................................................................................................260 3 SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS .............................................................................................264 4 COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT .....273 5 RESEARCH AND DEVELOPMENT ........................................................................................................................................................274 6 REAL ESTATE, SITES OF OPERATION .................................................................................................................................................274 7 SUSTAINABILITY AND ENVIRONMENT PROTECTION ..................................................................................................................275 8 CORPORATE COMPLIANCE ..................................................................................................................................................................281 9 ECONOMIC ENVIRONMENT AND OUTLOOK ...................................................................................................................................282 10 INTERNAL CONTROLS, RISKS AND UNCERTAINTIES .................................................................................................................283 11 ANALYSIS OF FINANCIAL RESULTS FOR 2023 .............................................................................................................................289 12 EVENTS AFTER THE REPORTING PERIOD ......................................................................................................................................291 Declaration.....................................................................................................................................................................................................292
158 SEPARATE FINANCIAL STATEMENTS OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION (EU IFRS)
159 GENERAL INFORMATION AND INDEPENDENT AUDITOR’S REPORT Magyar Telekom Telecommunications Public Limited Company complies with the requirements of European Securities and Markets Authority (ESMA) and publishes its annual report in XHTML format from January 1, 2021. The independent auditor’s report is a separate document.
160 STATEMENT OF FINANCIAL POSITION - ASSETS At December 31, At December 31, (in HUF millions) Note 2022 2023 ASSETS Cash and cash equivalents ............................ 4.2.1 431 643 Trade receivables within one year................ 4.2.2.1 129,212 158,595 Other current assets ....................................... 12.1 6,245 4,408 Derivative financial instruments contracted with related parties ......................................... 4.2.3 - 7,663 Other current financial assets ....................... 4.2.4.1 2,715 7,365 Contract assets ................................................ 4.2.2.3, 18.4 13,805 12,537 Current income tax receivable ...................... 6 - - Inventories......................................................... 7 19,415 28,446 171,823 219,657 Assets held for sale ......................................... 8 - 260 Total current assets .................................... 171,823 219,917 Property, plant and equipment..................... 9 385,484 391,953 Right-of-use assets ......................................... 9.2 116,890 117,558 Goodwill ............................................................. 10.4 173,572 173,572 Other intangible assets................................... 10 298,133 283,934 Investments ...................................................... 11 135,427 131,610 Trade receivables over one year................... 4.2.2.1 19,201 22,551 Derivative financial instruments contracted with related parties ......................................... 4.2.3 31,723 9,632 Other non-current financial assets .............. 4.2.4.2 4,484 2,825 Contract assets ................................................ 4.2.2.3, 18.4 3,385 3,105 Other non-current assets ............................... 12.2 6,984 8,708 Total non-current assets ............................ 1,175,283 1,145,448 Total assets ................................................. 1,347,106 1,365,365 Budapest, February 22, 2024 The accompanying Notes form an integral part of these Separate Financial Statements.
161 STATEMENT OF FINANCIAL POSITION – LIABILITIES AND EQUITY At December 31, At December 31, (in HUF millions) Note 2022 2023 LIABILITIES Financial liabilities to related parties ........... 4.4.1 86,160 118,861 Derivative financial instruments contracted with related parties ......................................... 4.4.3 2,035 121 Lease liabilities ................................................. 4.5.1.2, 17.2.2 24,417 25,562 Trade payables ................................................. 4.4.5 123,354 132,382 Other financial liabilities................................. 4.4.4.1 7,737 8,623 Current income tax payable .......................... 6 848 1,767 Provisions .......................................................... 13 1,982 1,783 Contract liabilities ........................................... 18.4 8,565 8,469 Other current liabilities ................................... 14 18,155 25,027 Total current liabilities ............................... 273,253 322,595 Financial liabilities to related parties ........... 4.4.1 98,061 47,847 Lease liabilities ................................................. 4.5.1.2, 17.2.2 112,547 108,369 Corporate bonds .............................................. 4.4.2 68,531 68,854 Other financial liabilities................................. 4.4.4.1 101,293 96,613 Deferred tax liabilities ..................................... 6.3.2 13,572 11,524 Provisions .......................................................... 13 12,093 11,884 Other non-current liabilities .......................... 15 2,034 1,586 Total non-current liabilities ....................... 408,131 346,677 Total liabilities ............................................ 681,384 669,272 EQUITY Common stock ................................................. 16 100,580 97,156 Capital reserves ............................................... 16 26,408 25,509 Treasury stock .................................................. 16 (18,742) (18,742) Retained earnings ............................................ 16 557,476 592,170 Total equity ................................................. 665,722 696,093 Total liabilities and equity .......................... 1,347,106 1,365,365 Budapest, February 22, 2024 The accompanying Notes form an integral part of these Separate Financial Statements.
162 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended December 31, (in HUF millions, except per share amounts) Note 2022 2023 Mobile revenue............................................................................................... 18 386,226 443,544 Fixed line revenue .......................................................................................... 18 197,340 231,895 SI/IT revenue................................................................................................... 18.2.2 9,388 15,516 Revenue............................................................................................... 592,954 690,955 Interconnect costs......................................................................................... (18,213) (16,986) SI/IT service-related costs ........................................................................... (7,951) (11,913) Impairment losses and gains on financial assets and contract assets 4.2.2.2 (6,814) (13,538) Telecom tax .................................................................................................... 19.1 (26,216) (25,435) Other direct costs .......................................................................................... 19.2 (193,078) (210,639) Direct costs ......................................................................................... (252,272) (278,511) Employee-related expenses ........................................................................ 20 (56,467) (69,676) Depreciation and amortization ................................................................... 9, 10 (114,209) (114,716) Other operating expenses............................................................................ 21.1 (63,302) (80,796) Supplementary telecommunication tax ................................................... 21.2 (24,497) (29,869) Operating expenses ............................................................................ (510,747) (573,568) Other operating income ............................................................................... 22 4,577 4,216 Operating profit .................................................................................. 86,784 121,603 Interest income .............................................................................................. 23 1,891 4,175 Interest expense ............................................................................................ 24 (18,587) (27,861) Other finance expense – net ....................................................................... 25 (7,096) (23,287) Net financial result ............................................................................. (23,792) (46,973) Results from investments ............................................................................ 26 10,668 15,382 Profit before income tax .................................................................... 73,660 90,012 Income tax....................................................................................................... 6.2 (14,131) (15,573) Profit for the period ............................................................................ 59,529 74,439 Total comprehensive income for the period ..................................... 59,529 74,439 Earnings per share (EPS) information: Profit attributable to the owners of the Company ................................. 27 62,954 78,951 Weighted average number of common stock outstanding used for basic/diluted EPS ....................................................................... 975,575,178 942,867,447 Basic / diluted earnings per share (HUF) .................................................. 27 64.53 83.73 Budapest, February 22, 2024 The accompanying Notes form an integral part of these Separate Financial Statements.
163 STATEMENT OF CASH FLOWS For the year ended December 31, (in HUF millions) Note 2022 2023 Cash flows from operating activities Profit for the period .......................................................................................... 59,529 74,439 Depreciation and amortization ...................................................................... 9, 10 114,209 114,716 Income tax expense ......................................................................................... 6.2 14,131 15,573 Net financial result ........................................................................................... 13,124 31,591 Change in assets carried as working capital ............................................... (16,171) (40,038) Change in provisions ........................................................................................ (1,312) (1,137) Change in liabilities carried as working capital .......................................... 9,504 16,193 Income tax paid................................................................................................. 6.4 (15,640) (14,255) Dividend received ............................................................................................. 26 10,680 14,792 Interest and other financial charges paid* .................................................. (22,317) (33,804) Interest received ............................................................................................... 1,870 3,379 Other non-cash items ...................................................................................... (2,383) 2,348 Net cash generated from operating activities ...................................... 165,224 183,797 Cash flows from investing activities Payments for property plant and equipment (PPE) and intangible assets .................................................................................................................. 28 (94,900) (81,695) Proceeds from disposal of PPE and intangible assets .............................. 579 580 Payments for subsidiaries and business units ............................................ 29 (6,950) - Payments for other financial assets.............................................................. 5 (15,545) Proceeds from other financial assets ........................................................... 5,830 136 Net cash used in investing activities ..................................................... (95,436) (96,524) Cash flows from financing activities Dividends paid to Owners of the parent ...................................................... 4.4.4.3 (15,000) (29,467) Proceeds from loans and other borrowings ................................................ 4.4.4.3 181,733 147,153 Repayment of loans and other borrowings ................................................. 4.4.4.3 (155,006) (159,731) Proceeds from corporate bonds .................................................................... 4.4.4.3 - - Repayment of lease and other financial liabilities ..................................... 4.4.4.3 (67,420) (30,407) Treasury share purchase ................................................................................. 4.4.4.3 (14,609) (14,609) Net cash used in financing activities ..................................................... (70,302) (87,061) Change in cash and cash equivalents .................................................... (514) 212 Cash and cash equivalents, beginning of period ....................................... 4.2.1 945 431 Cash and cash equivalents, end of period ............................................. 4.2.1 431 643 *In 2023 the amount of other financial charges paid is HUF 5,958 million (in 2022 HUF 4,585 million). The accompanying Notes form an integral part of these Separate Financial Statements.
164 STATEMENT OF CHANGES IN EQUITY pieces in HUF millions Shares of common stock Common stock Capital reserves Treasury stock Retained earnings Total Equity (a) (a) (b) (c) (d) Balance at January 1, 2022 ................................................................ 1,042,742,543 104,274 27,379 (19,566) 523,715 635,802 Dividend (e) ................................................................................................. - - - - (15,000) (15,000) Treasury share purchase (f) ...................................................................... - - - (14,609) - (14,609) Capital decrease with cancellation of treasury share (g) ...................... (36,941,191) (3,694) (971) 15,433 (10,768) - Transactions with owners in their capacity as owners ....................... (36,941,191) (3,694) (971) 824 (25,768) (29,609) Profit or loss ................................................................................................. - - - - 59,529 59,529 Balance at December 31, 2022 .......................................................... 1,005,801,352 100,580 26,408 (18,742) 557,476 665,722 Dividend (e) ................................................................................................. - - - - (29,459) (29,459) Treasury share purchase (f) ...................................................................... - - - (14,609) - (14,609) Capital decrease with cancellation of treasury share (g) ...................... (34,242,485) (3,424) (899) 14,609 (10,286) - Transactions with owners in their capacity as owners ........................ (34,242,485) (3,424) (899) - (39,745) (44,068) Profit or loss ................................................................................................. - - - - 74,439 74,439 Balance at December 31, 2023 .......................................................... 971,558,867 97,156 25,509 (18,742) 592,170 696,093 Of which treasury stock ............................................................................. (41,777,718) Shares of common stock outstanding ................................................ 929,781,149 The accompanying Notes form an integral part of these Separate Financial Statements.
165 NOTES TO THE SEPARATE STATEMENT OF CHANGES IN EQUITY (l) The total amount of issued shares of common stock of 971,558,867 (each with a nominal value of HUF 100) is fully paid as at December 31, 2023. The number of authorized ordinary shares on December 31, 2023 is 971,558,867. Voting Rights and Voting The holder of each Series “A” ordinary share shall be entitled to one vote at the General Meeting of Magyar Telekom Telecommunications Public Limited Company (the Company or Magyar Telekom). The names of shareholders and nominees who intend to participate at the General Meeting shall be registered in the Share Register on the second working day prior to the starting date of the General Meeting. The General Meeting shall adopt its resolutions by a simple majority vote except for resolutions on issues listed in the Articles of Association, which shall require at least a three-quarters majority of the votes cast. There is no limitation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the ordinary shares. There is no limitation of voting rights for ordinary shares in the Articles of Association. The Company has no shares assigned with special management rights. Transfer of Shares In order to transfer dematerialized shares, there must be a contract for transfer or other legal title is required and, in that context, the transferor’s securities account must be debited and the new holder’s securities account must be credited with the transferred dematerialized shares. The holder of dematerialized share shall be considered the holder of the securities account on which the dematerialized shares are recorded. The transfer of any Series “A” ordinary shares is not bound to any restriction or attainment of agreement. (m) Additional paid-in capital represents the amount exceeding the nominal value of the shares that was received by the Company during capital increases. (n) Treasury stock represents the cost of the Company’s own shares repurchased. When the Company purchases its equity shares, the consideration transferred, including any attributable incremental external costs, are deducted from the Equity of the owners of the parent as Treasury stock until they are re-sold or cancelled. When such shares are subsequently sold, the treasury share balance decreases by the original cost of the shares, thereby increasing equity, while any gains or losses are also recognized in equity (Retained earnings). Treasury stock transactions are recorded on the transaction date. The number of treasury stock on December 31, 2023 was 41,777,718 (on December 31, 2022 was 43,078,833). (o) Retained earnings include the accumulated and undistributed profit of the Company. The distributable reserves of the Company at December 31, 2023 amounted to approximately HUF 592 billion (HUF 557 billion at December 31, 2022). Untied retained earnings is available for the payment of dividends which contains retained earnings from the last financial year (Note 16). (p) Dividends payable to the Company’s shareholders are recognized as a liability and debited against Retained earnings in the period in which the dividends are approved by the shareholders. (q) The Company repurchased own shares for HUF 14.6 billion through a share buyback auction on May 25, 2023 for the purpose of shareholders’ remuneration as approved by the Annual General Meeting on April 19, 2023 (in 2022 HUF 14.6 billion own shares were repurchased). The Company concluded repurchase transactions for 34,242,485 Magyar Telekom ordinary shares at an average price of HUF 443 per share. (r) The Common stock was decreased from HUF 100,580,135,200 to HUF 97,155,886,700 with the cancellation of 34,242,485 pieces of dematerialized series “A” ordinary shares (treasury shares) owned by the Company, each with the face value of HUF 100. The transaction amounted to HUF 14.6 billion decreased Common stock at nominal value and Capital reserves on pro-rata basis and Retained Earnings. The cancellation thus resulted in a rearrangement between the elements of the total Equity, but there was no change in total Equity. The decrease of share capital as part of shareholders’ remuneration was approved on the Annual General Meeting on April 19, 2023 and registered by the Court of Registry on June 28, 2023. Following the transaction, the Company’s share capital consists of 971,558,867 pieces of dematerialized series “A” ordinary shares including treasury shares of 41,777,718 pieces, each with the face value of HUF 100.
166 Together with the approval of these financial statements for issue, the Board of Directors of the Company proposes a dividend distribution in total HUF 41,561 million to be approved by the Annual General Meeting of the Company in April 2024. In 2023 the Annual General Meeting of Magyar Telekom Plc. approved HUF 29,459 million dividend paid to shareholders. The actual amount of gross dividend per ordinary Magyar Telekom share for the business year 2022 was HUF 30.60. Dividend payment started on May 19, 2023. The accompanying Notes form an integral part of these financial statements.
167 NOTES TO THE SEPARATE FINANCIAL STATEMENTS 1 ABOUT THE COMPANY Magyar Telekom Plc. (hereinafter: Magyar Telekom or the Company) is the principal provider of telecommunications services in Hungary. These services are subject to various telecommunications regulations. The Company was incorporated in Hungary on December 31, 1991 and commenced business on January 1, 1992. The Company’s registered office is Könyves Kálmán körút 36., 1097 Budapest, Hungary. Name of the Court of Registration and the registration number of the Company: Registry Court of the Budapest-Capital Regional Court, Cg. 01-10-041928. Magyar Telekom is listed on the Budapest Stock Exchange and its shares are traded on the Budapest Stock Exchange. Magyar Telekom’s American Depository Shares (ADSs) each representing five ordinary shares were also traded on the New York Stock Exchange until November 12, 2010, when the ADSs were delisted. Magyar Telekom terminated the registration of its ADSs in the US in February 2012. The Company maintains its American Depositary Receipt program on a Level I basis. The ultimate controlling parent of the Company is Deutsche Telekom AG (DT or DT AG) who fully consolidates Magyar Telekom Group. Deutsche Telekom Europe B.V. (Stationsplein 8, 6221 BT Maastricht, the Netherlands), a member of the Deutsche Telekom Group, is the direct owner of 63.55% of the Company’s issued shares. The Consolidated Financial Statements of DT AG are available at DT AG’s website ( www.telekom.com/en). The Separate Financial Statements are prepared and presented in millions of HUF, unless stated otherwise, as the Company’s presentation currency is the Hungarian Forint. The Company’s Board of Directors (the Board) accepted the submission of these Separate Financial Statements of the Company on February 22, 2024 to the Annual General Meeting (AGM) of the owners, which is authorized to approve these financial statements, but also has the right to require amendments before approval. As the controlling shareholders are represented in the Board of the Company that accepted the submission of these financial statements, the probability of any potential change required by the AGM is remote and has never happened in the past. Persons authorized to sign the annual report: Tibor Rékasi - Chief Executive Officer, member of the Board (residence: Szentendre) Daria Aleksandrovna Dodonova - Chief Financial Officer, member of the Board (residence: Budapest) In Magyar Telekom, the accounting services are coordinated by Melinda Modok (certificate number: 18128. Area of speciality: IFRS entrepreneurial activity. Status: registered. Registration number: MK 199521. Residence: Budapest). The Company is subject to compulsory audit. The Company’s auditor is Deloitte Könyvvizsgáló és Tanácsadó Kft. (its register number is 01-09-071057, its taxation number is 10443785-2-42), the responsible person for carrying out the audit is Kornél Bodor (membership number at Chamber of Hungarian Auditors: 005343). The Company complies with the requirements of European Securities and Markets Authority (ESMA) and publishes its annual report in XHTML format from January 1, 2021. The Separate Financial Statements of Magyar Telekom and the Consolidated Financial Statements of Magyar Telekom Group are available at the Company’s registered office and on its corporate website. Magyar Telekom’s corporate website is: www.telekom.hu
168 2 BASIS OF PREPARATION AND SUMMARY OF MATERIAL ACCOUNTING POLICIES 2.1 Basis of preparation The Separate Financial Statements of Magyar Telekom have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). All standards and interpretations adopted by the EU are effective as at December 31, 2023 and applicable to Magyar Telekom had been adopted. These Separate Financial Statements also comply with the Hungarian Accounting Act on Separate Financial Statements, which refers to the IFRS as adopted by the EU. The Company as parent company also prepared consolidated financial statements in accordance with IFRS as adopted by the EU which were approved by the Company’s Board of Directors on February 22, 2024. The preparation of financial statements according to IFRS requires the use of certain critical accounting estimates. It also requires management judgement to apply the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas in which assumptions and estimates are material to the Separate Financial Statements, are disclosed in Note 3. Financial statements are prepared under going concern assumptions, which means it is assumed the Company will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities.
169 2.1.1 Initial application of standards, interpretations and amendments in the financial year The table below summarizes the Standards amended and the subject of the amendments effective on or after January 1, 2023 that could have an impact on Magyar Telekom’s accounting policies. Pronouncement Title Applied by Magyar Telekom from Changes Impact on the presentation of Magyar Telekom's results of operations and financial position Standards adopted by the EU IFRS 17 and Amendments to IFRS 17 Insurance Contracts Jan 1, 2023 IFRS 17 governs the accounting for insurance contracts and replaces IFRS 4. Deferral of first-time application of IFRS 17 to January 1, 2023. The amendments refer to specific topics helping entities to implement the standard and avoiding a significant loss of useful information. No material impact. Amendments to IAS 1 Presentation of Financial Statements Jan 1, 2023 Disclosure of material accounting policy information instead of significant accounting policies. In addition, IFRS Practice Statement 2 has been amended. No material impact. Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors Jan 1, 2023 Introduced a definition of ‘accounting estimates’ and included other amendments to help entities distinguish changes in accounting policies from changes in accounting estimates. No material impact. Amendments to IAS 12 Income Taxes Jan 1, 2023 Deferred Tax related to Assets and Liabilities arising from a Single Transaction No material impact. Amendments to IFRS 17 Insurance contracts Initial Application of IFRS 17 and IFRS 9 – Comparative Information Jan 1, 2023 Transition option relating to comparative information about financial assets presented on initial application of IFRS 17, helping entities to avoid temporary accounting mismatches between financial assets and insurance contract liabilities, and therefore improve the usefulness of comparative information for users of financial statements. Not applicable. Amendments to IAS 12 Income taxes International Tax Reform – Pillar Two Model Rules Immediately and Jan 1, 2023 The amendments introduce a temporary exception to the accounting requirements for deferred taxes in IAS 12, so that an entity would neither recognize nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes. Magyar Telekom has applied the exception not to recognize and disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes. Magyar Telekom is continuing to assess the impact of the Pillar Two income taxes legislation on its future financial performance. See Note 6.1.2.
170 2.1.2 Standards, amendments and interpretations that are not yet effective as at December 31, 2023 and have not been adopted early by the Company and other expected changes for 2024 and 2025. Pronouncement Title To be applied by Magyar Telekom from Changes Expected impact on the presentation of Magyar Telekom's results of operations and financial position Standards adopted by the EU Amendments to IAS 1 Presentation of Financial Statements Jan 1, 2024 Classification of Liabilities as Current or Non-current and Deferral of Effective Date. No material impact is expected. Amendments to IFRS 16 Leases Lease Liability in a Sale and Leaseback Jan 1, 2024 The amendments add subsequent measurement requirements for sale and leaseback transactions that satisfy the requirements in IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale. No material impact is expected. Standards not yet adopted by the EU* Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures Disclosures: Supplier Finance Arrangements Jan 1, 2024 The amendments add a disclosure objective to IAS 7 stating that an entity is required to disclose information about its supplier finance arrangements that enables users of financial statements to assess the effects of those arrangements on the entity’s liabilities and cash flows. In addition, IFRS 7 was amended to add supplier finance arrangements as an example within the requirements to disclose information about an entity’s exposure to concentration of liquidity risk No material impact is expected. Magyar Telekom is continuing to assess the impact of future Supplier Finance Arrangements. Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates Lack of Exchangeability Jan 1, 2025 The IASB has issued amendments to IAS 21 that will require companies to provide more useful information in their financial statements when a currency cannot be exchanged into another currency. Not applicable * For standards not yet adopted by the EU, the date of first-time adoption scheduled by the IASB is assumed for the time being as the likely date of first-time adoption. 2.2 Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates, that is the Hungarian forint (HUF), which is the functional currency of the Company. Foreign currency transactions are translated into HUF using the exchange rates prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Profit for the period (Other finance expense – net).
171 2.3 Macroeconomic environment Management continuously monitors the progress in the Hungarian economic environment and the effect of the wars, particularly the macroeconomic tendencies and current market conditions. The Russian-Ukrainian war has had a significant negative impact on the global economic outlook. Extensive sanctions have been imposed by the European Union on Russia in response to its aggression. In the previous financial year, Hungary faced high inflation and weakening of the forint above than the average rate in the Central European Region. During 2023, this showed a downward trend. The National Bank of Hungary introduced interventions during 2022 including gradual increase of base rate in Hungary to protect the forint and limit the inflation. In 2023, the inflation has decreased, however, it is still high in the European Union. The National Bank of Hungary started reducing the base rate. The Israel-Hamas war currently has no significant impact on the Company’s operations. However, this could cause disruption to current trade routes resulting in material and goods shortages. In May 2022 the government declared state of energy emergency and initiated additional corrective actions to keep the Central Budget in balance. In response to the consequences of the war, the energy shortage and dramatic increase in energy prices across Europe, in 2022, the government announced targeted measures such as fixing prices of basic consumption goods, cap on residential gasoline price, partial termination of caps on residential gas and electricity prices in case of usage above the average consumption level, further extension of loan moratorium and interest stop. Most of these actions have been phased out over the course of 2023. The cap on residential gasoline price has been ceased in December 2022. The price fixing of basic consumption goods was cancelled from August 1, 2023 and changed to compulsory discounts. The interest stop has been extended in 2023 and expected to be terminated in the second quarter of 2024. In addition to the above, the introduction of the supplementary telecommunication tax in 2022 put significant pressure on the profitability of the Company. In September 2023, the Magyar Telekom signed a Memorandum of Understanding with the Hungarian Government for the Digital Transformation of Hungary. The Government of Hungary intends to support fixed line gigabit internet network, 5G coverage developments and ICT investments, among other things, through the review of sector specific tax rules and the abolition of utility tax payment obligation of electronic telecommunication providers from January 2024, and the abolition of the supplementary telecommunication tax from January 2025. The Company is committed to build gigabit-capable fixed network covering an additional 1 million homes and businesses in 4 years, making the fixed gigabit-capable network infrastructure available to 4.5 million Hungarian homes and businesses by the end of 2027. Besides, the Company will also accelerate the rollout of 5G coverage, resulting in an increase to close to 99% population-based outdoor 5G coverage by 2026. In order to fulfill the above commitments, the Company intends to spend an overall HUF 123 billion on its fixed and mobile network development within the period of 2024-2027. The rollout of the fiber network continued throughout 2023, resulting in 80% coverage of gigabit-capable access points within the fixed network. In Hungary, there is uncertainty regarding further future funds coming from the European Union and around the government’s actions to address the higher-than-expected government deficit. Additionally, the industrial output is falling. These can impact the economy and GDP growth going forward. The inflationary environment and the fluctuation of the forint put increasing pressure on the Company’s costs, while a potential economic downturn could negatively impact the Company’s topline performance. Yet the Company remains committed to focusing on the delivery of its strategic objectives. The management closely monitors the recoverability of assets; therefore the Company has conducted the goodwill impairment test quarterly during the year and paid more attention to monitor the solvency of customers, taking into account the emerging macroeconomic impacts. See details in Notes 3.2 and 3.3. Altogether, the management has not identified any events which would threaten the going concern of the Company’s operations, and no major adverse changes are expected in the long term.
172 2.4 Climate disclosures The main objective of the new ten-year sustainability strategy launched in 2021 is to enable Magyar Telekom to remain the country’s leading sustainable company by bringing digitalization to the service of the development of people, families and businesses, and the protection of the environment. The climate-related key performance indicators (KPIs) are incorporated into the remuneration system for CEOs and deputy CEOs and certain senior management categories. As part of its sustainability strategy, the Company focuses on technological modernization, such as optical transition and 3G network retirement. These development plans are included in the annual useful life review, therefore no significant impairment recognition has been made. The asset retirement obligation (ARO) is part of the operational activity, which is defined in line with the asset retirement plans and is reviewed annually and evaluated in respect of any additional regulatory requirement, if any, see Note 13.2. Magyar Telekom’s new climate strategy focuses on reduction of fossil fuel-based energy sources, which is in line with the European Green Deal. Therefore, Magyar Telekom has already covered fully its electricity consumption from renewable energy since 2016 . In 2022, the European economic environment changed significantly, as a result of the procurement of renewable energy from the domestic market became a priority task, for this purpose a short-term physical power purchase agreement (PPA) was concluded in 2022, which, from 2023, partially replaces the purchase of renewable energy certificates, that were previously considered a sole source. The PPA is a 3-year, fixed-price contract with a Hungarian solar park for an expected electrical output of approximately 13.2 GWh per annum. Magyar Telekom applies the ‘own use’ exemption in paragraph 2.4 of IFRS 9 and therefore accounts for the PPA and the guarantees of origins as an executory contract. Both the purchase of renewable energy under the PPA and guarantees of origins are recognized in Other operating expenses as energy costs. The Company’s emission reduction commitment pledged in 2018, approved by the Science Based Target initiative (SBTi), which were replaced by more ambitious targets in 2019 in response to the IPCC 1.5°C report, have become the focus of the Group’s strategy. These commitments are still valid for Magyar Telekom: ▪ reduction of Scope 1-2 emissions by 84% compared to 2015; ▪ reduction of Scope 3 emissions by 30% compared to 2017. The Company can only maintain its market leadership if it can react promptly to external market, geopolitical and environmental changes. Due to external factors (fuel price and availability of fossil fuels) and internal transformation processes, as well as detailed mapping of emission sources (e.g. emergency power generation, fugitive emissions from refrigerants), the scope 1-2 strategy of Hungarian member companies has been rebuilt, with a base year harmonized with the SBT commitment. Detailed feasibility studies have been started to implement the new strategy. Market-based emission reduction of 80% seems feasible by 2030 with the extended emission sources for Magyar Telekom and Telekom Rendszerintegráció Zrt. in total. Risks The Company is exposed to the risk of future energy price uncertainty. The growing demand for green energy in the market, combined with the current macroeconomic situation, could lead to an increase in energy prices and renewable energy certificate prices. The Company remains committed to its environmental strategy and will continue its work by seeking new opportunities, such as concluding long-term power purchase agreements (PPAs). Within the framework of the Business Continuity Management System (BCM), the Company has identified critical climate risks (flooding, heatwaves) for which it has developed an action plan. All incidents that occurred were investigated and analyzed, but network damage did not reach significant levels. This analysis could help Magyar Telekom become more adaptable by modernizing its infrastructure. To meet emission reduction targets, including the Intergovernmental Panel on Climate Change (IPCC) target of 1.5°C, regulators may set stricter emission reduction targets in the future, which could result in higher spending, for the Company. Thanks to the Company’s forward-looking climate strategy, it enjoys an advantage over its competitors, even with stricter regulations. Based on these analyses, Magyar Telekom does not expect a significant impact on its business model or on the presentation of its operating profit or financial position. For more information, see Magyar Telekom’s Sustainability Report (https://www.telekom.hu/about_us/society_and_environment/sustainability_reports)
173 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the prevailing circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are outlined below. 3.1 Useful lives of assets The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. Management believes that this is a critical accounting estimate since it involves assumptions about technological development in an innovative industry and heavily dependent on the investment plans of the Company. Further, due to the significant weight of depreciable assets in total assets, the impact of any changes in these assumptions can be material to the financial position and results of operations. See Notes 9.3 and 10.3 for the changes made to useful lives in 2023. The Company is constantly introducing a number of new services or platforms. In the frame of that, Magyar Telekom focuses on investment into fixed (optical) and mobile networks to meet continued strong demand for mobile data, broadband and TV services. Continued the development of 5G platforms, the network modernization (fix and mobile) program and investments into the customer premise equipment (CPE). In case of the introduction of such new services, the Company conducts a revision of useful lives of the already existing platforms, but in the vast majority of the cases these new services or assets are designed to co-exist with the existing platforms, not necessarily resulting in changing over to the new technology. Consequently, the useful lives of the existing platforms usually do not require shortening. 3.2 Estimated impairment of goodwill and investments 3.2.1 Goodwill Goodwill is not amortized but tested for impairment annually in the last quarter of the year and in the other quarters quick tests are executed. During the preparation of the financial statement of 2023 the management updated its goodwill impairment test by considering updated internal and external information such as book values, foreign exchange rates, weighted average cost of capital and the possible effects of macroeconomic tendencies. Similarly to 2022, no impairment needed to be recognized in 2023. On Magyar Telekom Group (“Group”) level, the Company has a considerable portion of assets and liabilities presented in the MT-Hungary segment as well as contributing a significant proportion to the result of the MT-Hungary segment. The goodwill presented in the Company was tested as the considerable part of this segment when MT-Hungary segment was examined. Since the Company as a whole is a non-separable part of the MT-Hungary segment, therefore the impairment test presented below is in reference to the MT-Hungary segment of the Magyar Telekom Group. For additional information of operating segments, see Note 33. The recoverable amounts of the operating segments are calculated based on fair value less cost of disposal (FVLCD) determined by the discounted projected cash flows of the operating segments over the next ten years with a terminal value, as the payback period of investments in the telecommunications industry covers longer period. The impairment test is based on reasonable and supportable assumptions that present the management’s best estimate incorporating market participants’ assumptions and expectations. This is highly judgmental, which carries the inherent risk of arriving at materially different recoverable amounts if estimates used in the calculations proved to be inappropriate. In the calculations, Magyar Telekom uses different weighted average cost of capital (WACC) and estimated perpetual growth rate (PGR) depending on the country of operations and the characteristics of the markets the Group’s segments operate in.
174 Costs of certain central functions that are not cross charged are also considered in the fair value calculations when conducting the goodwill impairment tests. The costs of these central functions are allocated to the operating segments based on the segments’ revenue share of the Group’s total revenue. Details of the carrying amounts of goodwill allocated to the MT-Hungary segment are presented in Note 10.4. In 2023 and 2022 the following WACC and PGR rates have been applied in the fair value calculations for the goodwill impairment test. 2022 2023 MT-Hungary WACC ......................................................................................................... 11.20% 8.46% PGR ............................................................................................................. 1.0% 1.0% Sensitivity test During the sensitivity analysis the management assessed the effects of reasonable change in the main factors to the impairment calculation based on forward-looking projections, including financial projections for inflation and base rate whether it would result in an impairment of the goodwill allocated to either operating segment. The following factors are considered: WACC, PGR, Free Cash flow and CAPEX, each analysed separately. Variation in WACC rate generate major impact for the fair value less cost of disposal of the segments. The WACCs are determined by ▪ the capital asset pricing model (CAPM) using ▪ the average of the peer group’s betas, ▪ 10-year zero-coupon government bond yields ▪ debt ratio in line with the usual indebtedness of listed peer telecommunications companies. WACC rate is determined basically by the size of 10-year-zero-coupon government bond yield. Estimation of the potential change of a 10-year zero-coupon yields is difficult. Contrary to last year it has decreased by 2.75 points during 2023 in MT-Hungary segment (2022: increase by 3.26 points respectively) due to the recent economic environment explained in Note 2.3. Assessment of the possible tendency of WACC indicators is highly judgmental, still considering 1-2% variation no additional impairment should be recognized. PGRs used are in line with the long-term average growth rate for the segments. Significant variation in PGR is not projected to be reasonable therefore no sensitivity is performed on this parameter. Projecting fluctuation of future cash flows is a challenging task in the current macroeconomic surroundings which may cause solvency issues at residential and business customers. 5% fluctuation in free cash flow had been investigated and concluded with no indication to any impairment recognition. CAPEX budget is defined and closely monitored by the Company, the future CAPEX spending can be higher, therefore 5% variation has been used in the sensitivity test which has not resulted in any need for recognition of impairment on goodwill allocated to any of the segments. Altogether, the management believes that any reasonably possible change in the above tested key assumptions on which the recoverable amount of the CGU’s is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the related CGUs.
175 3.2.2 Investments Investments in subsidiaries, associates and joint ventures are measured at cost less any accumulated impairment losses. Cost of an investment is the fair value of consideration given, including contingent considerations and transaction costs incurred during the acquisition process. The Company examines whether an investment may or may not be impaired by using internal and external information. Magyar Telekom implemented the requirements of the IAS 36 standard as follows: If the carrying amount of investment exceeds HUF 20 billion then its recoverable amount is always analyzed using a DCF model (irrespective of whether there is any indication of impairment or not). If the carrying amount of an investment does not exceed HUF 20 billion then the Company examines whether there were any changes related to this investment which requires the preparation of impairment assessment based on the estimation for its recoverable amount (for further information see Note 11). In 2023, the Company investigated the recoverable amount in case of Telekom Rendszerintegráció Zrt. (TRI Zrt.), Cecoin Kft., Stonebridge A.D., KalászNet Kábel TV Kft. and Telekom New Media Zrt. For the detailed description on these investments see Note 11. The table below shows the net income and equity of the subsidiaries investigated. The figures on Telekom Rendszerintegráció Zrt., KalászNet Kábel TV Kft., Telekom New Media Zrt. and Cecoin Kft. are presented according to Act C of 2000 on Accounting (HAR) while figures on Stonebridge A.D. according to IFRS. 12.31.2022 12.31.2023 Profit after tax (unaudited) Equity (unaudited) Profit after tax (unaudited) Equity (unaudited) Telekom Rendszerintegráció Zrt... ............................... 3,044 36,966 6,196 34,837 Stonebridge A.D. ............................................................. 5,881 3,202 5,942 3,259 KalászNet Kábel TV Kft. ................................................ 886 6,457 809 7,943 Telekom New Media Zrt. ............................................... 39 722 58 727 Cecoin Kft.* ..................................................................... (46) 3,783 355 - *Cecoin Kft. was acquired by the Company in August 2022. In case of Telekom Rendszerintegráció Zrt. and Stonebridge A.D. the recoverable amount was calculated using DCF model. In DCF model Magyar Telekom uses weighted average cost of capital (WACC) and estimated perpetual growth rate (PGR). The WACCs are determined based on the capital asset pricing model (CAPM) using the average betas of the peer group, 10-year zero-coupon yields and a debt ratio in line with the usual indebtedness of listed peer telecommunications companies, while the PGRs used are in line with the long-term average growth rate for the particular segment. The Stonebridge A.D. is the owner of the 51% of the Makedonski Telekom A.D.’s equity, and its main activity is managing this capital. Accordingly, Magyar Telekom uses the DCF model of Makedonski Telekom A.D for the estimation of recoverable amount of Stonebridge A.D. The fair value less cost of disposal (FVLCD) of these investments exceeds their carrying amount therefore impairment of these investments did not need to be recognized either in 2023 or in 2022. See Note 11 for details of carrying amount of investments.
176 The table below shows the WACCs used in the fair value calculations of these investments conducted in 2022 and 2023. WACC 2022 2023 Telekom Rendszerintegráció Zrt....................... 15.06% 12.25% Stonebridge A.D................................................... 8.90% 8.61% KalászNet Kábel TV Kft. ..................................... 8.73% 8.73% Telekom New Media Zrt. .................................... 11.90% 11.90% In 2022 the Company decided the liquidation of Cecoin Kft. after acquired a fiber network the only asset possessed by the Cecoin Kft. and the remaining equity distributable as dividend was paid to the Company. The voluntary liquidation was registered in September 2023 by Court Registry. The Company, as the 100% owner of Cecoin Kft., is entitled the distributable property in accordance with the asset distribution proposal. Cecoin Kft. has performed disbursement in two ways. Firstly, with compensation as settled the credit claim against the Company (HUF 4,138 million) and secondly, it transferred the remaining amount from its bank account (HUF 100 million). Due to the received amount has exceeded the book value of the investment, HUF 415 million were accounted as write-back of impairment (for further information see Note 26). 3.3 Estimated impairment of trade and other receivables Impairment is calculated for accounts receivable based on estimated losses resulting from the inability of customers to make required payments. For the largest customers and other telecommunications service providers, impairment is calculated on an individual basis, while for other customers it is estimated on a portfolio basis - see classification in Note 4.1.2 -, for which the base of estimate is the aging of accounts receivable balance and historical write-off experience, customer credit-worthiness and recent and expected changes in customer payment terms and forward-looking information (e.g. unemployment rates, credit crisis, inflation, national and international statistics, macroeconomic surroundings and publications of the National Bank of Hungary). In addition, the nature of the business (residential, business, fixed line, mobile, internet, cable TV, etc.) is also considered and the environment in which the Company operates. The above factors of impairment calculation are reviewed annually, and changes are made to the calculations when necessary. The assessment of the correlation between historically observed default rates, forecasted economic conditions and expected impairment is considered as a critical estimate. According to the best estimation based on the annual reassessment the management concluded that there is no reason to modify the bad debt ratios used previously for the portfolios. Furthermore, the management reassessed the modification of the bad debt ratio for the undue installment receivables based on historical data and forward-looking information. In this context, the management evaluated the effects of the rising uncertainties of the international environment (e.g. the prolonged Russian-Ukrainian war) on the Hungarian economy, the termination of the previously introduced interest stop, the Hungarian energy dependency and the decreasing but still high inflation which may have a negative impact on the solvency of the households and the monetization of installment receivables. The management concluded that HUF 3.5 billion additional impairment loss was required on this sub-group of debtors. The annual revision also revealed that no other asset classes have been impacted materially. A sensitivity analysis has also been prepared that shows how much impairment would have been recognized on the undue installment receivables as at December 31, 2023 if the estimated non-payment rate would change. According to this, the financial effect of 1% and 2% improvement (-) and deterioration (+) of the estimated non-payment rate would increase or decrease by HUF 0.9 billion and by HUF 1.9 billion the calculated impairment of these trade receivables (current and non- current part). If the financial condition of customers were to deteriorate, actual write-offs of currently existing receivables may be higher than expected and may exceed the level of the impairment losses recognized so far. The management pays
177 particular attention to the continuous monitoring of the solvency of the customers in the future and would take additional corrective actions if it is necessary. Please see further information Notes 4.1.1, 4.2.2.2 and 5.1.2. 3.4 Contracts with customers The Company applies the guidance to a group of contracts with similar characteristics instead of to a single contract with a customer. The characteristics considered include mainly the business segment of the customer, business model of the contract, and whether the contract is committed or not. Contract assets are recognized for unbilled amounts typically resulting from sales under long-term contracts when revenue recognized exceeds the amount billed to the customer in that period. This is a temporary difference so that revenue recognized and revenue billed are the same by the end of the commitment term. The amount of the contract assets is determined considering the estimated churn rate, average contract cancellation rates (in first 14 days), estimated penalty rates of the relevant group of contracts and effective interest rate. Contract assets are released monthly – in line with revenue from invoiced services to customers – during the minimum contract term of the relevant group of contracts. Furthermore, the Company recognizes assets for costs incurred in connection with the signing of customer contracts which would not have been incurred if the customer contract had not been concluded, along with costs to fulfill a contract. Capitalization is subject to the expectation that those costs will be recovered by future revenue resulting from the contract. Costs of obtaining a contract with a customer generally include sales commissions in both direct and indirect distribution channels (selling and marketing costs, bid and proposal costs, sales commissions and legal fees). Capitalizing incremental costs of obtaining a contract does not only refer to contracts concluded with a new customer but also to contract renewals. Costs of obtaining a contract with a customer recognized on fix and mobile telecommunication services, are amortized on a portfolio basis over the period that the related goods or services are transferred to the customer which is ▪ in case of uncommitted contracts – without loyalty period - based on historical customer retention period (e.g. average period of usage of prepaid cards, postpaid, broadband, and IT services) and ▪ in case of committed contracts - with a loyalty period of 12-24 months - the commitment period is considered as amortization period (e.g. postpaid, broadband, IT services and bundled sales of equipment and services). The Company decided not to use the practical expedient of expensing the incremental costs of obtaining a contract immediately, which are amortized over a period of one year or less. Costs to fulfill a contract with a customer may include installation costs that are not distinct from other services provided in the contract, e.g. cabling activities, materials for internet and TV services. The Company has decided to apply IFRS 15.95 and should capitalize these costs as cost to fulfill a contract which are amortized in direct cost over the useful life of the contracts. See Notes 12.2 and 18.4 for the amount of contract assets, contract liabilities and contract costs. 3.5 Leases – Estimating the incremental borrowing rate and assessment of extension and termination options At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate. The incremental borrowing rate reflects the main risks of the lease arrangements in a specific country and is provided for each year up to a maturity of 30 years. A change in the interest rate is only applicable when after initial recognition the contract is modified, or a reassessment is necessary which causes a change in the interest rate. Generally, Magyar Telekom uses the lessee’s incremental borrowing rate. Magyar Telekom never uses negative interest rates. Any negative interest rates will be capped at an amount of zero.
178 The Company has several lease contracts that include extension and termination options. These options are negotiated by management to provide flexibility in managing the leased-asset portfolio and align with the Company’s business needs. Management exercises significant judgement in determining whether these extension and termination options are reasonably certain to be exercised. Extension options (or periods after termination options) are only included in the lease term if the Company is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The threshold for a “reasonably certain” exercise is lower than “virtually certain” and higher than “more likely than not.” For further information see Note 17.2.2.
179 4 FINANCIAL INSTRUMENTS A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets of the Company include ▪ cash and cash equivalents; ▪ equity instruments of another entity; ▪ contractual rights: ▪ to receive cash (trade receivables) or another financial asset from another entity; or ▪ to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity (derivatives); ▪ a contract that will or may be settled in the entity’s own equity instruments and is: ▪ a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or ▪ a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments. Financial liabilities of the Company include liabilities that originate from ▪ contractual obligations: ▪ to deliver cash or another financial asset to another entity (non-derivatives); or ▪ to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity (derivatives); or ▪ a contract that will or may be settled in the entity’s own equity instruments and is: a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments. IFRS 9 also applies to those contracts to buy or sell non-financial items which may be settled net in cash or other financial instruments (net settlement), except if those contracts were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements (i.e. own use contracts). The provisions of other Standards such as IAS 2 and IAS 37 apply to own use contracts. Contracts originally entered into in accordance with the Company's expected purchase, sale or usage requirements, which do not fulfill the own use requirements during the term of the contract also fall within the scope of IFRS 9 from that date. Relevant cases of application at Magyar Telekom are contracts for the physical purchase of electricity and renewable energy certificates. Sales of purchased electricity or renewable energy certificates and economically comparable transactions (e.g. close outs) generally result in the contracts in question being classified as derivatives and recognized at fair value through profit or loss. This applies accordingly if unusual contractual clauses are to be agreed that could lead to the separation of derivatives (e.g. embedded derivatives), such as complex price formulas or volume options in favor of the contractual partner.
180 4.1 Financial assets – accounting policies The Company classifies its financial assets on the basis of both: ▪ the entity's business model for managing the financial assets and ▪ the contractual cash flow characteristics of the financial asset in the following categories: ▪ at amortized cost if both of the following conditions are met: ▪ the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and ▪ the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. ▪ at fair value through other comprehensive income (FVOCI) if both of the following conditions are met: ▪ the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and ▪ the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding. ▪ at fair value through profit or loss (FVTPL) unless it is classified in the previous categories. Also, IFRS 9 4.1.4 provides the option to measure particular investments in equity instruments at fair value through other comprehensive income (OCI option). Changes in value are then recognized immediately and in full in other comprehensive income. For the purpose of the above classification: ▪ principal is the fair value of the financial asset at initial recognition ▪ interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. Standard purchases and sales of financial assets are recognized on settlement-date, on the date when the financial asset is actually settled ('settlement date accounting'). Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the Profit for the period. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred. Financial assets have been transferred when the contractual rights to receive cash flows of the financial assets have been transferred or the contractual rights to receive cash flows of the financial assets have been retained but there is a contractual obligation to pay the cash flows to one or more recipients in an arrangement compliant with the conditions set out by IFRS 9. Any gains or losses on derecognition are recognized in Profit for the period and are calculated as the difference between (a) the sum of the consideration received and any cumulative gain or loss that had been recognized in other comprehensive income and (b) the carrying amount derecognized with an exception for equity instruments for which the Company exercises the option of measurement at fair value through other comprehensive income in which case gains or losses are recognized directly to retained earnings. 4.1.1 Impairment of financial assets Depending on the business model of the Company and the characteristics of the contractual cash flows of the financial assets, financial assets are subsequently measured at amortized cost, at fair value through other comprehensive income or at fair value through profit or loss. A loss allowance must be recognized for financial assets measured at amortized cost and at fair value through other comprehensive income except when the OCI option was applied. The loss allowance must be recognized through profit or loss and reduces the carrying amount of the relevant financial asset measured at amortized cost; while in the case of financial assets measured at fair value through other comprehensive income where applicable, the corresponding offsetting entry is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset. Loss allowances must also be recognized for lease receivables as defined in IFRS 16, contract assets as defined in IFRS 15, financial guarantee contracts and loan commitments relating to loans bearing an off-market interest rate.
181 If the credit risk arising from the financial asset has increased significantly since initial recognition, the loss allowance must be measured at an amount equal to the lifetime expected credit losses. Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of a financial instrument. If the credit risk arising from the financial asset has not increased significantly since initial recognition, the loss allowance must be measured at an amount equal to the 12-month expected credit losses. The 12-month expected credit losses represent the total expected credit losses that result from default events on a financial instrument that are possible within the twelve months after the reporting date, weighted by the likelihood that a default event will occur during that period. Based on the changes in credit risk, it must be assessed at each reporting date whether the current loss allowance must be measured at an amount equal to the lifetime expected credit losses based on historical data and forward-looking considerations driven by the expected macroeconomic tendencies (unemployment rates, credit crisis, inflation, national and international statistics, governmental intervention, publications of the National Bank of Hungary or at an amount equal to the 12-month expected credit losses in accordance with the criteria above. Indicators that may sign a significant increase in the credit risk: ▪ contractual payments are more than 30 days past due ▪ change in external/internal rating ▪ changes in market conditions that could influence payment obligations ▪ financial difficulties of the borrower that significantly alter its creditworthiness ▪ adverse changes in business, financial, or economic conditions, i.e. increase in interest rates or unemployment rates Indicators for default event support the uncollectible classification in credit risk: ▪ financial asset is more than 90 days overdue ▪ counterparty repeatedly fails to meet payment obligations and the service is blocked (contract was not yet terminated) ▪ counterparty is over the credit limit with unpaid invoices and fails to pay despite repeated demands ▪ counterparty applies for insolvency protection proceedings ▪ in addition to the above quantitative aspects, qualitative aspects should also be taken into account in the evaluation, such as e.g. non-compliance with covenants The simplified and the general approaches are to be applied to assess and account for credit losses. ▪ Simplified approach All financial instruments underlying simplified approach are measured with lifetime expected credit loss based on historical data and forward-looking considerations driven by the expected macroeconomic tendencies. Therefore, except for insolvency, neither any indicators for increase in credit risk nor any default events are relevant within the simplified approach. The simplified approach is applicable for trade receivables, contract assets and lease receivables without a significant financial component. The Company has chosen to use the simplified approach for these receivables with a significant financial component as well. ▪ General approach According to the expected credit loss model the financial instruments are classified into three buckets. The classification into the three buckets is based upon the changes of the credit risk for the financial asset. A relative credit risk model is used for the evaluation of an increased credit risk. The significant increase of credit risk in comparison to the initial recognition is reflected in the transfer of the financial instrument between the buckets. According to the expected credit risk model the impairment is determined differently for the three buckets. The impairment for financial instruments in bucket 1 is calculated based upon the 12-month expected credit loss. The impairment for financial instruments in bucket 2 and 3 is calculated based upon the lifetime expected credit losses. The general approach is applied for bank accounts, factoring receivables, other financial receivables and employee loans, which financial instruments are classified into bucket 1. Factoring of trade receivables is generally without recourse that results in derecognition of trade receivables and recognition of other receivables from factoring. For further information see Note 4.2.2.1.
182 4.1.2 Financial assets measured at amortized cost The following items are assigned to this category: ▪ cash and cash equivalents; ▪ deposits over three months; ▪ trade receivables; ▪ other receivables. Financial assets at amortized cost are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method (relevant only for the receivables with long-term maturity), considered to be not material for financial assets within one year. Cash and cash equivalents Cash and cash equivalents include cash on hand and in banks, and all highly liquid deposits and securities with original maturities of three months or less and exclude all overdrafts. Trade receivables Receivables with similar credit risk characteristics assessed collectively for impairment, based on business segments (residential, business, wholesale and other category), type of service delivered (telco and SI/IT services), receivables with installments and governmental institutions including local governments. Impairment and subsequent recoveries of amounts previously written off are accounted for against the periods as Impairment losses and gains on financial assets and contract assets as part of Direct costs in the Statement of Profit or Loss. 4.1.3 Financial assets at fair value through other comprehensive income (FVOCI) The “financial assets at fair value through other comprehensive income” measurement category includes the following financial assets: ▪ listed and unlisted equity instruments for that OCI option has been applied; ▪ debt instruments within a business model whose objective is achieved by both collecting contractual cash flows that are solely payments of principals and interests and selling financial assets. Equity instruments at fair value through other comprehensive income where OCI option was applied The OCI option may only be applied for the equity instrument in its entirety, and only at initial recognition of the equity instrument in question. In the event of exercise, measurement does not give rise to effects on profit or loss. However, dividends are recognized in profit or loss. Equity instruments at fair value through other comprehensive income are initially recognized at fair value and are also subsequently carried at fair value. The unrealized changes in the fair value of financial assets at fair value through other comprehensive income are recognized in equity, in the Revaluation reserve for FVOCI financial assets. When equity instruments classified as financial assets at fair value through other comprehensive income are sold, the accumulated fair value adjustments recognized in equity before are recognized directly to retained earnings.
183 Debt instruments at fair value through other comprehensive income The Company does not classify any financial assets as a debt instrument at fair value through other comprehensive income based on the SPPI test. 4.1.4 Financial assets at fair value through profit or loss (FVTPL) Financial instruments which do not meet the conditions set out to be initially classified either at amortized cost or at fair value through other comprehensive income must be measured at fair value through profit or loss. The “financial assets at fair value through profit or loss” measurement category includes the following financial assets: ▪ Debt instruments that are designated as “at fair value through profit or loss” using the fair value option. ▪ Equity instruments acquired for the purpose of selling immediately or in the near term and thus classified as “held for trading” and equity instruments not held for trading where the OCI option has not been applied. ▪ Derivative financial assets. ▪ Debt instruments not fulfilling conditions of either financial assets at amortized cost or financial assets at fair value through other comprehensive income. Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are recognized in the profit or loss in the period in which they arise. 4.2 Financial assets in the statement of financial position 4.2.1 Cash and cash equivalents Cash and cash equivalents include cash on hand and in banks, and all highly liquid deposits and securities with original maturities of three months or less and exclude all overdrafts. These financial assets are exposed to credit risks, for which see more details in Note 5.1.2. Based on the impairment test no impairment had to be recognized for any of these balances in the reported years. Cash and cash equivalents 12.31.2022 12.31.2023 Cash on hand ........................................................................................................ 118 115 Cash in bank (demand deposits) ...................................................................... 313 528 Total ........................................................................................................... 431 643 Average interest rates 12.31.2022 12.31.2023 Cash on hand ........................................................................................................ 0.00% 0.00% Cash in bank (demand deposits) ...................................................................... 10.25% 4.89% Average interest rate ................................................................................. 7.44% 4.01% Cash and cash equivalents by currency 12.31.2022 12.31.2023 HUF .......................................................................................................................... 431 643
184 4.2.2 Trade receivables and contract assets 4.2.2.1 Trade receivables – carrying amounts The carrying amounts of trade receivables are shown net of impairment losses charged as of the financial statement dates. Age profile of Trade receivables The following table shows the age profile of the Company’s gross trade receivables by days outstanding. 12.31.2022 12.31.2023 Not past due ........................................................................................................... 144,452 173,549 within one year ..................................................................................................... 122,515 146,934 over one year ........................................................................................................ 21,937 26,615 Past due by less than 30 days ................................................................................................. 12,466 18,666 30–60 days ........................................................................................................... 2,966 4,370 61–90 days ........................................................................................................... 896 1,750 91–180 days ......................................................................................................... 1,320 3,419 181–360 days ...................................................................................................... 1,470 3,180 over 360 days ....................................................................................................... 3,492 3,459 Customers under bankruptcy ............................................................................. 480 533 Carrying amount ......................................................................................... 167,542 208,926 Vast majority of trade receivables is impaired on a portfolio basis using the simplified approach. Vast majority of past due trade receivables is partly or fully impaired depending mainly on the period of delay of payments. 4.2.2.2 Impairment losses of trade receivables and contract assets The table below shows the impairment losses and changes for trade receivables based on the lifetime expected credit losses therein for 2022 and 2023. 2022 2023 Impairment loss, beginning of period ............................................................. 17,866 19,129 Charged to expense – net (included in Direct costs) ................................... 5,855 12,746 Utilized ................................................................................................................... (a) (4,592) (4,095) Impairment loss, end of period ................................................................. 19,129 27,780 (a) Utilized means reversed on derecognition (settlement, write-off or factoring). 12.31.2022 12.31.2023 Trade receivables from third parties ..................................................................... 121,689 149,971 Trade receivables from subsidiaries ...................................................................... 2,296 3,245 Trade receivables from other related parties ...................................................... 5,227 5,379 Total trade receivables within one year ........................................................ 129,212 158,595 Trade receivables over one year............................................................................. 19,201 22,551 Total trade receivables ................................................................................... 148,413 181,146
185 The following table shows the age profile of trade receivables allowances based on lifetime expected credit losses therein for 2022 and 2023. 12.31.2022 12.31.2023 Not past due ........................................................................................................... 10,746 15,746 within one year ..................................................................................................... 8,010 11,682 over one year ........................................................................................................ 2,736 4,064 Past due by less than 30 days ................................................................................................. 971 1,297 30–60 days ........................................................................................................... 956 1,317 61–90 days ........................................................................................................... 461 896 91–180 days ......................................................................................................... 953 2,383 181–360 days ...................................................................................................... 1,142 2,442 over 360 days ....................................................................................................... 3,420 3,177 Customers under bankruptcy ............................................................................. 480 522 Total amount ............................................................................................... 19,129 27,780 The following table shows the average impairment rates by age profile for 2022 and 2023. 12.31.2022 12.31.2023 Not past due ........................................................................................................... 7.4% 9.1% within one year ..................................................................................................... 6.5% 8.0% over one year ........................................................................................................ 12.5% 15.3% Past due by less than 30 days ................................................................................................. 7.8% 6.9% 30–60 days ........................................................................................................... 32.2% 30.1% 61–90 days ........................................................................................................... 51.5% 51.2% 91–180 days ......................................................................................................... 72.2% 69.7% 181–360 days ...................................................................................................... 77.7% 76.8% over 360 days ....................................................................................................... 97.9% 91.8% Customers under bankruptcy ............................................................................. 100.0% 97.9% Total average impairment rate ................................................................... 11.4% 13.3% See also Note 5.1.2 for further analysis of credit risks related to Trade receivables. 4.2.2.3 Contract assets The carrying amounts of contract assets are shown net of impairment losses charged as of the financial statement dates. 12.31.2022 12.31.2023 Contract asset (current)............................................................................................ 13,805 12,537 Contract asset (non-current) ................................................................................... 3,385 3,105 Total contract asset......................................................................................... 17,190 15,642
186 The table below shows the impairment losses and changes for contract assets based on the lifetime expected credit losses therein for 2022 and 2023. 2022 2023 Impairment loss, beginning of period .............................................................. 1,598 1,036 Charged to expense – net (included in Direct costs) .................................... 958 792 Utilized .................................................................................................................... (a) (1,520) (478) Impairment loss, end of period ................................................................. 1,036 1,350 (a) Utilized means reversed on derecognition (settlement, write-off or factoring). 4.2.3 Derivative financial instruments contracted with related parties Derivatives contracted with related parties include cross-currency interest rate swaps and FX forwards concluded with DT AG to change the Company’s exposure to HUF in the case of the EUR-denominated loans and to cover FX needs of expected future foreign currency outflows (see more details in Notes 4.5.1.1, 5.1.1.1 and 5.1.1.2). 12.31.2022 12.31.2023 Cross currency and interest rate swaps (non-current) .......................................... 31,723 9,632 Cross currency and interest rate swaps (current) ................................................... - 7,499 Forward deals (current) ................................................................................................ - 164 Total derivative financial instruments contracted with related parties ........ 31,723 17,295 4.2.4 Other financial assets Other financial assets include receivables due within 12 months (current) and due after 12 months (non-current) from the end of the reporting period. These financial assets are exposed to credit risks, for which see more details in Note 5.1.2. The impairment loss recognized or reversed for other current and non-current financial assets is not material. 4.2.4.1 Other current financial assets 12.31.2022 12.31.2023 Cashpool receivables with related party ......................................................... (a) - 4,969 Loans to related parties ....................................................................................... 1,143 1,344 Finance lease receivables ................................................................................... (b) 276 148 Receivables from asset-related grants ............................................................ (c) 838 - Other ....................................................................................................................... 458 904 Total ............................................................................................................ 2,715 7,365 For the explanations of (a)-(c) see Note 4.2.4.2. 4.2.4.2 Other non-current financial assets 12.31.2022 12.31.2023 Equity instruments ................................................................................................. (d) 1,289 1,401 Finance lease receivables ..................................................................................... (b) 2,718 1,066 Other ......................................................................................................................... 477 358 Total.............................................................................................................. 4,484 2,825
187 (a) The following table shows the currency breakdown. 12.31.2023 Carrying amount Borrower Currency Interest rate (%) Fixed / floating 4,204 Deutsche Telekom AG EUR 3.90 Floating 1,588 Deutsche Telekom AG HUF 12.03 Floating (823) Deutsche Telekom AG USD 5.61 Floating Due within 1 year 4,969 (b) See Note 17.2 for more information on Finance lease receivables. (c) Starting from 2016 HUF 11.6 billion of EU funds were utilized by Magyar Telekom. The first and second rounds of the tender aimed to develop digital networks nationwide to cover households in Western and Eastern parts of Hungary with a fixed network capable of reaching speed of at least 30 Mbps. The Company received HUF 11.6 billion grant related to EU fund in advance from which HUF 1 million has not been used yet. The Company accomplished a number of investments which complied with the condition of the related EU Funding Contracts. With respect to these completed investments the amount of the grant which has not been financially settled yet is presented as receivable. For those investments where the conditions have not been satisfied yet, the advances received are shown as part of Other current liabilities (Unused advance payments for asset related grants). 12.31.2022 12.31.2023 Accumulated grant recognized in PPE................................................. 11,635 11,598 Accumulated advance payments received ......................................... 10,802 11,599 Unused advance payments for asset-related grants ........................ 5 1 Receivables from asset-related grants ................................................ 838 - (d) The Company has got a 50% ownership in E2 Hungary Zrt., the former Joint Venture of the Group, meanwhile has no significant influence over the company due to the agreement with the other investor MET Holding AG (MET) (from January 2023 the other owner is MET Sales and Trading Holding AG). Based on the terms of the agreement the equity instrument was designated as a financial asset measured at fair value through profit or loss. Due to that particular agreement MET also has got a call option on E2 Hungary Zrt., which was recognized as a financial liability measured at fair value through profit or loss correspondingly. Following the contractual Lock-up period the value of the call option became zero. (See Note 4.5.1.3) The amount of Equity instruments is in relation with E2 Hungary Zrt. (HUF 1,400 million) and the rest of it is in connection with the insignificant investment (2%) in EURESCOM (HUF 1 million). The estimated expected credit loss on other current and non-current financial assets considered to be not material and not recognized. 4.3 Financial liabilities – accounting policies There are two measurement categories for financial liabilities used by the Company: ▪ Financial liabilities carried at amortized cost ▪ Financial liabilities at fair value through profit or loss Both types of financial liabilities are initially recognized at fair value, while subsequent measurements are different (see below). A financial liability except lease liabilities (see Note 17) is derecognized (or a part of a financial liability) from the statement of financial position when, and only when, it is extinguished – i.e. when the obligation specified in the contract is discharged, cancelled or expired. 4.3.1 Financial liabilities carried at amortized cost The measurement category for “financial liabilities measured at amortized cost” includes all financial liabilities not classified as “at fair value through profit or loss”.
188 Loans and other financial liabilities Loans and other financial liabilities are recognized initially at fair value less transaction costs, and subsequently measured at amortized costs using the effective interest rate method. The effective interest is recognized in the Profit for the period (Interest expense) over the period of the liabilities. Trade and other payables Trade and other payables (including accruals) are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Bonds Bonds are recognized initially at fair value less transaction cost and subsequently measured at amortized cost using the effective interest rate method. 4.3.2 Financial liabilities at fair value through profit or loss Derivative financial instruments are measured under at fair value through profit or loss model. The Company currently has no intention of measuring non-derivative financial liabilities at fair value. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and their fair values are re- measured at subsequent financial statements dates. The Company does not apply hedge accounting for its financial instruments therefore all gains and losses are recognized in the Profit for the period (Other finance expense – net).
189 4.4 Financial liabilities in the statement of financial position 4.4.1 Financial liabilities to related parties Financial liabilities to related parties include HUF- and EUR-denominated loans taken from Deutsche Telekom AG (DT AG) and the Company’s subsidiaries and cashpool liabilities. For the whole nominal amount and interest payment of loans denominated in EUR granted by DTAG, the Company have cross-currency interest rate swap agreements in place (with DT AG) so that Magyar Telekom’s exposure in fact remains in HUF. Swapped HUF interest rates are fixed. The tables below show the details of the financial liabilities towards related parties as at December 31, 2022 and 2023. 12.31.2022 Carrying amount (HUF million) Lender Contrac- ted currency Effective interest rate (%) Interest-formula Fixed / floating Maturity Original Term (Year/s) 20,000 DT AG HUF 13.27 fix: 13.27% fixed July 2023 1 20,013 DT AG EUR 3.01 1 m EURIBOR+1.11% floating Nov 2023 1 12,008 DT AG EUR 3.06 3 m EURIBOR+1.09% floating Dec 2023 1 50 TNM* HUF 16.32 3 m BUBOR+0.7% floating March 2023 11 50 TNM* HUF 17.35 3 m BUBOR+0.7% floating March 2023 11 200 TNM* HUF 16.04 3 m BUBOR+0.7% floating March 2023 11 320 Combridge EUR 2.93 3 m EURIBOR+0.8% floating March 2023 10 480 Combridge EUR 2.29 3 m EURIBOR+0.8% floating March 2023 10 40 Combridge EUR 2.56 3 m EURIBOR+0.8% floating March 2023 10 3,648 Cecoin Kft. HUF 16.46 1 m BUBOR+0.7% floating March 2023 1 900 ViDaNet Zrt. HUF 16.04 1 m BUBOR+0.7% floating March 2023 1 200 ITgen Kft. HUF 16.29 1 m BUBOR+0.7% floating March 2023 1 1,510 DT AG USD 4.02 ** Cashpool N/A 11,085 DT AG HUF 18.28 ** Cashpool N/A (732) DT AG EUR 1.65 ** Cashpool N/A (1,631) TRI Zrt. USD 5.32 ** Cashpool N/A 1,341 TRI Zrt. EUR 2.61 ** Cashpool N/A 13,170 TRI Zrt. HUF 17.57 ** Cashpool N/A 684 Investel Zrt. HUF 17.57 ** Cashpool N/A 804 Kalásznet Kft. HUF 17.57 ** Cashpool N/A Due within 1 year ........ 84,140 Accrued interest*** ...... 1,966 Other financial liabilities 54 Total current ............... 86,160 48,030 DT AG EUR 3.17 6 m EURIBOR+0.826333% floating May 2024 5 50,031 DT AG EUR 1.25 6 m EURIBOR+1.02879% floating Jan 2025 5 Total non-current........ 98,061 *Telekom New Media Zrt. **Interest rates are defined by DT AG on monthly basis. ***Accrued interest shows the aggregated discount value of DT loans’ amortized cost while the loans separately show the principals of the particular loan. The whole amount of all DT loans is due on the expiry date.
190 12.31.2023 Carrying amount (HUF million) Lender Contrac- ted currency Effective interest rate (%) Interest-formula Fixed / floating Maturity Original Term (Year/s) 45,934 DT AG EUR 4.89 6 m EURIBOR+0.826333% floating May 2024 5 45,934 DT AG EUR 5.24 3 m EURIBOR+1.286% floating Dec 2024 2 350 TNM* HUF 11.69 3 m BUBOR+0.7% floating March 2024 12 612 Combridge EUR 4.74 3 m EURIBOR+0.8% floating March 2024 11 3,400 ViDaNet Zrt. HUF 11.97 3 m BUBOR+0.7% floating March 2024 2 1,750 VGreen Kft. HUF 12.27 3 m BUBOR+0.7% floating March 2024 1 273 TRI Zrt. USD 6.62 ** Cashpool N/A 1,742 TRI Zrt. EUR 5.06 ** Cashpool N/A 13,780 TRI Zrt. HUF 11.57 ** Cashpool N/A 413 Investel Zrt. HUF 11.57 ** Cashpool N/A 2,758 Kalásznet Kft. HUF 11.57 ** Cashpool N/A Due within 1 year ........ 116,946 Accrued interest*** ...... 1,839 Other financial liabilities 76 Total current ............... 118,861 47,847 DT AG EUR 4.92 6 m EURIBOR+1,02879% floating Jan 2025 5 Total non-current........ 47,847 *Telekom New Media Zrt. **Interest rates are defined by DT AG on monthly basis. ***Accrued interest shows the aggregated discount value of DT loans’ amortized cost while the loans separately show the principals of the particular loan. The whole amount of all DT loans is due on the expiry date. As at December 31, 2023 current liabilities exceed current assets by HUF 102,678 million, primarily due to the short-term loan facilities received from DT AG that were taken to finance working capital and daily ongoing activities. Management believes that short-term liabilities from DT AG will be refinanced in a similar manner to previous years. Financing needs will also be covered by cash flows generated by operating activities and third-party credit line facilities (see Note 5.1.3).
191 The table below shows the carrying amounts and fair values of the related-party loans. 12.31.2022 12.31.2023 Book Value Fair Value Book Value Fair Value HUF denominated loans At fixed rate .................................................. 20,000 20,000 - - At floating rate............................................. 30,791 30,788 22,451 22,451 50,791 50,788 22,451 22,451 EUR denominated loans At fixed rate .................................................. - - - - At floating rate............................................. 131,530 133,009 142,069 142,550 131,530 133,009 142,069 142,550 USD denominated loans At fixed rate .................................................. - - - - At floating rate............................................. (120) (120) 273 273 (120) (120) 273 273 Accrued interest.............................................. 1,966 1,966 1,839 1,839 Other financial liabilities ................................ 54 54 76 76 Total related-party financial liabilities ..... 184,221 185,697 166,708 167,189 The weighted-average interest rate on related-party loans was 5.93% in 2023 (6.16% in 2022). Any increase in market interest rates will result in a decrease in the fair value of the fixed interest rate liabilities. There were no defaults or breaches in connection with the financial liabilities to related parties. 4.4.2 Bonds In 2020 Magyar Telekom has initiated a review of its external funding framework in order to diversify and enhance the maturity profile of the Company’s debt portfolio. Accordingly, the Company participated in the Bond Funding for Growth Scheme (“Scheme” or “BGS”) of the National Bank of Hungary and obtained funding sources with competitive pricing. In order to increase the liquidity of the corporate bond market, the MNB launched Scheme from July 1, 2019, supplementing its unconventional monetary policy tools and the fixed Growth Loan Program. The proceeds of the bonds are used to fund investments into the fixed and mobile network roll-out and modernization (including the acquisition of new frequencies). The issued bonds amounted to HUF 70 billion at face value and were purchased for a total purchase price of HUF 70.83 billion by the attendees at the closed auction on November 24, 2020. The total purchase price was transferred to the Company by the attendees on November 26, 2020. Subsequently Magyar Telekom 2027 HUF Bonds were listed on the BSE XBond multilateral trading platform on December 17, 2020 and are available for trading in the XBond platform from December 21, 2020 (first trading day).
192 The table below shows the main parameters. Bond code Magyar Telekom 2027 HUF Bond Bond expiries HUF 35 billion HUF 35 billion November 26, 2026 November 26, 2027 Interest type................................................ Fixed interest Coupon (Nominal interest rate) .............. 1.45% Yield .............................................................. 1.26% Effective interest rate ............................... 1.95% At December 31, 2023 the carrying amount of bonds is HUF 68,854 million (at December 31, 2022 HUF 68,531 million). For further information see Notes 4.4.4.3 and 15. 4.4.3 Derivative financial liabilities contracted with related parties Derivatives contracted with related parties include FX forwards concluded with DT AG to cover FX needs of expected future foreign currency outflows (see more details in Notes 4.5.1.2, 5.1.1.1 and 5.1.1.2). At December 31, 2023 the carrying amount of derivative financial liabilities contracted with related parties is HUF 121 million (at December 31, 2022 HUF 2,035 million). 4.4.4 Other financial liabilities 4.4.4.1 Other financial liabilities - Balances The tables below show the current and non-current balances of Other financial liabilities. 12.31.2022 12.31.2023 Frequency fees payable............................................................................ (a) 5,420 4,942 Trade payables with extended payment period .................................. (b) - 1,467 Debtors’ overpayment .............................................................................. 1,277 1,357 Other............................................................................................................. 1,040 857 Total other financial liabilities – current .......................................... 7,737 8,623 12.31.2022 12.31.2023 Frequency fees payable.......................................................................... (a) 101,242 96,577 Other........................................................................................................... 51 36 Total other financial liabilities – non-current ................................. 101,293 96,613 There were no defaults or breaches in connection with other financial liabilities. (a) The present value of the future annual band fees payable is recognized as part of the carrying amount of the licenses as intangible assets, with corresponding current and non-current financial liabilities. (b) In 2023 Magyar Telekom made individual arrangements with certain partners under which the payments for trade payables become due at a later point in time than the customary payment terms in the industry practice. Consequently, these individual arrangements have been reclassified from Trade payables to Other financial liabilities (in 2023 is HUF 1,467 million). See Note 4.4.4.3.
193 4.4.4.2 Proceeds/repayments of loans and other borrowings Cash proceeds/payments for related-party loans are included in the Proceeds from loans and other borrowings/Repayment of loans and other borrowings line of the Statement of cash flows. 4.4.4.3 Additional disclosure about changes in liabilities arising from financing activities The following tables include changes in net debt reconciled with their effects on the Statement of cash flows in order to enable users of financial statements to evaluate changes in liabilities arising from financing activities. Changes in financial liabilities without cash movement are mainly due to the increase in liability related to lease liabilities and the FX effects of financial liabilities denominated mainly in EUR and transactions where future cash flows are recognized at the present value of the annual fees payable. In 2023, Magyar Telekom chose financing options totaling HUF 5,270 million under which extended the period of payment for trade payables beyond the customary market payment terms from investing activities without cash movement in the Statement of cash flows. As soon as the payments have been made, they are disclosed under net cash used in financing activities. See Note 4.4.4.1 (b)
194 Changes in cash and cash equivalents Changes that effect the cash flows from operating activities Addition to financial liabilities without cash movement Changes that effect the cash flows from investing activities Changes that effect the cash flows from financing activities Opening Balance at January 1, 2022 Proceeds from loans and borrowings Repayments of loans and other borrowings Proceeds from bonds Repayments of other financial liabilities Other Closing Balance at December 31, 2022 Related-party loans ....................................... 136,850 - 875 17,199 3,828 180,475 (155,006) - - - 184,221 Derivatives from related parties................... 21 - - 2,242 (228) - - - - - 2,035 Frequency fees payable ................................ 156,082 - (6,071) 4,631 - - - - (47,980) - 106,662 Lease liabilities ............................................... 135,088 - (4,245) 25,560 - - - - (19,440) - 136,963 Bonds ............................................................... 68,214 - (1,015) 1,332 - - - - - - 68,531 Debtors’ overpayment................................... 1,394 - (117) - - - - - - - 1,277 Other financial liabilities ................................ 975 - 52 64 - - - - - - 1,091 -Less cash and cash equivalents .................. (945) 514 - - - - - - - - (431) -Less other current financial assets and derivative financial instruments ................... (8,254) - (1,983) 2,669 3,595 1,258 - - - - (2,715) Net debt ...................................................... 489,425 514 (12,504) 53,697 7,195 181,733 (155,006) - (67,420) - 497,634 Treasury share purchase ........................................................................................................................................................................................................................................................................................................ (14,609) Dividend paid ........................................................................................................................................................................................................................................................................................................................... (15,000) Net cash used in financing activities .................................................................................................................................................................................................................................................................. (70,302)
195 Changes in cash and cash equivalents Changes that effect the cash flows from operating activities Addition to financial liabilities without cash movement Changes that effect the cash flows from investing activities Changes that effect the cash flows from financing activities Opening Balance at January 1, 2023 Proceeds from loans and borrowings Repayments of loans and other borrowings Proceeds from bonds Repayments of other financial liabilities Other Closing Balance at December 31, 2023 Related party loans ........................................ 184,221 - (9,135) (769) - 152,122 (159,731) - - - 166,708 Derivatives from related parties................... 2,035 - - 11,521 (13,435) - - - - - 121 Frequency fees payable ................................ 106,662 - (4,923) 4,386 - - - - (4,606) - 101,519 Lease liabilities ............................................... 136,963 - (7,002) 25,968 - - - - (21,998) - 133,931 Bonds ............................................................... 68,531 - (1,140) 1,463 - - - - - - 68,854 Debtors’ overpayment................................... 1,277 - 80 - - - - - - - 1,357 Other financial liabilities ................................ 1,091 - (2,294) 7,366 - - - - (3,803) - 2,360 -Less cash and cash equivalents .................. (431) (212) - - - - - - - - (643) -Less other current financial assets and derivative financial instruments ................... (2,715) - (1,146) (4,922) (1,276) (4,969) - - - - (15,028) Net debt ...................................................... 497,634 (212) (25,560) 45,013 (14,711) 147,153 (159,731) - (30,407) - 459,179 Treasury share purchase ........................................................................................................................................................................................................................................................................................................ (14,609) Dividend paid ........................................................................................................................................................................................................................................................................................................................... (29,467) Net cash used in financing activities .................................................................................................................................................................................................................................................................. (87,061)
196 4.4.5 Trade payables 12.31.2022 12.31.2023 Payables to subsidiaries .................................................................................. 5,983 7,088 Payables to other related parties .................................................................. 9,379 7,289 Payables to non-related parties..................................................................... 107,992 118,005 Total .............................................................................................................. 123,354 132,382 4.5 Additional disclosures on financial instruments 4.5.1 Financial assets and liabilities The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: ▪ quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) ▪ inputs other than quoted prices included within Level 1 observable for the asset or liability, either directly or indirectly (Level 2) ▪ inputs for the asset or liability that are not based on observable market data (Level 3) The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The significance of an input is assessed against the fair value measurement in its entirety. There was no transfer between Level 1 and Level 2 financial instruments. Most of the financial assets and most of the financial liabilities are measured at amortized cost, but fair value information is also provided for these. The initial fair value of the MT2027 bond was calculated based on Level 2 information as the bonds did not have an active market. The discount rate was determined based on relevant BIRS rates (Budapest Interest Rate Swap) and a margin estimation based on commercial bank offers during the auction. The fair value of financial instruments that are not traded on an active market is determined by using valuation techniques, mainly by applying the discounted cash flow method. The cash flow estimations are based on the relevant underlying contracts and the discount rates are calculated based on the interest rate benchmarks applicable for the relevant maturities and currencies (BUBOR, BIRS, EURIBOR, EUR IRS). Foreign exchange conversion is made based on central bank FX fixings (preferably that of the National Bank of Hungary). Level 2 information is available to determine derivatives assets and liabilities. Level 3 information is used for valuation of equity instruments designated as financial assets at fair value through profit or loss, and the corresponding liabilities designated as financial liability at fair value through profit or loss. The fair value is determined by applying a Black Scholes model using estimation on the terms and conditions of underlying contracts, peer group WACC and risk-free interest rate during the contractual Lock-up period. Following the Lock-up period the value is based on the prevailing exit price of the financial asset as of the reporting date. (See Note 4.2.4.2 for more information.) The following tables include the carrying amounts and fair values of the Company’s financial assets and liabilities as at December 31, 2023 and 2022.
197 4.5.1.1 Financial assets – Carrying amounts and fair values Carrying amounts, fair values and fair value hierarchy of financial assets are the following: 12.31.2022 Carrying amount Fair value Amortized cost FVOCI (Level 1) FVTPL (Level 2) FVTPL (Level 3) Total Cash and cash equivalents .......................... 431 - - - 431 431 Cashpool receivables .................................... - - - - - - Trade receivables within one year from third parties..................................................... 121,689 - - - 121,689 121,689 Trade receivables within one year from related parties ................................................ 7,523 - - - 7,523 7,523 Trade receivables over one year................. 19,201 - - - 19,201 16,412 Derivative financial instruments contracted with related parties ................ - - 31,723 - 31,723 31,723 Loans given to related parties ..................... 1,143 - - - 1,143 1,143 Equity instruments ........................................ - 1 - 1,288 1,289 1,289 Finance lease receivable from third parties .............................................................. 347 - - - 347 288 Finance lease receivable from related parties .............................................................. 2,647 - - - 2,647 2,133 Receivables from asset-related grants ..... 838 - - - 838 838 Other current receivables ............................ 458 - - - 458 458 Other non-current receivables .................... 478 - - - 478 397 Total .......................................................... 154,755 1 31,723 1,288 187,767 184,324 12.31.2023 Carrying amount Fair value Amortized cost FVOCI (Level 1) FVTPL (Level 2) FVTPL (Level 3) Total Cash and cash equivalents .......................... 643 - - - 643 643 Cashpool receivables .................................... 4,969 - - - 4,969 4,969 Trade receivables within one year from third parties..................................................... 149,971 - - - 149,971 149,971 Trade receivables within one year from related parties ................................................ 8,624 - - - 8,624 8,624 Trade receivables over one year................. 22,551 - - - 22,551 20,798 Derivative financial instruments contracted with related parties ................ - - 17,295 - 17,295 17,295 Loans given to related parties ..................... 1,344 - - - 1,344 1,344 Equity instruments ........................................ - 1 - 1,400 1,401 1,401 Finance lease receivable from third parties .............................................................. 336 - - - 336 321 Finance lease receivable from related parties .............................................................. 878 - - - 878 980 Receivables from asset-related grants ..... - - - - - - Other current receivables ............................ 904 - - - 904 904 Other non-current receivables .................... 358 - - - 358 339 Total .......................................................... 190,578 1 17,295 1,400 209,274 207,589
198 Fair value through profit or loss assets (Level 2) includes derivatives, for further information see Note 4.2.3. The fair values of those instruments are based on a discounted cash flow method. The calculation is prepared by Magyar Telekom based on money market interest rate curves, basis swap points and spot FX rates from Reuters database published on the last working day of the reporting period. The present value of the expected future cash flows is discounted to the reporting date using money market interest rates and basis swap points in the specific currency from Reuters and exchanged to HUF using the spot FX rate. The difference between the HUF present value of the payable and receivable is accounted for as assets or liabilities. Fair value through profit or loss financial assets (Level 3) includes the investment in E2 Hungary Zrt. in 2022 and 2023. Fair value through other comprehensive income financial assets (Level 1) includes the insignificant investment (2%) in EURESCOM with no change in the fair value, nor any dividend received. The carrying values of assets measured at amortized cost with short times to maturity approximate their fair values. 4.5.1.2 Financial liabilities Carrying amounts, fair values and fair value hierarchy of financial liabilities are the following: 12.31.2022 Carrying amount Measured at amortized cost FVTPL (Level 2) FVTPL (Level 3) Total Fair value Financial liabilities to related parties ......... 184,221 - - 184,221 185,697 Derivative financial liabilities contracted with related parties ....................................... - 2,035 - 2,035 2,035 Trade payables to third parties ................... 107,956 - - 107,956 107,956 Trade payables to related parties .............. 15,398 - - 15,398 15,398 Frequency fee payable ................................. 106,662 - - 106,662 67,122 Lease liabilities to third parties ................... 131,530 - - 131,530 108,615 Lease liabilities to related parties............... 5,434 - - 5,434 4,472 Bonds ............................................................... 68,531 - - 68,531 45,622 Debtors’ overpayment .................................. 1,277 - - 1,277 1,277 Other current liabilities ................................. 1,040 - - 1,040 1,040 Other non-current liabilities ........................ 50 - - 50 47 Total .......................................................... 622,099 2,035 - 624,134 539,281
199 12.31.2023 Carrying amount Measured at amortized cost FVTPL (Level 2) FVTPL (Level 3) Total Fair value Financial liabilities to related parties ......... 166,708 - - 166,708 167,189 Derivative financial liabilities contracted with related parties ....................................... - 121 - 121 121 Trade payables to third parties ................... 118,005 - - 118,005 118,005 Trade payables to related parties .............. 14,377 - - 14,377 14,377 Frequency fee payable ................................. 101,519 - - 101,519 80,858 Lease liabilities to third parties ................... 128,598 - - 128,598 118,384 Lease liabilities to related parties............... 5,333 - - 5,333 4,935 Bonds ............................................................... 68,854 - - 68,854 59,379 Debtors’ overpayment .................................. 1,357 - - 1,357 1,357 Other current liabilities ................................. 2,325 - - 2,325 2,325 Other non-current liabilities ........................ 36 - - 36 37 Total .......................................................... 607,112 121 - 607,233 566,967 See additional fair value information on financial liabilities in Note 4.4.1. The carrying values of the current financial liabilities measured at amortized cost approximate their fair values. 4.5.1.3 Financial liabilities carried at fair value determined using Level 3 type information Financial instruments which are carried at fair value where the fair value was determined using Level 3 type information is the liability pertaining to the call option under IFRS 9 (see Note 4.2.4.2 and 4.5.1). The table below includes the movements of these liabilities. 2022 2023 Opening balance at January 1 .......................................................................................... 144 135 Increase arising on call option ..................................................................................................... - - (Gains) or losses for the period on remeasurement................................................................ - - - recognized in profit or loss (net financial result)................................................................... (9) (135) Closing balance at December 31 ..................................................................................... 135 -
200 4.5.2 Items of net gains and losses arising on financial instruments The tables below include net gains/losses arising on financial instruments in 2022 and 2023. 2022 Subsequent measurement Interest Change in fair value FX gain/ (loss) Impair- ment loss Expenses /fees Total net gain / (loss) FVTPL financial instruments (Level 2) ............................................... - 20,450 - - - 20,450 FVTPL financial instruments (Level 3) ............................................... - 9 - - - 9 Financial assets measured at amortized cost.................................... 1,874 - (1,571) (6,814) (4,842) (11,353) Financial liabilities measured at amortized cost.................................... (18,257) - (21,622) - (29) (39,908) Equity instruments measured at FVTPL (Level 3) .................................. - 107 - - - 107 Net gain/(loss) on financial instruments .................................... (16,383) 20,566 (23,193) (6,814) (4,871) (30,695) 2023 Subsequent measurement Interest Change in fair value FX gain/ (loss) Impair- ment loss Expenses /fees Total net gain / (loss) FVTPL financial instruments (Level 2) ............................................... - (27,468) - - - (27,468) FVTPL financial instruments (Level 3) ............................................... - 135 - - - 135 Financial assets measured at amortized cost.................................... 3,377 - (493) (13,538) (5,958) (16,612) Financial liabilities measured at amortized cost.................................... (27,451) - 10,144 - (34) (17,341) Equity instruments measured at FVTPL (Level 3) .................................. - 112 - - - 112 Net gain/(loss) on financial instruments .................................... (24,074) (27,221) 9,651 (13,538) (5,992) (61,174) The tables above include the amounts before capitalization of borrowing costs (See Note 24). Impairment losses on financial assets measured at amortized cost includes all expenses incurred or expected to be incurred in relation to the default of customers and presented as a direct cost in the Statement of profit or loss and other comprehensive income. The amount of Expenses/fees mainly contains transactional fees on financial realization of income (like white check acceptance fee of Hungarian Post, online payment relevant cost and other various commissions) and other bank charges type fees.
201 4.5.3 Offsetting financial assets and financial liabilities For the financial assets and liabilities subject to enforceable netting arrangements, each agreement between the Company and the counterparty (typically roaming and interconnect partners) allows for net settlement of the relevant trade receivable and payable. The following trade receivables and trade payables are subject to offsetting agreements and are presented after netting in the Statement of financial position. 12.31.2022 12.31.2023 Trade receivables Trade payables Trade receivables Trade payables Gross amounts of recognized financial instruments .......... 130,372 124,514 159,367 133,154 Gross amounts of financial instruments set off ................... (1,160) (1,160) (772) (772) Net amounts of recognized financial instruments presented in the statement of financial position ............. 129,212 123,354 158,595 132,382 4.5.4 Other disclosures about financial instruments Magyar Telekom is also exposed to risks that arise from the possible drawdown of guarantees that in aggregation amounted to a nominal amount of HUF 16.1 billion as at December 31, 2023 (2022: HUF 16.4 billion). The guarantees are issued by banks on behalf of Magyar Telekom as collateral to secure the fulfillment of the Company’s certain contractual or tender related obligations. The Company has been doing its best to deliver on its contractual obligations and expects to continue to do so in the future. Even so disputes may emerge from time to time with partners and sometimes these can result in the drawdown of the guarantees. The utilization of these bank guarantees is not related and has no significant effect on the solvency of the Company. For more information see note 4.4.4.1. Magyar Telekom does not hold any material collateral of its financial assets. All financial assets transferred met the criteria of derecognition. The Company does not have compound financial instruments with multiple embedded derivatives.
202 5 FINANCIAL RISK MANAGEMENT 5.1 Financial risk factors Magyar Telekom is primarily exposed to credit risks related to its financial assets. In addition, the Company is also exposed to risks from movements in exchange rates interest rates that affect the fair value and/or the cash flows arising from financial assets and liabilities. Financial risk management aims to limit these risks through ongoing operational and finance activities. Selected derivative and non-derivative hedging instruments are also used for this purpose, depending on the risk assessment. Magyar Telekom only hedges the risks that affect the Company’s cash flows, no hedges are concluded to hedge fair values. Derivatives are exclusively used as hedging instruments, i.e., not for trading or other speculative purposes. To reduce the counterparty risk, derivatives are generally only concluded with leading Hungarian or international financial institutions or Deutsche Telekom. Nevertheless, hedge accounting is not applied to such transactions. The detailed descriptions of risks, the management thereof as well as sensitivity analyses are provided below. These sensitivity analyses calculate with reasonably possible changes in the relevant risk variables and their impact on profit before tax. The impacts disclosed below for the reported periods are subject to an average effective income tax rate of approximately 20%, i.e. the impact on Profit for the period would be approximately 80% of the pre-tax amount in a year that is free from significant one-off non-deductible pre-tax impacts and significant changes in tax legislation. The potential impacts disclosed (less tax) would be the same on the Company’s Equity. There were no major changes in these risks compared to the previous reporting period. 5.1.1 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: ▪ foreign currency risk ▪ interest rate risk ▪ price risk. The fundamentals of Magyar Telekom’s financing strategy are established each year by the Board of Directors. The Company’s policy is to borrow centrally using a balanced combination of medium-term and short-term loans, and fixed and floating interest rates on those liabilities. The Board of Directors has approved two debt protection ratio KPIs and monitors their fulfillment annually. At the end of 2023 Magyar Telekom Group fulfilled both criteria; Total Debt to EBITDA ratio of 1.59 in 2023 (2022: 1.98), while the allowed maximum can be 2.8 and EBITDA to Net financial result ratio of 6.52 in 2023, (2022: 9.99), while the allowed minimum can be 3.0. The Company during the implementation of the finance policy and ongoing financial risk management, determines and continuously monitors the foreign exchange, liquidity and counterparty risk management guidelines. Magyar Telekom is exposed to interest and foreign exchange (FX) rate risk associated with its interest-bearing assets and liabilities and anticipated transactions. The functional currency of Magyar Telekom is HUF, consequently, Magyar Telekom’s objective is to minimize the level of its financial risk applying HUF terms. For the presentation of market risks, sensitivity analyses are also provided that show the effects of hypothetical changes of relevant risk variables on Profit before tax and Equity. These hypothetical changes were modeled to present a reasonably possible change in the relevant risk variables. The periodic effects are determined by relating the hypothetical changes in the risk variables to the balance of financial instruments at the end of the latest reporting period (2023) and the preceding reporting period (2022). The balances at the end of the reporting period are usually representative for the year as a whole; therefore, the impacts are calculated using the year end balances. The methods and assumptions used in the sensitivity calculations did not change significantly compared to the previous period. As a result of a volatile international capital and securities markets, higher fluctuations of the FX and interest rates are also possible.
203 5.1.1.1 Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in FX rates. Currency risks arise on financial instruments denominated in currencies other than the functional currency of the Company. Relevant risk variables are generally all non-functional currencies in which Magyar Telekom has financial instruments. The Hungarian Forint appreciated by approx. 4% against the euro in 2023. In 2020 and 2021 the forint was fluctuating in a 7-12% range against the EUR, in 2022 this range widened significantly to approx. 23% while in 2023 narrowed to 10%. In order to mitigate FX risk in the case of FX denominated financial instruments, Magyar Telekom minimized its foreign currency borrowings in the past years or covered them with derivative instruments to substantially reduce FX risk. The corporate bond is HUF denominated and thus no foreign currency exposure arises related to this instrument. FX risks arising on loans and related swaps with DT AG Several related-party loans taken to finance general corporate needs from Deutsche Telekom AG (DT AG) are denominated in EUR, while, at the same time, cross-currency interest rate swaps are concluded with Deutsche Telekom AG to fix the actual cash flows of Magyar Telekom in HUF. Even though the Company does not apply hedge accounting, the change in the HUF/EUR exchange rate has limited (net) impact on profit or loss and equity related to the hedged loans and the swaps together. The table below shows the breakdown by currency of loans taken from DT AG: Currency 12.31.2022 12.31.2023 HUF ................................................................................................. 20,000 - EUR ................................................................................................. 130,082 139,715 Total ....................................................................................... 150,082 139,715 Sensitivity analysis A reasonably possible strengthening or weakening of the EUR in the table below against HUF as at December 31 would have affected the measurement of loans denominated in a foreign currency and increased (+)/ decreased (-) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. As the profit or loss effect would be the same as the equity effect, only the former is disclosed. Profit or loss Strengthening Weakening 12.31.2022 EUR/HUF (20% movement) Loans ........................................................................................................... (26,016) 26,016 Swap agreements ..................................................................................... 26,399 (26,399) Net effect......................................................................................... 383 (383) 12.31.2023 EUR/HUF (10% movement) Loans ........................................................................................................... (13,971) 13,971 Swap agreements ..................................................................................... 14,156 (14,156) Net effect......................................................................................... 185 (185)
204 Other FX exposure The Company’s remaining FX exposure is mostly related to (i) cash balances held by the Company in foreign currency, and (ii) operating activities through revenue from, and payments to, international telecommunications operators as well as (iii) capital and operating expenditure contracted with vendors in foreign currency. In line with currency hedging policy, the Company holds sufficient amounts of foreign currencies on its bank accounts or buys foreign currencies through FX forward transactions, the amounts of which are determined considering the balance of short-term FX denominated trade and lease payables and trade receivables in the next period in order to hedge the currency risk arising in connection with those assets and liabilities. The Company’s foreign currency (EUR and USD) denominated liabilities (other than the above described loans) exceed the Company’s foreign currency (EUR and USD) denominated assets, therefore changes in the functional currencies’ exchange rates would have impact on the profit or loss of the Company. The following tables show the breakdown by currency of finance lease receivables, lease liabilities, trade payables and cashpool receivables and liabilities: 12.31.2022 in HUF million EUR USD GBP HUF Other Total finance lease receivables .. 2,707 31 - 256 - Total lease liabilities..................... (51,668) (37) - (85,259) - Trade payables .............................. (48,043) (1,325) (10) (73,956) (21) Cashpool receivables ................... - - - - - Cashpool liabilities ....................... (608) 120 - (25,743) - 12.31.2023 in HUF million EUR USD GBP HUF Other Total finance lease receivables .... 1,039 - - 175 - Total lease liabilities....................... (46,557) (6) - (87,368) - Trade payables ................................ (47,063) (2,593) (3) (75,716) (7,007) Cashpool receivables ..................... 4,204 (823) - 1,588 - Cashpool liabilities ......................... (1,742) (273) - (16,951) - 95% of trade receivables (current and non-current part) is denominated in HUF and 5% are in EUR as of December 31, 2023 (2022: 94% in HUF and 6% in EUR). In order to reduce the above exposure, Magyar Telekom occasionally enters into derivative contracts. The negative fair value of the open short-term forward positions was HUF 64 million (liability) as of December 31, 2023 (2022: HUF 945 million liability). These positions were opened to mitigate the FX risks of future FX payments exceeding FX income.
205 Sensitivity analysis A reasonably possible strengthening or weakening of the currencies in the table below against HUF as at December 31 would have affected the measurement of financial instruments denominated in a foreign currency and increased (+)/ decreased (-) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. As the profit or loss effect would be the same as the equity effect, only the former is disclosed. Profit or loss Strengthening Weakening 12.31.2022 EUR/HUF (20% movement) Net balance of current FX trade and lease payables, trade and financial receivables plus bank deposits................................................ (9,681) 9,681 Connected forward deals ............................................................................ 5,524 (5,524) Net effect............................................................................................. (4,157) 4,157 USD/HUF (40% movement) Net balance of current FX trade and lease payables, trade and financial receivables plus bank deposits.................................................. (482) 482 Connected forward deals ............................................................................ 1,553 (1,553) Net effect............................................................................................. 1,071 (1,071) 12.31.2023 EUR/HUF (10% movement) Net balance of current FX trade and lease payables, trade and financial receivables plus bank deposits................................................. (3,767) 3,767 Connected forward deals ............................................................................ 3,179 (3,179) Net effect............................................................................................. (588) 588 USD/HUF (15% movement) Net balance of current FX trade and lease payables, trade and financial receivables plus bank deposits.................................................. (660) 660 Connected forward deals ............................................................................ 238 (238) Net effect............................................................................................. (422) 422 As a result of the volatile international money markets, even a more than 10% fluctuation of the functional currency HUF against EUR and a more than 15% against USD is possible as extraordinary market conditions may cause extreme volatility on FX markets. 5.1.1.2 Interest rate risk Magyar Telekom is also exposed to interest rate fluctuations: BUBOR, ESTR, EURIBOR, SOFR and USD LIBOR. This is due to the fact that changing interest rates affect the fair value of the fixed-rate instruments and also affect the cash flows through the floating rate instruments. Changes in the market interest rates of non-derivative financial instruments with fixed interest rates does not affect Profit for the period because none of them are measured at fair value through profit or loss. On the other hand, all financial instruments with fixed interest rates which are carried at amortized cost are not subject to cash flow interest rate risk as defined in IFRS 7. Changes in the market interest rate of interest rate derivatives (interest rate swaps, cross-currency swaps) that are not part of a hedging relationship as set out in IFRS 9 affect Other finance expense - net (net gain/loss from re-measurement of the financial assets and liabilities to fair value).
206 Changes in market interest rates affect the interest income or expense of non-derivative floating-interest financial instruments for which no cash flow hedges are in place. Financial assets Excess cash of the Company’s Hungarian operations is primarily used to repay loans, so it has no significant bank deposits. Financial liabilities Financial liabilities exposed to interest rate risk are primarily the related-party (DT AG) loans and the related swap agreements in place. These loans are almost exclusively taken by the Company as the financing of the Company is managed centrally. The analysis below describes the Company’s net exposure to the net interest rate risks related to the loans and the related swap agreements. As the vast majority of the debt portfolio is denominated in HUF, or swap agreements are in place so that the loans payable are exposed to changes in HUF interest rates, the Company is mostly exposed to the HUF interest rate fluctuations for its financial liabilities. To control this interest rate risk, a combination of fixed and floating rate debt is used. Fixed interest-bearing debts (including loans swapped to fixed interest and excluding loans swapped to floating interest) made up 69% of the Company’s total debt as of December 31, 2023 (2022: 74%). Cash flow sensitivity analysis for variable rate instruments Floating interest-bearing debts (including loans swapped to floating interest and excluding loans swapped to fixed interest) made up 31% of the Company’s total debt as of December 31, 2023 (2022: 26%). A reasonably possible change of 200 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. As the profit or loss effect would be the same as the equity effect, only the former is disclosed. Profit or loss 200 bp increase 200 bp decrease 12.31.2022 Floating rate instruments..................................................................... (3,291) 3,291 Interest rate swap .................................................................................. 1,961 (1,961) Cash flow sensitivity (net) ........................................................... (1,330) 1,330 Profit or loss 200 bp increase 200 bp decrease 12.31.2023 Floating rate instruments..................................................................... (3,312) 3,312 Interest rate swap .................................................................................. 1,876 (1,876) Cash flow sensitivity (net) ........................................................... (1,436) 1,436
207 The Company’s exposures to interest rates on loans, cashpool liabilities and swaps: 12.31.2022 12.31.2023 Interest rates Loans from DT AG and subsidiaries, Cashpool liabilities Swaps Loans from DT AG and subsidiaries, Cashpool liabilities Swaps BUBOR .......................... 31,632 - 22,451 - EURIBOR/ESTR ........... 131,422 (98,061) 142,069 (93,781) USD LIBOR/SOFR........ 1,510 - 1,096 - Total ........................... 164,564 (98,061) 165,616 (93,781) For further information on loans see Note 4.4.1. 5.1.2 Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk as at the end of the reporting period are represented by the carrying amounts of the financial assets in the Statement of financial position. Guarantee agreements reducing the maximum exposure to credit risk as at the end of the reporting period are described later in this section. The vast majority of credit risks may arise in respect of Cash and cash equivalents, Bank deposits with original maturities over three months and Trade receivables, most of which have short-term maturities. To decrease counterparty risk and optimize financing costs Magyar Telekom uses the generated cash for repayment of the loans and borrowings and in this way, it does not hold significant bank deposits. The cash held on the bank account is primarily related to daily liquidity needs and not to investment purposes. Additionally, Magyar Telekom keeps bank accounts only with substantial credit institutions to further limit counterparty risk. Concentrations of credit risk relating to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographic areas and industries. Credit risks are taken into account through individual allowances and allowances calculated at portfolio level. The annual impairment losses of the Company in 2023 was 2% (2022: 1.1%) of revenue. For further information see Notes 3.3. and 4.2.2.2. There are varying credit checking practices applied as described below. Credit checking at the time of the service request is carried out automatically by the credit checking application. A variety of checks including checking the bankruptcy list, the internal database of risky installation locations, the collection history of the past six months, the outstanding debt and the joint database of debtors of the Hungarian mobile operators are performed depending on the service to be used. The Fraud Detecting System monitors extreme usage and fraudulent behavior of customers for mobile, fixed line and internet services. In the case of business customers, account managers check if the customer has outstanding debts. Dunning procedures are run automatically by the billing systems and include various reminder tools like SMS, reminder message via Telekom APP, telephone calls, reminder letters, restricted service, termination letters and disconnections. In the case of medium and large enterprises the dunning process starts manually (first reminder letter). After the first step, this process is also automated. Based on the effective laws and regulations and over a minimum overdue amount the Company applies varying and customized reminder procedures with specific deadlines to the different customer groups. After the termination of the contract and depending on the expected success of the process, the Company combine the different collection steps of involving external partners, selling the outstanding debt or initiating legal proceedings. All parts of the process are regulated by internal directives. For further information see Note 4.1.1.
208 5.1.3 Liquidity risk Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial liabilities. Prudent liquidity risk management implies maintaining sufficient Cash and cash equivalents and Bank deposits as well as available funding through an adequate amount of committed credit lines. The Company’s finance management aims to maintain flexibility in funding by keeping committed credit lines available. The undrawn bank credit lines amounted to HUF 44.5 billion as at December 31, 2023 (2022: HUF 45.5 billion). The following two tables summarize the maturity structure of Magyar Telekom’s financial liabilities including the interest payable on those liabilities (undiscounted amounts) as of December 31, 2023 and 2022. The majority of the financial liabilities are financed from the short-term loan facilities received from DT AG that were taken to finance working capital and daily ongoing activities. Management believes that short-term liabilities from DT AG will be refinanced in a similar manner to previous years. Financing needs will also be covered by cash flows generated by operating activities and third-party credit line facilities. Therefore, the maturity analysis of the financial assets as at the end of the reporting periods (in comparison with the financial liabilities) would not be useful, therefore, is not included in the following tables. 12.31.2022 Total within 1 year 1 to 5 years after 5 years Trade payables to third parties ................................... 107,956 107,956 - - Trade payables to related parties .............................. 15,398 15,398 - - Financial liabilities to related parties ......................... 193,839 91,333 102,506 - Derivative financial liabilities contracted with related parties ................................................................ 2,035 2,035 - - Lease liabilities to third parties ................................... 158,151 28,763 69,661 59,727 Lease liabilities to related parties .............................. 5,967 1,402 4,553 12 Bonds ............................................................................... 73,099 1,015 72,084 - Frequency fees payables ............................................. 144,995 9,588 35,153 100,254 Other financial liabilities............................................... 2,288 2,223 65 - Total cash outflows ................................................. 703,728 259,713 284,022 159,993 Open swap positions’ cash flows Gross cash inflow in EUR million................................. 264 8 256 - Gross cash inflow in HUF million (at spot rate) ....... 105,666 3,202 102,464 - Gross cash outflow in HUF million.............................. 85,064 1,910 83,154 - Net cash inflow / (outflow) in HUF million............. 20,602 1,292 19,310 - Open forward positions’ cash flows Gross cash inflow in EUR million................................. 150 150 - - Gross cash inflow in USD million ................................ 11 11 - - Total gross cash inflow in HUF million (at spot rate) ................................................................................. 64,170 64,170 - - Gross cash outflow in HUF million.............................. 67,805 67,805 - - Net cash inflow / (outflow) in HUF million............. (3,635) (3,635) - -
209 The average maturity of Magyar Telekom’s debt portfolio was 1.5 years as at December 31, 2023 (2022: 2.22 years). The floating interest payments arising from the financial instruments were calculated using the last interest rates fixed before December 31, 2023 and 2022. Actual cash flows may be different if the floating interest rate changes in future periods. For further information see Note 4.4.1. 5.2 Capital management The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. The Company’s management proposes to the owners (through the Board) of the Company to approve dividend payments or adopt other changes in the Company’s equity capital in order to optimize the capital structure of the Company. This can be achieved primarily by adjusting the amount of dividends paid to shareholders, or alternatively, by returning capital to shareholders by capital reductions, selling or buying own shares. In 2023 the Board of Directors of Magyar Telekom approved HUF 29,459 million dividend (HUF 15,000 million dividend in 2022), and the Company’s Board recommends to declare a 41,561 HUF million dividend at the April 2024 Annual General Meeting. In addition to the above, according to the Hungarian Civil Code (2013. V.), Magyar Telekom has to ensure that the Company’s Equity in the Separate Financial Statements does not fall below two thirds of its Common stock, i.e. the total of the reserves should not be negative. The Company is in compliance with this regulation. The equity capital, which the Company manages, amounted to HUF 696 billion on December 31, 2023 (2022: HUF 666 billion), see Note 16. 12.31.2023 Total within 1 year 1 to 5 years after 5 years Trade payables to third parties ................................... 118,005 118,005 - - Trade payables to related parties .............................. 14,377 14,377 - - Financial liabilities to related parties ......................... 171,735 122,879 48,856 - Derivative financial liabilities contracted with related parties ................................................................ 121 121 - - Lease liabilities to third parties ................................... 156,271 30,092 70,517 55,662 Lease liabilities to related parties .............................. 5,797 1,450 4,336 11 Bonds ............................................................................... 72,407 1,015 71,392 - Frequency fees payables ............................................. 135,973 8,886 34,583 92,504 Other financial liabilities............................................... 3,636 3,593 43 - Total cash outflows ................................................. 678,322 300,418 229,727 148,177 Open swap positions’ cash flows Gross cash inflow in EUR million................................. 257 129 128 - Gross cash inflow in HUF million (at spot rate) ....... 98,374 49,379 48,996 - Gross cash outflow in HUF million.............................. 83,155 41,047 42,108 - Net cash inflow / (outflow) in HUF million............. 15,219 8,332 6,888 - Open forward positions’ cash flows Gross cash inflow in EUR million................................. 203 203 - - Gross cash inflow in USD million ................................ 5 5 - - Total gross cash inflow in HUF million (at spot rate) ................................................................................. 79,437 79,437 - - Gross cash outflow in HUF million.............................. 79,996 79,996 - - Net cash inflow / (outflow) in HUF million............. (559) (559) - -
210 6 INCOME TAXES 6.1 Income taxes – accounting policies Income tax expense comprises current and deferred tax. It is recognized in Profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. 6.1.1 Current taxes Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. Current tax assets and liabilities are offset only if certain criteria are met. Income taxes are comprised of corporate income taxes, trade tax and other income taxes. 6.1.1.1 Corporate income taxes Corporate income taxes are payable to the central tax authorities. The basis of the tax is the taxable entities’ accounting profit adjusted for non-deductible and non-taxable items. The withholding tax relating to the dividend received is also reported in corporate income taxes. From January 1, 2017 a flat corporate income tax rate of 9% has been enacted. 6.1.1.2 Trade tax and other income taxes Trade tax is a local tax levied in Hungary on the companies’ net margins, usually determined at a substantially higher level than the corporate tax base but applying a significantly lower tax rate. Other income taxes include innovation fee calculated similarly to trade tax but with a lower rate and it is to be paid to the state budget. 6.1.2 Global minimum tax Hungary has implemented a legislation that shall ensure a global minimum taxation according to the OECD’s Pillar-II regulations and the corresponding EU directive. However, the legislation process has not been completed yet as further regulations are expected to be announced in 2024. Nevertheless, the legislation would be applicable for Magyar Telekom Group from 2024 onwards. Hence, no minimum tax is due at the reporting date. Furthermore, Magyar Telekom Group does apply the exception to recognizing and disclosing information about deferred taxes related to global minimum taxes in line with IAS 12. 88A and 4A. Due to the complexity of the provisions and the fact that the legislative process has not been completed yet, it is not possible to give a reliable estimate of the future tax burden being related to this minimum tax legislation. Therefore, the potential tax burden has been assessed based on information available at the reporting date (historical information, planning data). Based on this assessment, Magyar Telekom Group expects that it would not be subject to minimum taxation in Hungary itself in 2024. However, Magyar Telekom Group does also operate in jurisdictions in which the local corporate income tax rate is lower than the global 15% minimum tax rate (e.g. North Macedonia). Hence, Magyar Telekom Group expects that there will be an additional minimum tax burden to be borne in 2024, however it is assumed this tax burden to be smaller than HUF 100 million. 6.1.3 Deferred taxes Deferred tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Separate statement of financial position. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit.
211 Deferred tax is determined using income tax rates that have been enacted or substantively enacted by the financial statement date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit (or reversing deferred tax liabilities) will be available against which the temporary differences can be utilized. 6.2 Income taxes in the Statement of profit or loss and other comprehensive income The table below shows the income tax expenses charged in the Profit for the period. Income tax expense 2022 2023 Corporate income tax .............................................................................................. 1,627 1,966 Trade tax ..................................................................................................................... 7,944 8,662 Other income taxes .................................................................................................. 1,254 1,355 Deferred tax expense ............................................................................................... 3,306 3,590 Total ............................................................................................................... 14,131 15,573 6.2.1 Tax expense reconciliation The reconciliation between the reported income tax expense and the theoretical amount arising from applying the statutory income tax rates is as follows. 2022 2023 Profit before income tax ............................................................................... 73,660 90,012 Calculated amount of tax 9% ...................................................................... (a) (6,629) (8,101) Tax shield of items not subject to income tax .......................................... (b) 1,304 1,351 Tax impact of non-deductible items .......................................................... (c) (462) (301) Trade tax .......................................................................................................... (d) (7,944) (8,662) Other income taxes ....................................................................................... (d) (1,254) (1,355) Impact of tax deductibility of trade and other income taxes................ (e) 828 902 Investment tax credit accretion .................................................................. (f) 26 593 Income tax expense ............................................................................ (14,131) (15,573) Effective tax rate ............................................................................................ 19.18% 17.30% For explanations (a)-(f) see as follows. (a) The applicable tax rate used in the below reconciliation is the domestic standard rate of corporate tax in Hungary 9% in 2023 (2022: 9%). (b) This line of the reconciliation primarily includes the tax shield impact of expenses, which are not included in the profit before tax, but deductible when determining the separate corporate income tax base. These items include the depreciation of assets (or additional values of assets) which are not included in the assets of the statement of financial position, and which are not considered in the deferred tax calculation. (c) This line of the reconciliation includes the negative tax impact of the expenses included in the profit and loss, but non- deductible when determining the corporate income tax base. These items primarily include the non-deductible receivable impairment and write-downs and penalties. (d) Trade tax and other income taxes include certain local and central taxes levied in Hungary. Trade tax and the innovation tax, levied in Hungary on the companies’ net margins, determined usually at a substantially higher level than the corporate tax base, but with substantially lower tax rates (max 2%). As the first line of the reconciliation calculates theoretical tax expense calculated using the corporate tax rate, the trade tax and the innovation fee impose additional income tax expenses on the Company, included in this line of the reconciliation.
212 (e) Trade tax and innovation fee are deductible expenses for corporate tax purposes, the positive tax impact of which is included in this line of the reconciliation. (f) Investment tax credit accretion includes the increase of the net present value of the investment tax credit deriving from the utilization of the tax credits in periods subsequent to the year of recognition. For further information see Note 6.3.2.1. 6.3 Income taxes in the Statement of financial position 6.3.1 Current taxes in the Statement of financial position Current tax assets and liabilities in the Statement of financial position represent the amount of corporate and other income taxes receivable from, and payable to the Hungarian tax authorities. 6.3.2 Deferred taxes in the Statement of financial position Magyar Telekom's deferred tax balances are as follows: Balance at December 31, 2021 Effect on profit Other movements Balance at December 31, 2022 Effect on profit Other movements Balance at December 31, 2023 Deferred tax assets and (liabilities) Investment tax credits (Note 6.3.2.1) ........... 886 (3,207) 6,052 3,731 (3,346) 5,638 6,023 Impairment of receivables and inventory ..... 1,316 86 - 1,402 648 - 2,050 PPE and intangible assets ................................ (5,730) (123) - (5,853) (819) - (6,672) Goodwill ............................................................... (14,481) - - (14,481) - - (14,481) Provisions for liabilities and charges.............. 1,691 (62) - 1,629 (73) - 1,556 Total net deferred tax .................................. (16,318) (3,306) 6,052 (13,572) (3,590) 5,638 (11,524) Of which deferred tax liabilities ...................... (20,211) (20,334) (21,153) Of which deferred tax assets ........................... 3,893 6,762 9,629 The Other movements column includes the increase in investment tax credit relating to energy efficiency improvement recognized in 2023 and 2022. Deferred tax assets arising from investment tax credits are recognized against the capitalized cost of the related asset acquisition. Temporary differences associated with investments in subsidiaries for which deferred tax liabilities or assets have not been recognized amounted to a net liability of HUF 20,799 million at December 31, 2023 (HUF 20,799 million was the temporary difference not recognized at December 31, 2022). Deferred tax liability on goodwill is related to the goodwill arising from the acquisition of subsidiaries (Emitel Zrt. and T- Mobile) in the Company’s Separate Financial Statements, which had merged into Magyar Telekom. The amortization of goodwill is a tax-deductible expense in corporate income tax, while under IFRSs no amortization is accounted for in relation to goodwill. The difference deriving from the two types of accounting is represented by the deferred tax liability. 6.3.2.1 Investment tax credits Since 2020 Magyar Telekom have accomplished a new tax credit program in order to increase energy effectiveness. In order to utilize these tax credits, the Company had to meet certain audit requirements set out in the relevant tax regulations and independent external auditors stated that the investments fulfill the criteria of energy effectiveness. The investment tax credit is accounted for as a decrease from the investment costs of the assets, as well as a deferred tax asset of the whole tax credit amount is accounted for accordingly. The Company utilizes HUF 3,940 million tax credit in the 2023 corporate tax return, while the remaining HUF 6,023 million tax credit remains as deferred tax asset in the Company’s records. The Company expects that the tax credit carried forward can be utilized in the 2024 corporate tax return.
213 The following table shows the details of the energy saving investment tax credits as of December 31, 2023: Earned in year Amount of qualifying investment Amount of tax credit earned Accretion recognized in tax expense Tax credit utilized Tax credit carried forward 12.31.2023 Expires in year 2020 7,650 2,752 9 (2,761) - 2025 2021 12,614 4,642 26 (4,668) - 2026 2022 17,384 6,003 593 (6,259) 337 2027 2023 17,351 5,686 - - 5,686 2028 Total 54,999 19,083 628 (13,688) 6,023 In order to utilize the tax credits and certain tax deductibility opportunities earned by the Company, they had to comply with strict requirements as set out in the relevant tax regulations. The Company fulfilled all requirements connecting energy effective investment programs. 6.4 Income taxes in the Statement of cash flows The Company classifies its tax settlement of energy saving investment tax credit as an investing activity in the Statement of cash flows. The table below shows how the total cash flows from income tax are allocated over the activities: Activities in the Statement of Cash Flows 2022 2023 Cash flows from operating activities (presented on the line income tax paid) ............. (15,640) (14,255) Cash flows from investing activities (investment tax credit utilized in the tax report) 4,264 3,234 Cash flows from financing activities ...................................................................................... - - Total cash flows from income tax ................................................................................ (11,376) (11,021) Magyar Telekom has been doing investments relating to energy saving since 2020, based on this the payment of the reduced income tax was settled in 2022 and 2023. 6.5 Tax reviews The tax authorities may at any time inspect the books and records within five years from the end of the year when tax declarations were submitted and may impose additional tax assessments with penalties and penalty interest. Management is not aware of any circumstances which may give rise to a potential material liability in this respect. 6.6 Dividends paid by Magyar Telekom The dividends paid and payable by Magyar Telekom to its owners may be subject to withholding or income taxes of the owners, which do not have any impact on the amount of the dividend declared or on the Company’s tax expense as these taxes – if any – are levied on the owners.
214 7 INVENTORIES 7.1 Inventories – Accounting policies Inventories are stated at the lower of cost or net realizable value using the historical cost method of accounting and are valued on a weighted average basis. The cost of inventories comprises all costs of purchase, cost of construction and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Impairment losses on Inventories are recognized as Other operating expenses in the Statement of profit or loss and other comprehensive income. 7.2 Inventories in the Statement of financial position 12.31.2022 12.31.2023 Inventory for resale .................................................................................................... 18,904 27,901 Other inventory ........................................................................................................... 511 545 Subtotal ........................................................................................................... 19,415 28,446 Impairment................................................................................................................... - - Total ................................................................................................................. 19,415 28,446 The Company has no inventory pledged as security either as at December 31, 2022 or December 31, 2023. The impairment and its reversal are not significant therefore no impairment movement table is presented. 8 ASSETS AND LIABILITIES HELD FOR SALE 8.1 Assets and liabilities held for sale – Accounting policies An asset (typically properties and closely related other assets) is classified as held for sale if it is no longer needed for the future operations of the Company, and has been designated for sale, which is highly probable to take place within 12 months, and the asset is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets. These assets are measured at the lower of their carrying amount and fair value less cost of disposal. Depreciation is discontinued from the date of designation to the held-for-sale status. When an item of PPE or intangible assets is designated for sale, and the fair value less cost of disposal is determined to be lower than the carrying amount, the difference is recognized in the Profit for the period (Depreciation and amortization) as an impairment loss. If the requirements for the classification of assets as held for sale are no longer met, the assets may no longer be shown as held for sale. The assets are to be measured at the lower of the carrying amount that would have applied if the asset had not been classified as held for sale, and the recoverable amount at the date at which the requirements for the classification as held for sale are no longer met. 8.2 Assets held for sale in the Statement of financial position The assets and liabilities classified as held for sale are disclosed below. 12.31.2022 12.31.2023 Property, plant and equipment ................................................................. - 260 Total assets held for sale .................................................................. - 260
215 9 PROPERTY, PLANT AND EQUIPMENT (PPE) 9.1 PPE – Accounting policies Property, plant and equipment are measured at historical cost less accumulated depreciation and any accumulated impairment losses. The cost of an item of PPE comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located is also included in the costs if the obligation incurred is recognized as a provision according to IAS 37 (see Note 13). Government grants relating to the purchase of PPE are deducted from the original cost of the items and are recognized in the Profit for the period through the reduced amount of depreciation of the related assets over their useful lives. Investment tax credits relating to qualifying investment projects (Note 6.3.2.1) are also recognized in this manner. Cost, in the case of telecommunications equipment, comprises the borrowing costs of related loans and corporate bonds. Subsequent expenditure on an asset that meets the recognition criteria to be recognized as an asset or an addition to an asset is capitalized, while maintenance and repairs are charged to expense when incurred. When assets are scrapped, the cost and accumulated depreciation are removed from the accounts and the loss is recognized in the Profit for the period (Depreciation and amortization). When assets are sold, the cost and accumulated depreciation are removed from the accounts and any related gain or loss is recognized in the Profit for the period (Other operating income/expense). Depreciation is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. On an annual basis, Magyar Telekom reviews the useful lives and residual values for consistency with current development plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 9.3. In addition to the regular revisions, any investment decisions made throughout the year may also result in a change of useful life of a group of assets in any period of the year. The estimated useful lives assigned to different classes of property, plant and equipment are as follows: Years Buildings .................................................................................................................................................... 5-50 Duct, cable and plant .............................................................................................................................. 3-38 Other telecommunications equipment ............................................................................................... 2-25 Other equipment...................................................................................................................................... 2-50 Useful lives of property, plant and equipment in operation may increase if the asset is refurbished. Useful life change is not automatic, only if it is significantly increased as a result of the investment, which is based on well-founded technical experts’ decision performed on individual basis. Tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the assets’ fair value less cost of disposal and its value in use (VIU). The recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount determined on the cash-generating unit (CGU) to which the asset belongs, those assets are grouped at the lowest level for which there are separately identifiable cash-flow. Fair value less costs of disposal may be determined using various valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific
216 inputs. If the FVLCD exceeds the carrying amount of an asset or CGU then the asset or CGU is not impaired and it is not necessary to calculate the VIU. The impairment losses of PPE are accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income. Magyar Telekom also record the small value assets as a Property plant and equipment and the cost of the asset is depreciated during the useful life. In exception from this regulation, only protection equipment immediate depreciation is allowed, taking into account cost-effectiveness aspect.
217 9.2 PPE in the Statement of financial position Land and buildings Telecom equipment Other equipment Total 01.01.2022 Gross value .............................................................. 88,984 937,463 70,087 1,096,534 Accumulated depreciation .................................. (42,525) (637,424) (60,497) (740,446) Carrying amount .............................................. 46,459 300,039 9,590 356,088 Of which held for sale ........................................... (115) 355,973 Carrying amount - 01.01.2022 ........................ 46,459 300,039 9,590 356,088 Investments ............................................................ 433 81,901 2,104 84,438 Changes due to revisions of asset, retirement obligations ............................................................... 516 - - 516 Disposals ................................................................. (96) (455) (84) (635) Depreciation charge .............................................. (2,574) (49,244) (3,981) (55,799) Reclassifications .................................................... 244 243 389 876 Carrying amount - 12.31.2022 ....................... 44,982 332,484 8,018 385,484 12.31.2022 Gross value .............................................................. 89,245 968,345 65,237 1,122,827 Accumulated depreciation .................................. (44,263) (635,861) (57,219) (737,343) Carrying amount .............................................. 44,982 332,484 8,018 385,484 Of which held for sale ........................................... - 385,484 Carrying amount - 01.01.2023 ........................ 44,982 332,484 8,018 385,484 Investments ............................................................ 1,599 56,315 4,550 62,464 Changes due to revisions of asset, retirement obligations ............................................................... 508 - - 508 Disposals ................................................................. (146) (577) (48) (771) Depreciation charge .............................................. (2,724) (50,175) (3,859) (56,758) Reclassifications .................................................... 231 891 164 1,286 Carrying amount - 12.31.2023 ........................ 44,450 338,938 8,825 392,213 12.31.2023 Gross value .............................................................. 91,336 961,186 67,647 1,120,169 Accumulated depreciation .................................. (46,886) (622,248) (58,822) (727,956) Carrying amount .............................................. 44,450 338,938 8,825 392,213 Of which held for sale ........................................... (260) 391,953 This table also contains property, plant and equipment assets subject to operating leases, for further information see Note 17.3.
218 The right-of-use assets by class of underlying asset are listed in the table below. For further information see Note 17. Land and Buildings Telecom equipment Other equipment Total 01.01.2022 Gross value .............................................................. 97,524 61,325 8,636 167,485 Accumulated depreciation .................................. (28,643) (14,342) (4,514) (47,499) Carrying amount - 01.01.2022 ........................ 68,881 46,983 4,122 119,986 Investments ............................................................ 9,813 9,412 10,556 29,781 Disposals ................................................................. (858) (10,659) (679) (12,196) Depreciation charge .............................................. (11,077) (4,708) (4,020) (19,805) Reclassifications .................................................... - (876) - (876) Carrying amount - 12.31.2022 ........................ 66,759 40,152 9,979 116,890 12.31.2022 Gross value .............................................................. 105,100 52,579 15,601 173,279 Accumulated depreciation .................................. (38,341) (12,427) (5,622) (56,389) Carrying amount .............................................. 66,759 40,152 9,979 116,890 Carrying amount - 01.01.2023 ........................ 66,759 40,152 9,979 116,890 Investments ............................................................ 10,648 11,334 1,927 23,909 Disposals ................................................................. (682) (155) (165) (1,002) Depreciation charge .............................................. (12,620) (4,798) (3,535) (20,953) Reclassifications .................................................... - (1,286) - (1,286) Carrying amount - 12.31.2023 ........................ 64,105 45,247 8,206 117,558 12.31.2023 Gross value ............................................................... 114,314 61,610 16,545 192,469 Accumulated depreciation ................................... (50,209) (16,363) (8,339) (74,911) Carrying amount ............................................... 64,105 45,247 8,206 117,558 The closing balance of Property, plant and equipment (PPE) includes assets under construction in an amount of HUF 37,475 million as at December 31, 2023 (2022: HUF 49,919 million). In the table above, the assets under construction are shown in the categories where the asset is expected to be classified when placed into service. Changes due to revisions of asset retirement obligations represent the adjustments of the carrying amounts of the assets against a provision for asset retirement obligation (see also Note 13.2.4). No material impairment was identified in 2022 and 2023. The Company has no PPE with restricted titles or pledged as security either as at December 31, 2023 or December 31, 2022.
219 9.3 Review of useful lives Reviews of the useful lives (and residual values) of property, plant and equipment based on the strategic directions and accepted annual development plans conducted in 2023 affected the useful lives of a large number of assets. The revisions resulted in the following change in the original trend of depreciation in the current and future years. 2023 2024 2025 2026 After 2026 Increase / (decrease) in depreciation expense ... 480 (1,368) 581 392 (85) Reviews of the useful lives (and residual values) of property, plant and equipment based on the strategic directions and accepted annual development plans conducted in 2022 affected the useful lives of a large number of assets. The revisions resulted in the following change in the original trend of depreciation in the current and future years. 2022 2023 2024 2025 After 2025 Increase / (decrease) in depreciation expense ... 1,351 (1,292) 315 105 (479) 10 INTANGIBLE ASSETS 10.1 Intangible assets – Accounting policies Intangible assets (excluding goodwill) are measured at historical cost less accumulated amortization and any accumulated impairment losses. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use. Costs associated with developing or maintaining computer software programs are generally recognized as an expense as incurred. Costs directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee-related costs and an appropriate portion of relevant overhead and borrowing costs. Most computer software capitalized include acquired elements representing the majority of the cost and own costs incurred to a lesser extent. These are considered non self-developed software. Computer software fully developed by own resources represent an immaterial portion of all software, therefore these are not disclosed separately. Costs associated with the acquisition of long-term frequency licenses are recognized as an intangible asset when the Company receives a right to charge users of the service provided under the license. The present value of the future annual payments for the use of the frequencies are also capitalized if these payments can be estimated reliably, or otherwise recognized as Other operating expenses in the year the payment obligation refers to. The useful lives of concessions and licenses are determined based on the underlying agreements and are amortized on a straight-line basis over the period from availability of the frequency for commercial use until the end of the initial concession or license term. Amortization of intangible assets is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. Other than goodwill, the Company has no intangible assets with indefinite useful life. The amortization expense is presented in the depreciation and amortization line of the Statement of profit or loss and other comprehensive income. Intangible assets with a useful life of exactly one year are recognized if, and only if, the intangible asset was acquired before the beginning of the useful life (e.g. before the beginning of the license period of an acquired license.) On an annual basis, Magyar Telekom reviews the useful lives for consistency with current development and replacement plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 10.3. In addition to the regular revisions, any investment decisions made throughout the year may also result in a change of useful life of a group of assets.
220 The estimated useful lives of intangible assets other than goodwill are as follows: Years Software .............................................................................................................................................. 1-24 Concessions and licenses ................................................................................................................. 3-25 Other intangible assets ..................................................................................................................... 3-10 At the date of transition to IFRS (January 1, 2016) the Company recognized goodwill on those investments that merged into the Company after their acquisition but before the date of transition to IFRS in its separate statement of financial position. Goodwill represents the amount by which the cost of an acquisition exceeds over the fair value of the Company’s share of the net assets and contingent liabilities of the acquired business at the date of acquisition. Goodwill is carried at cost less any accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill allocated to the entity or business sold. In determining whether an asset that incorporates both intangible and tangible elements should be treated as tangible asset under IAS 16 - Property, Plant and Equipment or as an intangible asset under IAS 38 – Intangible Assets, management uses judgement to assess which element is more significant and recognizes the assets accordingly. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the assets’ fair value less cost of disposal and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units – CGUs). The recoverable amount of the individual intangible assets of the Company in most cases cannot be determined as individual assets and do not generate cash flows. Instead, the Company determines CGUs to which the individual assets are allocated and the fair values can only be determined at CGU level. Corporate assets which have the distinctive characteristics of not generating cash inflows independently of other assets or groups of assets are allocated to CGUs when conducting impairment tests. Goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred. When conducting the impairment tests, Magyar Telekom allocates goodwill to its cash generating units determined at operating segment level. See also Note 3.2. Operating segments may include one clearly identifiable company or a group of companies, or certain components of one company and other companies as well. The Company establishes the segments’ recoverable amounts by determining their fair value less cost of disposal by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The fair values determined as described above are used as a basis when establishing the need for an impairment of any goodwill allocated to the operating segments. As long as the FVLCD exceeds the carrying amount of a CGU, in this case an operating segment, then the CGU is not impaired and it is not necessary to calculate the VIU. Calculation of VIU is performed only if FVLCD does not exceed the carrying amount of an operating segment. If the calculated recoverable value is lower than the carrying amount of the operating segment, goodwill is impaired. The impairment losses of intangible assets, including that of goodwill are accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income.
221 10.2 Intangible assets in the Statement of financial position Goodwill Concessions and licenses Software Other Total 01.01.2022 Gross value ............................................. 173,572 343,512 282,740 15,724 815,548 Accumulated amortization ................. - (99,457) (215,783) (8,911) (324,151) Carrying amount ............................... 173,572 244,055 66,957 6,813 491,397 Carrying amount – 01.01.2022 ...... 173,572 244,055 66,957 6,813 491,397 Investments ........................................... - 293 15,538 3,193 19,024 Disposals ................................................ - - (111) - (111) Amortization charge ............................. - (16,803) (18,625) (3,177) (38,605) Reclassification ..................................... - (438) 361 77 - Carrying amount – 31.12.2022 ...... 173,572 227,107 64,120 6,906 471,705 12.31.2022 Gross value ............................................. 173,572 262,696 280,446 18,982 735,696 Accumulated amortization ................. - (35,589) (216,326) (12,076) (263,991) Carrying amount ............................... 173,572 227,107 64,120 6,906 471,705 Carrying amount – 01.01.2023 ...... 173,572 227,107 64,120 6,906 471,705 Investments ........................................... - 586 18,317 3,903 22,806 Disposals ................................................ - - - - - Amortization charge ............................. - (16,003) (18,244) (2,758) (37,005) Reclassifications ................................... - - - - - Carrying amount – 31.12.2023 ...... 173,572 211,690 64,193 8,051 457,506 12.31.2023 Gross value ............................................. 173,572 263,283 290,757 20,931 748,543 Accumulated amortization ................. - (51,593) (226,564) (12,880) (291,037) Carrying amount ............................... 173,572 211,690 64,193 8,051 457,506 The amortization expense, as well as the impairment losses of intangible assets, including also goodwill, is accounted for in the Depreciation and amortization line of the Statement of profit or loss and other comprehensive income. Investments represent the regular investing activity in intangible assets. The book value of Concessions and licenses represents the frequencies initially recognized consisting of the one-time spectrum fee and the present value of annual band fees related to spectrums band. The useful life of these frequencies and the present value calculations are based on the term of rights of use for these frequencies. For further information see Notes 4.4.4.1, 10.5, 28 and 34.2. The reclassifications between asset categories or their impact on amortization expense was not material. The Company has no intangible assets with restricted title or pledged as security either as at December 31, 2023 or December 31, 2022.
222 10.3 Useful lives The reviews of the useful lives of intangible assets based on the strategic direction and accepted annual development plans during 2022 and 2023 affected the useful lives of a large number of assets, primarily software. The revisions resulted in the following change in the original trend of amortization in the current and future years. 2023 2024 2025 2026 After 2026 Increase / (decrease) in depreciation expense (117) (1,938) (879) (45) 2,979 2022 2023 2024 2025 After 2025 Increase / (decrease) in depreciation expense . (2,328) 17 481 536 1,294 10.4 Goodwill At the date of transition to IFRS (January 1, 2016) the Company recognized goodwill on investments that merged into the Company after their acquisition but before the date of transition to IFRS in its separate statement of financial position. The Company recognizes goodwill for the following merged investments: 12.31.2022 12.31.2023 T-Mobile ............................................................................................... 161,374 161,374 Emitel Zrt. ............................................................................................ 6,471 6,471 KTV/T-Kábel......................................................................................... 4,408 4,408 Modultechnika Kft. ............................................................................ 703 703 Kábel TV ................................................................................................ 462 462 Dél-Vonal Kft. ..................................................................................... 100 100 T-Online ................................................................................................ 54 54 Total ............................................................................................ 173,572 173,572 The Company is a considerable part of the MT-Hungary segment on Magyar Telekom Group level. The goodwill presented in the Company was tested as the considerable portion of this segment. The recoverable amount of the MT Hungary segment significantly exceeds the carrying amount, therefore there is no indication that the goodwill presented in the Company may be impaired. For the goodwill impairment tests, the total amount of goodwill was allocated to the operating segments of the Group and the recoverable amounts of the operating segments were determined based on fair values less costs of disposal based on Level 3 inputs in the fair value calculations (Note 4.5.1). The recoverable amounts of the segments disclosed in the table below exclude net debts, which are not allocated to the segments. For further information, please also see Note 3.2. 12.31.2022 12.31.2023 Carrying amount of Recoverable amount of operating segment Carrying amount of Recoverable amount of operating segment goodwill allocated operating segment (incl. goodwill) goodwill allocated operating segment (incl. goodwill) MT-Hungary ......... 192,514 1,052,686 1,368,990 192,514 1,063,601 2,486,970 The Group regularly carries out an impairment test on goodwill in the last quarter of the financial years, while a simplified goodwill impairment test is conducted quarterly based on the main input changes. During the impairment tests conducted in 2022 and 2023 no goodwill impairment was established for any goodwill.
223 10.5 Significant individual intangible assets The Company’s most significant individual intangible assets are the mobile licenses. The carrying values and remaining amortization periods of the significant licenses are listed in the table below. For further information on these assets, please see Note 34.2. 12.31.2022 12.31.2023 Carrying amount Remaining amortization period (years) Carrying amount Remaining amortization period (years) 700 MHz ........................................................ 36,340 17 34,234 16 800 MHz ........................................................ 25,266 11 23,069 10 900 MHz ........................................................ 37,047 11-20 35,034 10-19 1800 MHz ...................................................... 63,845 11-20 59,894 10-19 2100 MHz ...................................................... 26,019 4-17 22,991 3-16 2600 MHz ...................................................... 11,370 11 10,381 10 26 GHz............................................................ 145 1-4 48 3 3600 MHz ...................................................... 26,905 17 25,346 16 32 GHz............................................................ - - 563 14 Other .............................................................. 169 4 130 3 Total concessions and licenses .............. 227,107 211,690 11 INVESTMENTS 11.1 Investments – accounting policies Investments in subsidiaries, associates and joint ventures are measured at cost less any accumulated impairment losses. Cost of an investment is the fair value of consideration given, including contingent considerations and transaction costs incurred during the acquisition process. The Company examines whether an investment may or may not be impaired by using internal and external information. Magyar Telekom implemented the requirements of the IAS 36 standard as follows: If the carrying amount of investment exceeds HUF 20 billion then its recoverable amount is always analyzed using a DCF model (irrespective of whether there is any indication of impairment or not). If the carrying amount of an investment does not exceed HUF 20 billion then the Company examines, considering the following, whether there were any changes related to these investments which requires the preparation of impairment assessment based on the DCF model: 1) The Company examines whether during the period there were or whether there are expected to be any significant adverse changes in the market or in the technological, economic and legal environment of the investment. 2) The company examines the forecasted results of its investments. 3) If subsidiaries, joint ventures or associates pay dividend then it has to be examined whether the investments’ carrying amount in the Company’s Separate Financial Statements exceeds the carrying amount of the investee’s net assets (including goodwill) recognized in the consolidated financial statements. In addition, it has to be examined in the period the dividend was declared whether the dividend exceeds the total comprehensive income accumulated since the acquisition of the control which is subjectable for declaration as a dividend. If any of the above three examinations indicates that the market value of the investment declines below its carrying amount then the Company prepares the impairment assessment based on a DCF model also for that investment where the carrying amount does not exceed HUF 20 billion. If the carrying amount of the investment exceeds its recoverable amount, the Company recognizes the necessary impairment loss. If the recoverable amount of the investment exceeds its carrying amount, no impairment is necessary.
224 When the estimates used to determine an asset’s or a CGU’s recoverable amount have improved since the last impairment loss was recognized, the impairment loss that was previously recognized for the asset, other than goodwill, is reversed. In this case the carrying amount of an assets shall not be increased above the lower of: ▪ its recoverable amount and ▪ the carrying amount that would have been determined without any prior impairment loss. For further information see Note 3.2.2. 11.2 Investments Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The existence and effect of potential voting rights that are presently exercisable or presently convertible are also considered when assessing whether the Company controls another entity. As December 31, 2022 and 2023, the Company's investments in subsidiaries are summarized as follows. 01.01.2022 Opening balance Changes in 2022 12.31.2022 Carrying amounts Changes in 2023 12.31.2023 Carrying amounts Stonebridge A.D. ....................................... 77,999 - 77,999 - 77,999 Telekom Rendszerintegráció Zrt. ............ 41,984 - 41,984 - 41,984 Cecoin Kft. .................................................. - 3,817 3,817 (3,817) - Combridge S.R.L. ...................................... 2,544 - 2,544 - 2,544 Novatel E.O.O.D. ........................................ 1,999 - 1,999 - 1,999 Investel Zrt. ................................................. 1,658 - 1,658 - 1,658 Other............................................................. 5,426 - 5,426 - 5,426 Total ....................................................... 131,610 3,817 135,427 (3,817) 131,610 In 2022, the Company has exercised its call option on the business quota of Cecoin Kft. allowing it to acquire a fiber network covering 110 thousand access points in Hungary (see Note 29). The Company examined the indicators mentioned in Note 11.1 and carried out the tests as necessary and recognized an impairment on Cecoin Kft. investment in 2022 consequently (for more information see Note 3.2.2) In 2023 the voluntary liquidation of Cecoin Kft., 100% owned by the Company, has been finished and the Court of Registration deleted the Company from the register on September 27, 2023. Short descriptions of companies in which Magyar Telekom has significant shares: Stonebridge Communications A.D. Skopje (Stonebridge A.D.) In December 2000, Magyar Telekom, on behalf of a consortium, reached an agreement with the government of the Republic of North Macedonia to purchase 51% of Makedonski Telekom A.D., the leading telecommunication provider of North Macedonia. The 51% ownership acquired by Magyar Telekom was contributed in 2001 to a newly established Macedonian holding company, Stonebridge A.D. residing in Skopje which is owned 100% by Magyar Telekom. Telekom Rendszerintegráció Zrt. (former T-Systems Magyarország Zrt.) In 2006 Magyar Telekom purchased the 100% ownership in KFKI Zrt. (the predecessor of T-Systems Magyarország Zrt.). In the course of the years the company acquired several firms which subsequently merged into the company. On January 31, 2022, the Magyar Telekom Group sold its 100% shareholding in Pan-Inform Kft. by its sole owner of T- Systems Magyarország Zrt. The scope of the agreement covered the support and development operations provided for central digital healthcare services in Hungary and for the related hospital information system, that partially had been involved in the operation of T-Systems Magyarország Zrt. at year-end 2022. This transaction did not affect the value of the investment. On February 1, 2023, the company name of T-Systems Magyarország Zrt. changed to Telekom Rendszerintegráció Zrt.
225 Combridge S.R.L. The company is an alternative telecommunication service provider of Romania. Its main activities are: international and domestic leased line connection, international internet access, international IPVPN services, roaming services and international VoIP call termination. Magyar Telekom has a 100% share in Combridge S.R.L. Novatel E.O.O.D. The company was established in 2004 with headquarters in Bulgaria. The company's main activities are: international and domestic leased line connection, international internet access and IPVPN services, roaming services, infocommunication business solutions and international call termination. Magyar Telekom has a 100% share in Novatel E.O.O.D. A joint arrangement is an arrangement whereby two or more parties have joint control. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Company had no investment in joint ventures either at December 31, 2022 or December 31, 2023. Associates are entities over which the Company has significant influence but not control, generally reflecting a voting right between 20% and 50%. The Company had no investment in associates either at December 31, 2022 or December 31, 2023. 11.3 Joint operations Magyar Telekom and Yettel Hungary (formerly: Telenor Hungary) agreed in 2015 to jointly operate and develop their 800 MHz 4G mobile networks in all parts of Hungary except Budapest. The primary goal of the agreement was to accelerate 4G mobile broadband coverage rollout in the countryside and to offer higher bandwidth to the 4G customers, in line with the coverage obligations of the 800 MHz spectrum contract signed in 2014 with the NRA. Based on the agreement, Yettel Hungary maintains sites in West Hungary and Magyar Telekom operates base stations in the eastern region of the country. The Company assessed the agreement as joint operation as strategic decisions are made jointly by Magyar Telekom and Yettel, and there is no separate vehicle to control the operation of the arrangement. The Company does not share the obligations for liabilities and any returns or expenses beyond the assets included in the agreement. Therefore, only the assets owned by the Company are recognized while there is no need to present the partner’s assets, liabilities, or revenue and expenses. The charges from Magyar Telekom to Yettel and from Yettel to Magyar Telekom are almost equal and settled on a net basis and accounted for in the Statement of profit or loss on a gross basis and other comprehensive income and the effect of this settlement is not significant. If any of the parties initiates the termination of this contract, in order to ensure the continuous service for the customers the Company might be exposed to additional capital expenditure. The probability is currently estimated remote by the Management.
226 12 OTHER ASSETS Other assets usually include current and non-current receivables considered non-financial instruments. 12.1 Other current assets 12.31.2022 12.31.2023 Accrued income and prepayments for costs and expenses ................................. 5,544 3,627 Other tax receivable ...................................................................................................... 208 264 Other receivables ........................................................................................................... 493 517 Total .................................................................................................................... 6,245 4,408 12.2 Other non-current assets 12.31.2022 12.31.2023 Asset recognized from the costs of obtaining a contract with customers (Notes 3.4, 18.1.1 and 18.4.) ....................................................................................... 6,963 6,981 Asset recognized from the costs to fulfill a contract with customers (Notes 3.4, 18.1.1 and 18.4.) .................................................................................................... - 1,711 Other ................................................................................................................................ 21 16 Total .................................................................................................................... 6,984 8,708 13 PROVISIONS 13.1 Provisions – Accounting policies Provisions are recognized when Magyar Telekom has a present legal or constructive obligation (excluding executory contracts) as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured and recorded as the best estimate of the economic outflow required to settle the present obligation at the financial statement date. The estimate can be calculated as the weighted average of estimated potential outcomes or can also be the single most likely outcome. Provisions for obligations expected to fall due after 12 months are generally recognized at their present value and are accreted (against Interest expense) until utilization or reversal. Expenses for provisions are recognized in the line item of the Statement of profit or loss and other comprehensive income where the actual expense is expected to be incurred. When a provision is released unused, it is released typically to the same line item of the Statement of profit or loss and other comprehensive income where it was originally provided for.
227 13.2 Provisions in the statement of financial position Severan- ce payment Share- based payments Other employee -related Total employee -related Legal cases ARO Other Total 01.01.2022 .................... 616 2,297 9 2,922 1,452 8,596 1,329 14,299 Reversed ........................... (112) (110) - (222) (9) (12) (1,351) (1,594) Additions .......................... 1,268 1,324 6 2,598 29 516 561 3,704 Interest .............................. - (24) - (24) 80 505 - 561 Utilized (incl. interest component) ..................... (1,030) (1,697) (2) (2,729) (56) (58) (52) (2,895) 12.31.2022 .................... 742 1,790 13 2,545 1,496 9,547 487 14,075 Of which current ............. 675 1,020 - 1,695 18 19 250 1,982 Of which non-current ..... 67 770 13 850 1,478 9,528 237 12,093 01.01.2023 .................... 742 1,790 13 2,545 1,496 9,547 487 14,075 Reversed ........................... (152) (119) (10) (281) (644) (194) (300) (1,419) Additions .......................... 1,315 1,207 1 2,523 20 508 412 3,463 Interest .............................. - 19 - 19 (712) 767 - 74 Utilized (incl. interest component) ..................... (1,153) (992) (4) (2,149) (140) (44) (193) (2,526) 12.31.2023 .................... 752 1,905 - 2,657 20 10,584 406 13,667 Of which current ............. 702 880 - 1,582 20 35 146 1,783 Of which non-current ..... 50 1,025 - 1,075 - 10,549 260 11,884 The Interest lines in the table above include the subsequent unwinding of the discount applied at initial recognition and the interest element of any provision recognized, as well as the release of the interest / accretion element in the case of reversal of provisions. Magyar Telekom does not expect any reimbursement with regards to the provisions recognized, therefore no related assets have been recognized in the financial statements. 13.2.1 Severance payment The majority of the provision for severance as at December 31, 2023 relates to the stand-by-pool and the employee terminations payable in relation to the 2024 efficiency improvement in Magyar Telekom. The stand-by-pool of employees includes people whose legal status is an employee, however, these people do not provide services to the Company any more, but the Company provides a reduced amount of compensation and pays social security expenses for them. This is a manner of severance that is not paid in one lump sum but in monthly installments following the discontinuation of services. The majority of the provision for severance as at December 31, 2022 also related to the stand-by-pool and the employee terminations paid in relation to the 2023 efficiency improvement in Magyar Telekom. 395 employees left the Company in 2023 (2022: 331), related to which termination payments were made. The balance of provision as at December 31, 2023 relates to 85 employees and stand-by-pool of employees (2022: 119). The total payments made in relation to employee termination in 2023 amounted to HUF 1,586 million (2022: HUF 1,322 million).
228 13.2.2 Share-based payments Share-based payments are detailed in Note 20.1.2. 13.2.3 Legal cases Provisions for legal cases mainly include amounts expected to be paid to regulatory and competition authorities as well as to ex-employees and trading partners as a result of legal disputes. There are numerous legal cases for which provisions were recognized, which are individually not material. 13.2.4 Asset retirement obligations (ARO) Asset retirement obligations primarily exist in the case of the telecommunications structures constructed on third parties’ properties. The Company carries out a revision of the necessary provisions every year. The revisions did not result in material changes in 2023 or 2022. 13.2.5 Other provisions Other provisions include guarantee obligations, onerous contracts and further other individually small items. 14 OTHER CURRENT LIABILITIES 12.31.2022 12.31.2023 Other taxes and social security ......................................................................... 8,327 10,443 Salaries and wages .............................................................................................. 5,609 6,822 Supplementary telecommunication tax.......................................................... (a) 2,120 5,539 Deferred revenue and advances received ...................................................... 2,008 2,196 Unused advance payments for asset-related grants ................................... 5 21 Other liabilities ..................................................................................................... 86 6 Total ........................................................................................................... 18,155 25,027 (a) On June 4, 2022 the Government of Hungary issued a decree (Government Decree of 197/2022. (VI.4.)) imposing a new type of tax on a number of industries, including telecommunications. For further information see Note 21.2. 15 OTHER NON-CURRENT LIABILITIES The table below shows the balances of Other non-current liabilities. 12.31.2022 12.31.2023 Other liabilities – non-current ................................................................................. 2,034 1,586 Bonds were initially recognized in 2020 at fair value (HUF 67,875 million) net of transaction costs (HUF 12 million) incurred and increased by premium received (HUF 2,948 million), which resulted in a 1.26% yield. The bond is subsequently measured at amortized cost under IFRS 9. Any difference between the proceeds (net of transaction cost) and the redemption amount are recognized in profit or loss over the period of the liability using the effective interest method. For further information please see Note 4.4.2.
229 16 EQUITY Equity reconciliation table In accordance with Act C of 2000 on Accounting (HAR) effective in Hungary, the following equity reconciliation table shows the reconciliation between the components of equity presented in these financial statements (under EU IFRS) and the equity components defined by Section 4 (a) 114/B of HAR. The reconciliation consists of an allocation of equity components under EU IFRS to equity components under HAR and adjustments for differences between the equities determined on different bases. 31.12.2022 31.12.2023 Common stock ................................................................................................................................................. 100,580 97,156 Reserves ............................................................................................................................................................ 524,355 543,240 Treasury stock ................................................................................................................................................... (18,742) (18,742) Profit or loss for the year ................................................................................................................................. 59,529 74,439 Equity in accordance with IFRS (Section 4 114/B) ......................................................................... 665,722 696,093 Section 4 (a) 114/B Equity ................................................................................................................ 665,722 696,093 Common stock provided for by the articles of association if that qualified as an equity instrument 100,580 97,156 Nominal value of own shares repurchased (-) ............................................................................................ (4,308) (4,178) Section 4 (b) 114/B Common stock in accordance with IFRS* ....................................................... 96,272 92,978 Section 4 (c) 114/B Subscribed but unpaid capital ......................................................................... - - Sum of all part of equity that does not comply with the definitions of common stock, subscribed but unpaid capital, retained earnings, valuation reserve, profit or loss for the year or restricted reserves in accordance with IFRS .................................................................................................................... 11,974 10,945 Section 4 (d) 114/B Capital reserves ............................................................................................... 11,974 10,945 Previous years’ profit accumulated and not yet distributed for the owners disclosed in the financial statements in accordance with IFRS that may not include other comprehensive income (±) ......................................................................................................................................................................... 497,947 517,731 Section 4 (e) 114/B Retained earnings ............................................................................................ 497,947 517,731 Section 4 (f) 114/B Valuation reserve .............................................................................................. - - Profit or loss for ongoing activities disclosed in statement of performance in its own right within the comprehensive income statement or in the separate profit and loss statements ...................... 59,529 74,439 Section 4 (g) 114/B Profit or loss for the year ................................................................................. 59,529 74,439 Section 4 (h) 114/B Restricted reserves .......................................................................................... - - Section 5 (a) 114/B Reconciliation of the capital registered by the Court of Registry with the subscribed capital under IFRS Capital registered by the Court of Registry ................................................................................................ 100,580 97,156 Subscribed capital under IFRS ....................................................................................................................... 96,272 92,978 Difference (nominal value of treasury stock repurchased) ............................................................ 4,308 4,178 Section 5 (b) 114/B Untied retained earnings available for the payment of dividends Retained earnings (contains profit or loss of the last financial year) .................................................... 557,476 592,170 Untied retained earnings available for the payment of dividends ................................................. 557,476 592,170 *Common stock shows the value of common stock recorded in article of association in the balance sheet, the table above contains the deduction defined in the relevant sections of the Hungarian Act on Accounting.
230 17 LEASES 17.1 Leases – Accounting policies A contract is a lease (or contains a lease) if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Recognition exemptions Short-term leases, low value leases IFRS 16 includes recognition exemptions available to lessees for short-term leases and leases of low-value items and specifies alternative requirements. ▪ In the Company, a decision was made not to apply the short-term recognition exemptions to lease contracts, except for some minor and insignificant lease arrangements with a lease term of one month or less. Such very short-term leases and related asset classes are expensed as incurred and no additional quantitative disclosure is required. ▪ The Company has made the decision not to apply the practical expedient with respect to low-value items. Hence, they have to be recognized, measured and presented as lease arrangements in the scope of IFRS 16. Lease term The lease term assessment at the commencement date refers to the period for which Magyar Telekom is reasonably certain to maintain the contract under the terms and conditions as originally negotiated. The initial lease term assessment is made at commencement of the lease. When determining the lease term, the shortest reasonably possible, i.e. justifiable, term is always to be used in the case of doubt. The lease term assessment is largely based on management judgement and Magyar Telekom usually use estimates or assumptions (especially in the case of options and indefinite contracts) on asset cluster level. The commencement date of the lease (commencement date) is the date on which a lessor makes an underlying asset (i.e., the property, plant or equipment that is subject to the lease) available for use to the lessee. At the commencement date, the lease term begins, and lease liability and the right-of-use asset are initially recognized and measured. Options- “Reasonably certain criteria” In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, lessees and lessors shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease. Lease payments Lease payments are defined as payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term. The Company decided to apply the practical expedient not to separate lease from non-lease components on the lessee side (except data centers; car fleet). As a result, lease and non- lease components will be considered a single lease component. In accordance with the recognition and measurement requirements in IFRS 16, the initial measurement of the lease liability includes variable lease payments that depend on an index or rate, e.g. the consumer price index (CPI) or a market interest rate, such as the Budapest Interbank Offered Rate (BUBOR). In contrast, variable lease payments that are not based on an index or rate (e.g. for example, variable lease payments linked to performance or usage of the underlying asset) and which are not in-substance fixed payments are not included in lease payments and recognized in profit or loss in the period in which the event or condition occurs that triggers those payments.
231 Reassessment of the lease liability IFRS 16 specifies when the lease liability has to be reassessed. It is important to note that, in terms of IFRS 16, a reassessment of the lease liability only takes place if the change is based on already existing contractual clauses, i.e. those that have been part of the contract since commencement. A lessee reassesses the lease term, i.e. whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that is within the control of the lessee; and affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term. Accounting for lease modifications A lease modification is defined as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term)”. Modification can result from a change in consideration only. The effective date of the modification is defined as the date when both parties agree to a lease modification. A lessee accounts for a lease modification as a separate lease if both of the following conditions are fulfilled: ▪ the modification increases the scope of the lease by adding the right to use one or more underlying assets; and ▪ the consideration for the lease increases by an amount equivalent to the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. When these conditions are met, the modification is considered to result in the creation of a new lease that is separate from the original lease. The agreement for the right to use one or more additional assets is accounted for as a separate lease (or leases) to which the requirements of IFRS 16 are applied independently of the original lease. For a lease modification that is not a separate lease, i.e. that does not meet the conditions outlined above, at the effective date of the modification, the lessee accounts for the lease modification by remeasuring the lease liability using a discount rate determined at that date and: ▪ for lease modifications that decrease the scope of the lease, the lessee decreases the carrying amount of the right- of-use asset to reflect the partial or full termination of the lease, and recognizes a gain or loss that reflects the proportionate decrease in scope; and ▪ for all other lease modifications, the lessee makes a corresponding adjustment to the right-of-use asset. When a lease arrangement is modified, then the revised lease payments will always be discounted with a revised discount rate. This is different from the requirements for a reassessment of the lease, where only in specific cases a revised discount rate is required. Presentation and disclosures for Magyar Telekom as lessee Statement of financial position The Company decided to present the right-of-use assets (separately from other assets) as well the lease liabilities as separate line items on the face of the statement of financial position. Statement of profit or loss and other comprehensive income In the statement of profit or loss and other comprehensive income Magyar Telekom presents separately interest expense on the lease liability from depreciation for the right-of-use asset. In addition, interest expense on the lease liability is a component of finance costs.
232 Statement of cash flows The following items are presented within operating activities in the statement of cash flows: ▪ cash payments for the interest portion of the lease liability, according to the Company’s accounting policy to present interest payments in operating cash flows and; ▪ variable lease payments not included in the lease liability Cash payments for the principal portion of lease liability are presented within financing activities in the statement of cash flows. Presentation and disclosures for Magyar Telekom as lessor Presentation of leases in Statement of profit or loss and other comprehensive income and in Statement of financial position In the Statement of profit or loss and other comprehensive income, operating lease revenue is not disclosed separately from other revenue. There is only one-line item titled “Revenue”. The operating lease revenue line item in the Notes is titled “Other sources” (see Note 18.3.1). Magyar Telekom as a Lessor presents assets subject to operating leases in its statement of financial position according to the nature of the underlying asset. In the Company, portions of assets that are physically distinct and are identified as underlying assets (leases) are not presented separately from the whole asset in the statement of financial position. Other lease topics Sale and leaseback transactions Assessing whether the transfer of the asset qualifies as a sale In the Company, both the short-term and the low value recognition exception have not been elected for any asset class. As a result, Magyar Telekom seller-lessee will always recognize (materiality considered) sale-and-leaseback transactions on-balance sheet. To determine how to account for a sale-and-leaseback transaction, the Company first considers whether the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale. The Company then applies IFRS 15 to determine whether a sale has taken place. This assessment determines the accounting by both the seller-lessee and the buyer-lessor, as follows. Accounting for sale and leaseback − Transfer of an asset is not a sale If the transfer of an asset is not a sale, the seller-lessee and the buyer-lessor account for the transaction as financing. Accounting for sale and leaseback − Transfer of an asset is a sale If control passes as defined in IFRS 15 (sale), the seller-lessee must recognize an asset at an amount equaling the pro-rata carrying amount arising from the pro-rata right-of-use retained. Any gains or losses from this transaction are also only recognized proportionately. Hence, the seller-lessee restricts the gain that it recognizes on the sale to the amount that relates to the portion of the underlying asset that has been transferred, i.e. to the buyer-lessor’s residual interest in the underlying asset. Sale and leaseback transactions have no material effect on financial statements of Magyar Telekom.
233 Subleases A sublease is defined as a transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect. In classifying a sublease, Magyar Telekom, as the intermediate lessor, should classify the sublease as a finance lease or an operating lease in the same manner as any other lease using the criteria discussed in IFRS 16.61. Sublease is a finance lease If Magyar Telekom classifies the sublease as a finance lease, the lease is entered into the following: ▪ derecognize the right-of-use asset relating to the head lease that it transfers to the sublessee and recognizes the net investment in the sublease; ▪ recognize any difference between the right-of-use asset and the net investment (finance lease receivable) in the sublease in profit or loss; and ▪ retain the lease liability relating to the head lease in its statement of financial position, which represents the lease payments owed to the head lessor. At the commencement date of the sublease, if Magyar Telekom cannot readily determine the rate implicit in the sublease, then it uses the discount rate that it uses for the head lease to account for the sublease, adjusted for any initial direct costs associated with the sublease. Presentation and disclosures for subleases No sublease-specific balance sheet and income statement presentation rules apply to subleases. Magyar Telekom applies the respective presentation rules that apply to other finance and operating leases. Magyar Telekom does not offset assets and liabilities arising from a head lease and a sublease of the same underlying asset, unless the financial instruments requirements for offsetting are met. The same applies to lease income and lease expenses relating to a head lease and a sublease of the same underlying asset, unless the requirements for offsetting in IAS 1 are met. Under IFRS 16 the head lease and a sublease are two separate contracts that are accounted for under the lessee and lessor models, respectively. The general disclosure rules equally apply for the head lease and for subleases, either disclosures for finance sub-lessors or operating sub-lessors. Lessor accounting Finance lease – Definition A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee. The nature of finance lease arrangement is akin to financing the sale of an asset. The presentation in the financial statements departs from the legal lease form of the transaction and is based on the economic substance (i.e. as if the underlying lease asset was sold by the lessor to the lessee). Operating lease – Definition An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. There is a typically simple short-term hire arrangement (an operating lease), whereby rental payments received are dealt with in profit or loss with the primary impact on the balance sheet relating to the timing of lease payments.
234 17.2 Finance lease 17.2.1 Finance lease – Company as lessor Finance leases mainly include building and equipment – dark fibres, broadband network, offices, sites – provided to business customers as part of IT service contracts where the Company is the service provider. Future lease receivables under finance leases at December 31, 2022 and 2023 are as follows: 12.31.2022 12.31.2023 Present value Interest component Minimum lease receipt Present value Interest component Minimum lease receipt Within 1 year............. 276 224 500 148 100 248 1–2 years ................... 206 208 413 148 90 238 2–3 years ................... 222 192 413 97 81 178 3–4 years ................... 232 175 407 105 73 178 4–5 years ................... 250 156 407 114 63 177 After 5 years ............. 1,808 459 2,266 602 151 753 Total ........................ 2,994 1,414 4,406 1,214 558 1,772 The interest component represents the unearned finance income. The present value due within one year is included in Other current financial assets, while the present value after one year is included in Other non-current financial assets. The finance income accruing to the Company over the lease term is recognized in the Profit for the period (Interest income). See Note 23. The unguaranteed residual values accruing to the benefit of the Company are insignificant. 17.2.2 Lease – Company as lessee Leases are mainly in respect of the rental of the new headquarters, mobile cell sites and sale and lease back of spaces in buildings accommodating telephone exchanges, and to a lesser extent, related to other buildings, network and other telecommunications facilities, equipment and vehicle. In most cases the contracts are denominated in HUF and EUR, the term of the leases is 1–15 years, and the contracts include renewal options but no purchase options. Leases of buildings generally have lease terms between 1 and 12 years, in the case of telecom equipment 3 and 15 years, while these terms are between 1 and 4 years for motor vehicles and other equipment. The Company’s obligations under its leases are secured by the lessor’s title to the leased assets. Generally, the Company is restricted from assigning and subleasing the leased assets and some contracts require the Company to maintain certain financial ratios. The maturity analysis of lease liabilities is disclosed in Note 5.1.3.
235 The followings are the amounts recognized in profit or loss: 2022 2023 Depreciation expense of right-of-use assets .......................................................... 19,804 20,953 Interest expense on lease liabilities .......................................................................... 5,972 7,003 Foreign exchange loss on lease liabilities ................................................................ 4,232 (2,449) The expense relating to variable lease payments not included in the measurement of lease liabilities ................................................................................ (a) 1,704 1,943 Income from subleasing right-of-use assets........................................................... - 544 Gains or losses arising from sale and leaseback transactions ............................. - - (a) From January 1, 2022, the treatment of rental fees based on subscriber/service number has changed according to IFRS 16, as they are classified as variable (performance-based) payments, so they must be accounted for in the Statement of Profit or Loss and other comprehensive income. The network rental contracts were affected by the change. Related to these contracts the future cash outflows for variable lease payment that are not reflected in the measurement of lease liabilities are HUF 8,021 million in 2023 (HUF 5,836 million in 2022). The Company had total cash outflows for leases of HUF 21,998 million in 2023 (HUF 19,440 million in 2022). The Company has various lease contracts that have not yet commenced as at December 31, 2023. The future lease payments for these non-cancellable lease contracts are HUF 9,777 million in 2023 (HUF 9,281 million in 2022). The amount of undiscounted potential future rental payments relating to periods following the exercise date of extension and termination options that are not included in the lease term is HUF 15,962 million in 2023 (HUF 16,943 million in 2022). The Company initially estimates and recognizes amounts expected to be payable under residual value guarantees as part of the lease liability. Typically, the expected residual value at lease commencement is equal to or higher than the guaranteed amount, and so the Company does not expect to pay anything under the guarantees. As at December 31, 2023, there is no amount of residual value guarantees to which the Company is potentially exposed that are not reflected in the measurement of lease liabilities (HUF 0 million in 2022). 17.3 Operating leases – Company as lessor The following table includes the future minimum lease payments receivable by the Company for the operating leases of mobile tower sections, network, dark fiber, buildings and customer premise equipment. 12.31.2022 12.31.2023 Within 1 year................................................................................. 4,174 4,566 1–2 years ....................................................................................... 3,641 4,121 2–3 years ....................................................................................... 3,417 3,852 3–4 years ....................................................................................... 3,269 3,549 4–5 years ....................................................................................... 2,769 3,039 After 5 years ................................................................................. 1,391 1,477 Total ...................................................................................... 18,661 20,604 The lease income from operating leases is HUF 6,858 million in 2023 (HUF 5,158 million in 2022). The Company has no lease income relating to variable lease payments that do not depend on an index or rate. The estimated expected credit loss on operating lease considered to be not material and not recognized.
236 The following table disaggregates class of property, plant and equipment into assets subject to operating leases: Land and Building Telecom equipment Total 01.01.2022 Gross value ............................................................................................... 3,782 2,493 6,275 Accumulated depreciation ................................................................... (1,640) (1,051) (2,691) Carrying amount 01.01.2022 ........................................................ 2,142 1,442 3,584 Carrying amount 01.01.2022 ........................................................ 2,142 1,442 3,584 Additions .................................................................................................. 42 6,970 7,012 Disposal .................................................................................................... (144) (207) (351) Depreciation charge ............................................................................... (108) (1,143) (1,251) Carrying amount 12.31.2022 ........................................................ 1,932 7,062 8,994 12.31.2022 Gross value ............................................................................................... 3,643 9,133 12,776 Accumulated depreciation ................................................................... (1,711) (2,071) (3,782) Carrying amount 12.31.2022 ........................................................ 1,932 7,062 8,994 Carrying amount 01.01.2023 ........................................................ 1,932 7,062 8,994 Additions .................................................................................................. 194 4,218 4,412 Disposal .................................................................................................... (115) (156) (271) Depreciation charge ............................................................................... (127) (1,975) (2,102) Carrying amount 12.31.2023 ........................................................ 1,884 9,149 11,033 12.31.2023 Gross value ............................................................................................... 3,780 13,119 16,899 Accumulated depreciation ................................................................... (1,896) (3,970) (5,866) Carrying amount 12.31.2023 ........................................................ 1,884 9,149 11,033
237 18 REVENUE 18.1 Revenue – accounting policies 18.1.1 Sale of goods and Rendering of services The core principle of IFRS 15 is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. Revenue should be recognized if it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. If the Company determines that collectability is no longer ensured (e.g. because subsequently the customer’s ability or intent to pay significantly deteriorates), the Company must apply cash accounting for the remainder of the contract, i.e. for the outstanding goods and services to be provided. This reassessment does not affect recorded assets and revenue relating to performance obligations already satisfied. Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control either transfers over time or at a point in time, which affects when revenue is recorded. As a practical expedient, the Company applies the guidance to a group of contracts with similar characteristics instead of to a single contract with a customer. A portfolio approach is acceptable if the Company can reasonably expect that the effect of applying a portfolio approach to a group of contracts or group of performance obligations would not differ materially from considering each contract or performance obligation separately. This implies that a portfolio of contracts with similar characteristics does not necessarily need to refer to homogenous products being included in these contracts. Main principles ▪ If the Company performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the Company shall present the contract as a Contract asset, excluding any amounts presented as a receivable. A contract asset is the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. ▪ In the case of multiple-element arrangements (e.g., mobile contract plus handset) with subsidized products delivered in advance, a larger portion of the total remuneration is attributable to the component delivered in advance (mobile handset), requiring earlier recognition of revenue. This leads to the recognition of what is known as a contract asset in the Statement of Financial Position. See Note 3.4 for more details. ▪ Incremental expenses for sales commissions (customer acquisition costs or costs of obtaining a contract) and costs to fulfill a contract with a customer must be capitalized and presented on the Other current and non-current assets lines of the Statement of Financial Position and recognized over the estimated customer retention period or over the useful life of the contracts, see Notes 3.4 and 12.2 for more details. ▪ Later recognition of revenue appears in cases where “material rights” are granted, such as offering additional discounts for future purchases of further products. ▪ Contract liabilities are netted off against the contract assets for each customer contract. ▪ The Company presents the revenue on gross basis (as principal) when it controls the specified goods or services before they are transferred to the customer, and it must be transferred by the Company. ▪ When the Company is a reseller of a supplier’s branded digital products and is the legal seller of these products, it should generally be considered primarily responsible towards the customer for providing the promised goods or services when both of the following conditions are fulfilled: ▪ The Company is the only party which the customer enters into a contract with; ▪ The Company must be the only party that is responsible towards the customer for product acceptability, providing support, handling complaints and rectifying product issues. ▪ A significant financing component is not considered for the amount and timing of revenue recognition if the period between when a promised good or service is transferred to the customer and when the customer pays for that good or service will be one year or less. For sevice contracts covering period over one year, consisting specifically trade receivables over one year and contract assets, revenue recognized using the effective interest method described in Notes 3.4 and 4.1.2, respectively. ▪ If the promise to grant a license is distinct from the other promised goods or services in the contract then the promise to grant the license is a separate performance obligation and the Company shall determine whether the license transfers to a customer is either at a point in time or over time.
238 18.1.2 Revenue from operating leases Revenue from operating leases is recognized as revenue on a straight line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income, over the term of the lease. For further information, please see Note 17.3. 18.2 Revenue from major service lines 18.2.1 Mobile and fixed line telecommunications revenue Revenue is primarily derived from services provided to Magyar Telekom’s customer subscribers and other third parties using Magyar Telekom’s telecommunications network and equipment sales. Customer subscriber arrangements typically include an equipment sale, subscription fee and charge for the actual voice, internet, data or multimedia services used. Subscription fees and flat rate revenue is recognized on over time basis in the period they relate to. Revenue for airtime services is recognized over-time. Revenue from fixed, mobile and TV services provided through narrow and broadband accesses are recognized over-time basis at post-paid contracts, while on usage basis at pre-paid contracts. Streaming TV service revenue is recognized on net basis, for further information see Note 18.2.2. Revenue from premium rate services typically include intermediated services (e.g. lottery, parking and public transport tickets, motorway toll) is generally recognized on net basis. Advertising revenue is recognized in the period that the advertisements are exhibited. Customers may also purchase prepaid mobile, public phone and internet credits (cards) which allow those customers to use Magyar Telekom’s telecommunications network for a selected amount of time. Customers must pay for such services at the date when the card is purchased. Revenue from the sale of cards is recognized when they are used by the customers or when the credits expire with unused traffic. Third parties using Magyar Telekom’s telecommunications network include roaming customers of other service providers and other telecommunications providers which terminate or transit calls on Magyar Telekom’s network. These wholesale (incoming) traffic revenue is recognized in the period of related usage. A proportion of the revenue received is often paid to other operators (interconnect) for the use of their networks, where applicable. The revenue and costs of these transit calls are stated gross in the Financial statements as the Company is the principal supplier of these services using its own network freely defining the pricing of the services and recognized in the period of related usage. Contracts are frequently sold to customers containing a cross subsidy between two or more components. A typical example is where a mobile phone is sold at a price significantly below its market value in a bundle with a service contract for a period of 12 or 24 months. From a commercial point of view, the subsidy on the mobile phone is compensated via the service fee. See also Note 3.4. With this adjustment requirement (also termed as "basic adjustment") a cross-subsidy or an overall bundle discount must be allocated to the individual components of the bundle consequently revenue generally reflects the standalone selling price of the good and/or service. 18.2.2 System Integration and Information Technology (SI/IT) revenue Contracts for network services, which consist of the installation and operation of communication networks for customers, have an average duration of 2-3 years. Revenue from systems integration or installation contracts requiring the delivery of customized products and/or services is generally performed in projects and covered by fixed-price or time and material-based contracts. For fixed-price contracts, revenue is measured based on the input method that determined on the progress of performance. In this case revenue recognition is based on the efforts or inputs to the satisfaction of a performance obligation (resources consumed, labour hours expended, cost incurred, time elapsed or machine hours used) relative to the total expected inputs. In case of contracts billed on the basis of time and material, revenue is recognized over time.
239 Ongoing operation of IT system – outsourcing contracts – reflects the extent of actual services delivered in the period in accordance with the terms of the contract, could be performed either on the equipment of the client or the Company’s (e.g. cloud, running, monitoring and maintenance services) related revenue invoiced on monthly basis (over-time). Revenue from IT services delivered in the period in accordance with the terms of the contract are analyzed based on the IFRS 16 requirements – determining whether an arrangement contains a lease, and if they include embedded lease elements, the revenue attributable to these is recognized according to IFRS 16 – Leases as described in Note 17. Magyar Telekom transfers control of goods and services over time, therefore satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: ▪ a customer simultaneously receives and consumes the benefit provided by The Company’s performance as the Company performs, containing services provided continuously during the contracted period (desktop services, database management services, operational and maintenance services). ▪ The Company’s performance creates or enhances assets that the customer controls as the asset is created or enhanced or the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date, include project works covering a longer period whose measured based on input method and related revenue recognized accordingly. This kind of project works could contain e.g.: Information and communications technology (ICT) network planning and related construction works with one or more milestones during of project period from revenue recognition point of view. If the performance obligation is not satisfied over time, Magyar Telekom satisfies the performance obligation at a point in time. Revenue from hardware sales or sales-type leases is recognized when the customer obtains the control over the product. Equipment revenue is recognized at a point in time. When the Company is a reseller of a supplier’s branded digital products and is the legal seller of these products, it should generally be considered primarily responsible towards the customer for providing the promised goods or services when both of the following conditions are fulfilled: ▪ The Company is the only party which the customer enters into a contract with; ▪ The Company must be the only party that is responsible towards the customer for product acceptability, providing support, handling complaints and rectifying product issues. With (rights to) another party’s intangible goods or services with a (virtually) unlimited supply (e.g. software licenses, cloud services, streaming services), there is a rebuttable presumption that inventory risk is not a relevant indicator for control. If the good or service provided by the other party is a branded product by this other party, and the Company is not the legal seller of this good or service or of a right to the other party’s good or service, the Company will be considered an agent thus revenues recognized on a net basis. Revenue from software license sales provided by the Company to customers based on the principle-agent accounting method.
240 18.3 Revenue in the Statement of profit or loss and other comprehensive income 18.3.1 Disaggregation of revenue from contracts with customers 2022 2023 Mobile revenue Voice retail ......................................................................................................... 104,063 114,033 Voice wholesale ................................................................................................ 8,542 8,068 Data ..................................................................................................................... 131,194 168,635 SMS...................................................................................................................... 22,638 24,872 Equipment .......................................................................................................... 106,525 109,447 Other mobile revenue ...................................................................................... 13,264 18,489 Total Mobile revenue ............................................................................. 386,226 443,544 Fixed line revenue Voice retail ......................................................................................................... 29,392 30,119 Broadband retail ............................................................................................... 62,415 79,477 TV* ....................................................................................................................... 52,468 61,565 Equipment .......................................................................................................... 16,184 19,364 Data retail ........................................................................................................... 10,491 11,454 Wholesale ........................................................................................................... 13,073 13,242 Other fixed line revenue*................................................................................. 13,317 16,674 Total fixed line revenue ......................................................................... 197,340 231,895 SI/IT revenue...................................................................................................... 9,388 15,516 Total revenue .......................................................................................... 592,954 690,955 Of which: Revenue from contracts with customers ..................................................... 587,796 684,097 Other sources .................................................................................................... 5,158 6,858 *2022 values are represented as revenue from video-on-demand services is now included in TV revenue instead of fixed other revenue to better reflect operational performance. Other sources of revenue include real estate and network rental fees which are presented above in the Fixed line wholesale and Fixed line other revenue lines. There was a higher increase in CPE operating leases revenue in 2023 (HUF 1,611 million). None of the Company’s customers represent a significant source of revenue individually. Revenue from transactions with a single external customer (or group of entities that – knowingly to us – are under common control of a third party or government) do not exceed 10% of the Company’s revenue. Regarding geographical segmentation of revenue please see Note 33.
241 18.4 Assets and liabilities related to contracts with customers Contract assets of the Company consist of unbilled amounts typically resulting from sales under long-term contracts when revenue recognized exceeds the amount billed to the customer. See Notes 3.4, 4.2.2.3., 12.2 and 18.1.1. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. 12.31.2022 12.31.2023 Contract assets – current .................................................................................. 13,805 12,537 Contract assets – non-current .......................................................................... 3,385 3,105 Contract liabilities – current .............................................................................. (8,565) (8,469) Net contract assets (liabilities) ................................................................ 8,625 7,173 Revenue recognized in the reporting period from amounts included in contract liability at the beginning of the period ............................................ 6,868 7,381 Asset recognized from the costs of obtaining a contract with customers .... 6,963 6,981 Asset recognized from the costs to fulfill a contract with customers....... - 1,711 Amortization recognized as cost of obtaining a contract during the period (7,360) (7,917) Amortization recognized as cost to fulfill a contract during the period ... - (325) Impairment losses recognized on contract assets amounted to HUF 1,350 million as at December 31, 2023 (HUF 1,036 million in 2022). As of December 31, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligation is HUF 204,172 million and the Company will recognize this revenue as services are rendered, which is expected to occur over the next 1-24 months. 19 DIRECT COSTS 19.1 Telecom tax Telecom tax was introduced in Hungary for fixed and mobile voice and mobile SMS/MMS services, effective from July 1, 2012. The tax imposed on fixed and mobile usage amounts to HUF 2 per minute and HUF 2 per SMS/MMS for private individual subscribers’ subscriptions and to HUF 3 per minute and HUF 3 per SMS/MMS for non-private individual subscribers’ subscriptions. The tax is capped at HUF 700 and HUF 5,000 per month per calling number for private and non-private individuals’ subscriptions, respectively. 19.2 Other direct costs Other direct costs include costs of mobile and fixed devices, accessories and other equipment, agent commissions and non-voice direct costs.
242 20 EMPLOYEE-RELATED EXPENSES 20.1 Employee-related expenses – Accounting policies 20.1.1 Short-term employee benefits Short-term employee benefits are recognized as a current expense in the period when employees render their services. These include wages, social security contributions, bonuses, paid holidays, discounted telephone bills, meal and holiday contributions and other fringe benefits and the tax charges thereon. Payments to defined contribution pension and other welfare plans are recognized as an expense in the period in which the service is rendered by the employees. 20.1.2 Share-based payments Magyar Telekom recognizes the costs of services received from its employees in a Share-based payment transaction when services are received. Magyar Telekom recognizes a corresponding increase in its equity reserves (Reserve for equity-settled share-based transactions) if the services are received in an equity-settled share-based payment transaction. When the share-based compensation program is completed, i.e. the shares are transferred to the employees’ ownership or the share options have forfeited, the respective reserve is derecognized. If the services are received in a cash-settled share-based payment transaction, the Company recognizes the expense against a liability, re-measured to fair value at each financial statement date. Bonuses tied to the long-term performance of the Magyar Telekom and Deutsche Telekom shares are recognized in the Profit for the period at their time-proportioned fair value against an accumulating balance in liabilities. 20.1.2.1 Share Matching Plan of Deutsche Telekom Group (SMP) As of July 1, 2015, Magyar Telekom implemented a Share Matching Plan. The participant can invest a minimum of 10% of his/her gross annual bonus in Deutsche Telekom shares, with an option to voluntarily increase this amount to a maximum of 50% (personal investment). These shares must be kept for at least for four years (the lock-up period), the participant is granted matching shares upon expiry of the lock-up period. The share allocation ratio of the program (1:1 or 1:2) depends on the participant’s individual Management Group (MG). Deutsche Telekom grants the matching shares to the participant based on the Deutsche Telekom shares acquired by the participant within the framework of the program. The program starts annually if the free cash flow target of Deutsche Telekom Group was met in the previous year. The program initiated by DT is settled in DT shares with the participants, meanwhile Magyar Telekom has to settle it with DT AG in cash at the same time participants are granted the DT shares therefore the closing balance of the program is presented as a related-party financial liability in the Separate statement of financial positions as it is settled in cash from the perspective of Magyar Telekom and is due to be paid to DT AG. In 2023 HUF 47 million was recognized (2022: HUF 44 million) as expense for the program. 20.1.2.2 Long-term incentive program (LTI) As of January 1, 2015, Magyar Telekom Company changed its existing LTI program, which turned it into a share-based compensation program. The 2022 LTI program is a global, Deutsche Telekom Group-wide incentive program. Commencing on January 1, 2023, the prerequisite of participating in LTI is the participation in the Share Matching Plan (SMP) and making a complying personal investment accordingly. Approximately 30 executives may participate in the program. The CEO’s participation is unconditional, while other executives may participate only if the evaluation of the participant's performance in the previous year meets the requirements. LTI is payable in cash tied to the achievement of four key strategic indicators. In the framework of the program, in each year a new four-year tranche is to be launched. Payment is due after the end of the program term depending on the evaluation of the achievement of the pre-set targets (0 to 150%).
243 At the beginning of the program, the relevant incentive amount is converted into a number of virtual shares of DT AG and awarded to the plan participant in the form of virtual shares (basic number). The annual level of target achievement is determined at the end of each year. This target achievement level is multiplied on a pro rata basis by the basic number of virtual shares awarded. The number of virtual shares calculated using this method shall then be "fixed" for the plan participant as the binding result for that specific year ("annual result"). At the end of the plan term, the four binding annual results shall be added together. The resulting total number of virtual shares shall be converted into cash applying the prevailing price of DT AG shares at that time, which is paid to the plan participants. For dividend payments during the plan term, the virtual shares shall be treated as real shares. The dividends shall be taken into account as follows: The first, second and third dividend payments shall be “reinvested” into virtual shares when the actual dividends are paid on real shares. The fourth (last) dividend payment shall not be “reinvested” but paid in cash together with the plan payment following the DT AG shareholders' meeting at which a decision is made regarding this dividend payment. The plan currency is euro. In 2023, HUF 618 million was recognized as expenses for the program (2022: HUF 808 million). 20.1.3 Game Changer Incentive (GCI) Game Changer Incentive is a long-term incentive program paid in cash that is linked to the performance of two equally weighted indicators (50% financial and 50% customer centricity). The program is a four-year program, from January 1, 2022 to December 31, 2025. For each program-year different base amount, rising in sequence, has been determined. Payment condition for the given program-year is that the target achievement level of the two performance indicators are each at least 50%. The base amount payable for the program- years depend on how many times in uninterrupted succession the necessary condition has been met (sequence of payment). If the necessary condition for payment is not met in a program-year, the payment sequence will recommence with the base amount determined for the first program year. The program currency is euro. Payment is always made after the program-year’s expiry and the evaluation of the targets’ performance levels on a scale of 0-150%. The detailed rules are determined by the Remuneration and Nomination Committee. The rules of participation in the program are included in the regulation adopted by the Remuneration and Nomination Committee. After payment is made, the incentive may not be reclaimed. In 2023 HUF 293 million was recognized as expense for the program in (in 2022: HUF 242 million). 20.1.4 Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the nominal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without the possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. 20.2 Employee-related balance in the Statement of financial position Liabilities payable on incentive plans and termination benefits recognized as provision in the statement of financial position and annual movements for 2023 and 2022 disclosed in Note 13.2. Short-term liabilities on employee benefits (Salaries and wages) as of 2023 and 2022 presented in Note 14.
244 20.3 Employee-related expenses in the Statement of profit or loss and other comprehensive income 2022 2023 Short-term benefits (Note 20.1.1) ................................................................... 57,933 70,625 Termination benefits (Note 20.1.4) .................................................................. 1,449 1,594 Cash-settled share-based compensations (LTI) (Note 20.1.2.2) ............... 808 618 Cash-settled compensation (GCI) (Note 20.1.3) .......................................... 242 293 Equity-settled share-based compensations (Note 20.1.2.1)...................... 44 47 Total before capitalization ....................................................................... 60,476 73,177 Expenses capitalized ........................................................................................... (4,009) (3,501) Total ........................................................................................................... 56,467 69,676 Total costs expensed in relation to defined contributions (including social security contribution) ............................................................................................ 7,493 8,885 Average number of employees (full time equivalent) ..................................... 4,938 5,350 Closing number of employees (full time equivalent) ...................................... 4,868 5,392 Capitalized expenses represent the employee related costs incurred in connection with developments and recognized as a cost of an intangible or tangible assets. 21 OTHER OPERATING EXPENSES 21.1. Other operating expenses 2022 2023 Cost of other purchased services ..................................................................... (a) 33,090 36,454 Energy costs ......................................................................................................... 6,142 21,367 Marketing expenses ............................................................................................ 7,104 7,919 Utility tax ............................................................................................................... 7,241 7,522 Other ...................................................................................................................... 9,725 7,534 Total ........................................................................................................... 63,302 80,796 Research as well as marketing costs are expensed as incurred. The Company did not recognize research and development among other operating expenses either in 2022 or 2023. (a) Audit costs included in other purchased services Cost of other purchased services, among others, include expenses incurred in relation to the audit of the separate and consolidated financial statements of the Company as well as other services which were settled with PricewaterhouseCoopers Könyvvizsgáló Kft. (PwC) and Deloitte Könyvvizsgáló és Tanácsadó Kft. (Deloitte) as follows. 2022 2023 Audit of the financial statements ..................................................................... 364 393 Other audit-related fees ..................................................................................... 1 1 Other non-audit-related fees* ........................................................................... 27 - Total expenses paid to PwC and Deloitte ................................................ 392 394 *Services provided by PwC in the first quarter of 2022 and their fees Audit of the financial statements is the aggregate fees of Deloitte in connection with the audit of the annual financial statements and services performed in relation to legal obligations and submissions required by regulatory provisions. Review of the quarterly financial statements is also included, as well as information systems and procedural reviews and testing to understand and place reliance on the systems of internal control.
245 Other audit-related services mainly include cost of other professional auditing services provided by the Auditor beyond the audit of the financial statements, as well as fees of other audit procedures necessary for meeting the reporting requirements arising from relevant legislation and internal regulations applicable to the Company. Other non-audit related fees are fees primarily related to consulting services and services like participation by Magyar Telekom employees in conferences and training sessions. 21.2 Supplementary telecommunication tax On June 4, 2022 the Government of Hungary issued a decree (Government Decree of 197/2022. (VI.4.)) imposing new tax on a number of industries, including telecommunications. The supplementary telecommunication tax is levied on the actual business year’s annual net sales of telecommunication services as defined by the law on local taxes using progressive rates, appropriately weighted based on the expected full year revenue and is payable for the years 2022, 2023 and 2024. The applicable tax rate is progressive: 0% for turnover below HUF 1 billion; 1% for turnover exceeding HUF 1 billion and below HUF 50 billion; 3% for turnover exceeding HUF 50 billion and below HUF 100 billion; and 7% for turnover exceeding HUF 100 billion. The major proportion of Magyar Telekom’s telecommunication revenue is subject to 7% tax rate. The supplementary telecommunication tax classification requires judgment. Management believes that this tax is not a tax on consumption of services by end customers but rather a tax on entities operating in selected industries and its fundamental aim is to support the corrective actions in relation to the economic downturn that Hungary is facing. The calculation of supplementary telecommunication tax ignores whether revenue is invoiced to and collected from customers or not. Altogether, management classified this tax as indirect operating expense and for transparency it is disclosed on a separate line of Statement of Profit or Loss and Other Comprehensive Income. In 2023 the supplementary telecommunication tax expense is amounted to HUF 29.9 billion (2022: HUF 24.5 billion). 22 OTHER OPERATING INCOME 2022 2023 Income received for the relocation of own network ........................................ 914 843 Gain on the sale of PPE, Intangible assets and assets held for sale - net .... 332 192 Other ......................................................................................................................... 3,331 3,181 Total .............................................................................................................. 4,577 4,216 23 INTEREST INCOME 2022 2023 Interest income on receivables and loans....................................................... 1,589 3,263 Unwinding of interest component of provisions ........................................... 17 787 Interest income from finance leases ................................................................ 284 114 Dividend income .................................................................................................. 1 11 Total ........................................................................................................... 1,891 4,175
246 24 INTEREST EXPENSES 2022 2023 Interest expense payable on loans to related parties ...................................... 4,568 12,578 Interest expense on lease liabilities .................................................................... 5,972 7,003 Interest expense on frequency fee liabilities..................................................... 4,687 4,183 Other interest expense .......................................................................................... 3,048 3,762 Interest components of provisions ...................................................................... 579 861 Borrowing costs capitalized ................................................................................. (267) (526) Total .............................................................................................................. 18,587 27,861 Borrowing costs include interest and other costs that the Company incurs in connection with the borrowing of funds. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. The borrowing costs eligible for capitalization of general borrowings that are used for the purpose of obtaining qualifying assets are capitalized applying the weighted average of the borrowing costs applicable to the general borrowings of the Company that are outstanding during the period. For further information see Notes 9.1 and 10.1. A qualifying asset is an asset that necessarily takes a substantial period of time, in general over 12 months, to get ready for its intended use. Other borrowing costs are recognized as an expense. Total Interest expenses is shown net of borrowing costs capitalized using average borrowing rates of 3.75%-4.74% in 2023 (2022: 0.67%-2.34%). When calculating the borrowing rates, Other finance expenses (included in Note 25) are also considered. 25 OTHER FINANCE EXPENSES – NET 2022 2023 Fee expense .................................................................................................................... 4,871 5,993 Net foreign exchange losses / (gains) on financial instruments .......................... 23,193 (9,651) Other net foreign exchange losses / (gains)............................................................. (403) (275) Losses / (gains) on the subsequent measurement of financial assets fair value through profit and loss (other than derivatives) .......................................... ........................................................................................................................................... (107) (112) Losses / (gains) on the subsequent measurement of financial liabilities at fair value through profit and loss (other than derivatives) .......................................... ........................................................................................................................................... (9) (135) Losses/(gains) on the subsequent measurement of derivatives contracted with related parties ....................................................................................................... (20,449) 27,467 Total .................................................................................................................... 7,096 23,287 The significant foreign exchange loss on financial instruments in 2022 is due to the dramatical weakening of HUF exchange rates. In 2023 due to the strengthening of the forint this turned into significant amount of gains. Significant part of the foreign exchange exposure is covered by derivatives; therefore the negative foreign exchange impact of the HUF movement is partially offset. The high amount of gains on the subsequent measurement of derivatives contracted with related parties in 2022 beyond the foreign exchange movement effect, was due to the considerable increasing of HUF interest environment. During 2023 the significant losses on derivatives contracted with related parties are partly due to the decreasing forint interest rate environment and approaching maturity of affected derivatives reversing significant gains from the previous years and partly due to strengthening of the forint, which is a compensation effect related to the gains on financial instruments above.
247 26 RESULTS OF INVESTMENTS Dividends declared by the subsidiaries to be paid to the Company, any gain or losses on the sale of a subsidiary and any impairment losses arising on a subsidiary charged as of the financial statement dates are presented in the profit for the year as a result from investments. The following table shows the results from the Company’s investments related to years 2022 and 2023: 2022 2023 Telekom Rendszerintegráció Zrt. .................................................................. 5,000 8,000 Stonebridge A.D. . ............................................................................................. 4,838 5,581 Investel Kft. ....................................................................................................... - 300 Cecoin Kft. ………………………………………………………………………………………………. 3,121 - Other ................................................................................................................... 842 1,086 Total dividend received ......................................................................... 13,801 14,967 Impairment (loss)/gain (including reversals of impairment losses) on Cecoin Kft. ......................................................................................................... (3,133) 415 Total results from investments ............................................................. 10,668 15,382 Dividends receivable by the Company are recognized as a receivable and income in the period in which the dividends are approved by the general meeting of the investees. The Company did not sell any of its subsidiary either in 2023 or in 2022. For more information on impairment see Note 3.2.2. 27 EARNINGS PER SHARE (EPS) Basic earnings per share is calculated by dividing profit attributable to the owners of the Company for the period by the weighted average number of common stocks outstanding. Furthermore, the weighted average number of common stock outstanding is determined by deducting the weighted average number of treasury shares held by the Company. All figures are presented in the Statement of profit or loss and other comprehensive income. There was no transaction resulting dilutive shares in the reported periods therefore the presented basic and diluted EPS are equal in 2022 and 2023. The Company is subject to preparation of a consolidated annual report, so disclosures related to the EPS indicator (based on IAS 33) are shown based on consolidated financial statements.
248 28 PURCHASE OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS The table below shows the reconciliation of investments in property, plant and equipment and intangible assets and the cash payments made for these investments. Capitalized borrowing costs are included in the Investments in PPE and intangible assets, where applicable. 12.31.2022 12.31.2023 Investments in property, plant and equipment (Note 9) .......................... 84,438 62,464 Investments in Right-of-use assets ............................................................... (a) 29,781 23,909 Investments in intangible assets (Note 10) ................................................. 19,024 22,806 Total investments in PPE and intangible assets ................................... 133,243 109,179 Capitalized asset-related grant ..................................................................... (b) (2,662) (854) Change in Right-of-use assets ....................................................................... (29,781) (23,909) Change in trade payables relating to capital expenditures ..................... (c) (7,688) (5,126) Recognition / (Derecognition) of investment tax credit ........................... (d) 1,788 2,405 Cash payments for purchases of PPE and intangible assets ............... 94,900 81,695 (a) For further information, please see Notes 9.2, 17. (b) In 2023 HUF 838 million is paid by the government. It is presented in Notes 4.2.4.2 and see also Notes 9 and 14 for government grants relating to the purchase of PPE. (c) Change in payables relating to capital expenditures includes the effect that the actual cash settlement of the vendor invoices is made subsequent to the recognition of the investment. (d) For further information see Note 6. 29 PURCHASE OF SUBSIDIARIES There were no payments on acquisitions considered as a subsidiary or a business combination in 2023. In 2022, the Company has exercised its call option on the business quota of Cecoin Kft. for a purchase price of HUF 6,950 million.
249 30 CONTINGENT ASSETS AND LIABILITIES 30.1 Contingent assets A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of uncertain future events not within the control of the Company. These assets are not recognized in the statement of financial position. The Company has no contingencies where the inflow of economic benefits would be probable and material. 30.2 Contingent liabilities No provision is recognized for contingent liabilities. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events (excluding executory contracts) not wholly within the control of the Company; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. The most significant contingent liabilities of the Company are described below. No provisions have been recognized for these cases, as management estimates that it is unlikely that these claims originating from past events would result in any material economic outflows or the amount of the obligation cannot be measured with sufficient reliability. 30.2.1 Guarantees Magyar Telekom is exposed to risks that arise from the possible drawdown of guarantees, for which see more details in Note 4.5.4. 31 PURCHASE COMMITMENTS 31.1 Property, plant and equipment and intangible assets The table below summarizes Magyar Telekom’s contractual purchase commitments for property, plant and equipment and intangible assets with the majority falling due within two years. 12.31.2022 12.31.2023 Property, plant and equipment ............................................................................ 11,725 9,824 Intangible assets ..................................................................................................... 1,033 5,107 Total .............................................................................................................. 12,758 14,931 31.2 Investments As at December 31, 2023 and 2022 the Company had no committed business combinations.
250 32 RELATED-PARTY TRANSACTIONS Related parties of the Company include legal entities and persons that are related to the Company. A person or a close member of that person's family is related to the Company if that person: ▪ has control or joint control of the reporting entity; ▪ has significant influence over the reporting entity; or ▪ is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. An entity is related to a reporting entity if any of the following conditions apply: ▪ The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ▪ One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). ▪ Both entities are joint ventures of the same third party. ▪ One entity is a joint venture of a third entity and the other entity is an associate of the third entity. ▪ The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. ▪ The entity is controlled or jointly controlled by a person related to the entity or such a person holds a key position in the reporting entity. ▪ The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. The transactions with related parties are priced at arm’s lengths basis. 32.1 Related-party transactions in the Statement of financial position The tables below summarize the carrying amount of assets and liabilities arising from the significant transactions with related parties as of December 31, 2022 and 2023: 12.31.2022 Trade recei- vables Other receivables (advances) Financial recei- vables Lease recei- vables Cashpool recei- vables Derivative financial instru- ments Trade payables Financial liabilities Derivative financial liabilities Lease liabili- ties Parent ......................... 719 - 1 - - 31,723 (3,031) (163,725) (2,035) - Subsidiaries ................ 2,295 298 1,142 2,647 - - (5,967) (20,320) - (5,382) Associates and joint ventures ...................... - - - - - - - - - - Other related parties . 4,509 66 - - - - (6,400) (176) - - Total .......................... 7,523 364 1,143 2,647 - 31,723 (15,398) (184,221) (2,035) (5,382) 12.31.2023 Trade recei- vables Other receivables (advances) Financial recei- vables Lease recei- vables Cashpool recei- vables Derivative financial instru- ments Trade payables Financial liabilities Derivative financial liabilities Lease liabili- ties Parent ......................... 1,353 - - - 4,969 17,295 (2,501) (141,364) (121) - Subsidiaries ................ 3,244 375 1,344 878 - - (7,088) (25,340) - (5,333) Associates and joint ventures ...................... - - - - - - - - - - Other related parties . 4,027 15 - - - - (4,788) (4) - - Total .......................... 8,624 390 1,344 878 4,969 17,295 (14,377) (166,708) (121) (5,333) In 2023 HUF 18,894 million dividend was paid to DT AG for the business year 2022 (in 2022 HUF 9,290 million). Lease receivables include the lease of a part of the Magyar Telekom headquarters to Telekom Rendszerintegráció Zrt. Based on the impairment test no impairment was recognized for receivables from related parties in the reported years.
251 32.2 Related-party transactions in the Statement of profit or loss and other comprehensive income The tables below summarize the significant transactions with related parties as of December 31, 2022 and 2023: 12.31.2022 Revenue from services Direct cost of services Goods and services purchased Dividend received Interest expense Swap loss/gain Parent ..................................... 2,209 (303) (3,991) - (2,616) 20,450 Subsidiaries ........................... 5,524 (11,564) (3,661) 13,801 (2,140) - Associates and joint ventures ................................. - - - - - - Other related parties ............ 10,929 (9,636) (2,793) - (29) - Total .................................... 18,662 (21,503) (10,445) 13,801 (4,785) 20,450 12.31.2023 Revenue from services Direct cost of services Goods and services purchased Dividend received Interest expense Swap loss/gain Parent ..................................... 3,025 (284) (4,836) - (9,351) (27,468) Subsidiaries ........................... 9,501 (11,574) (4,734) 14,967 (3,140) - Associates and joint ventures ................................. - - - - - - Other related parties ............ 11,125 (10,133) (2,925) - - - Total .................................... 23,651 (21,991) (12,495) 14,967 (12,491) (27,468) 32.3 Transactions with Deutsche Telekom Group and the Federal Republic of Germany 32.3.1 Deutsche Telekom Group Deutsche Telekom AG is the ultimate (indirect) controlling owner of Magyar Telekom, holding 63.55% of the Company’s shares. Deutsche Telekom Group has a number of fixed line, mobile and IT service provider subsidiaries worldwide, with whom Magyar Telekom has regular transactions. 32.3.2 The Federal Republic of Germany The Federal Republic of Germany is both a direct and an indirect shareholder and holds approximately 30.5% of the share capital of DT AG. Due to the average attendance at the shareholders’ meetings in previous years, the Federal Republic of Germany represents a solid majority at the shareholders’ meetings of DT AG, although it only has a minority shareholding, making DT AG a dependent company of the Federal Republic. Therefore, the Federal Republic and the companies controlled or jointly controlled by the Federal Republic are classified as related parties of DT AG, and consequently of Magyar Telekom as well. DT AG and Magyar Telekom did not execute, as part of its normal business activities, any transactions that were individually material in the 2023 or 2022 financial year with companies controlled or jointly controlled by the Federal Republic.
252 32.4 Board and Supervisory Board members 12.31.2022 12.31.2023 Remuneration of the members of the Board of Directors* ...................................... 26 19 Remuneration of the members of the Supervisory Board ........................................ 37 37 Loans granted to the members of the Board of Directors ........................................ - - Loans granted to the members of the Supervisory Board ........................................ - - *Exemption for the independent members, members of the Board of Directors waived their remuneration or offered their remuneration for charity. The honorarium offered for charitable purposes is HUF 6 million in 2023 (HUF 8.4 million in 2022). 32.5 Key management personnel Key management has been identified as the members of the Company’s Chief Officers. The Chief Executive Officer (CEO) and the other Chief Officers (Chief Officers) together fulfill the Chief Operating Decision Maker (CODM) function in the Company. The table below shows, in total, the compensation expenses (including social security and other payroll-related taxes) incurred by the Company in relation to the key management. 12.31.2022 12.31.2023 Salaries and other employee benefits .......................................................................... 1,264 1,440 Contractual termination expense .................................................................................. 1 - Share-based payments (Note 20) ................................................................................. 32 27 1,297 1,467 Costs expensed in relation to defined contribution plans (including social security contribution) ...................................................................................................... 162 210 Detailed information on the remuneration of the Board of Management and the Supervisory Board is published in the separate remuneration report. The Company did not provide loans or guarantees to its key management. 32.6. Guarantees provided by the Company for liabilities of related parties and guarantees provided by related parties for liabilities of the Company 32.6.1 Bank guarantees Bank guarantees for subsidiaries issued by Magyar Telekom in the name of the subsidiaries and it pays the related fees for the bank. In the case of guarantee drawdown the Magyar Telekom’s bank account shall be debited with the amount drawdown/paid. Fees paid by Magyar Telekom reinvoiced within the group. The following table presents the guarantees provided by the Company for liabilities of related parties: Type of the guarantee 31.12.2022 31.12.2023 Bank guarantee ..................................................................................... 722 572 For further information see Note 4.5.4.
253 33 REPORTABLE SEGMENTS AND INFORMATION ABOUT GEOGRAPHICAL AREAS 33.1 General information The Group’s segments are reported in a manner consistent with the internal reporting provided to the CODM, the key management of Magyar Telekom Plc. The CODM of Magyar Telekom is responsible for allocating resources to, and assessing the performance of, the operating segments on a monthly basis. Magyar Telekom Group’s operating segments are: MT-Hungary and North Macedonia. For further information on reportable segments see Note 33 in the Consolidated Financial Statements. 33.2 Information about geographical areas Considering that Magyar Telekom provides its services within the boundaries of Hungary and the base of geographical classification is the headquarters of the Company, all the realized revenue by the Company is in the category of Hungary. In a similar manner all tangible assets of the Company are classified as Hungary considering geographical areas (for further information see Note 33 in the Consolidated Financial Statements). 33.3 Information about revenue for group of products and services Revenue from customers for group of similar products and services is disclosed in Note 18.3. 33.4 Information about revenue from major customers None of the Company’s customers represent a significant source of revenue. Revenue from transactions with a single external customer (or group of entities that – knowingly to us – are under common control of a third party or government) do not exceed 10% of the Company’s revenue. 34 REGULATED MARKETS AND PROCEDURES Magyar Telekom’s primary activities are the fixed line and mobile operations in Hungary. These services are regulated by European and Hungarian legislation. The most important features of the regulation of these services are described below. The regulation of the Hungarian telecommunications markets is primarily based on Act C of 2003 on Electronic Communications (Eht.) and the decrees issued by the President of the National Media and Communications Authority (NRA). The NRA is an independent regulatory body which, in addition to its law enforcement activities, also legislates on the basis of legal authority. Hungary implemented Directive 1972/2018 / EU (EECC) partially by December 21, 2020 (with Section 16 of the Electronic Communications Act being applicable June 30, 2021). The EECC regulates fix and mobile call termination rates in the whole EU/EEA by a Delegated Act, but the legal framework for formerly regulated markets remains largely unaffected by the EECC. 34.1 Access regulation Regulated markets are governed by EU Commission’s recommendations. Parallel to the EECC, the Commission produced a new recommendation replacing Recommendation 2014/710/EU: 2020/2245/EU. The new recommendation only covers two markets: ▪ Wholesale access for mass-market products (M1) ▪ Wholesale high-quality access at a fixed location (M2) National NRA’s, nonetheless, have the power to diverge from this recommendation. The former Hungarian regulation designates 4 regulated markets, Magyar Telekom is currently designated as an SMP operator (a service provider with significant market power) on all of these.
254 M1: With regards the fix networks’ regulated interconnection (M1) the NRA published its fifth-round market analysis procedure’s resolution on May 15, 2018, according to which, the obligations were extended to a total of 144 telephone service providers. After that, from July 1, 2021, the fixed voice termination rate - regardless of the rate in the effective market decision - is determined by Commission Regulation (EU) 2021/654 on the basis of the EECC, which was HUF 0.2880/minute converted for the year 2023.The latest MARIO and supplementary interconnection service fees came into force on January 1, 2020. M2: The Company is designated as an SMP operator (a service provider with significant market power) in the mobile wholesale call termination market and subject to the Commission Regulation (EU) 2021/654 regarding the termination charge of calls into its network, mobile termination rate (MTR). The rate of the MTR for the year 2023 was HUF 1.6461/minute. The last mobile market resolution was published on January 13, 2021 in two folds: one resolution only contains the SMP designation, while with regards to obligations, the NRA delivered a separate resolution. M3: Magyar Telekom is Hungary’s leading fixed line broadband service provider in the wholesale market and one of the leading ones in the retail market. In accordance with the effective 3a (M3a) and 3b (M3b) resolution, all retail fixed products shall be ‘reproducible’ by competitors based on the wholesale service. Consequently, the full retail portfolio shall have a wholesale equivalent. Previous regulation defined a retail minus price setting. The NRA published the latest resolutions with regards to markets 3a (M3a) and 3b (M3b) on December 15, 2017. SMP operators are obliged to prepare reference unbundling offer for access to (physical) passive network infrastructure (RUO) and to provide these services when there is a request for them by other telecommunications service providers. The reference offer of each SMP operator must be approved by the NRA. The latest market resolution introduced the geographical segmentation, thus relieving the company of obligations in certain competing settlements. Magyar Telekom was designated as an SMP in both 3a and 3b markets. Service fee calculation for all relevant regulated services – both markets 3a (resolution PC/17915-66/2017.) and 3b (resolution PC/17920-66/2017.) - are with a BU-LRIC+ model. New fees had to be applied as of January 1, 2019. As a novelty the geographically segmented regulation was implemented with the last resolution. As a result, in those settlements where competition bases, Magyar Telekom’s SMP was withdrawn. In the M3a resolution a new service obligation has been introduced, the L2-WAP (Layer 2 Wholesale Access Service) obligation. The NRA has published the latest reference unbundling offer – containing the L2WAP service – through its resolution PC/16593-31/2018. on November 6, 2019. The revised reference offer entered into force on December 1, 2019. The L2-WAP service is to be offered sixth months after the entry into force of the revised reference offer, i.e. June 1, 2020. M4: In the high-quality broadband market (M4) the NRA published its resolution (PC/12186-44/2018.) on February 27, 2019. Magyar Telekom has been designated as the SMP for the “Ethernet leased line termination segment service”. According to the resolution Magyar Telekom is subject to SMP obligations throughout Hungary, providing high-quality access at a regulated cost-based price. 34.2 Spectrum procedures In June 2012, the Hungarian Parliament adopted the modification of the Electronic Communications Law extending the scope of competence and tasks of the NRA. Pursuant to the amendment, all spectrum-related issues are dealt with by the NRA. On December 7, 2004, the Company obtained the spectrum usage right of certain frequency blocks in the 2100 MHz band for the deployment and operation of an IMT2000/UMTS mobile telecommunications system (3G system). The duration of the spectrum license was 15 years (until December 7, 2019) that was extended for another 7.5 years in December 2018 for a one-time fee of HUF 11 billion. The Company won a tender for a spectrum usage right for a 26 GHz block on April 30, 2009. On May 14, 2012 the NRA granted spectrum license to Magyar Telekom for four pieces of basic spectrum blocks (4 x 2 x 28 MHz each) in the 26 GHz band. Furthermore, Telekom acquired GTS Hungary Ltd.’s two blocks in the 26 GHz band for HUF 114.6 million HUF net, and has a usage right for it from November 1, 2016. Blocks purchased in 2009 were extended in 2018. The Company filed an auction bid in December 2011 with the NRA for the right of use of unused spectrum in the 900 MHz frequency band, related to the provision of mobile telecommunications services. The spectrum can be utilized in a technology-neutral manner. The NRA announced its first-instance decision on the result of the 900 MHz auction (Auction) on January 30, 2012. Magyar Telekom won the right of use of two duplex frequency blocks of 1 MHz each for a period of 15 years.
255 On September 6, 2013 Magyar Telekom and the NRA signed the modification of the Authority Contract on the use of the 900 MHz and 1800 MHz frequency bands. The main stipulations of the modification are the following: On May 22, 2014, the NRA published the “Documentation for the tender announced in the subject of spectrum licenses for broadband services”. Blocks in 800 MHz / 900 MHz / 1800 MHz / 2600 MHz and 26 GHz frequency bands were auctioned. On September 29, 2014 the NRA published the tender results so that Magyar Telekom acquired the following frequencies for an aggregate amount of HUF 58,650 million: ▪ 2 x 10 MHz in 800 MHz ▪ 2 x 2 MHz in 900 MHz ▪ 2 x 30 MHz in 2600 MHz ▪ 2 x 10 MHz in 1800 MHz. On October 15, 2014 Magyar Telekom and the NRA signed the Authority Contract on the use of the 800 MHz, 900 MHz and 1800 MHz frequency bands that came into force right on that day. For the new bands the frequency license and radio permission were issued on October 17, 2014 to Magyar Telekom. As a result of the last tender Magyar Telekom acquired frequency usage rights in the above listed spectrums till June 15, 2029. The Authority Contract can be extended another five years if all requirements defined in the contract are met. On July 18, 2019, the NRA published the “Documentation for the auction announced in the subject of spectrum licenses for 5G services”. Blocks in the 700 MHz / 2100 MHz / 2600 MHz and 3600 MHz frequency bands were auctioned. On March 26, 2020 the NRA published the bidding results of the auction so that Magyar Telekom acquired the following frequencies for HUF 54,240 million: ▪ 2 x 10 MHz in 700 MHz ▪ 2 x 10 MHz in 2100 MHz ▪ 1 x 120 MHz in 3600 MHz. As a result of the auction Magyar Telekom acquired frequency usage rights in the above-listed spectrums till April 3, 2034. The usage rights can be extended another five years if all requirements defined in the documentation are met. On October 16, 2020, the NRA published the “Documentation for the auction announced in the subject of spectrum licenses for 900 MHz and 1800 MHz bands”. Usage rights shall be valid for 15 years starting from April 2022 and might be extended another five years if all requirements defined in the documentation are met. Magyar Telekom submitted its participation request on November 10, 2020. Six lots of 2 x 5 MHz blocks were sold in the 900 MHz band, and 12 lots of 2 x 5 MHz blocks were sold in the 1800 MHz band. Magyar Telekom acquired 2 x 8 MHz in the 900 MHz spectrum band while 2 x 20 MHz in the 1800 MHz spectrum band. On November 8, 2022, the NRA published the draft documentation of the planned auction procedure to be announced for the entitlements to the radio spectrum use of the 32 GHz frequency band and a call for consultation that was held on November 22, 2022. According to the NRA resolution published on May 23, 2023, Magyar Telekom has successfully secured the usage of 6 frequency blocks. 34.3 Universal services Universal services are basic communications services (including access to communication services at a fixed location, public payphones, directory and directory enquiry services) that should be available to all customers at an affordable price. The NRA published its request for voluntary universal service provisioning on January 19, 2018. MT did not bid on any parts of the universal services, so the NRA designated Magyar Telekom to offer the following universal services from January 1, 2019: public payphones, access on fixed location and for national directory enquiry service. As a result of the procedure Magyar Telekom lost two primary areas to serve (Szekszárd – nr74 and Paks – nr75) and received a new one (Szeged - nr62). The EECC brings a new framework in universal services as well – Magyar Telekom was able to let go of some of the obscure obligations of the past (printed directory), while Hungary will have to ensure affordable and available internet access to consumers. The NRA has published its resolution on available and affordable internet on December 19, 2022. As
256 a result of the NRA decision, Magyar Telekom is obligated to offer affordable and available internet as a universal service from July 1, 2023. 34.4 End-user rights Since June 30, 2007, an EU regulation has been regulating international roaming tariffs for wholesale and retail customers on the basis of a price cap system. The first EU roaming regulation prescribed a glide-path that mandated annual reductions of wholesale and retail prices. (EU Roaming Regulation I.) As of July 2009. the EU also introduced regulated tariffs for SMS and data roaming similarly to the regulation of voice roaming. (EU Roaming Regulation II.) As of July 1, 2012. the EU further broadened the European roaming regulation with a new regulatory measure: separate sales of regulated roaming services. As a result, Magyar Telekom had to implement the technical possibility to host an Alternative Roaming Provider in its network and also it allows its own customers to use Local Break-out solutions within the EU offered by a foreign EU member country’s mobile operator from July 1, 2014. (EU Roaming Regulation III.) The actual EU roaming regulation - “Full Roam Like At Home With Fair Use Policy Possibility” - is applied from June 15, 2017. (EU Roaming Regulation IV.). As a result, European retail roaming price levels for voice, SMS and data are equal to domestic prices since summer 2017. The Commission implementing regulation (EU) 2016/2286 of December 15, 2016 laid down detailed rules on the application of fair use policy and on the methodology for assessing the sustainability of the abolition of retail roaming surcharges and on the application to be submitted by a roaming provider for the purposes of that assessment. In addition, the Company has implemented, by the required deadline of May 15, 2019, Regulation (EC) No 2018/1971 of the European Parliament and of the Council supported by BEREC and BEREC Office, and according to the modified Regulation (EU) 2015/2120, taking into account the withdrawal decision of regulation 1211/2009/EC regulation, the reduction of charges for international calls and SMSs to member states of the European Union. The EECC affected all customer relations of Magyar Telekom and it is prepared for compliance with serious IT- developments as well as changes in the processes. 35 EVENTS AFTER THE REPORTING PERIOD There were no material events after the reporting period. Budapest, February 22, 2024
257 SEPARATE BUSINESS / MANAGEMENT REPORT OF MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2023
258 INTRODUCTION Magyar Telekom Plc.’s (hereinafter: Magyar Telekom or the Company) activities are described in Note 34 of the Financial Statements, while the Business / Management Report provides additional information on the following topics: ▪ SUMMARY ON 2023 OPERATIONS ▪ THE COMPANY’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES ▪ CORPORATE GOVERNANCE ▪ SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS ▪ COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT ▪ RESEARCH AND DEVELOPMENT ▪ REAL ESTATE, SITES OF OPERATION ▪ SUSTAINABILITY AND ENVIRONMENT PROTECTION ▪ CORPORATE COMPLIANCE ▪ ECONOMIC ENVIRONMENT AND OUTLOOK ▪ INTERNAL CONTROLS, RISKS AND UNCERTAINTIES ▪ ANALYSIS OF FINANCIAL RESULTS FOR 2023 ▪ EVENTS AFTER THE REPORTING PERIOD
259 SUMMARY ON 2023 OPERATIONS Since the Company is the parent company of Magyar Telekom Group, therefore the Summary on 2023 operations related to Magyar Telekom Group is presented below. Financials Despite challenging economic environment, Magyar Telekom delivered its public guidance communicated for 2023. Group revenue rose by 13.8% year-on-year to HUF 849.4 billion and EBITDA AL reached HUF 257.9 billion representing a 16.4% increase year-on-year. Furthermore, adjusted net income reached HUF 93.6 billion and the free cash flow excluding spectrum licenses amounted to HUF 86.8 billion for the year 2023. These results are equally attributable to the successful monetization of the Group’s quality networks, the introduction of the inflation-based fee adjustment, the appealing service offerings and the excellent customer servicing. Network In 2023, Magyar Telekom continued its flagship network investments in both country of operation which aim to provide its customers with an outstanding network that they require and appreciate, whether they are at home or on the move. In the frame of the fiber roll-out program in Hungary ca 200 thousand further access points were added to the Group’s gigabit network, thus making the Group able to provide gigabit speed at around 3.6 million access points in Hungary by the end of the year. This translates to over 80% of its fixed infrastructure. Fiber roll-out progressed in North Macedonia as well, by the end of the year over 300 thousand access points became gigabit capable. The Group also made progress in the comprehensive mobile radio network modernization project in Hungary, allowing it to meet the surging mobile data demand as well as to steadily expand 5G. Thanks to the developments implemented throughout the year, 80% of the Hungarian mobile network undergone modernization and by the end of the year, the population-based outdoor 5G coverage has reached 65%. Besides, in North Macedonia, where the RAN modernization was already fully completed in 2022, population based outdoor 5G coverage surpassed 80% by the end of 2023. Customers The success of the Group’s efforts to provide outstanding infrastructure, excellent service and tailor-made solutions to its customers were again reflected in the further expansion of its customer base: fixed broadband subscriber base in Hungary expanded by 5% with TV subscriber number growing by 3% whilst mobile SIM base rose by 5% against last year. At the same time, increasing number of the customers has opted to connect via a gigabit capable technology to Magyar Telekom’s fixed network, reaching 1.3 million by the end of the year. On the mobile side, data consumption continued to rise sharply; the average monthly mobile data usage per customer rose by over 20% year-on-year to close to 12 GB. Resilience The above positive commercial developments, were however accompanied by unfavorable external developments including supplementary telecommunication tax payment obligation, rise in energy costs and cost pressure stemming from the high level of the inflation in the economy. Consequently, the Group’s efficiency measures played a vital role in protecting its profitability. In this context, the Group introduced inflation-based fee adjustment, first implemented as of March 1, 2023 at the Hungarian operation. The success of the Group’s efforts is reflected in that Scope Ratings GmbH improved the outlook on Magyar Telekom’s issuer credit rating to positive, following its annual credit rating review, and affirmed the Company’s issuer credit rating and senior unsecured debt rating at BBB+. The Group also received further recognitions for its sustainability achievements during 2023; MSCI kept Magyar Telekom’s ESG rating to ‘AAA’, whilst Carbon Disclosure Project upgraded its climate change rating to A-, and ISS Corporate Solutions ranked the Group among the best performers of the telecom sector globally with respect to its sustainability credentials.
260 1 THE COMPANY’S SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES As of December 31, 2023, the share capital of Magyar Telekom Plc. was HUF 97,155,886,700, consisting of 971,558,867 Series “A” dematerialized ordinary shares. All Series “A” ordinary shares have a nominal value of HUF 100. Rights and obligations related to Series “A” ordinary shares are described in detail in Section 4 of the Articles of Association (http://www.telekom.hu/about_us/investor_relations/corporate_governance/corporate_governance_documents ). On June 28, 2023, the Court of Registry registered the Company’s capital decrease that was decided upon at its Annual General Meeting held on April 19, 2023. The Company’s share capital consequently was decreased from HUF 100,580,135,200 to HUF 97,155,886,700 with the cancellation of 34,242,485 pieces of dematerialized series “A” ordinary shares, owned by the Company (treasury shares), each with the face value of HUF 100. Information concerning its ownership structure as of December 31, 2023, is described in the following table: Shareholder Number of shares Percentage of share capital Deutsche Telekom Europe B.V. ............................................................... 617,436,759 63.55 Publicly traded ............................................................................................ 312,344,390 32.15 Treasury shares ........................................................................................... 41,777,718 4.30 971,558,867 100.00 Deutsche Telekom Europe B.V. owning 66.41% of the Company’s voting rights is a member of the Deutsche Telekom Group. The ultimate controlling parent of Magyar Telekom is Deutsche Telekom AG (DT or DT AG). Deutsche Telekom Europe B.V. does not have different voting rights than our other shareholders and, as with our other shareholders, Deutsche Telekom Europe B.V. is entitled to one vote per each ordinary share that it owns. 1.1 Voting Rights and Voting The holder of each Series “A” ordinary share shall be entitled to one vote at the General Meeting of the Company. The names of shareholders and nominees who intend to participate at the General Meeting shall be registered in the Share Register on the second working day prior to the starting date of the General Meeting. The General Meeting shall adopt its resolutions by a simple majority vote except for resolutions on issues listed in the Articles of Association, which shall require at least a three-quarters majority of the votes cast. There is no limitation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the ordinary shares. There is no limitation of voting rights for ordinary shares in the Articles of Association. The Company has no shares assigned with special management rights. 1.2 Transfer of Shares For the transfer of dematerialized shares, a contract for transfer or other legal title is required and, in that context, the transferor’s securities account shall be debited, and the new holder’s securities account shall be credited with the transferred dematerialized shares. The holder of dematerialized shares shall be considered the holder of the securities account on which the dematerialized shares are recorded. The transfer of any Series “A” ordinary shares is not bound to any restriction or attainment of agreement. 2 CORPORATE GOVERNANCE 2.1 Annual General Meeting The General Meeting has the exclusive right to approve and amend the Articles of Association (section 5.2. (a)) unless otherwise provided by law or the Articles of Association. According to the Articles of Association, the Board of Directors is entitled to make decisions regarding any change in the registered seat, sites, branch offices and – except for the main activity – the scope of activities of the Company and in relation to this, to modify the Articles of Association (section 6.4.(p)).
261 2.2 Board of Directors The Board of Directors operates based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/board_of_directors ). The Board of Directors is responsible for all matters relating to the Company’s management and course of business not otherwise reserved to the General Meeting or to other corporate bodies by the Articles of Association or by the laws. The Board of Directors draws up, at the end of each business year, a report for the General Meeting and quarterly to the Supervisory Board on the management of the Company, the assets of the Company, the financial situation of the Company and the business policy of the Company. The rules of competence regarding the capital increase and purchase of treasury shares are detailed in Sections 5.2 (b) and (p) as well as 6.4. (l) and (m) of the Articles of Association. The General Meeting with its Resolution No. 8/2023 (IV.19.) authorized the Board of Director to purchase Magyar Telekom ordinary shares for 18 months starting from the date of approval of the resolution. The relevant resolution is available on the General Meetings section of the Company’s website. Pursuant to the Articles of Association, the Board of Directors consists of a minimum of five and a maximum of eleven members elected by the General Meeting for a term of three years, unless otherwise provided by the General Meeting. On December 31, 2023, the Board of Directors had eight members. Meetings of the Board of Directors are held at least four times a year. Meetings of the Board of Directors require the presence of at least the majority of the members for a quorum. Each member of the Board of Directors has one vote. The Board of Directors passes resolutions by a simple majority vote. On December 31, 2023, members of the Board of Directors, their principal occupation and the years of their original election were as follows: Name Born Principal Occupation Member since Daniel Daub ............................................ 1976 Senior Vice President Finance and Performance Management Europe, Deutsche Telekom AG, Chairperson of the Board of Directors of Magyar Telekom Plc. 2023 Daria Aleksandrovna Dodonova ......... 1976 Chief Financial Officer of Magyar Telekom Plc. 2020 Gábor Fekete ......................................... 1950 Consultant 2020 Elvira Gonzalez ...................................... 1975 Senior Vice President B2B Europe, Deutsche Telekom AG 2022 Frank Odzuck ......................................... 1959 Chief Executive Officer of Zwack Unicum Plc. 2006 Péter Ratatics ........................................ 1982 Consumer Services Executive Vice President of MOL Group 2019 Tibor Rékasi ............................................ 1973 Chief Executive Officer of Magyar Telekom Plc. 2018 Melinda Szabó ....................................... 1971 Senior Vice President B2C Europe, Deutsche Telekom AG 2022 The members’ assignment lasts until May 31, 2025.
262 2.3 Management As part of the corporate governance simplification initiative, the Board of Directors of Magyar Telekom resolved to cease the activity of the Management Committee established in 2000 as a formal corporate decision-making body with effect from January 1, 2020. The tasks and responsibilities of the Management Committee have been re-allocated to the Chief Officers and to the Board of Directors of the Company. As a result of this change, the Management Committee transformed into an agile „Leadership Squad”. On December 31, 2023, the members of the Management and the years of their original election were as follows: Name Born Current position Member since Tibor Rékasi ............................................ 1973 Chief Executive Officer of Magyar Telekom Plc. 2013 Daria Aleksandrovna Dodonova ......... 1976 Chief Financial Officer 2020 Zoltán Pereszlényi ................................. 1978 Chief Commercial Officer 2022 Zsuzsanna Friedl .................................... 1977 Chief People Officer 2017 Gábor Gonda .......................................... 1976 Chief Commercial Officer Enterprise, Chief Executive Officer of Telekom Rendszerintegráció Zrt. 2020 Lubor Zatko ............................................. 1974 Chief Technology and IT Officer 2019 2.4 Supervisory Board The Supervisory Board carries out its activities based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/supervisory_board). The Supervisory Board shall examine all submissions to be submitted to the General Meeting and present its opinion thereof at the General Meeting. The General Meeting may pass a resolution on a report pursuant to the Accounting Act and the use of the profit after income tax only upon receipt of the written report of the Supervisory Board. The Supervisory Board makes a proposal directly to the General Meeting regarding the election, remuneration and removal of the Statutory Auditor. Pursuant to the Company’s Articles of Association, the Supervisory Board consists of five members (three independent members and two employee representatives) elected by the General Meeting for a term of three years, unless otherwise provided by the General Meeting. The employee representatives in the Supervisory Board shall be nominated by the Central Workers’ Council. Meetings of the Supervisory Board have a quorum if two-thirds of the elected members but at least three members are present. On December 31, 2023, the members of the Supervisory Board, their principal occupation and the years of their original election were as follows: Name Born Principal Occupation Member since Prof. Dr. Attila Borbély.......................... 1951 Professor Emeritus of University of Debrecen, Faculty of Economics and Business, Chairperson of the Supervisory Board of Magyar Telekom Plc. 2020 Gyula Bereznai ....................................... 1978 Chairman of the Central Workers’ Council, Magyar Telekom Plc. 2022 Krisztina Dorogházi................................ 1972 Senior Vice President Chief Accounting Officer and Controller, TechnipFMC 3 2020 András Szakonyi ..................................... 1973 Senior Vice President – Global Data Centers, Iron Mountain 2020 Endre Szepesi ......................................... 1966 Member of the Workers Council, Magyar Telekom Plc. 2022 The members’ assignment lasts until May 31, 2025. 3 She held the position until December 21, 2023.
263 2.5 Audit Committee The Audit Committee operates based on its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/audit_committee). The members of the Audit Committee have been elected by the General Meeting from the independent members of the Supervisory Board for the same period as their membership in the Supervisory Board. On December 31, 2023, the members of the Audit Committee were as follows: ▪ Prof. Dr. Attila Borbély ▪ Krisztina Dorogházi ▪ András Szakonyi 2.6 Remuneration and Nomination Committee The Remuneration and Nomination Committee is established by the Board of Directors of the Company to support the Board of Directors of the Company regarding the remuneration and certain nomination related issues of the members of the corporate bodies and the top executives of the Company in accordance with its Rules of Procedure (https://www.telekom.hu/about_us/investor_relations/corporate_governance/compensation). The Remuneration and Nomination Committee, among others, makes recommendations to the Board of Directors on the establishment and/or termination of employment, and the modification of the employment contract of the Chief Executive Officer and the Chief Officers, and defines the remuneration of the Chief Executive Officer and the Chief Officers of the Company. The Remuneration and Nomination Committee consists of three members. The members are elected by the Board of Directors from among its members. The Remuneration and Nomination Committee holds at least two meetings each year. On December 31, 2023, the members of the Remuneration and Nomination Committee were as follows: ▪ Daniel Daub ▪ Elvira Gonzalez ▪ Frank Odzuck 2.7 Corporate Governance and Management Report Magyar Telekom Plc. is a public limited company listed on the Budapest Stock Exchange. In 2004, the Budapest Stock Exchange issued its Corporate Governance Recommendations (the Recommendations) containing recommendations related to the corporate governance practice of companies listed on the Budapest Stock Exchange, taking account of the most commonly used international principles, of experiences gathered in Hungary, and of the characteristics of the Hungarian market as well as the Companies Act. The Recommendations were updated in 2007, 2008, 2012, 2018 and in 2021. The Recommendations effective from time to time is available at the website of the Budapest Stock Exchange: https://bse.hu/Issuers/corporate-governance-recommendations/Corporate-Governance-Recommendations In line with the current regulations, the Board of Directors of Magyar Telekom with the approval of the Supervisory Board submitted it to the General Meeting the Corporate Governance and Management Report of the Company (report) prepared in accordance with the Corporate Governance Recommendations. The report – along with other corporate governance related documents - is published in the Corporate Governance section of the website of the Company: http://www.telekom.hu/about_us/investor_relations/corporate_governance/corporate_governance_documents Companies listed on the stock exchange are required to express their views on their corporate governance practices in two ways. In the first part of the report, they have to give account of the corporate governance practices applied by their company in the given business year, including their corporate governance policy, and a description of any unusual circumstances. In the second part of the report, the issuers should give an account on their compliance with each point of the Recommendations in accordance with the "comply or explain" principle, including any reasons for derogating from a specific recommendation and/or proposal. When an issuer does not apply a recommendation or applies it in a different way, they should explain where the differences are and offer a reason for such derogation (‘comply or explain’ principle).
264 This method allows issuers to consider their unique, industry-specific etc. idiosyncrasies and to inform shareholders and market players about their derogations from general corporate governance principles and to provide an explanation. Operating on the same principle, issuers can also explain any derogations from the proposals. Sections 1 to 5 of the above report include the description and operation of the Board of Directors, the Supervisory Board, the relevant committees, and executive management. Section 6 of the report includes a description of the internal controls and risk management procedures, Section 7 gives information on whether the auditor has carried out any activities not related to auditing, while Section 8 of the report describes the disclosure policies and insider trading guidelines. In Sections 9 to 10 the method of exercising shareholders’ right and the rules on conducting the General Meeting is summarized, while Section 11 contains the Remuneration Policy. The Company complies with the vast majority of the 72 recommendations and proposals, however in the business year of 2023 in case of 1 proposal it has not or not completely complied with due to the organizational structure or processes of the Company. In 2023, the Magyar Telekom’s disclosure processes were evaluated in the ICS (Internal Control System) by the relevant organizational units and were tested by the internal audit area. The disclosure controls and procedures of Magyar Telekom were effective and designed to ensure a proper basis for the timely and accurate disclosures to the market participants required under the respective accounting, capital markets and company law regulations. 3 SOCIAL COMMITMENTS, LABOR STANDARDS, HUMAN RIGHTS Some of the key challenges of the sustainability strategy comes from the area of human resources management. That is why human resources management has a crucial part in the achievement of its sustainability targets. The Company’s vision is to operate in a corporate environment that is livable, likeable and successful. This set of values strengthens the commitment and satisfaction of the company’s employees and is also attractive on the job market. 3.1 People focus The business strategy of Magyar Telekom is centered around the realization of a digital business model that is based on utilizing new technologies in service of consumer relationship management in order to build trust and drive value creation. To achieve this goal, the human resources organization has been transformed to an even more efficient, agile, customer- focused People Unit in support of the corporate business strategy. Key objectives and key results of people services in 2023: We are becoming an inspiring community for all generations We pay particular attention to ensuring that all our colleagues - currently spanning 5 generations - all find the specific objectives they have set themselves to achieve their professional goals. Everyone should aim to grow and learn, because today's world is changing rapidly and we need to be able to adapt, to improve ourselves or to revisit our skills, as to which are the ones we need most. We can do this not only by attending training courses, vocational courses or even skills development training, but more importantly by using the knowledge we already have in-house, sharing our existing knowledge, experience and teaching each other. Attracting and retaining young people is an important aspect, but we also need to focus on ensuring that our existing colleagues - if they are thinking about a career move - do it in-house, find their next development opportunity, their next career move, within the company. In addition to professional knowledge, mental balance is also important, so we also aim to create mental balance for our colleagues, to make them feel cared for by Telekom, to be a safe haven for all our colleagues. With a STABLE background, we dare to change Change is a regular feature of Telekom's life, as we not only have to adapt to the needs of our customers on the professional side, but we also have to constantly rethink how and with what organizations we can support this in the most effective way. Telekom is a learning, self-reflective, flexible and evolving organization, where we listen to each other, build mutual trust, create a community of strong empowerment and personal growth, based on an agile culture. In support of this, we are constantly evolving our organization, experimenting with new ways of working, testing the 4 day working week and bravely exploring ways to better support our business areas in delivering the best possible service to our customers.
265 The People Unit acts as a role model We have a common goal to develop together, to collectively influence the whole Telekom organization. We change, we automate, we experiment and we are frontrunners in how a change helps our operations. This includes making the best use of our resources, communicating effectively and creating a stimulating and supportive environment for our colleagues. Our organizational structure and processes are aligned and adapted to achieve our goals. Innovation and flexibility are key as the organization is able to adapt to ever-changing circumstances. We operate in the way we expect others in Telekom to operate, People Unit is a role model organization for Telekom as a whole. We have the coolest leaders We pride ourselves on our focus on developing our management. By valuing their commitment and leadership qualities, we are confident that their successful development, engagement and collaboration will deliver results. We are constantly creating opportunities for our managers to share their experiences, their pride and their dilemmas in this circle, helping each other to develop. This is essential if they are to be outstanding leaders who motivate, develop and effectively manage their teams. Both our passion for innovation and our inspiring leadership team contribute to the growth and development of our company. In addition to the above, the following people management perspectives continued to be emphasized in 2023 Employer brand building – the Company creates a livable and likeable workplace, which is satisfactory for its employees and offers an attractive perspective in the labor market through its future oriented methods of work. The Company puts greater emphasis on using social media solutions in building the brand. Recruitment-selection – The Company uses segment-based online recruitment channels and means to select the best candidate for the specific positions. During the selection process, Magyar Telekom seeks the inclusive attitude and personal traits defined as requirements for future Telekom employees. Remuneration – the Company has a transparent, simpler, and consistent job grading model, which reflects primarily the respective values of jobs, and provides for market comparison, as a basis for a competitive remuneration policy. Digital solutions – the interface of its employee app (MagentApp) was renewed, the login was simplified, and new technology was introduced to pave the way for further improvements and to increase the number of regular users. Quarterly, the Company has worked on employee and manager experience point/process/tool improvements to improve the internal customer experience, which are largely IT system and process improvements. This has included the introduction of a new e-learning system to support self-development, and a revamp of its Reflex employee self-service interface. 3.1.1 Headcount The following table provides information on the number of employees, including full-time equivalents, of Magyar Telekom Plc.: 2022 2023 Magyar Telekom Plc. ........................................................................................................ 4,868 5,392
266 3.2 Policies 3.2.1 Policies and agreements Code of Conduct https://www.telekom.hu/static-tr/sw/file/Code_of_conduct.pdf The Code of Conduct provides the framework of orientation for all employees of Deutsche Telekom Group and Magyar Telekom Group. Additionally, it applies to people to who are viewed as equivalent to employees in functional terms, e. g. to temporary agency employees. It combines the joint requirement of compliance with legal obligations and acting with integrity and thus ensures that Deutsche Telekom and Magyar Telekom remain transparent and traceable enterprises for everybody. Deutsche Telekom and Magyar Telekom expect their suppliers and consultants to comply with the rules of behavior manifested in this Code of Conduct and to endeavor them to ensure that they are also obliged to abide to its regulation by contract. Code of Human Rights and Social Principles https://www.telekom.hu/static-tr/sw/file/code-of-human-rights-social-principles-eng.pdf The Code of Human Rights and Social Principles as well as the company groups Equal Opportunities Plan in force defines the groups general human rights principles and the provisions for the implementation of these principles. Decision makers of Magyar Telekom are aware that employee diversity is the prerequisite of sustainable and equitable operations enhancing business efficiency and contributing to competitive advantage. Group Diversity, Equity and Inclusion Policy https://www.telekom.hu/static-tr/sw/file/Telekom_diversity__equity_and_inclusion_group_policy.pdf As part of the Deutsche Telekom Group, Magyar Telekom has renewed its Diversity, Equity and Inclusion (DE&I) Policy in December 2021. The renewed policy defines the company’s global understanding of what characterizes the approach to diversity, equity and inclusion in its interactions with employees. It aims to ensure a consistent work experience, learning and development for every member of the Company, strengthening the sense of belonging and involvement. The framework of the renewed policy details and clarifies its understanding of DE&I through a set of key elements and covers aspects of the work-life cycle that are relevant to the company culture. It addresses social and business responsibility in providing an equitable and inclusive workplace locally within its global framework but respecting local legislation of diverse cultures and local needs. Group Policy on Employee Relations Telekom_Group_policy_on_employee_relations.pdf The opening up of markets, digitalization and globalization have led to an increasingly knowledge-based working world. New forms of networking are changing communication, public impact, reputation and compliance challenges and other key elements of company management. Thus, the company realized a need to renew its definition of how they understand the shared characteristics of employee relations to ensure consistent working experience for every employee. As part of the Deutsche Telekom Group, Magyar Telekom has renewed its Group Policy on Employee Relations in December 2021. It specifies the key elements of its people policy and describes what the company stand for in its relationships with employees, that are characterized by its shared values and derive from a set of values as well as from other group policies. The policy covers all aspects of work life that are relevant to industrial relations and informed by sustainability as a key driver. Suppliers’ Compliance Magyar Telekom is committed to respect and protect human rights and it expects its suppliers to comply with these rules of behavior. Prior to becoming authorized suppliers of Magyar Telekom must register their enterprises at its vendors’ registration site. https://beszerzes.telekom.hu/beszerzes/portal_en?appid=beszerzes&page=english/registration_vendor.vm
267 As an obligatory part of the registration process vendors are obliged to understand and accept its Suppliers Code of Conduct that among other policies, entails its Code of Conduct, Social Charter, and Diversity Policy. The Company’s suppliers must understand and accept these policies and obligatory frameworks for their behaviors as well. Equal Opportunities Plan https://www.telekom.hu/about_us/society_and_environment/society/equal_opportunities Anti-discrimination and the safeguarding of equal opportunities is a key priority to Magyar Telekom. According to the act CXXV of 2003 on Equal Treatment and Promotion of Equal Opportunities, and the corporate protocol in place since 2010 Magyar Telekom has accepted its 5 th Equal Opportunities Plan in order to secure the practices of equal treatment, the advancement of equal opportunities and the monitoring an improvement of the labor positions of particular disadvantaged employee groups. The Equal Opportunities plan currently in force is valid between 2021 and 2025 and has been developed in close cooperation with the employee representative bodies. The Diversity Charter of the European Union – Hungary has joined the Diversity Charter of the European Union in 2016 and, among 50 signatory companies Magyar Telekom has also underscored its dedication to safeguard diversity as a fundamental value. Magyar Telekom has been among the signatory companies in in the forthcoming years as well as in 2023. UN Guiding Principles on Business and Human Rights – According to the dedication of Magyar Telekom to safeguard and protect human rights along its operations as stated in the UN Guiding Principles of Business and Human Rights, the Company considers the rights and guidelines stated in the Universal Declaration of Human Rights and in the ILO’s Declaration on Fundamental Principles and Rights at Work to be mandatory in its own practices. UN Human Rights Treaties ratified by Hungary – Magyar Telekom as a corporation legally registered in Hungary is carrying out its entire operations and business practices in full accordance with the nationally ratified UN Human Rights Treaties. http://tbinternet.ohchr.org/_layouts/TreatyBodyExternal/Treaty.aspx?CountryID=77&Lang=EN 3.2.2 Monitoring and auditing practices The group-level coordination of corporate sustainability operations that also incorporate labor standards, social issues and the protection of human rights has been led by an ESG Squad (formerly Sustainability Squad) from 2023. From 2020 to 2022, the Chief People Officer (CPO) was the senior manager responsible for sustainability. As of January 1, 2023, the Chief Financial Officer (CFO) has become the responsible for sustainability, and sustainability coordination has been transferred to the Capital Market Relations Hub, where a dedicated ESG expert has led the group-wide coordination and ESG Squad governance. ESG Squad reviews and assists the area responsible in strategy formulation and management. According to group instructions, the ESG Squad meets regularly, at least quarterly, to effectively coordinate corporate and group sustainability tasks. Each strategy topic has a CxO level manager and a dedicated sponsor from the Leadership Team. The sponsors are also members of the ESG Squad. Operative implementation is carried out by cross-cutting working groups whose task is to clarify goals, develop a business plan and timing, and implement it. Magyar Telekom’s Code of Conduct covers the requirements of corporate compliance and states its collective set of values, and thus stands as an affirmation of the Company’s strong reputation, solid position and future success. The Code of Conduct applies to all board members of Magyar Telekom from employees to managing directors, executives and board members. Furthermore, Magyar Telekom expects its suppliers and consultants to comply with the rules of behavior manifested in this Code of Conduct and to endeavor them to ensure that they are also obliged to abide to its regulation by contract. Magyar Telekom’s Corporate Compliance Program has been elaborated with the aim to ensure that Magyar Telekom conducts its business with maximum consciousness and commitment, in accordance with relevant laws and regulations, in harmony with the strictest possible business ethics standards. The Compliance Program involves the Group Compliance Manager and compliance representatives of particular functional areas of operation, who are working together as members of the Group Compliance Committee. The Compliance Program has been designed to ensure that the Company conducts its business to the highest standards of awareness, transparency, accountability, commitment, and adherence to applicable laws and regulations.
268 External audits could be conducted as part of the control process carried out by the Hungarian Labor Inspectorate. The Inspectorate has the right to issue such an auditing process in case of public complaints or issued requests. The Inspectorate also provides counseling to the corporations in support of legal compliance. 3.3 Results of Policies 3.3.1 Diversity and Equal Opportunities As one of the largest employers in the Hungarian ICT sector Magyar Telekom believes that diversity contributes to the success of businesses and all kinds of organizations to a large extent. This value is also at the core when it comes to the increase of creativity and innovation, to the involvement of new partners, experts and clients, to the quick adaptation to changes and most of all, to the compliance with the legal obligations of non-discrimination in all corporate operations. Magyar Telekom and the employee representative bodies have accepted the 5th Equal Opportunities Plan of Magyar Telekom in 2021 for the period 2021-2025. The corporate Equal Opportunities Plan addresses actions and procedures to improve the labor conditions and career perspectives of vulnerable employee groups such as women, employees with families, employees on child-care leave, employees living with disabilities, recent graduates and 50+ employees. The corporate diversity and inclusion expert and the employee representatives discuss the conducts and results of the action plan annually. Several employee surveys contribute to the development and the adjustment of the actions each year, allowing the rollout of the equal opportunities plan to adapt to employee needs. The principles of justice and equal treatment of Magyar Telekom are being defined by its Code of Conduct. Ways of non- typical employment such as Telework, flexible working hours, part-time work, employment of people living with disabilities allow the company to realize the principle of equal treatment in practice. These measures are further assisted by several measures implemented in corporate day-to-day operations, such as the large office spaces that are designed to support Teleworking in the new headquarters of Magyar Telekom. In accordance with Hungarian labor legislations the Company provides its employees with extra days off after their children, and after blood donation. In case of more than 40% health damage the company provides its employees with extra five days off annually for rehabilitation. One of the key objectives of the new group level corporate sustainability strategy 2021-2030 among climate protection and digital inclusion is the improvement of diversity and inclusion experience on both customer and employee side. It was launched in 2021 and is in effect until the end of 2030. The details of the Sustainability strategy 2021-2030 were presented in detail in the Sustainability report published in first half of 2022. In 2023, Magyar Telekom continued with practices securing equal opportunities for all employee groups. Following the process developed in 2020 the company continued to monitor its gender pay gap along 9 indicators identifying multilayered action plan to tackle the detected inequalities and further reduce the overall gap between male and female general workforce. In 2021, Magyar Telekom has joined the „One step closer” initiative of Amnesty International with its commitment to reduce its gender wage gap by at least one percent annually. Similarly to the previous years, in 2023 Magyar Telekom opened its on-site childcare facility in the summer and fall school holiday season thus supporting parents in the difficult family management periods. On the first day of the vacation, as part of the #Showmewhere you work (#mutiholdolgozol) Day, nearly 400 children visited the headquarters and got to know the company's digital products and what their parents who work here do. In 2023, the distribution of its very own children’s book "My Mummy/Daddy works at Telekom" for parent colleagues raising children between the ages of 3-10 was continued. The storybook offers a playful introduction to the magical world of telecommunication for the preschool and elementary school aged children and offers examples on how to develop family rules for conscious screen time and internet use. In 2023 – as in every year since 2018 -, the Company was rewarded with the Family Friendly Mentor Company certificatebased on its family-friendly initiatives implemented. 3.3.2 Anti-discrimination and labor-market integration actions As an employer, Magyar Telekom has issued the following actions in 2021 to improve the conditions of the employee groups marked in the 2021–2025 Equal Opportunities plan.
269 As a mentor company Magyar Telekom supports roma workforce integration program Integrom to contribute to the equal labor market opportunities. The program participants are being supported with job application counselling, job interview- practices, CV writing and editing skill practices. Its inclusive recruitment practices include dedicated recruiter tracking support for program participants throughout their application process, providing detailed evaluation and feedback, and company mentoring upon request. Starting from the fall of 2021 Magyar Telekom joined the HBLF Romaster initiative supporting two talented roma students for 4 years with scholarship funding and mentoring. In 2023 the LGBTQ & allies employee group of Magyar Telekom and Deutsche Telekom IT Solutions Hungary have attended the Budapest Pride March again. The Company in cooperation with Magenta Pride Employee Resource Group (ERG) has continued to work on and improve its LGBTQ inclusive workplace initiatives as well. Flagship events of 2023 were a Living Library event in May and the celebration of World Coming-Out Day in October. In 2023, its headquarters in Budapest hosted the Women's Day Conference of the Egyenlítő Foundation. The event focused on women leadership. In the various round table discussions, 3 of its female leaders represented Magyar Telekom and shared their thoughts on the topic. In March 2023, the Women in Telekom ERG was established. Among others, their goals include a dedicated female career program and the support of the workplace reintegration of colleagues returning from long-term absence (maternity leave). Dedicated working groups were formed and started to work on these topics. In order to secure the equal opportunities of current and future colleagues living with disabilities, the Company is using a special module on its online job-application site (https://www.telekom.hu/about_us/career) since 2010, where its applicants are encouraged to state any accessibility requests, they might have in order to attend the selection process. In May 2023, the Accessible Telecom employee resource group was established to facilitate the integration of the employees with altered work ability or disabilities, and better understanding and acceptance of different groups with disabilities. Organized by the ERG, in cooperation with Deutsche Telekom IT Solutions, Magyar Telekom organized the Accessibility Day at the Company's headquarters. Via gamification, presentations, round table discussions, inclusive brunch, and the involvement of NGOs, the Company brought the world and everyday challenges of people with disabilities closer to the colleagues. Fourth in line at the Company, in May 2023, the Telekom Family ERG was established, aiming to support the colleagues with families - parents, grandparents, caregivers. Their first event was a Christmas arts&crafts program for children and adults held at the headquarters. At the MagentaLand event in September, the company dedicated a special section to the introduction and promotion of its employee resource groups. The Chief People Officer represented the Company in the advertising spot of We Are Open association's (of which the Company is a member) media campaign which aimed to promote workplace diversity, openness, and acceptance in companies. 3.3.3 Respect of Human Rights, actions against child labor and all kinds of forced labor As disclosed in the Code of Human Rights and Social Principles the Company rejects child labor and all kinds of forced or compulsory labor and fights against all kinds of human trafficking and modern-day slavery by all means at its disposal. As the parent company of Magyar Telekom, the Deutsche Telekom Group is responsible for supply chain compliance auditing and management on a global level. More detailed information about the methodology and results of the global supply chain management at https://www.telekom.com/en/corporate-responsibility/assume-responsibility/assume- responsibility/supply-chain-management-355304 New employees of Magyar Telekom as part of their orientation process in their first two months receive compulsory education about the company principles, guidelines and practices concerning social issues, labor standards and human rights. All employees must understand and accept these guidelines as the fundaments of their own professional behavior and operations and they are also obliged to complete the Telekom unconscious bias e-Learning course during the onboarding period. In line with the Code of Human Rights and Social Principles, in 2018 all Magyar Telekom employees and all partners closely related to its brand representation attended compulsory trainings regarding human rights. From the end of 2018 the training is part of the compulsory trainings of Magyar Telekom. Moreover, the Company is aware of the fact that there could be situations in which it is harder to tell appropriate from inappropriate. In order to assist employees in making the right choices in these situations, all employees participate in the Company’s digital mandatory annual compliance training, and the company offers secure internal whistleblower channels,
270 operated by the Corporate Compliance Department. “Kérdezz!” (“Ask me!”) advice portal has been set up to help resolve uncertainties as far as compliance-¬relevant behavior is concerned. Serious misconduct must be announced for prevention purposes and for appropriate sanctions. For this reason, the “Tell me!” whistleblower portal has been established. The main principles and the detailed description of the internal inspection process is detailed in employee directives available on all employees on the shared intranet platform. Throughout the inspection process the whistleblowers’ anonymity, personal and data privacy are guaranteed and handled with utmost discretion. 3.3.4 Relationship of management and employees At present two unions (Telecommunications Trade Union (TÁVSZAK) and T-Net Trade Union) and workers’ council operate at Magyar Telekom, communication with them runs on two levels. Central decisions concerning the whole Company, when the employee representation bodies need to be consulted, are deliberated with the Central Workers Council and the representatives delegated by the trade unions, either in the frame of joint consultation (Interest Reconciliation Council), or separately, depending on the nature of the matter discussed. Central communication is managed both verbally (negotiation) and in writing. The Chief People Officer the Competitive Workforce Hub Lead and the accredited HR Business Partner are responsible for central level communication with the employee representation bodies. Interest enforcement issues concerning a given governance area are also discussed locally with the representatives of the trade unions and the local workers’ council. The HR Business Partner Leads of the governance area are responsible for communication with the local employee representation bodies. Trade union and the workers’ council (Central Workers Council) must be consulted, and their opinion solicited on significant decisions resulting in organizational changes or changes affecting a large group of employees. In organization restructuring decisions the collective bargaining bodies have 15 days to submit their comments. The measure in question may not be implemented during this 15-day period. Trade unions and workers’ councils (Central Workers Council) must be consulted with regard to draft resolutions, aiming at organizational changes without regard to the number of employees concerned. Under the Act V of 2013 on the Civil Code one third of the Supervisory Board shall consist of employee representatives. The employee representatives in the Supervisory Board are nominated by the Central Workers’ Council considering the opinion of the trade unions operating at the Group. Persons nominated by the Central Workers’ Council shall be elected by the General Meeting to the member of the Supervisory Board, except if disqualifications exist in respect of the nominated persons. On December 31, 2023, there were two members of the Supervisory Board were employee representatives. These members were Gyula Bereznai and Endre Szepesi. 3.3.5 Freedom of organization and collective bargaining Magyar Telekom acknowledges the basic rights to freedom of organization and collective agreement in its Social Charter. In line with an openness and trust that relies on a constructive social dialogue, Magyar Telekom declares its support to cooperation with the legitimate representatives of the employees in order to establish a balance of interests. The Social Charter together with the long history of mutual respect and cooperation of the management and employee representative councils are the guarantees that these rights are being fully and thoroughly respected. 100% of the employment contracts of Magyar Telekom employees operating in Hungary fall under collective bargaining agreements developed with the Hungarian Telecommunications Trade Unions (Távközlési Szakszervezet, TÁVSZAK and Magyar Távközlési Ágazati Szakszervezet, MATÁSZ). The agreement, which can be terminated by either party with three months' notice, applies to all Magyar Telekom Plc. employees except the CEO, regardless of their union membership status. Wage terms in the collective bargaining agreement must be renegotiated annually. If the employment is terminated due to reasons related to the employer’s operation, employees are entitled to a specific amount of severance pay surplus, which depends on the tenure of the employee. In addition to the collective bargaining agreement, employees of Hungarian operations are generally covered by the Act I of 2012 on the Labor Code, which imposes various restrictions on the involuntary termination of employment. The Labor Code protects employee interests through two different labor organizations: the Trade Union and the Workers’ Council. The Trade Union, as the official representative of employee interests in negotiations relating to the terms of employment, has the right to be informed of all corporate measures that may significantly affect the interests of employees and to commence legal action against Magyar Telekom for employment-related conduct that infringes an employment rule. In addition, the Workers’ Council directly represents employee interests in dealings with management and decides jointly
271 with management on matters involving employee welfare funds and institutions. The Workers’ Council must be informed semi-annually on issues affecting the economic performance and changes in wages, employment conditions and working hours. The Workers’ Council must also be consulted on corporate measures affecting employees. Magyar Telekom believes that its relations with its employees are good and has not experienced any labor strikes or disruptions since the Company’s formation. 3.3.6 Workforce Reduction and Redeployment Magyar Telekom – in order to ensure the resources related to the Company’s strategic objectives - has reached an agreement with the trade unions in 2023 on headcount plans and wage increase measures for 2024. According to the terms of the agreement, there will be no company-initiated downsizing in 2024, however, the company's goal is still continuous efficiency improvement and process optimization, which is continuous but does not bring significant changes. 3.3.7 Benefit Programs Magyar Telekom’s welfare and social benefits constitute an exceedingly wide-ranging pool. A part of them is granted to every employee, while others are available on certain conditions or are of an insurance nature. In case of certain benefits, employee’s individual contribution is a prerequisite of the employer’s contribution. The way social benefits and discretionary benefits are granted is set out in the Collective Agreement and related regulations. Magyar Telekom provides employees with telecommunication allowances, fringe benefits life and health insurance benefits and health screening packages. 3.4 Risk management 3.4.1 Providing educational and professional background The educational pillar of Magyar Telekom’s Sustainability Strategy aims to improve the digital competencies of the clients and the wider public. It also aims to contribute to the development of industrial succession knowing that a potential throwback in the amount of available highly qualified professionals in the industry could mean a serious risk to maintaining, improvement and development of the quality of its services. In order to secure the highest quality service to the company’s clients, Magyar Telekom needs work with the best professionals. To be able to have them a competitive industrial educational background is necessary. Upon the initiative and by funding of T-Labs (Telekom Innovation Laboratories, Berlin) the faculty Data Science and Engineering began to operate at Eötvös Loránd University from September 2016 as the first pillar of the EU Labs researcher network. The role of Magyar Telekom is in the support of the teaching and research capacities. Magyar Telekom’s colleagues are in close relationship with several higher education institutes and help the universities with consultancy for writing theses, expert education and giving lectures. Within the Company’s strategic partnership started in 2021, the company continued the cooperation with the Miskolc EC Kandó Kálmán Technical School for IT Technology. The aim of the partnership is to offer professional support in keeping the curriculum up-to-date with the latest technological realities of the industry. In addition, Magyar Telekom offered internship opportunities for students. The Company continued its partnership with Szent István University, in order to offer the training practice pillar of the electric engineer dual major. 2 students started this dual major in 2023. The joint education platform of Deutsche Telekom IT Solutions and Magyar Telekom, the “Deutsche Telekom Group remote IT Faculty” at Óbuda University formed in 2021 continued its operation in 2023. The courses are run mainly by DT- ITS specialists, and Magyar Telekom colleagues also contribute. In the fall of 2022, the Company signed a cooperation agreement with the Faculty of Electrical Engineering and Informatics of the Budapest University of Technology and Economics on the participation in the Plant Engineering- Informatics cooperative training, to provide opportunity for students to get familiar with the practical aspects of their future profession, based on the guidelines of experienced professionals. This cooperation was continued in 2023 as well.
272 Almost 80% of the third Kickstart-class, has continued to work in junior positions at Magyar Telekom following their trainee year. In September of 2023 30 senior year university students joined Magyar Telekom Plc. as the fourth, extended numbered generation of Kickstart trainees. During the one-year program, the trainees received professional, soft-skill and design thinking trainings. Kickstart trainees who work in a variety of areas throughout the company gather up for a half term agile project assignment strengthening their ability to work in a cross-functional team. The joint project task is based on real business needs, thus strengthening the importance of the program in parallel with the development of Magyar Telekom. Launched in March 2020, MagentaKraft helps young visionaries with trainings and events on their journey to develop their inventions and projects. The KraftRoad program supports young talents with workshops and events in the development, elaboration and improvement of their innovation projects. Via Kraft Agency, which is Magyar Telekom's own, internal creative team of young people, whose aim is to renew the content production in Hungary and create a new kind of content production model, talented young people are involved in building and shaping the brand. Throughout the year, the KraftLab in Debrecen was also available to the young people, where they could use various tools, from a video studio to a podcast studio to a programmable robot arm. Almost 3,500 youngster took advantage of this opportunity and boosted their various projects with the help of the site. At Zyntern Jobportal Big Beginner Survey which evaluate the most popular employers among young people (aged 16-28), Magyar Telekom was the #1 choice for youngsters and ranked first as the Most attractive employer among IT and human studies students. Based on the survey, Telekom Kickstart Program was the most popular intern program in Hungary. 3.4.2 Employee expectations and equal opportunities The pillars of People Focus in Magyar Telekom are based on the aim to meet the needs of the company’s employees, and to live up to the challenges of maintaining the company status as a highly competitive and future oriented employer. Employees of Magyar Telekom require security, stability, opportunities for advancement and competitive compensations. Magyar Telekom, as a company committed to provide equal opportunities to its employees, finds it especially important to harmonize wages and to terminate unjust wage gaps. Magyar Telekom’s remuneration system is fully transparent thus its base wage tables and the relevant policies are available for all employees. The dimensions of the position system are being developed at the intersections of the Hay-system and the competence-based position levels of its agile organizations. Magyar Telekom pays extraordinary attention not to differ unreasonably the wages of the employees performing the same tasks and that the wage differences between the employees reflect real work differences. As a responsible company, the Company is aware of the social phenomenon of the gender pay gap and are committed to eliminating its root causes within its own business environment. Since July 2020, the Company conducts twice a year regular and complex gender pay gap analysis, during which the Company defines its equal opportunities action plan to reduce the possibilities of inequalities such as the ’motherhood penalty’ and the female career gap. As an employer dedicated to diversity as a core value, Magyar Telekom finds it important to raise the number of women in leadership positions. One of the key objectives of the Diversity pillar of the Sustainability strategy is to reach at least 35% of female leadership by 2025. From May 2020, for the first time in the company’s history, the company has achieved a balanced 33.33% gender ratio in the senior management which the company continued to maintain in 2023. The proportion of female leadership in the overall management was 29.15%. Magyar Telekom considers stress, overload and burnout related risk-reduction as its priority duty in relation to its employees. In order to take charge of these risks by securing an empowering environment to develop and maintain a healthy lifestyle, employees are also provided with coaching and training opportunities and the availability of the Employee Assistance Program all of which help in maintaining a sustainable life balance. Efficient work-life balance of employees with families is further supported by the company’s on-site childcare facility supporting parents in the difficult family management period its child-friendly offices and the available, tax-free nursery and/or kindergarten support that could be selected from its cafeteria benefit scheme, thus contributing to the reduction of expenses. Taking notice of the special conditions of employees (ex. illness or the longer-term domestic care of a relative) a longer period of unpaid leave is also available. 3.5 Performance indicators Non-typical employment at Magyar Telekom Group ▪ No. of Part-time employees in 2023: 156 ▪ No. of Flexi-time employees in 2023: 1,260 ▪ No. of Teleworking employees in 2023: 4,205
273 More women in leadership positions at Magyar Telekom Plc. ▪ Percentage of women in overall workforce: 34.76% ▪ Percentage of women in senior management: 31.37% ▪ Percentage of women in Leadership Squad: 33.33% Volunteer work benefits at Magyar Telekom Group ▪ No. of volunteer working hours (blood donation): 3,146 ▪ No. of volunteer employees (blood donation): 416 4 COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORY BOARD, AND MANAGEMENT The aggregate compensation of the members of the Board of Directors in their capacity as Board members was HUF 19 million in 2023. The aggregate compensation of the members of the Supervisory Board in their capacity as Supervisory Board members was HUF 37 million in 2023. The total compensation expenses (including social security and other payroll-related taxes as well as contractual termination expenses) of the members of the Leadership Squad (LS) was HUF 1,677 million in 2023. On December 31, 2023, four members of the LS have an employment contract with indefinite and two members with definite duration. The notice period is two months for two of the indefinite contracts. The severance payment usually is in accordance with the Labor Code and the Collective Agreement, for the contracts the severance payment is usually between 3 and 16 months. In addition to the above, the affected persons are bound by the non-compete clause, under which the employee is barred from entering into employment with any Hungarian or international competitor of Magyar Telekom and is required to refrain from providing direct or indirect services or activities of any kind to such companies for a definite period (not longer than one year) upon termination of his/her employment. Furthermore, such employee is barred from any action aimed to recruit employees of Magyar Telekom for any other company. This limitation entails certain compensation which is proportional with the above obligation. If the employee is in breach of the agreement, he/she will reimburse the net amount of compensation to the employer. In addition, the employee will be liable for a payment of compensation to the employer. LS members from foreign countries may be entitled to housing subsidies. There are two members affected by this entitlement. In line with the Company’s remuneration guidelines, the Company provides contribution-based personal pension scheme, personal insurance scheme and health insurance scheme for the LS members. In addition, the LS members are entitled to the use of company cars. For information about the Share Based Compensation programs, see Note 20.1.2 of the Financial Statements.
274 5 RESEARCH AND DEVELOPMENT Research and development tasks are carried out by Magyar Telekom Company's own researchers, product and service developers, with the involvement of innovative SMEs in Hungary. In addition, the Company exploits the synergies of its internal and external knowledge base and seeks partnerships with well-known innovation centers and higher education institutions. The Company's main partners in this field are renowned Hungarian universities and research institutes. In addition to the R&D and 5G Campus cooperation, the Company has launched dual training courses together with Széchenyi István University, and a joint project with the university was the simulation of a Hungaroring competition in the 5G Campus framework. In 2023 keep going the „Deutsche Telekom Group IT” Off-site Department faculty at Óbuda University. Also proceed with the engineer educational programs with the universities and higher education institutions and expanded with further subjects. Magyar Telekom recently established partnerships with university science parks currently under construction. 6 REAL ESTATE, SITES OF OPERATION Magyar Telekom has one of the largest real estate holdings in Hungary. The Company uses substantially all of these properties for telecommunications installations, offices, warehouses, garages and shops. Its equipment and machinery primarily consist of switches, communication towers and other telecommunications equipment. In order to increase the utilization of real estates and increase efficiency, also adapting to the recent changes in the energy sector, the Company is committed to reduce the cost of its energy consumption (finding alternative methods in heating and cooling, and to rationalize the usage of offices) furthermore the Company make efforts to sublet or sell its surplus properties. 6.1 The registered office of the Company: ▪ 1097 Budapest, Könyves Kálmán körút 36. 6.2 Sites of the Company: ▪ 1073 Budapest, Dob u. 76-78. ▪ 1106 Budapest, Örs vezér tere 25. 1. em. ▪ 1138 Budapest, Váci út 178. ▪ 1195 Budapest, Üllői út 201. ▪ 1191 Budapest, Vak Bottyán u. 75. a-c. ▪ 1024 Budapest, Lövőház u. 2-6. 2. em. ▪ 1123 Budapest, Alkotás út 53. ▪ 1062 Budapest, Váci út 1-3. ▪ 1117 Budapest, Október huszonharmadika utca 8-10. ▪ 1033 Budapest, Huszti út 32. ▪ 1098 Budapest, Távíró utca 3-5. ▪ 1156 Budapest, Száraznád utca 1-3. ▪ 1211 Budapest, Rákóczi Ferenc út 154-170. ▪ 1087 Budapest, Kerepesi út 9. ▪ 1119 Budapest, Hadak útja 1. ▪ 1087 Budapest, Asztalos Sándor út 13. ▪ 1087 Budapest, Ciprus utca 2-6. Out of the 1,810 buildings on the 1,626 sites of Magyar Telekom, 48% are owned by the Company, 4% are jointly owned and the rest 48% are leased. Magyar Telekom is managing more than 7,000 contracts for base stations, mobile sites and technology properties. The total area of buildings used by Magyar Telekom as of December 31, 2023 was 468,656 m 2 . The majority of sites used in the company’s operations are smaller than 100 m 2 . The largest site is the Company’s headquarters building (leased) located at Könyves Kálmán krt. 36 in Budapest, with floor space of over 39,207.53 m 2 , and including underground area with total space of 82,210 m 2 .
275 7 SUSTAINABILITY AND ENVIRONMENT PROTECTION Magyar Telekom has been dealing with sustainability issues for nearly twenty years and has been planning its goals and tasks strategically for more than 15 years. On this basis, its sustainability activities are characterized by a comprehensive, planned and long-term approach, and in 2021 it already defined its fifth long-term sustainability strategy up to 2030, with key objectives for 2025 and 2030, where the largest subsidiaries were involved. Magyar Telekom has been committed to support the 10 principles of the UN Global Compact in the fields of human rights, environment, and anti-corruption since 2009, and reports on the progress made in this regard year after year in its sustainability report. In 2015, the UN adopted the 2030 Agenda for Sustainable Development, which is set out in 17 headline goals and a total of 169 sub-goals. These goals set out the directions for responsible action to solve the most pressing problems facing humanity and the planet. Magyar Telekom has defined its new sustainability strategy for the period 2021-2030 in line with these SDG goals. The Company's contribution to the primary objectives of its activities is presented annually in a separate sustainability report. Sustainability activities and results are presented in an integrated and comprehensive manner through the annual Sustainability Report, with which is aims to make it’s environmental, social and economic operation covering all topics transparent for everyone. Reports are based on Global Reporting Initiative (GRI) guidelines, adhering to the principle that reports should be the basis for transparency and comparability at an international level. The 2007 report was the first in Hungary to be prepared according to GRI G3 A+ compliance level, which meant the highest level of application of GRI G3 directives at that time. Since then, Magyar Telekom has prepared a report every year of the highest compliance with international guidelines. Independent testing and certification of compliance with GRI criteria was carried out by PricewaterhouseCoopers against the ISAE 3000 international standard. In this annual report, covers only a few key themes of the overall sustainability approach, such as human rights, employees, climate protection and compliance topics. Further details on the company's sustainability performance can be found in the annual sustainability reports, which are available at: https://www.telekom.hu/about_us/society_and_environment/sustainability_reports 7.1 Sustainability governance at Magyar Telekom Coordination has been led by an ESG Squad (formerly Sustainability Squad) from 2023. From 2020 to 2022, the Chief People Officer (CPO) was the senior manager responsible for sustainability. As of January 1, 2023, the Chief Financial Officer (CFO) has become responsible for sustainability, and sustainability coordination has been transferred to the Capital Market Relations Hub, where a dedicated ESG expert has led the group-wide coordination and ESG Squad governance. The Chief People Officer (CPO) is still responsible for the social related topics. ESG Squad reviews and assists the area responsible in strategy formulation and management. Each strategy topic has a CxO level manager and a dedicated sponsor from the Leadership Team. Operative implementation is carried out by cross-cutting working groups whose tasks are to clarify goals, develop a business plan and timing, and implement it. Magyar Telekom upholds its commitment to sustainable development and environment protection first in the environmental policy. In addition to the policy, it has also issued environmental guidelines, which sets out in more detail the company's areas of commitment and expectations. Lastly, in 2022 Magyar Telekom has introduced it’s biodiversity policy. 7.2 Sustainability strategy Magyar Telekom started its fifth ten-year (2021-2030) sustainability strategy period in 2021. The sustainability strategy was defined along three pillars: 4) Climate protection, 5) Digitalization 6) Diversity and inclusion. At the beginning of 2023, it revised its strategic objectives in order to respond to changed external and internal circumstances and to define its objectives based on even more precise calculations. The strategic sub-targets are
276 affected by the risk of fuel price and availability, as well as the faster scale energy demand of 5G services and data centers. In addition to external changes, there were also changes in Magyar Telekom's structure: T-Systems Magyarország Zrt. was transformed and partly merged into Magyar Telekom Plc. Despite the changes, Magyar Telekom Plc. still benefits from the emission reduction commitment renewed in 2019 – approved by the Science Based Target initiative (SBTi). The target is to reduce direct (scope 1) and scope 2 emissions by 84% by 2030 compared to 2015 base year and by 30% compared to other indirect (and scope 3) emissions compared to 2017. 7.2.1 Climate protection In the field of climate protection, Magyar Telekom with Telekom Rendszerintegráció Zrt. undertook to reduce greenhouse gas emissions by 80% in scope 1-2 compared to the base year of 2015. The scope of data has also been clarified and sources such as fugitive emissions of refrigerants, consumption of devices with operational control in data centers or consumption of aggregators providing emergency power sources. While direct and indirect emissions (scope 1+2) remain at net zero. To this end, Magyar Telekom takes the following steps: ▪ 55% electricity reduction in fixed network in Hungary by 2030 compared to 2015 due to modernization, ▪ greening of data centers in Hungary according to the EU taxonomy recommendations, ▪ coverage of electricity from 100% renewable sources, ▪ increasing the share of local renewable energy, ▪ investment for more efficient buildings and infrastructure, ▪ greening the fleet. Reduction of additional indirect emissions (Scope 3) is also an important goal: ▪ with reduction of suppliers' emissions by 30% ▪ with transition to circular economy by 2030. 7.2.2 Digitalization Under this pillar, Magyar Telekom aims to place digitalization at the service of people, families, and businesses. By improving the infrastructure, these services will be available to everyone. In addition, with digital inclusion programs customers can maximize the opportunities offered by digitalization. 7.2.3 Commitments made in relation to the digitalization of Hungary: ▪ By 2027, Magyar Telekom has committed to providing Gigabit network access to 4.5 million households and companies. ▪ By 2026, Magyar Telekom has committed to build 99% external 5G coverage proportional to the population. ▪ In connection with promoting digital maturity, Magyar Telekom works on various programs, where support clients through older generation to small and medium-sized enterprises. For example, with the „Hello Szülő”, „Hello Biznisz”,” Netrevalók” programs. 7.2.4 Diversity and inclusion Magyar Telekom already paid special attention to ensuring diversity and equal opportunities for its employees in the previous strategy. In the new strategy (2021-2030), it has expanded its aim to create a 100% inclusive workplace and provide a 100% accessible service. Inclusive workplace (2025): ▪ 100% barrier-free workplace ▪ The proportion of female managers should be at least 35% ▪ 100% WCAG compliant Inclusive workplace (2030): ▪ The proportion of female managers should be at least 40% Magyar Telekom also advocates the introduction of a complete educational program promoting inclusion and awareness- raising.
277 7.3 Awards Magyar Telekom’s efforts have been recognized by many independent organizations. The list below is a list of the recognitions, awards and sustainability assessments, which the Company have won or continue to receive in 2023:. ▪ FTSE4Good Index membership; FTSE Russell ESG Rating ▪ CECE SRI Sustainability Index membership ▪ MSCI ESG Rating AAA (scale: CCC-AAA) ▪ ISS ESG rating: B Prime (scale: D-A+) ▪ CDP assessment in the field of climate change: A- ▪ PwC Most attractive employer of the year 2023 - Most attractive empolyer in telecommunication sector (sixth time in a row) ▪ Randstad Employer Brand research 2023 - Most attractive employer in telecommunication sector (fifth time in a row) ▪ Zyntern Jobportal – Big Beginner Survey – Most attractive employer #2 place ▪ Family-friendly mentoring company – Three Princes, Three Princesses Movement 7.4 Climate and environment protection in 2023 In line with its strategic objectives, in 2023 Magyar Telekom. Offsetting has resulted in significant risks in the case of corporate greening in recent years, so Magyar Telekom introduced a quality assurance process when purchasing emission reduction certificates in 2023. It uses a scoring system set up by the Carbon Credit Quality Initiative to select the most appropriate project to support and check whether it meets other quality requirements, such as the CDP questionnaire or the various safeguards formulated by CORSIA, based on the available documentation. In addition, Magyar Telekom considers it is important that the implementation of emission reduction projects and the period to be compensated be as close in time as possible, so an additional criterion during the selection was that the start date of the project should preferably be after 2020. In 2023, based on this, Magyar Telekom purchased 15,000 emission reduction units, namely verified emission units (VER) from the Ganzhou Swine Farm Animal Manure Management System GHG Mitigation Project to cover its own emissions and also the emissions of Telekom Rendszerintergáció Zrt. In addition to reducing emissions, the project also supports the UN Sustainable Development Goals (SDGs) through social contribution. In 2023, Magyar Telekom continued to use 100% renewable electricity to achieve the emission reduction targets, backed by 138.8 GWh renewable energy certificates from Guarantees of Origin and also short-term physical PPA (Power Purchase Agreement). The PPA is a 3-year, fixed-price contract with a Hungarian solar park for an expected electrical output of approximately 13.2 GWh per annum. Both the purchase of renewable energy under the PPA and guarantees of origins are recognized in Other operating expenses as energy costs. The biggest contributors to Hungarian emission reduction targets in 2023 were the following measures, which can be read in more detail in the sustainability report: ▪ Energy savings in the building: a uniquely combined complex software solution was tested for energy efficiency and office space optimization. Real-time monitoring of space utilization and energy consumption in the office building enabled more efficient resource allocation and sustainable energy management. In 2023, the following emissions have been calculated according to the corporate standard guidance of the Greenhouse Gas Protocol. Cumulative GHG emission for Magyar Telekom: ▪ 54,756 tonnes of CO2 emissions (greenhouse gas emissions in CO2 equivalent) if purchased renewable energy is not taken into account (location-based emissions) ▪ 14,099 tonnes of CO2 emissions when purchased renewable energy is taken into account (so-called market-based emissions) Magyar Telekom’s GHG emissions by category ▪ Scope 1: 12,517 tons of CO2 emissions (currently local and market-based emissions are the same) ▪ Scope 2: 42,240 tons of CO2 emissions in case of location-based calculations ▪ Scope 2: 1,582 tons of CO2 emissions in case of market-based calculations Energy efficiency for Magyar Telekom Plc. and Telekom Rendszerintegráció Zrt. – bits transmitted/power consumption – 457 Gbit/kWh.
278 7.5 Risks Within the framework of the Business Continuity Management System (BCM), the company identified critical climate risks (flooding, heat alert) and developed an action plan for them. The annual amount of climate damage in the networks did not reach the level of action (HUF 50 million per month). The total restoration cost was HUF 18.55 million. In 2023, 591 cases had to be investigated due to various problems caused by the weather. On hot days, the company gives colleagues the opportunity to work remotely, thus reducing the energy load of offices. The base temperature of engine rooms and base stations is also raised, thus reducing the energy consumption of air conditioners. The physical risks of climate change to infrastructure were analyzed in 2022 – using different climate scenarios in terms of extreme temperatures (RCP4.5 and RCP8.5). Flash flooding was the riskiest weather event, and 19-24% of infrastructure (depending on scenarios) could be negatively affected by extreme hot weather in the coming decades. This analysis can help make infrastructure more resilient to expected changes when modernizing. The transition under the Paris Agreement could also entail a number of risks for companies. Magyar Telekom group's parent company, Deutsche Telekom, together with its largest subsidiaries, including Magyar Telekom, conducted a detailed analysis in 2023 of which changes in legislation, market environment, technology or even reputational risk are expected during the transition and to what extent they affect the company's situation. During the analysis, the Magyar Telekom identified the greatest risks in changes related to energy supply, and there is an extremely high risk that with the spread of 5G, users will generate more and more data traffic - and thus energy consumption – which the energy efficiency measures will not be able to compensate. However, it should be stressed that the increase in energy use in the ICT sector should not be seen as a clearly negative effect. This transition is similar to the transition from fossil fuels to electricity, except that digitalization can replace not only energy use, but also material use. Magyar Telekom of course, is continuously working to reduce its energy consumption, maintain security of supply while using renewable energies, and contribute to the domestic net zero-emission transition with its transition plan. Possibilities Energy efficiency investments and the use of renewable energies are considered by the company to be the most effective tools for mitigating climate change. Therefore, its long-term goal is to ensure the electricity supply of the network with renewable energy sources as much as possible. Magyar Telekom has embarked on two paths, one of which is the conclusion of long-term PPA contracts, the other way is the installation of solar cell systems on its own buildings in several stages. Its strategic goals include the further expansion of self-generated renewable energy, which is why in 2023 it piloted self-developed solutions at 8 base stations. More details can be found in the Sustainability Report. Magyar Telekom also provides an opportunity for its customers, who also consider the fight against climate change important, to choose a service that contributes to the protection of the climate. That's why in 2019 it created the world's only ExtraNet Green 1GB extension option. Although measures taken during the pandemic reduced turnover in 2020 after its success in 2019, the company still retains the option for its customers. In 2023, this service has not lost its popularity. A change in customer preference creates not only high risk, but also an opportunity with early detection. In addition to enabling our customers to shop more consciously with Eco Rating initiated by Deutsche Telekom and other European mobile operators, Magyar Telekom entered the market with refurbished devices in 2023 so that residential and corporate customers who keep material consumption and circular economy in mind can also find an appealing option. Furthermore, Telekom's Smart Energy software, a smart approach to energy consumption and generation meets real-time data collection and efficient forecasts. The software not only provides simple data about equipment, but also collects realistic consumption and production information, enabling customers to accurately understand their energy use. More details can be found in annual Sustainability Report. 7.6 Stakeholder related initiatives Building strong relationships with your stakeholders is essential for a company to operate successfully. Some of our most important activities, about which detailed information can be found at Sustainability Report related chapters: All stakeholders of the company have the option to express their expectations towards Magyar Telekom online. These are taken into account when implementing sustainability activities.
279 7.6.1 Investors During 2023, the CEO and the Chief Financial Officer presented the quarter's results to investors' representatives four times. Magyar Telekom's senior management and the staff of the Investor Relations Department, as well as investors and analysts hold about 80 meetings (virtual and face-to-face) annually at various conferences, roadshows and individual inquiries. Magyar Telekom also places great emphasis on satisfying the information needs of interested parties on its website. Under the Investors menu item, those interested can find up-to-date information about the financial situation of the Company (quarterly financial reports), general meetings, dividend payments, and they can also follow the current price of Magyar Telekom's shares and find all the information they need to contact the Company. In addition, the Company assesses the needs of investors on an annual, biennial basis, using a questionnaire method. Magyar Telekom commissions the preparation of the so-called perception study to a specialized, independent company, which assesses the opinions, needs and expectations of investors based on a representative sample with the help of a detailed list of questions. 7.6.2 Customers Magyar Telekom would also like to provide an opportunity for its customers so that those who, together with the company, consider the fight against climate change important can choose a service that contributes to climate protection, few examples are mentioned in chapter 7.5, under possibilities. Magyar Telekom has also created platforms to promote digital maturity. For instance, Hello Parent (Hello Szülő) Digital Platform is created for families which was launched in mid-October 2023. This new brand and commercial asset aim to serve as a versatile, ever-expanding digital knowledge base for families. Hello Parent has had nearly 130,000 visitors since its launch until December 31. Within the framework of the Netrevalók program, in partnership with the Metropolitan Ervin Szabó Library, the digital skills development of the older generation takes place by connecting two generations: high school students and pensioners. Registration for the sessions in libraries is through the Hello Parent platform: https://helloszulo.hu/netrevalok. In the framework of library activities, secondary school students can introduce digital solutions that make everyday life easier for older people personally, based on their own level of knowledge and interests. 7.6.3 Employees In March 2023, the community solar program was announced again. During the program, employees had the opportunity to adopt a solar panel, and the 200 solar panels found a host in less than an hour. As an employer committed to diversity as a core value, Magyar Telekom considers it important to increase the number of women in management positions. One of the key goals of the Diversity Pillar of the Sustainability Strategy is to reach at least 35% female leaders by 2025. As of May 2020, the company achieved a balanced gender ratio of 33.33% in senior management for the first time in its history, which the company maintained in 2023. Monitoring of the gender pay gap has also continued, along which further improvements can be planned. In 2023, three more employee communities were formed at the company: Women in Telekom, Telekom Family Drivers, Obstacle-Menes Telekom, in addition to the already operating Magenta Pride employee community aimed at supporting colleagues belonging to the LGBTQI+ community. The Company reports in details on communities and its diversity and equal opportunities activities for its employees in Chapters 3.3.1 and 3.3.2 of the report. The Magenta Alliance Foundation was established in July 2020 on the initiative of Tibor Rékasi, CEO, and the members of Telekom's top management, the Leadership Squad, out of their personal responsibility and financial donations. Since the beginning of its operation, the Foundation has awarded grants in 399 cases until the end of 2023, totaling HUF 67,247,000, of which the amount of grants awarded in 2023 is HUF 11,300,000. Volunteering: In recent decades, it has become increasingly important for companies to prove themselves not only in the market, but also in the field of social responsibility. It is extremely important for Magyar Telekom that as a company and its employees as individuals set a good example. To encourage volunteering, the company organized a Volunteer Fair in April 2023, where 10 NGOs were given the opportunity to communicate their activities and goals to their employees and recruit volunteers. In 2023 Magyar Telekom employees have spent 3,146 hours on volunteering activities in 2023.
280 7.6.4 Non-governmental organizations Magyar Telekom’s cooperation with NGOs is implemented along the focus of sustainability and poppy seed strategy. Some of these collaborations span years, as is traditionally the case with SUHANJ! Foundation support, support for the Edison platform established by Bridge Budapest Association, which brings together and encourages cooperation between value-based actors related to children's skill development, or participation in the HBLF Romaster Program, which aims to educate talented Roma youth. In addition, Magyar Telekom has civil cooperation that aims to support initiatives to be implemented in a given year, but in connection with these, it also applies to the fact that given programs provide solutions to social and environmental issues that the company treats as a top priority. These include the representation of women in IT professions through the support of the Women in IT Security Association, or the support of the Hungarian Ethology Foundation program, which aims to provide parents with solutions based on scientific research related to the device use of their young children. 7.6.5 Suppliers Magyar Telekom examines the sustainability performance of its suppliers every year within the framework of its sustainable supply chain management process. Magyar Telekom does this independently for suppliers besides joint ones with Deutsche Telekom who are not evaluated in the EcoVadis system. Magyar Telekom invites strategically important suppliers with a high risk factor to comment on their operational practices based on EcoVadis' detailed criteria. Within this framework, 46 suppliers directly and 3,311 indirectly have valid assessments based on social, environmental, economic and sustainable sourcing criteria. These suppliers accounted for 34.28 % of the annual order value, which was 40.59% in 2017, 45.06% in 2018, 44.40% in 2019, 38.30% in 2020, 36.56% in 2021 and 34.28% in 2022. In 2023, Magyar Telekom has contacted another 300 suppliers with the webaudit questionnaire. 7.6.6 Future generations Magyar Telekom is also supporting the future generation. KraftLab has been created as community creative space in Debrecen to help young people, provide opportunities and tools for their development. They can experiment risk-free and that they can use digital tools and the possibilities of the digital world for their own development, alone or in cooperation with each other. The community space continued to operate with a full house in 2023, with nearly 3,500 visitors.
281 8 CORPORATE COMPLIANCE When shaping the compliance program of Magyar Telekom, the goal was to ensure that Magyar Telekom pursues its business activity with maximum awareness of and commitment to compliance with the applicable laws and legal provisions, in accordance with the strictest norms of ethical business conduct. To this end, the company issued policy statements addressing the potentially arising compliance-related risks, and the company applies the procedures set out in these policy statements and arrange continuous training courses for its employees related to these procedures. The Company established clear concise processes to report, examine, follow up and correct suspected cases of non- compliance. The Corporate compliance program is supervised by the Group compliance officer. The Group compliance officer reports directly to the Audit Committee, and cooperates with the Board of Directors, the Supervisory Board and the management. The Corporate compliance program focuses on the Code of Conduct. The Code of Conduct of Magyar Telekom Plc. contains the summary of the compliance requirement within the company, sets common values of the Company and is a key to the strong position, reputation and successful future of Telekom. The Code of Conduct applies to everyone within the Magyar Telekom from the employees to the members of the Board. In addition, contracted partners of the Magyar Telekom also have to know and accept these values, when registering on the procurement website. In the year 2010, an external independent party audited the implementation of the Compliance program, and the company was awarded a certificate of compliance with the external expectations and of the implementation of the system. The program was revised in 2013, including other related areas as well – such as procurement, internal audit, HR, sales. The audit was not aimed only at the implementation and control of the system in the different areas, but it measured the operational efficiency of the control system. The Company met the expectations and was awarded by a certificate issued by Ernst&Young as independent external party. In 2017, again an external auditor (KPMG) evaluated the effectiveness of the compliance management system of Magyar Telekom, and issued a certification that the program complies with the requirements of the new anti-corruption ISO standard. In 2021 an external advisor (KPMG Germany) reviewed the Compliance program. They found the operation of the program efficient. The first distance learning course addressing compliance was started in 2008 in the topic of “Conscious recognition of fraud and corruption”. Since then, the company been providing a general eLearning course for its new employees, mandatory for all colleagues joining to the company. The course is completed with the acceptance of the Code of Conduct. Since the start of the program, 107,673 distance learning courses were completed by the employees on group level, related to topics, such as compliance awareness, supplier due diligence, anti-corruption measures, incompatibility or insider trading. On the top of that, the Company has arranged personal training sessions for employees working in professional areas exposed to compliance and abuse related risks – both within the parent company and Hungarian and international subsidiaries – in the topics of organized anti-corruption behavior, screening of contracted partners and rules of giving and accepting gifts. In 2023 – similarly to the practice of the previous years – risk analyses were conducted with the participation of organizations and subsidiaries of Magyar Telekom Plc. Based on the results of the survey, a comprehensive audit was prepared for the potential compliance and abuse risks, the result of which was submitted to the Audit Committee of the Company. During the year Magyar Telekom checks the soundness of the reports submitted to its company in connection with unethical behavior, and if necessary, the Company act on these reports. In case the company identifies actual abuses, it takes care of the necessary and adequate countermeasures. Magyar Telekom published all cases of corruption and the related countermeasures in accordance with the related applicable laws and legal provisions. 8.1 Fight against bribery and corruption 8.1.1 Policies Magyar Telekom does not tolerate any attempts of corruption, so numerous procedures and policies were introduced to prevent and fight corruption. Magyar Telekom complies with the anti-corruption rules of the Group, and expects its business partners not to engage in unlawful activities (including breaching the anti-corruption laws) such as utilize any money or other services provided by Magyar Telekom for unlawful purposes. This also includes direct or indirect payments to individual(s) to improve the perception of Magyar Telekom (or any parties acting for Magyar Telekom) or to
282 influence any business decision. Magyar Telekom strictly prohibits any form of corruption including (but not only), receiving personal advantages or monetary gains, accepting or providing bribes or promising facilitating payments. The Company also prohibits employees from making beneficial decisions towards family, friends or close or distant acquaintances. It is not allowed to provide any gift or invitation to an event to third parties if it could potentially influence any business transaction. Magyar Telekom does not support morally or financially any political parties, organizations or representatives of these. Magyar Telekom will not start business relations with third parties that violate the anti- corruption clauses of the Compliance Program or the basic principles of the Code of Conduct. Due Diligence procedures: There are no fixed procedures on how thorough due diligence should be to avoid legal responsibility or any investigation as per the anti-corruption laws. The aim of these procedures is to identify high-risk areas, and to provide indication when further due diligence or review is required. 8.1.2 Result of the policies During the year, the Company has verified the plausibility of any complaints the company has received about unethical behavior and initiated internal investigations if necessary. If the Company has identified any misconduct, it initiated the necessary measures and actions. Any complaints regarding breaches of internal or external rules can be sent to the Tell Me! portal of Magyar Telekom. Any questions regarding corporate compliance can be asked on the Ask Me! intranet portal. 8.1.3 Risk The basis and prerequisite of the efficient defense against breaches of laws and policies is the registering and analysis of compliance risks and identifying other compliance relevant cases at Magyar Telekom. The yearly Compliance Risk Assessment (CRA) handles active and passive corruption separately. The risk assessment always includes Magyar Telekom, Telekom Rendszerintegráció Zrt. and Makedonski Telekom. Other subsidiaries can be included on a case-by-case basis, based on information originating from internal investigations. The CRA fully covers the abovementioned companies. The Group Compliance Officer informs the Audit Committee, the Board of Directors, and the management about the result of the risk assessment and gives an update about the status of the measures in every quarter. 9 ECONOMIC ENVIRONMENT AND OUTLOOK As a result of previous years’ economic developments, in 2023 economic growth slowed globally whilst inflation rates reached elevated levels, especially in the beginning of the year. At the same time, telecommunication industry has continued to play a critical role as the need for digitalization and possibilities provided through digitalization have been dynamically increasing, expanding. 9.1 Economic environment and outlook During 2023, Hungarian GDP witnessed contraction, primarily due to lower household consumption and reduction in investment levels. Decline in household consumption was mostly driven by the high inflation environment, as the development of the spending level could not match the average 17.6% inflation rate. To limit rise in the inflation rate, the central bank raised the policy rate in several steps during 2022 which resulted in a downward inflationary path from the second quarter of 2023. As a result, central bank started monetary easing in the second half of 2023, which is to positively impact economic growth going forward. With regards to the Hungarian telecommunication sector, sustained strong demand for data mitigated unfavorable impacts of the cost pressure and thus the industry could keep its momentum in 2023. Looking ahead, there are further uncertainties related to the economic and business developments, as well related to the changes in the competitive environment. To ensure the reliability and security of its networks and its leading market position, Magyar Telekom remains committed to invest in its infrastructure and continue with the customer centric operational approach going forward.
283 10 INTERNAL CONTROLS, RISKS AND UNCERTAINTIES 10.1 The presentation of the systems of internal controls and the evaluation of the activity in the relevant period Magyar Telekom’s management is committed to establishing and maintaining an adequate internal control system to ensure the reliability of the financial reports and minimize operating and compliance risks. Magyar Telekom’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union. For the business year 2023 control documentation and evaluation were accomplished in the IT supported ICS-Tool 4 system. Transaction Level Controls describe the controls built into the Company’s business processes that have been designed and operated to ensure that material misstatements in each significant financial account and disclosure within the financial statements of the Company are prevented or detected in a timely manner. Complete evaluation of the internal control system of Magyar Telekom is based on the method established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The operation of the internal control system is supported also by the independent internal audit function. It contributes to the improvement t of the internal control processes and the reduction of existing risks by performing audits according to the risk based internal audit work plan and testing ICS controls. The Internal Audit area follows up the implementation of the measures defined based on the audits. The Supervisory Board and the Audit Committee inter alia also receive regular reports on the findings of the audits and related measures, and on measure fulfilment. In line with the criteria of the adopted internal control framework, management evaluates the effectiveness of internal control system within each financial year. Management’s assessment for 2023 is finished and based on the collected information internal control system has been operating effectively to prevent potential material misstatements in the financial statements and minimize operating and compliance risks. The Company’s shareholders are being informed about the operation of the internal control system through its public reports. The management and Board of Directors of Magyar Telekom are committed to conducting all business activities of Magyar Telekom Group according to the highest legal and ethical standards. Based on this commitment, the Board of Directors established the Corporate Compliance program of Magyar Telekom. The Corporate compliance program is applicable to all bodies, organizations, employees of Magyar Telekom, and advisors, agents, representatives as well as to all persons and organizations that work on behalf of the Company or its subsidiary. The Corporate compliance program of Magyar Telekom ensures that the business activities of the Magyar Telekom Group are conducted observing and in compliance with the relevant laws to the utmost extent, according to the highest standards of training and commitment. It requires the realization of guidelines and processes that manage potential compliance risks and implement specific processes in order to report, investigate, monitor and correct suspected or actual lack of compliance. 10.2 The utilization of financial instruments, risk management and hedging policies Introduction As Hungary's leading telecommunications provider Magyar Telekom is subject to uncertainties and changes of the telecommunications and IT industry. To operate successfully in this continuously changing environment risks have to be systematically identified, assessed and managed. Risk management system is not only needed from a business point of view, but as a company listed in the stock market, Magyar Telekom is obliged to operate a risk management system and prepare a risk report to inform its investors. Upon the establishment of the comprehensive risk management system the Company acts in line with the relevant requirements of the Budapest Stock Exchange, as well as the rules laid down in the applicable international standards. 4 Internal Control System
284 The Group level risk management system covers strategic, operational, financial, compliance and legal risks, which is also applicable to the consolidated subsidiaries of the Company. The objective is to identify, monitor and manage these risks in an early phase. Risk management guidelines It is Magyar Telekom Plc.’s policy that all disclosures to its shareholders and the market participants should give an accurate and complete picture of Magyar Telekom Group and fairly present the financial condition and results of the Company in all material respects. Such disclosures are made on a timely basis as required by applicable laws, rules and regulations. The risk management organization and process: To meet these objectives, Magyar Telekom continuously develops and regularly reviews the functionality and effectiveness of the elements of its risk management system. The risk management of Magyar Telekom includes the identification, assessment and evaluation of risks, the development of necessary action plans, as well as the monitoring of performance and results. Magyar Telekom performs its risk management activities in accordance with the risk management guidelines developed by the Group level risk management organization and approved by the Boards of Directors. The risk owners of the individual organizations are responsible for identifying, reporting, assessing and monitoring risks on a continuous basis, in line with the framework of the risk management process, under the governance of the central risk management organization. During the annual planning process, the management takes into account potential risks. The established risk management standard provides a process framework: ▪ The identification of risks through the involvement of all organizations. ▪ Following the identification of risks, they are analyzed, assessed and quantified in details, (by estimating their probability of occurrence and potential impact) according to a predefined methodology. Risk assessment allows the management to focus more effectively on those risks that have significant impact on the Group's strategic objectives. ▪ A decision is taken on the specific course of action to reduce risks. ▪ The relevant risk owner implements, monitors and evaluates the relevant actions. ▪ These steps are repeated as necessary to reflect current developments and decisions. To operate the risk management system effectively, Magyar Telekom needs to ensure that management takes business decisions based on knowledge of all relevant risks supported by regular Magyar Telekom Group-wide risk reporting. At the same time, risks related to the business plans are continuously assessed and managed and considered in the risk management process. Risk factors that impact the operations of Magyar Telekom are reviewed regularly throughout the Company. All of the subsidiaries and organisations are required to identify and report the risk to their operations. Once these risks have been evaluated, the results are communicated to the Board of Directors, the Audit Committee and Deutsche Telekom’s Risk management area in form of a group-level risk report. This regular reporting ensures that the most significant risks are monitored, that up-to-date risk mitigation measures are in place and that they are regularly followed. Risk items affecting the operations of the Company are reviewed regularly and proactively throughout the Magyar Telekom Group. In this context, all the organisations and subsidiaries must immediately report any new facts, information or risks that comes to their attention that meet the criteria for mandatory reporting. The risk management function evaluates the information communicated and notifies the Chief Financial Officer if significant new risks or information emerge. Responsibilities of employees on monitoring and managing risks are governed by internal regulations. The risk assessment is carried out for a three-year period by Magyar Telekom Group. If there are significant risks beyond the forecast period, such risks are monitored on a continuous basis.
285 Besides the systematic management of risks the identification of opportunities and their strategic and financial assessment are also essential parts of the annual planning process of Magyar Telekom Group. This allows the Company to take these opportunities into account in its forecasts. 10.3 Main risk factors The Company’s financial condition, results of operations or the market prices of its securities could be materially adversely affected by any of the risks described below. These risks are not the only risks the company faces. Additional risks not currently known to the company, or risks that the company currently regard as low priority, could also have a material adverse effect on its financial condition, results of operations or security prices. Regulatory risks ▪ Magyar Telekom operates within a strictly regulated market environment. Most of the regulatory framework is the result of EU legislation. Risk management activities: ▪ The Company cooperates and maintains an active dialogue with regulators. ▪ The Company maintains processes to ensure compliance and provide timely and accurate information to regulators. Legal risks ▪ Regulatory cases and legal disputes with parties could influence the Company’s results of operations. Risk management activities: ▪ Protecting its interest and values through legal representation, continuous management and monitoring of legal disputes. ▪ See also the compliance risk management activities. Financial risks ▪ For details on financial risks and their management, see Note 5 of the Financial Statements. ▪ Developments in the technology and telecommunications sectors may result in impairment of the book value of certain of the company’s assets. ▪ Unpredictable changes in the Hungarian tax regulations may have an adverse effect on its results. ▪ Fluctuations in the exchange rates could have an adverse effect on its results of operations. ▪ Economic, geopolitical trends in Hungary and in other countries could have an adverse impact on the value of the company’s investments, operating results or financial situation. ▪ The increasing trend of inflation could erode Magyar Telekom's results with limited predictability. ▪ In the future, as a direct consequence of the global energy crisis, the market prices of electrical energy and several crucial energy carriers (natural gas, oil, coal) may further increase. Risk management activities: ▪ The Company continuously analyzes financial actual data and provide forecasts on financial indicators. ▪ The Company monitors technological developments and its competitors’ activities. ▪ The Company carries out sensitivity analyses (e.g. foreign exchange, free cash flow). ▪ The Company tests all key controls on an annual basis. ▪ The Company continuously improves its processes, systems for the purpose of automated accounting, reporting and auditing. ▪ The Company constantly monitors energy prices to ensure that it purchases energy at a proper price level. Strategic risks ▪ The Company is subject to intense competition in the fixed business due to overlaps with its competitors on more and more locations as a result of the network roll-outs. ▪ The Company is subject to intense competition in System integration /IT segment.
286 ▪ Adaption to new trends and technological changes in the telecommunications market (IoT, Big Data, AI, 5G) might be a serious challenge. ▪ Its business may be adversely affected by actual or perceived health risks associated with mobile communications technologies, and unsubstantiated and rapidly spreading news about new technologies. ▪ Sustainability: information on the Company's approach to sustainability risks and opportunities can be found in Note 7 of the Business / Management Report . Risk management activities: ▪ The Company continuously invests in the development of its network. ▪ The Company transform its internal processes to be even better prepared for future challenges. ▪ The Company monitors technological developments and its competitors’ activities. ▪ The Company pursues responsible and sustainable business activities. ▪ In order to maintain trust and reputation the company continuously informs its key stakeholders on its plans, risks and achievements. ▪ The Company integrates digital initiatives into its long-term planning and align their technology and business strategies. ▪ The Company continuously provides training for its employees to familiarize them with new technologies. Operational risks ▪ The future of its current operational model is subject to currently unforeseeable changes in the future business environment. Risk management activities: ▪ The Company has a flexible business model. The company closely monitors the competitive environment in all markets and responds accordingly to both consumer and business segment needs. ▪ Its price offers are competitive in the markets where the company operates. ▪ The Company supports its business customers with its innovative products to increase efficiency. ▪ The Company transforms its internal processes to be even better prepared for future challenges. ▪ The impact of a pandemic can affect its entire risk environment. Risk management activities: ▪ Experiences in reacting to effects of COVID-19 have become part of the Company’s everyday operation. Due to the nature of the telecom industry and the importance of communication services in a pandemic the company continuously strengthen its digital strategy. ▪ The Company continuously invests in the development of its network to prepare for the challenges of the future and to successfully continue to ensure the operation and capacity of its network infrastructure. ▪ Magyar Telekom can ensure the health protection, productivity and efficient way of working of employees by creating and enabling conditions for teleworking. ▪ The effects of system errors may reduce user traffic, result in lower revenue, incur fines for the company, and harm its reputation. Risk management activities: ▪ Magyar Telekom operates network monitoring systems and defines recovery goals to minimize service outages. ▪ Magyar Telekom considers it of key importance to inform its customers in a timely manner about service problems thus the company operates an advanced information system. ▪ Loss of key personnel could weaken its business. Risk management activities: ▪ Operation of an advanced human resources strategy, for further details see Note 3 (“Social commitments, labor standards, human rights”) of the Business / Management Report.
287 ▪ The number of cyber-attacks has increased significantly in the whole world. Cybersecurity risks have worsened due to the pandemic, as work, shopping, social interactions and education have become significantly digitized. The quick change increased the vulnerability of organizations to cyber-attacks. The number of cyber-attacks has significantly increased worldwide in recent times. The cyber security risk has further worsened due to the global pandemic, as work, shopping, social interactions, and education have shifted significantly towards digitization. The rapid development of digitization has increased organizations' vulnerability to cyber-attacks. Also, teleworking may increase the risk of fraud and misuse of business information and data, as well as unauthorized access, theft and fraudulent use of data. Risk management activities: ▪ Magyar Telekom provides services with highest security-standards and constantly tests and updates its cyber security countermeasures. ▪ Magyar Telekom performs regular audits on key security risks affecting its business and maintains strategies to identify, prevent and respond to these challenges. ▪ The Company’s cybersecurity approach focuses on minimizing the risk of cyber security incidents impacting its networks, systems and services. ▪ Magyar Telekom promotes conscious conduct among its colleagues via communication, campaigns and training. ▪ Data protection incidents are punishable with very high fines. Despite the appropriate technical and organizational measures adapted to the nature of data processing, purposes and risks of data protection and well-designed data protection management structures data protection incidents and compliance deficiencies cannot be entirely excluded. There may be problems that can have a negative impact on Magyar Telekom's reputation and may incur costs and other legal consequences (including fines). Risk management activities: ▪ In order to ensure data protection compliance and to avoid other legal consequences (fines) the company pays special attention to compliance with data protection principles (e.g. purpose limitation, data minimisation), to the definition of appropriate legal bases for data processing, to the assurance of privacy by design and by default in the design and operation of the services and processes as well as to high-level data security measures to avoid system failures that may impact a large number of subscribers, employees or any other data subjects. ▪ The Company provides regular data protection and data security trainings, privacy awareness communication and other tools (e.g. privacy aids on the corporate intranet) to help colleagues make better and risk-conscious decisions. ▪ The increased penetration of artificial intelligence systems requires a high level of attention and can have serious legal consequences if not properly applied. Risk management activities: ▪ Magyar Telekom incorporates related guidelines and requirements into its processes and provide regular legal and compliance support for business decisions in the use and development of artificial intelligence systems. ▪ In the course of use of artificial intelligence systems, if personal data processing is also involved, Magyar Telekom pays special attention to the compliance with the data protection requirements. ▪ Procurement and supply chain: the company cooperates with a wide range of vendors. High risk products and services include hardware, network technology components, and all products and services provided directly to end users. Supply risks cannot be entirely avoided. Epidemics, natural disasters, wars, transportation bottlenecks, price increases, changes in the economic or political environment or the suppliers' product strategies may have a negative impact on the company’s business processes and results. Further risks may arise from dependencies on specific suppliers or from their default due to capacity or economic reasons.
288 Risk management activities: ▪ In order to reduce the Company’s exposure to risks the company implements organizational, operational and profession-specific procurement strategies. Its procurement processes are planned and are monitored through regular internal and external controls. Key professional factors for managing procurement risks: proactive management of the supplier base, their frequent and ad-hoc due diligence, supplier segmentation, risk analysis of strategic and critical suppliers and continuous active contact keeping together with the business areas. Compliance risks ▪ Violation of laws may result in loss of trust, financial sanctions, impairment of the company’s shareholder value and further sanctions. Serious violation of laws may lead to criminal proceedings, litigation and regulatory actions. Risk management activities: ▪ The company operates a compliance framework program for the identification, regular assessment and mitigation of risks. ▪ Magyar Telekom trains its employees, runs awareness raising programs that explain its ethical norms throughout the organization and help the employees to understand their role in ensuring compliance. ▪ The Company supports a culture where its colleagues can voice their concerns, so company can identify problems and prevent them from happening again. 10.4 Financial risk management The classification of the Company’s financial instruments is described in detail in Note 4 and the financial risk management of the Company is described in detail in Note 5 of the Financial Statements.
289 11 ANALYSIS OF FINANCIAL RESULTS FOR 2023 11.1 Revenues Total revenue increased from HUF 593 billion in 2022 to HUF 691 billion in 2023, reflecting continued strong growth in mobile data and fixed broadband as well as the impacts of the inflation-based fee adjustment implemented. Mobile revenue increased to HUF 443.5 billion in 2023 compared to HUF 386.2 billion in 2022, reflecting the continued positive momentum in mobile data usage. ▪ Voice retail revenue grew by 9.6% to HUF 114 billion in 2023, as lower usage level was offset by the impacts of the inflation-based fee adjustment implemented at the Hungarian operation. ▪ Voice wholesale revenue was down by 4.7% to HUF 8.1 billion in 2023, as a result of lower incoming traffic. ▪ Data revenue grew by 28.5% to HUF 168.6 billion in 2023, driven by the continued growth in subscriber numbers and strong demand for mobile data usage. ▪ SMS revenue rose by 9.9% to HUF 24.9 billion in 2023, as broadly stable usage levels were coupled with the positive impacts of the fee adjustment. ▪ Mobile equipment revenue increased by 2.7% to HUF 109.4 billion in 2023, driven primarily by increase in the average handset prices. Fixed line revenue increased to HUF 231.9 billion in 2023, up from HUF 197.3 billion in 2022 primarily as a result of higher broadband and TV revenues. ▪ Voice retail revenue was up by 2.5% at HUF 30.1 billion in 2023, as the further decline in the customer base and usage level in Hungary was mitigated by the fee adjustment impacts. ▪ Broadband retail revenues increased by 27.3% to HUF 79.5 billion in 2023, thanks to further growth of the customer bases that was coupled with continued strong demand for bandwidth upgrade transactions in Hungary and the impact of the inflation-based fee adjustment. ▪ TV revenues increased by 17.3% to HUF 61.6 billion in 2023, reflecting the continued expansion of the IPTV customer bases as well as fee adjustment measures. ▪ Fixed equipment revenues rose by 19.6% to HUF 19.4 billion in 2023, primarily driven by higher sales volumes and lower present value related discounts at the Hungarian operation. ▪ Data retail revenues rose by 9.2% to HUF 11.5 billion in 2023 thanks to higher revenue from leased line fixed internet services. ▪ Wholesale revenues were up by 1.3% to HUF 13.2 billion in 2023 thanks to higher wholesale fixed access revenues. System Integration (SI) and IT revenues were up at HUF 15.5 billion in 2023, compared to HUF 9.4 billion in 2022, primarily driven by increased revenues from high value projects in Hungary. 11.2 Direct costs Direct cost increased from HUF 252.3 billion in 2022 to HUF 278.5 billion in 2023, driven by higher SI/IT service related, bad debt and equipment sales expenses. ▪ Interconnect cost decreased by 6.7% to HUF 17.0 billion in 2023, reflecting lower usage levels at the Hungarian operation. ▪ SI/IT service-related costs increased by 49.8% to HUF 11.9 billion in 2023, reflecting higher volume of related projects during the year. ▪ Bad debt/Impairment losses and gains on financial assets and contract assets expenses were higher by HUF 6.7 billion at HUF 13.5 billion in 2023 reflecting partly the higher revenue base as well as HUF 3.5 billion forward- looking impairment recognized in relation to the outstanding instalment sales receivables due to the increased probability of deteriorating recovery rates. ▪ Telecom tax was lower by 3.0% at HUF 25.5 billion in 2023, reflecting mostly the lower mobile voice usage among business customers.
290 ▪ Other direct costs increased by 9.1% to HUF 210.6 billion in 2023, driven primarily by higher equipment costs coupled with an increase in roaming and TV-content outpayments. 11.3 Gross profit Gross profit increased to HUF 412.4 billion in 2023, from HUF 340.7 billion in 2022, reflecting the increase in revenues. 11.4 Employee-related expenses Employee-related expenses rose by 23.4 % year-on-year to HUF 69.7 billion in 2023, driven primarily by the wage increases implemented at the Hungarian operation. 11.5 Supplementary telecommunication tax Supplementary telecommunication tax, increased to HUF 29.9 billion in 2023 from HUF 24.5 billion in 2022 due to the higher relevant revenue base. 11.6 Other operating expenses Other operating expenses increased from HUF 63.3 billion in 2022 to HUF 80.8 billion in 2023 driven by higher energy costs and general inflationary pressure in Hungary. 11.7 EBITDA EBITDA grew to HUF 236.3 billion in 2023 versus HUF 201.0 billion in 2022, thanks to higher gross profit that could offset the increase in indirect costs. 11.8 Depreciation and amortization Depreciation and amortization (D&A) expenses remained broadly stable, amounting to HUF 114.7 billion in 2023. 11.9 Operating profit Operating profit rose to HUF 121.6 billion in 2023 from HUF 86.8 billion in 2022 thanks to the improvement in EBITDA. 11.10 Net financial result Net financial result declined from a loss of HUF 23.8 billion loss in 2022 to a loss of HUF 47.0 billion in 2023. Interest expense increased driven by higher interest related to lease liabilities and higher average interest costs whilst the unfavourable change in other finance expense reflects higher losses related to derivatives fair value measurements. 11.11 Income tax Income tax expense rose to HUF 15.6 billion in 2023 from HUF 14.1 billion in 2022 driven by the higher profit before tax.
291 12 EVENTS AFTER THE REPORTING PERIOD There were not any events to be reported after the reporting period within the Company. Budapest, February 22, 2024
292 Declaration We the undersigned declare that ▪ the attached annual financial statements which have been prepared in accordance with the applicable set of accounting standards and to the best of our knowledge, gives a true and fair view of the assets, liabilities, financial position and profit or loss of Magyar Telekom Plc. and ▪ the business report gives a fair view of the position, development and performance of Magyar Telekom Plc., together with a description of the principal risks and uncertainties of its business. Budapest, February 22, 2024