Edgar Filing: TELEFONICA S A

Form 6-K

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of February, 2015

Commission File Number: 001-09531

Telefónica, S.A.

(Translation of registrant’s name into English)

Distrito Telefónica, Ronda de la Comunicación s/n,

28050 Madrid, Spain

3491-482 87 00

(Address of principal executive offices)

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

Form 20-F x Form 40-F ¨

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

Yes ¨ No x

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

Yes ¨ No x

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

Yes ¨ No x

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

Telefónica, S.A.

TABLE OF CONTENTS


Item		Sequential Page Number

1.	Telefónica - 2014 Annual Accounts

	• Account Auditor’s Report, Annual Financial Statements and Management Report of Telefónica, S.A., all for the Fiscal Year 2014.		4

	• Account Auditor’s Report, Annual Financial Statements and Management Report of the Consolidated Group of Companies, all for the Fiscal Year 2014.		229

Telefónica, S.A. hereby submits the Individual Annual Accounts of “Telefónica, S.A.” and the Consolidated Annual Accounts of “Telefónica S.A.” and its “Group of Subsidiaries” for 2014 financial year, that have been filed with the Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores - CNMV).

The aforesaid Annual Accounts will be submitted for approval of the next Annual General Shareholders’ Meeting of the Company, the dates of which will be announced due course.

Madrid, February 27, 2015

LOGO

AUDIT REPORT, ANNUAL FINANCIAL STATEMENTS, AND

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

YEAR ENDED DECEMBER 31, 2014

Independent Audit Report

TELEFÓNICA, S.A.

Financial Statements and Management Report

for the year ended

December 31, 2014

LOGO

Translation of a report and financial statements originally issued in Spanish. In the event of

discrepancy, the Spanish-language version prevails (See Note 23)

INDEPENDENT AUDIT REPORT ON THE FINANCIAL STATEMENTS

To the Shareholders of

Telefónica, S.A

Report on the financial statements

We have audited the accompanying financial statements of Telefónica, S.A., which comprise the balance sheet at December 31, 2014, and the income statement, the statement of changes in equity, the cash flow statement, and the notes thereto for the year then ended

Directors’ responsibility for the financial statements

The Directors are responsible for the preparation of the accompanying financial statements so that they give a true and fair view of the equity and financial position and the results of Telefónica, S.A., in accordance with the regulatory framework for financial information applicable to the Entity in Spain, identified in Note 2.a to the accompanying financial statements, and for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on the accompanying financial statements based on cur audit. We conducted our audit in accordance with prevailing audit regulations in Spain. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation of financial statements by the Directors of the Company in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Domicilio Social: PI. Pablo Ruiz Picasso. 1. 28020 Madrid - Inscrita en el Registro Mercantil de Madrid al Tomo 12749, Libro 0, Folio 215, Sección 8^a, Hoja M-23123, Inscripción 116. C.I.F. B-78970506. A member firm of Ernst & Young Global Limited.

LOGO

Opinion

In our opinion, the accompanying financial statements give a true and fair view, in all material respects, of the equity and financial position of Telefónica, S.A. at December 31, 2014, and its results and cash flow for the year then ended, in accordance with the applicable regulatory framework for financial information in Spain, and specifically the accounting principles and criteria contained therein.

Report on other legal and regulatory requirements

The accompanying 2014 management report contains such explanations as the Directors consider appropriate concerning the situation of the Company, the evolution of its business and other matters; however, it is not an integral part of the financial statements. We have checked that the accounting information included in the aforementioned management report agrees with the 2014 financial statements. Our work as auditors is limited to verifying the management report in accordance with the scope mentioned in this paragraph, and does not include the review of information other than that obtained from the Company’s accounting records.

ERNST & YOUNG, S.L.

/s/ Ignacio Viota del Corte

Ignacio Viota del Corte

February 27, 2015

2014

TELEFÓNICA, S.A.

Annual financial statements and management report for the year ended December 31, 2014

Index


Balance sheet at December 31			4

Income statements for the years ended December 31			6

Statements of changes in equity for the years ended December 31			7

Cash flow statements for the years ended December 31			8

Note 1. Introduction and general information			9

Note 2. Basis of presentation			10

Note 3: Proposed appropriation of profit			11

Note 4. Recognition and measurement accounting policies			12

Note 5. Intangible assets			15

Note 6. Property, plant and equipment			16

Note 7. Investment properties			17

Note 8. Investments in group companies and associates			19

Note 9. Financial investments			28

Note 10. Trade and other receivables			32

Note 11. Equity			33

Note 12. Financial liabilities			38

Note 13. Bonds and other marketable debt securities			40

Note 14. Interest-bearing debt and derivates			42

Note 15. Payable to group companies and associates			45

Note 16. Derivate financial instruments and risk management policies			49

Note 17. Income tax			61

Note 18. Trade and other payables			65

Note 19. Revenue and expenses			66

Note 20. Other information			72

Note 21. Cash flow analysis			79


Note 22. Events after the reporting period			82

Note 23. Additional note for English translation			83

Appendix I: Details of subsidiaries and associates at December 31, 2014			84

Appendix II: Board of Director’s Compensation			89

Management report 2014			96

Business Model			96

Additional information			97

Economic results of Telefónica, S.A.			98

Investment activity			99

Share price performance			102

Research, development and innovation			103

Environment			105

Human Resources			106

Liquidity and capital resources			108

Financing			108

Treasury shares			110

Risks and Uncertainties Facing the Company			112

Trend evolution			124

Events after the reporting period			126

Annual Corporate Governance Report for Listed Companies			127


		Financial Statements

Telefónica, S.A.

Balance sheet at December 31


Millions of euros
	Notes	2014		2013
ASSETS
NON-CURRENT ASSETS			73,065		70,506
Intangible assets	5		58		58
Software			13		12
Other intangible assets			45		46
Property, plant and equipment	6		225		262
Land and buildings			142		146
Plant and other PP&E items			76		90
Property, plant and equipment under construction and prepayments			7		26
Investment property	7		417		399
Land			94		65
Buildings			323		334
Non-current investments in Group companies and associates	8		62,367		62,380
Equity instruments			59,123		58,155
Loans to Group companies and associates			3,227		4,205
Other financial assets			17		20
Financial investments	9		5,709		3,082
Equity instruments			483		591
Loans to third parties			217		—
Derivatives	16		4,998		2,369
Other financial assets	9		11		122
Deferred tax assets	17		4,289		4,325
CURRENT ASSETS			12,782		14,634
Net assets held for sale			—		2,302
Trade and other receivables	10		1,081		1,122
Current investments in Group companies and associates	8		5,168		5,992
Loans to Group companies and associates			5,031		5,956
Derivatives	16		105		10
Other financial assets			32		26
Investments	9		1,941		445
Loans to companies			1,399		45
Derivatives	16		488		337
Other financial assets			54		63
Accruals			8		5
Cash and cash equivalents			4,584		4,768

TOTAL ASSETS			85,847		85,140

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

Telefónica, S.A. 4


		Financial Statements


Millions of euros
	Notes	2014			2013
Equity and liabilities
EQUITY			23,168			22,827
CAPITAL AND RESERVES			24,232			23,658
Share capital	11		4,657			4,551
Share premium	11		460			460
Reserves	11		18,682			18,528
Legal			984			984
Other reserves			17,698			17,544
Treasury shares and own equity instruments	11		(1,587	)		(545	)
Profit for the year	3		2,604			664
Interim dividend	3		(1,790	)		—
Other equity instruments	11		1,206			—
UNREALIZED GAINS (LOSSES) RESERVE	11		(1,064	)		(831	)
Available-for-sale financial assets			20			49
Hedging instruments			(1,084	)		(880	)
NON-CURRENT LIABILITIES			49,351			47,154
Non-current provisions			267			213
Non-current borrowings	12		8,069			9,096
Bonds and other marketable debt securities	13		831			177
Bank borrowings	14		4,027			6,079
Derivatives	16		3,122			2,677
Finance leases			—			75
Other debts			89			88
Non-current borrowings from Group companies and associates	15		40,728			37,583
Deferred tax liabilities	17		179			262
Long term deferred revenues			108			—
CURRENT LIABILITIES			13,328			15,159
Current provisions			46			12
Current borrowings	12		1,201			1,869
Bonds and other marketable debt securities	13		77			943
Bank borrowings	14		759			831
Derivatives	16		365			95
Current borrowings from Group companies and associates	15		11,702			12,982
Trade and other payables	18		336			286
Accruals			43			10

TOTAL EQUITY AND LIABILITIES			85,847			85,140

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

Telefónica, S.A. 5


		Financial Statements

Telefónica, S.A.

Income statements for the years ended December 31


Millions of euros	Notes	2014			2013
Revenue	19		8,727			11,003
Rendering of services to Group companies and associates			643			687
Rendering of services to non-group companies			3			3
Dividends from Group companies and associates			7,974			10,078
Interest income on loans to Group companies and associates			107			235
Impairment and gains (losses) on disposal of financial instruments			(3,675	)		(7,990	)
Impairment losses and other losses	8		(3,679	)		(7,998	)
Gains (losses) on disposal and other gains and losses			4			8
Other operating income	19		96			84
Non-core and other current operating revenue - Group companies and associates			25			62
Non-core and other current operating revenue - non-group companies			71			22
Employees benefits expense	19		(233	)		(154	)
Wages, salaries and others			(203	)		(135	)
Social security costs			(30	)		(19	)
Other operational expense			(327	)		(343	)
External services - Group companies and associates	19		(104	)		(104	)
External services - non-group companies	19		(198	)		(225	)
Taxes other than income tax			(25	)		(14	)
Depreciation and amortization	5, 6 and 7		(64	)		(76	)
OPERATING PROFIT			4,524			2,524
Finance revenue	19		184			179
From equity investments of third parties			4			7
From marketable securities and other financial instruments of third parties			180			172
Finance costs	19		(2,296	)		(2,712	)
Borrowings from Group companies and associates			(2,034	)		(1,971	)
Third-party borrowings			(262	)		(741	)
Change in fair value of financial instruments			(57	)		(38	)
Trading portfolio and other securities			(38	)		6
Gain (loss) on available-for-sale financial assets recognized in the period	9 y 11		(19	)		(44	)
Exchange rate gains (losses)	19		(96	)		82
Impairment and gains (losses) on disposal of financial instruments with third-parties	9.3 y 19.9		(270	)		(2	)
NET FINANCIAL EXPENSE			(2,535	)		(2,491	)
PROFIT BEFORE TAX	21		1,989			33
Income tax	17		615			631
PROFIT FOR THE YEAR			2,604			664

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

Telefónica, S.A. 6


		Financial Statements

Telefónica, S.A.

Statements of changes in equity for the years ended December 31

A) Statement of recognized income and expense


Millions of euros	Notes	2014			2013
Profit of the period			2,604			664

Total income and expense recognized directly in equity	11		(360	)		463

From measurement of available-for-sale financial assets			(59	)		74
From cash flow hedges			(411	)		588
Income tax impact			110			(199	)

Total amounts transferred to income statement	11		127			111

From measurement of available-for-sale financial assets			19			44
From cash flow hedges			163			114
Income tax impact			(55	)		(47	)

TOTAL RECOGNIZED INCOME AND EXPENSE			2,371			1,238

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

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


Millions of euros	Share capital		Share premium and Reserves			Treasury shares			Profit for the year			Interim dividend			Other net equity instruments		Net unrealized gains (losses) reserve			Total
Balance at December 31, 2012		4,551		19,989			(788	)		631			—			—		(1,405	)		22,978

Total recognized income and expense		—		—			—			664			—			—		574			1,238

Transactions with shareholders and owners		—		(1,680	)		243			—			—			—		—			(1,437	)
Dividends paid		—		(1,588	)		—			—			—			—		—			(1,588	)
Transactions with treasury shares or own equity instruments (net)		—		(92	)		243			—			—			—		—			151
Other movements		—		48			—			—			—			—		—			48
Appropriation of prior year profit (loss)		—		631			—			(631	)		—			—		—			—
Balance at December 31, 2013		4,551		18,988			(545	)		664			—			—		(831	)		22,827

Total recognized income and expense		—		—			—			2,604			—			—		(233	)		2,371

Transactions with shareholders and owners		106		(485	)		(1,042	)		—			(1,790	)		1,206		—			(2,005	)
Dividends paid		106		(348	)		—			—			(1,790	)		—		—			(2,032	)
Transactions with treasury shares or own equity instruments (net)		—		(113	)		(1,042	)		—			—			—		—			(1,155	)
Other transactions with shareholders and owners		—		(24	)		—			—			—			1,206		—			1,182
Other movements		—		(25	)		—			—			—			—		—			(25	)
Appropriation of prior year profit (loss)		—		664			—			(664	)		—			—		—			—
Balance at December 31, 2014		4,657		19,142			(1,587	)		2,604			(1,790	)		1,206		(1,064	)		23,168

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

Telefónica, S.A. 7


		Financial Statements

Telefónica, S.A.

Cash flow statements for the years ended December 31


Millions of euros	Notes	2014			2013
A) CASH FLOWS FROM OPERATING ACTIVITIES			8,418			6,224
Profit before tax			1,989			33
Adjustments to profit:			(1,836	)		226
Depreciation and amortization	5,6 and 7		64			76
Impairment of investments in Group companies and associates	8		3,679			7,998
Change in long term provisions			(29	)		(18	)
Gains on the sale of financial assets			(4	)		—
Losses on disposal of property, plant and equipment			—			(8	)
Dividends from Group companies and associates	19		(7,974	)		(10,078	)
Interest income on loans to Group companies and associates	19		(107	)		(235	)
Net financial expense			2,535			2,491
Change in working capital			43			(52	)
Trade and other receivables			35			(7	)
Other current assets			(40	)		11
Trade and other payables			(49	)		(76	)
Other current liabilities			97			20
Other cash flows from operating activities	21		8,222			6,017
Net interest paid			(1,872	)		(1,664	)
Dividends received			9,750			6,428
Income tax receipts			237			1,253
Other payments/proceeds from operating activities			107			—
B) CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES			(3,024	)		(147	)
Payments on investments	21		(5,704	)		(2,938	)
Proceeds from disposals	21		2,680			2,791
C) CASH FLOWS USED IN FINANCING ACTIVITIES			(5,524	)		(3,736	)
Payments on equity instruments			(21	)		(244	)
Proceeds from financial liabilities	21		(3,502	)		(1,904	)
Debt issues			10,038			10,127
Repayment and redemption of debt			(13,540	)		(12,031	)
Dividends paid	21		(2,001	)		(1,588	)
D) NET FOREIGN EXCHANGE DIFFERENCE			(54	)		(23	)
E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS			(184	)		2,318
Cash and cash equivalents at January 1			4,768			2,450
Cash and cash equivalents at December 31			4,584			4,768

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

Telefónica, S.A. 8


		Financial Statements

TELEFÓNICA, S.A.

Annual financial statements for the ended December 31, 2014

Note 1. Introduction and general information

Telefónica, S.A. (“Telefónica” or “the Company”) is a public limited company incorporated for an indefinite period on April 19, 1924, under the corporate name of Compañía Telefónica Nacional de España, S.A. It adopted its present name in April 1998.

The Company’s registered office is at Gran Vía 28, Madrid (Spain), and its Employer Identification Number (CIF) is A-28/015865.

Telefónica’s basic corporate purpose, pursuant to Article 4 of its Bylaws, is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. All the business activities that constitute this stated corporate purpose may be performed either in Spain or abroad and wholly or partially by the Company, either through shareholdings or equity interests in other companies or legal entities with an identical or a similar corporate purpose.

In keeping with the above, Telefónica is currently the parent company of a group that offers both fix and mobile telecommunications with the aim to turn the challenges of the new digital business into reality and being one of the most important players. The objective of the Telefonica Group is positioning as a Company with an active role in the digital business taking advantage of the opportunities of its size and industrial and strategic alliances.

The Company is taxed under the general tax regime established by the Spanish State, the Spanish Autonomous Communities and local governments, and files consolidated tax returns with most of the Spanish subsidiaries of its Group under the consolidated tax regime applicable to corporate groups.

Telefónica, S.A. 9


		Financial Statements

Note 2. Basis of presentation

a) True and fair view

These financial statements have been prepared from Telefónica, S.A.’s accounting records by the Company’s Directors in accordance with the accounting principles and standards contained in the Spanish GAAP in force approved by Royal Decree 1514/2007, on November 16 (PGC 2007), modified by Royal Decree 1159/2010, dated September 17, 2010 and other prevailing legislation at the date of these financial statements, to give a true and fair view of the Company’s equity, financial position, results of operations and of the cash flows obtained and applied in 2014.

The accompanying financial statements for the year ended December 31, 2014 were prepared by the Company’s Board of Directors at its meeting on February 23, 2015 for submission for approval at the General Shareholders’ Meeting, which is expected to occur without modification.

The figures in these financial statements are expressed in millions of euros, unless indicated otherwise, and therefore may be rounded. The euro is the Company’s functional currency.

b) Comparison of information

In 2013 and 2014 there have not been significant transactions that should be taken into account in order to ensure the comparison of information included in the Annual Financial Statements of both years.

c) Materiality

These financial statements do not include any information or disclosures that, not requiring presentation due to their qualitative significance, have been determined as immaterial or of no relevance pursuant to the concepts of materiality or relevance defined in the PGC 2007 conceptual framework.

d) Use of estimates

The financial statements have been prepared using estimates based on historical experience and other factors considered reasonable under the circumstances. The carrying value of assets and liabilities, which is not readily apparent from other sources, was established on the basis of these estimates. The Company periodically reviews these estimates.

A significant change in the facts and circumstances on which these estimates are based could have an impact on the Company’s results and financial position.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the financial statements of the following year are discussed below.

Provisions for impairment of investments in Group companies and associates

Investments in group companies, joint ventures and associates are tested for impairment at each year end to determine whether an impairment loss must be recognized in the income statement or a previously recognized impairment loss be reversed. The decision to recognize an impairment loss (or a reversal) involves estimates of the reasons for the potential impairment (or recovery), as well as the timing and amount. In note 8.2 it is assessed the impairment of these investments.

There is a significant element of judgment involved in the estimates required to determine recoverable amount and the assumptions regarding the performance of these investments, since the timing and scope of future changes in the business are difficult to predict.

Telefónica, S.A. 10


		Financial Statements

Deferred taxes

The Company assesses the recoverability of deferred tax assets based on estimates of future earnings. The ability to recover these taxes depends ultimately on the Company’s ability to generate taxable earnings over the period for which the deferred tax assets remain deductible. This analysis is based on the estimated schedule for reversing deferred tax liabilities, as well as estimates of taxable earnings, which are sourced from internal projections and are continuously updated to reflect the latest trends.

The appropriate valuation of tax assets and liabilities depends on a series of factors, including estimates as to the timing and realization of deferred tax assets and the projected tax payment schedule. Actual income tax receipts and payments could differ from the estimates made by the Company as a result of changes in tax legislation or unforeseen transactions that could affect tax balances. The information about deferred tax assets and unused tax loss carryforwards, whose effect has been registered when necessary in balance, is included in Note 17.

Note 3. Proposed appropriation of profit

Telefónica, S.A. obtained 2,604 million euros of profit in 2014. Accordingly, the Company’s Board of Directors will submit the following proposed appropriation of 2014 profit for approval at the Shareholders’ Meeting:


Millions of euros
Proposed appropriation:
Profit for the year			2,604
Distribution to:
Goodwill reserve (Note 11.c)			2
Voluntary reserves			812
Interim Dividend			1,790

At its meeting of April 25, 2014, the Company’s Board of Directors resolved to pay an interim dividend against 2014 profit of a fixed gross 0.40 euros for each of the outstanding shares carrying dividend rights. This dividend was paid in full on May 7, 2014. The total amount paid was 1,790 million euros (see Note 11.1.d).

In accordance with Article 277 of the Spanish Enterprise Law, the following table shows the provisional statement issued by the Directors to substantiate that the Company had sufficient liquidity at that time to distribute this dividend.


Millions of euros
Liquidity statement
Income from January 1 through March 31, 2014	3,177
Mandatory appropriation to reserves	—
Distributable income	3,177
Proposed interim dividend (maximum amount)	(1,820	)

Cash position
Funds available for distribution
Cash and cash equivalents	4,135
Unused credit facilities	4,397
Proposed interim dividend (maximum amount)	(1,820	)

To ensure its liquidity requirements are met throughout the following year, the Company effectively manages its liquidity risks (see Note 16).

Telefónica, S.A. 11


		Financial Statements

Note 4. Recognition and measurement accounting policies

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

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

a) Intangible assets

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

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

b) Property, plant and equipment and investment property

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

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


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

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

c) Impairment of non-current assets

Non-current assets are assessed at each reporting date for indicators of impairment. Where such indicators exist, or in the case of assets which are subject to an annual impairment test, the Company estimates the asset’s recoverable amount as the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows deriving from the use of the asset or its cash generating unit, as applicable, are discounted to their present value in the currency in which they will be generated, using a discount rate appropriate to that currency and reflecting current market assessments of the time value of money and the risks specific to the asset.

Telefónica bases the calculation of impairment on the business plans of the various companies to which the assets are allocated. The projected cash flows, based on strategic business plans, cover a period of five years. Starting with the sixth year, an expected constant growth rate is applied.

d) Financial assets and liabilities

Financial investments

All regular way purchases and sales of financial assets are recognized on the trade date, i.e. the date that the Company commits to purchase or sell the asset.

Telefónica, S.A. 12


		Estados financieros

“Investments in group companies, joint ventures and associates” are classified into a category of the same name and are shown at cost less any impairment loss (see Note 4.c). Group companies are those over which the Company exercises control, either by exercising effective control or by virtue of agreements with the other shareholders. Joint ventures are companies which are jointly controlled with third parties. Associates are companies in which there is significant influence, but not control or joint control with third parties. Telefónica assesses the existence of significant influence not only in terms of percentage ownership but also in qualitative terms such as presence on the board of directors, involvement in decision-making, the exchange of management personnel, and access to technical information.

Financial investments which the Company intends to hold for an unspecified period of time and could be sold at any time to meet specific liquidity requirements or in response to interest rate movements and which have not been included in the other categories of financial assets defined in the PGC 2007 are classified as available-for-sale. These investments are recorded under “Non-current assets,” unless it is probable and feasible that they will be sold within 12 months.

Derivative financial instruments and hedge accounting

When Telefónica chooses not to apply hedge accounting criteria but economic hedging, gains or losses resulting from changes in the fair value of derivatives are taken directly to the income statement.

e) Revenue and expenses

Revenue and expenses are recognized on the income statement based on an accruals basis; i.e. when the goods or services represented by them take place, regardless of when actual payment or collection occurs.

The income obtained by the Company in dividends received from Group companies and associates, and from the interest accrued on loans and credits given to them, are included in revenue in compliance with the provisions of consultation No. 2 of BOICAC 79, published on September 30, 2009.

f) Related party transactions

In mergers and spin-offs of businesses involving the parent company and its direct or indirect subsidiary, in cases of non-monetary contributions of businesses between Group companies, and in cases of dividends, the contributed assets are valued, in general, at their pre-transaction carrying amount in the individual financial statements, given that the Telefónica Group does not prepare its consolidated financial statements in accordance with the Standards on Preparing Consolidated Financial Statements (Spanish “NOFCAC”).

In these same operations, companies may also opt to use the consolidated values under International Financial Reporting Standards (IFRS) as adopted by the European Union, providing that the consolidated figures do not differ from those obtained under the NOFCAC. Lastly, the Company may also opt to use the values resulting from a reconciliation to the NOFCAC. Any accounting difference is taken to reserves.

g) Financial guarantees

The Company has provided guarantees to a number of subsidiaries to secure their transactions with third parties (see Note 20.a). Where financial guarantees provided have a counterguarantee on the Company’s balance sheet, the value of the counterguarantee is estimated to be equal to the guarantee given, with no additional liability recognized as a result.

Guarantees provided for which there is no item on the Company’s balance sheet acting as a counterguarantee are initially measured at fair value which, unless there is evidence to the contrary, is the same as the premium received plus the present value of any premiums receivable. After initial recognition, these are subsequently measured at the higher of:

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

ii)

The amount initially recognized less, when applicable, any amounts take to the income statement corresponding to accrued income.

Telefónica, S.A. 13


		Financial Statements

h) Consolidated data

As required under prevailing legislation, the Company has prepared separate consolidated annual financial statements, drawn up in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The balances of the main headings of the Telefónica Group’s consolidated financial statements for 2014 and 2013 are as follows:


Millions of euros
Item	2014		2013
Total assets		122,299		118,862

Equity:
Attributable to equity holders of the parent		21,115		21,185
Attributable to minority interests		9,174		6,297
Revenue from operations		50,377		57,061
Profit for the year:
Attributable to equity holders of the parent		3,001		4,593
Attributable to minority interests		251		376

Telefónica, S.A. 14


		Financial Statements

Note 5. Intangible assets

The movements in the items composing intangible assets and the related accumulated amortization in 2014 and 2013 are as follows:

2014


Millions of euros	Opening balance			Additions and allowances			Disposals		Transfers			Closing balance
INTANGIBLE ASSETS, GROSS		261			10			—		3			274
Software		120			5			—		4			129
Other intangible assets		141			5			—		(1	)		145
ACCUMULATED AMORTIZATION		(203	)		(13	)		—		—			(216	)
Software		(108	)		(8	)		—		—			(116	)
Other intangible assets		(95	)		(5	)		—		—			(100	)
Net carrying amount		58			(3	)		—		3			58

2013


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers		Closing balance
INTANGIBLE ASSETS, GROSS		331			7			(78	)		1		261
Software		184			4			(69	)		1		120
Other intangible assets		147			3			(9	)		—		141
ACCUMULATED AMORTIZATION		(267	)		(13	)		77			—		(203	)
Software		(169	)		(8	)		69			—		(108	)
Other intangible assets		(98	)		(5	)		8			—		(95	)
Net carrying amount		64			(6	)		(1	)		1		58

At December 31, 2014 and 2013 commitments exist to acquire intangible assets amounting to 0.7 and 0.1 million euros, respectively.

At December 31, 2014 and 2013, the Company had 175 million euros and 157 million euros, respectively, of fully amortized intangible assets.

Telefónica, S.A. 15


		Financial Statements

Note 6. Property, plant and equipment

The movements in the items composing property, plant and equipment and the related accumulated depreciation in 2014 and 2013 are as follows:

2014


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers			Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS		567			6			(13	)		(3	)		557
Land and buildings		228			—			—			—			228
Plant and other PP&E items		313			3			—			6			322
Property, plant and equipment under construction and prepayments		26			3			(13	)		(9	)		7
ACCUMULATED DEPRECIATION		(305	)		(40	)		13			—			(332	)
Buildings		(82	)		(17	)		13			—			(86	)
Plant and other PP&E items		(223	)		(23	)		—			—			(246	)
Net carrying amount		262			(34	)		—			(3	)		225

2013


Millions of euros	Opening balance			Additions and allowances			Disposals			Transfers			Closing balance
PROPERTY, PLANT AND EQUIPMENT, GROSS		592			11			(35	)		(1	)		567
Land and buildings		227			—			(17	)		18			228
Plant and other PP&E items		325			4			(18	)		2			313
Property, plant and equipment under construction and prepayments		40			7			—			(21	)		26
ACCUMULATED DEPRECIATION		(289	)		(52	)		36			—			(305	)
Buildings		(79	)		(21	)		18			—			(82	)
Plant and other PP&E items		(210	)		(31	)		18			—			(223	)
Net carrying amount		303			(41	)		1			(1	)		262

Firm commitments to acquire property, plant and equipment at December 31, 2014 and 2013 amounted to 3 million euros and 0.7 million euros, respectively.

At December 31, 2014 and 2013, the Company had 139 million euros and 47 million euros, respectively, of fully depreciated items of property, plant and equipment.

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

“Property, plant and equipment” includes the net carrying amount of the land and buildings occupied by Telefónica, S.A. at its Distrito Telefónica headquarters, amounting to 74 million euros and 76 million euros at the 2014 and 2013 year-ends, respectively. Also included is the net carrying amount of the remaining assets (mainly plant and property) of 48 and 63 million euros at December 31, 2014 and 2013, respectively. The land and buildings rented to other Group Companies have been included as “Investment properties” in Note 7.

Telefónica, S.A. 16


		Financial Statements

Note 7. Investment properties

The movements in the items composing investment properties in 2014 and 2013 and the related accumulated depreciation are as follows:

2014


Millions of euros	Opening balance			Additions and allowances			Disposals		Transfers		Closing balance
INVESTMENT PROPERTIES, GROSS		470			29			—		—		499
Land		65			29			—		—		94
Buildings		405			—			—		—		405
ACCUMULATED DEPRECIATION		(71	)		(11	)		—		—		(82	)
Buildings		(71	)		(11	)		—		—		(82	)
Net carrying amount		399			18			—		—		417

2013


Millions of euros	Opening balance			Additions and allowances			Disposals		Transfers		Closing balance
INVESTMENT PROPERTIES, GROSS		470			—			—		—		470
Land		65			—			—		—		65
Buildings		405			—			—		—		405
ACCUMULATED DEPRECIATION		(60	)		(11	)		—		—		(71	)
Buildings		(60	)		(11	)		—		—		(71	)
Net carrying amount		410			(11	)		—		—		399

As of September 4^th, 2014 the Company exerted its pre-emptive rights and acquired the building of its headquarters in Barcelona, known as “Diagonal 00”, for 107 million euros plus transaction taxes. Until the purchase moment, the building was registered as an asset in financial leasing and the liability associated with this transaction amounted to 79.5 million euros. Having examined it, the Company has estimated that the additional investment corresponds only to a higher value of land, so in September the difference between liability and purchase cost was booked as addition under the “Land” caption. As a result of the transaction described, the obligation of future minimum payments under this finance lease has been canceled. The following detail shows the disclosure of the liability at 2013 year end.


Future minimum payments
Millions of euros	2013
Up to one year		5
Between two and five years		21
Over 5 years		44

Total		70

In addition to the “Diagonal 00” building mentioned above, “Investment properties” mainly includes the value of land and buildings leased by Telefónica, S.A. to other Group companies at the Distrito Telefónica head offices in Madrid.

Telefónica, S.A. 17


		Financial Statements

In 2014, the Company has buildings with a total area of 322,039 square meters leased to several Telefónica Group and other companies, equivalent to an occupancy rate of 92.81% of the buildings it has earmarked for lease. In 2013, it had a total of 330,044 square meters leased, equivalent to an occupancy rate of 92.72% of the buildings earmarked for lease.

Total income from leased buildings in 2014 (see Note 19.1) amounted to 49 million euros (52 million euros in 2013). Future minimum rentals receivable under non-cancellable leases are as follows:


	2014		2013
Millions of euros	Future minimum recoveries		Future minimum recoveries
Up to one year		48		51
Between two and five years		17		30
Over 5 years		1		1

Total		66		82

The lease contracts held with subsidiaries occupying Distrito Telefónica have been renewed in 2014 for a non-cancellable period of 12 months. The figures also include non-cancellable lease revenue from Diagonal 00, the contracts for which expire in July 2016.

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

Telefónica, S.A. 18


		Financial Statements

Note 8. Investments in group companies and associates

8.1. The movements in the items composing investments in Group companies, joint ventures and associates in 2014 and 2013 are as follows:

2014


Millions of euros	Opening balance			Additions			Disposals			Transfers			Exchange losses		Dividends			Hedges of a net investment		Closing balance			Fair value
Equity instruments (Net) (1)		58,155			1,049			—			(227	)		—		(2	)		148		59,123			131,415
Equity instruments (Cost)		80,107			4,728			—			(2,976	)		—		(2	)		148		82,005
Impairment losses		(21,952	)		(3,679	)		—			2,749			—		—			—		(22,882	)
Loans to Group companies and associates		4,205			801			(12	)		(1,789	)		22		—			—		3,227			3,335
Other financial assets		20			14			—			(17	)		—		—			—		17			17

Total non-current investment in Group companies and associates		62,380			1,864			(12	)		(2,033	)		22		(2	)		148		62,367			134,767

Loans to Group companies and associates		5,956			4,302			(5,723	)		482			14		—			—		5,031			5,031
Derivates		10			311			(216	)		—			—		—			—		105			105
Other financial assets		26			19			(30	)		17			—		—			—		32			32

Total current investments in Group companies and associates		5,992			4,632			(5,969	)		499			14		—			—		5,168			5,168

(1)

Fair value at December 31, 2014 of Group companies and associates quoted in an active market (Telefónica Brasil, S.A.) was calculated taking the listing of the investments on the last day of the year; the rest of the shareholdings are stated at the value of discounted cash flows based on those entities’ business plans.

2013


Millions of euros	Opening balance			Additions			Disposals			Transfers			Exchange losses			Dividends			Hedges of a net investment			Closing balance			Fair value
Equity instruments (Net) (1)		67,770			(6,275	)		(142	)		(2,553	)		—			(575	)		(70	)		58,155			133,297
Equity instruments (Cost)		82,532			1,723			(195	)		(3,308	)		—			(575	)		(70	)		80,107
Impairment losses		(14,762	)		(7,998	)		53			755			—			—			—			(21,952	)
Loans to Group companies and associates		3,988			2,146			(1,664	)		(269	)		4			—			—			4,205			4,281
Other financial assets		21			—			(1	)		—			—			—			—			20			20

Total non-current investment in Group companies and associates		71,779			(4,129	)		(1,807	)		(2,822	)		4			(575	)		(70	)		62,380			137,598

Loans to Group companies and associates		3,608			5,774			(3,692	)		269			(3	)		—			—			5,956			5,956
Derivates		2			44			(36	)		—			—			—			—			10			10
Other financial assets		26			—			—			—			—			—			—			26			26

Total current investments in Group companies and associates		3,636			5,818			(3,728	)		269			(3	)		—			—			5,992			5,992

(1)

Fair value at December 31, 2013 of Group companies and associates quoted in an active market (Telefónica Brasil, S.A.) was calculated taking the listing of the investments on the last day of the year; the rest of the shareholdings are stated at the value of discounted cash flows based on those entities’ business plans.

Telefónica, S.A. 19


		Financial Statements

The most significant transactions occurred in 2014 and 2013 as well as their accounting impacts are described below:

2014

On January 28th, 2014 Telefónica announces that after obtaining the relevant regulatory approval, the sale transaction of the 65.9% of the capital share of Telefónica Czech Republic, a.s. to PPF Group N.V.I. has been completed. This concept was registered in 2013 balance under caption “Non-current assets held for sale” for an amount of 2,302 million euros.

On June 16, 2014 the three Italian shareholders of Telco, S.p.A. requested the initiation of the process of “demerger” (spin off) of the Company, as provided in the Shareholders Agreement. Implementation of the demerger, approved by the General Meeting of Shareholders of Telco, S.p.A. held on July 9, 2014, is subject to obtaining any required anti-trust and telecommunications approvals (including Brazil and Argentina). Once the aforementioned approvals are obtained, this decision will be implemented by transferring all the current stake of Telco, S.p.A. in Telecom Italia to four newly created companies. The share capital of each of these companies will belong in its entirety to each of the shareholders of Telco, S.p.A. and each of these companies will receive a number of shares of Telecom Italia S.p.A. proportional to the current economic stake in Telco, S.p.A. of its respective shareholder.

The application process of the aforementioned anti-trust and telecommunications approvals (including Brazil and Argentina) to proceed to the “demerger” (spin off) of Telco, S.p.A. has already started, once completed in Italy the corresponding corporate documents.

2013

On April 29, 2013, Telefónica, S.A. signed an agreement with Corporación Multi Inversiones (“CMI”) to incorporate jointly a Spanish company to manage the Group’s investments in Guatemala, El Salvador, Nicaragua and Panama.

The resulting company, Telefónica Centroamérica Inversiones, S.L. (“TCI”) was incorporated through the initial contribution by Telefónica, S.A. of its entire shareholdings in Guatemala and El Salvador, along with 31.85% of its interest in Telefónica Móviles Panamá, S.A. at its net carrying amount equivalent to 633 million euros. The new company was incorporated and the corresponding contributions made on June 7, 2013.

On August 2, 2013 and having obtained the necessary regulatory authorisations, TCI’s capital was increased in 500 million US dollars (equivalent to 377 million euros on the payment date), subscribed in full by TLK Investments, C.V. (a company part of the CMI group), thereby completing the operation. Consequently, TLK Investments, C.V. holds a 40% interest in TCI and Telefónica, S.A. the remaining 60%. On the same date, Telefónica, S.A. sold the remainder of its stake in Telefónica Móviles Panamá, S.A. (24.5%) for 83 million euros.

Telefónica, S.A. 20


		Financial Statements

On November 5, 2013, Telefónica announced that it had reached an agreement to sell 65.9% of the capital of Telefónica Czech Republic, a.s. (“Telefónica Czech Republic”) to PPF Group N.V.I. (“PPF”) for, approximately, 306 Czech crowns/share (around 2,467 million euros at the agreement date). This consideration is to be settled in two tranches:

(i) 2,063 million euros in cash on completion of the sale; and

(ii) 404 million euros in cash as a deferred payment over four years.

Subsequent to the transaction, Telefónica held a stake of 4.9% in Telefónica Czech Republic until the date of the sale (see Note 9).

At the date of the agreement, Telefónica, S.A. measured its stake in Telefónica Czech Republic at its total market value, recognising a provision for its investment portfolio of 643 million euros under the “Impairment losses and gains (losses) on disposal of financial instruments” heading of the income statement.

The agreed price for the stake being sold, updated at year end exchange rates, was reclassified to the “Non-current assets held for sale” until the pertinent authorisations were received from the regulators. The market value of the 4.9% stake that was retained totaling 178 million euros was reclassified to the “Equity instruments” heading under non-current financial assets (see Note 9.3). The aforementioned reclassifications were presented under “Transfers” in the table of movements for 2013.

On September 24, 2013, Telefónica and the other shareholders of the Italian company Telco, S.p.A. (which holds a 22.4% stake with voting rights of Telecom Italia, S.p.A.) reached an agreement whereby Telefónica, S.A. subscribed and paid out a share capital increase in Telco, S.p.A., through a cash contribution of 324 million euros, in exchange for shares with voting rights in Telco, S.p.A. As a result of this capital increase, the interest held by Telefónica in the voting share capital of Telco, S.p.A. remained unchanged (i.e. 46.18 %), although its interest in the total share capital of Telco, S.p.A. was increased to 66%. This amount is recognised as “Additions” of equity instruments in the accompanying table of movements.

Other movements

Movement in “Transfers” in both 2014 and 2013 mainly includes the reclassification between long-term and current loans in accordance with the loan maturity schedule, as well as the reclassification under “Loans to third parties” of the bond and not yet due accrued interest of Telco, S.p.A. (see Note 8.5).

In 2014, movement in “Transfers” in “Equity instruments” caption refers to the net book value reclassification of the investment in Telco, S.p.A. (amounting to 358 million euros) as it has been described in this Note. Offsetting this figure, it is also included the reclassification to “Long term provisions” of the negative net book value of some investments in group companies totaling 131 million euros.

The column headed “Dividends” sets out the amounts of dividends paid out by Group companies and associates in respect of earnings generated prior to the effective date of the corresponding shareholding. In 2014 the amount is not significant and in 2013, Dividends comprised those distributed by Telefónica Czech Republic, a.s. totaling 101 million euros, O2 Europe Ltd. totaling 286 million euros and Panamá Cellular Holdings, B.V. totaling 186 million euros.

Telefónica, S.A. 21


		Financial Statements

In 2014 and 2013, Telefónica, S.A. bought and sold the following shareholdings:

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


Millions of euros Companies	2014		2013
Telfin Ireland, Ltd.		3,700		—
Telefónica de Contenidos, S.A.U.		400		—
Telefónica Digital Holdings, S.A.U.		268		—
Telefónica Finanzas México, S.A. de C.V.		138		—
Telco, S.p.A.		—		324
Telefónica Móviles México, S.A. de C.V.		56		1,170
Other companies		166		229

Total		4,728		1,723

2014

With the object of regaining equity balance, on January 16^th, 2014 Telefónica Digital Holding, S.A.U. increased its share capital totally subscribed and paid by Telefónica, S.A. amounting 31 million euros. On October 2^nd, 2014 an additional capital increase was completed totaling 237 million euros also totally subscribed and paid by Telefónica, S.A. with the same objective of regaining the equity balance of the company and its affiliates.

On January 22^nd, 2014 Telefónica México, S.A. de C.V. completed a share capital increase amounting to 1,000 million Mexican pesos (56 million euros) fully subscribed by Telefónica, S.A.

On March 25, 2014 Telefónica Finanzas México, S.A. de C.V. has increased its share capital by 2,500 million Mexican pesos (138 million euros) fully subscribed and paid by Telefónica, S.A.

On July 7^th, 2014, and within the framework of the purchase of the shares that Promotora de Informaciones, S.A. (PRISA) owns in Distribuidora de Televisión Digital, S.A. (DTS), Telefónica de Contenidos, S.A. increased its share capital in 300 million euros totally subscribed by Telefónica, S.A. With the aim of raising the funds needed to complete the acquisition of this investment once the relevant regulatory approvals are achieved, on November 17^th, the company increased its share capital in 100 million euros, fully subscribed and paid by Telefónica, S.A.

On August 1st and September 18th, Telefónica, S.A. completed two capital increases fully subscribed and paid in Telfin Ireland, Ltd totaling 2,900 million and 800 million euros, respectively, in order to provide the company with the funds needed to fulfill borrowing activities for other subsidiaries of the Telefónica Group such as Telefónica Deutschland and carry out their activities.

2013

On February 11, June 19 and August 29, 2013, Telefónica Móviles México, S.A. de C.V. increased its share capital by 2,173 million Mexican pesos (127 million euros), 2,435 million Mexican pesos (143 million euros) and 3,000 million Mexican pesos (170 million euros), which was fully subscribed by Telefónica, S.A.

On April 19, 2013, Telefónica, S.A. authorised the capitalisation of part of the loans it had extended to its subsidiary Telefónica Móviles México, S.A. de C.V. amounting to 11,697 million Mexican pesos (730 million euros).

The agreement reached to increase the stake in Telco, S.p.A. is described in this Note.

Telefónica, S.A. 22


		Financial Statements

b) Disposals of investments and capital decreases:


Millions of euros Companies	2014		2013

Subsidiaries:
Telefónica Móviles Panamá, S.A.		—		130
Other companies		—		65

Total Subsidiaries:		—		195

2013

The disposal of Telefónica Móviles Panamá, S.A. forms part of the partial sale described at the start of this Note.

8.2. Assessment of impairment of investments in group companies, joint ventures and associates

At each year end, the Company re-estimates the future cash flows derived from its investments in Group companies and associates. The estimate is made based on the discounted cash flows to be received from each subsidiary in its functional currency, net of the liabilities associated with each investment (mainly net borrowings and provisions) and translated to euros at the official closing rate of each currency at December 31, 2014.

As a result of these estimations and the effect of the net investment hedge in 2014, an impairment provision of 3,679 million euros was recognized (7,998 million euros in 2013). This amount derives mainly from the following companies:

(a) write down recognized for Telefónica Europe, plc. Amounting to 2,352 million euros in 2014 (2,423 million euros in 2013), increased by 148 million euros for the effect of the net investment hedge (70 million euros in 2013).

(b) write down of 559 million euros for Telefónica Brasil, S.A. (2,948 million euros in 2013) and 176 million euros for Sao Paulo Telecomunicaçoes, S.A. (915 million euros in 2013).

(c) write down of 92 million euros for Telco, S.p.A. (359 million euros in 2013), the owner of a stake in Telecom Italia, S.p.A.

(d) write down of 126 million euros for Telefónica México, S.A. de C.V. (211 million euros in 2013).

(e) write down of 300 million euros for Telefónica Digital Holding, S.A.U. (166 million euros in 2013).

In 2013, a write down recognised for Telefónica Czech Republic of 643 million euros was also included.

The write down in Telefónica Europe, plc. is mainly due to the impact of the 1,304 million-euro dividend distribution in 2014 and the changes in the present value of the expected turnover of the subsidiary. In this regard, the Operating Income Before Depreciation and Amortization (OIBDA) margin used to calculate long term cash flows is 1.7 p.p. lower compared with the same parameter used in 2013 plan.

The write down of the stake in Telefónica Brasil, S.A. and Sao Paulo Telecomunicaçoes, S.A. in 2014 results from the changes in the macroeconomic scenario. The estimate of GDP growth in the country, prepared by Focus Economics and analysts, was estimated in 2.3% for 2014 and it has finally been 0.2% and it will be no higher than 0.7% in 2015. The change in expectations has been reflected in the decrease of OIBDA used to calculate future cash flows. The OIBDA margin used to calculate long term cash flows, has decreased 2 p.p. compared with those used in 2013.

Telefónica, S.A. 23


		Financial Statements

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

8.4. Transactions protected for tax purposes

Transaction carried out in 2014 that qualify for special tax treatment, as defined in Articles 83 or 94, as applicable, of Chapter VIII of Title VII of Legislative Royal Decree 4/2004 of March 5 approving the Revised Spanish Corporate Income Tax Law, is detailed in the following paragraph. Transactions qualified for special tax treatment carried out in prior years are disclosed in the financial statements for those years.

On May 14, 2014, exercising the powers conferred by shareholders in the Extraordinary Shareholders’ Meeting, the representative of the sole stakeholder of Telefónica Digital España, S.A.U., resolved to approve the takeover of Telefónica Global Aplications, S.L., by Telefónica Digital España, S.A.U., and transfer en bloc of their assets and liabilities to Telefónica Digital España, S.A.U., which will also acquire all their rights and obligations by universal succession.

The takeover merger deed was filed in the Madrid Companies Register on July, 9^th 2014, with economic effect on January 1st, 2014.

Telefónica, S.A. 24


		Financial Statements

8.5. The breakdown and maturity of loans to Group companies and associates in 2014 and 2013 are follows:

2014


Millions of euros
Company	2015		2016		2017		2018		2019		2020 and subsequent years		Final balance, current and non-current
Telefónica Móviles España, S.A.U.		276		638		—		400		—		—		1,314
Telefónica Móviles México, S.A. de C.V.		226		654		—		—		—		—		880
Telefónica de Contenidos, S.A.U.		419		—		—		—		—		—		419
Telefónica de España, S.A.U.		471		—		165		—		550		—		1,186
Telefónica Global Technology, S.A.U.		4		—		—		—		21		177		202
Telefónica Digital Holding, S.A.U.		—		155		—		—		—		—		155
Telefónica Emisiones, S.A.U.		138		—		—		—		—		—		138
Telefónica Internacional, S.A.U.		3,272		—		—		—		—		—		3,272
Other companies		225		106		29		203		36		93		692

Total		5,031		1,553		194		603		607		270		8,258

2013


Millions of euros
Company	2014		2015		2016		2017		2018		2019 and subsequent years		Final balance, current and non-current
Telefónica Móviles España, S.A.U.		130		—		638		—		400		—		1,168
Telefónica Móviles México, S.A. de C.V.		171		648		—		—		—		—		819
Telefónica de Contenidos, S.A.U.		—		419		—		—		—		—		419
Telefónica de España, S.A.U.		200		—		—		165		—		—		365
Telefónica Global Technology, S.A.U.		1		1		—		—		—		207		209
Telco, S.p.A.		33		1,225		—		—		—		—		1,258
Telefónica Emisiones, S.A.U.		223		122		—		—		—		—		345
Compañía de Inversiones y Teleservicios, S.A.U.		449		—		—		—		—		—		449
Telefónica Internacional, S.A.U.		4,530		—		—		—		—		—		4,530
Otras		219		31		219		—		—		130		599

Total		5,956		2,446		857		165		400		337		10,161

Telefónica, S.A. 25


		Financial Statements

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

•

The financing extended to Telefónica Móviles España, S.A.U. in 2014 and 2013 consists of two loans for 638 million euros and 400 million euros, with maturity date in 2016 and 2018, respectively, and formalised in 2013 to enable this company to meet its payment obligations. These credits have 4 million euros of accrued interest receivable.

Moreover, 272 million euros of taxes are receivable from this subsidiary for its tax expense declared in the consolidated tax return (126 million euros in 2013).

•

At December 31, 2014, the account receivable with Telefónica Móviles México, S.A. de C.V. amounts to 11,696.57 million Mexican pesos, equivalent to 654 million euros (11,696.57 million Mexican pesos, equivalent to 648 million euros in 2013). This consideration is recognised as non-current pursuant to the expected collection date at the reporting date. In 2013, half the nominal debt outstanding was capitalised, totaling 730 million euros and this movement has been recognised under “Disposals” in the table of movements for 2013. This transaction is described in section 1 a) of this Note.

At December 31, 2014, accrued interest receivable totals 226 million euros (171 million euros in 2013), which forms part of the current balance receivable.

•

At December 31, 2014, the account receivable with Telefónica de Contenidos, S.A.U. is broken down as follows:

A 340 million-euro participating loan awarded in 2013 and maturity date in February 2015, all of which has been drawn down. This loan replaces a previous participating loan of 1,142 million euros which was settled in 2013. Interest on this loan is calculated according to the performance of Telefónica de Contenidos, S.A.U. At December 31, 2014 and 2013, no accrued interest is outstanding.

A 79 million-euro participating loan extended in 2005 and maturing in 2015.

•

The 2014 balance for Telefónica de España, S.A.U. consists of a 550 million euros credit facility granted and drawn down in full in November 2014 and maturing in 2019, and a credit facility of 165 million euros maturing in 2017. Additionally, there is also a balance of 470 million euros comprising tax receivables from the subsidiary for its tax expense declared in the consolidated tax return (200 million euros in 2013) and accrued interest of 1 million euros.

•

At December 31, 2014, the account receivable from Telefónica Global Technology, S.A.U. (“TGT”) consists of a number of long-term financing agreements under participating loans which bear interest based on the business performance of the company, with an outstanding balance at December 31, 2014 of 202 million euros (207 million euros in 2013).

•

T. Digital Holding, S.L.U. has a financing maturing in 2016, with an outstanding balance at December 31, 2014 of 155 million euros.

•

During January and February 2014, according to their maturity schedule, Telefónica Emisiones S.A.U. bonds totaling 153 million euros and 57 million pounds sterling (equivalent to 69 million euros) have been cancelled. The remaining bonds (136 million euros), with a maturity date in the first half of 2015, are booked as short term financial assets. Accrued interest receivable amounts to 2 million euros at the 2014 year end (12 million euros at the 2013 year end).

•

On April 24, 2013, Telco, S.p.A.’s Board of Directors approved the issue of bonds totalling 1,750 million euros and maturing on February 28, 2015. Telefónica, S.A. and the other stakeholders resolved to subscribe their respective allocations on a pro-rata basis, with Telefónica, S.A.’s contribution amounting to 808 million euros. Pursuant to the agreement reached by Telefónica and the other stakeholders of Telco, S.p.A., on September 24, 2013, Telefónica, S.A. acquired 23.8% of the non-convertible bonds described above from the remaining stakeholders in exchange for 39,021,411 treasury shares, representing 0.9% of its share capital. (see Note 11.1.a.).

Telefónica, S.A. 26


		Financial Statements

This amount of 417 million euros were recognised as “Additions” of loans to Group companies and associates in the accompanying table of movements of 2013.

•

On July 9, 2014, each of the Telco shareholders, among which Telefónica is one of them, agreed with Telco a shareholders loan agreement with a maturity date no later than April 30, 2015. The aggregate amount of shareholders loans made available pursuant to such loans is up to 2,550 million euros (1,683 million euros corresponding to Telefónica, S.A. according to its stake in Telco), which will enable Telco to repay in full all amounts due by Telco under its banking debt and the subordinated bond. As of December 31, 2014 there was no outstanding amount under there loans.

In 2014, the net book value of the investment in this company as well as the receivables and payables have been reclassified as third party balances in these annual accounts (see Notes 8 and 9). This movement is shown as “Transfers” in 2014 chart of movements.

•

In 2014 the General Shareholders’ Meeting of Telefónica Internacional, S.A.U. approved the distribution of 3,238 million euros against unrestricted reserves. The amount has been registered as short term financial receivables.

In 2013, the shareholders of Telefónica Internacional, S.A.U. agreed in a general meeting to distribute a dividend of 4,500 million euros against unrestricted reserves, which was book as short term financial receivable in 2013 and it has been settled in 2014.

•

In 2013, the shareholders of Compañía de Inversiones y Teleservicios, S.A.U. agreed in a general meeting to distribute a dividend of 440 million euros against unrestricted reserves. This consideration was recognised as a current receivable in the table of movements for 2013, and it has been collected in December 2014.

The Company has also extended 825 million euros (355 million euros in 2013) of loans in connection with the taxation of Telefónica, S.A. as the head of the tax group pursuant to the consolidated tax regime applicable to corporate groups (see Note 17). The most significant amounts have already been disclosed through this Note. All these amounts fall due in the short term.

Disposals of current loans to group companies and associates includes the cancellation of balances receivable from subsidiaries on account of their membership of Telefónica, S.A.’s tax group against debts held by these same subsidiaries totaling 355 million euros (827 million euros in 2013).

Total accrued interest receivable at December 31, 2014 included under “Current loans to group companies and associates” amounted to 234 million euros (222 million euros in 2013).

8.6. Other financial assets with Group companies and associates

This includes rights to collect amounts from other Group companies related to share-based payment plans involving Telefónica, S.A. shares offered by subsidiaries to their employees maturing in 2015, 2016 and 2017 (see Note 19.3).

Telefónica, S.A. 27


		Financial Statements

Note 9. Financial investments

9.1. The breakdown of “Financial investments” at December 31, 2014 and 2013 is as follows:

2014


	Assets at fair value														Assets at amortized cost
									Measurement hierarchy

Millions of euros	Available-for-sale financial assets		Financial assets held for trading		Hedges		Subtotal assets at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on observable market data		Loans and receivables		Other financial assets		Subtotal assets at amortized cost		Subtotal liabilities at fair value		Total carrying amount		Total fair value
Non-current financial investments		483		2,457		2,541		5,481		483		4,998		—		217		11		228		236		5,709		5,717
Equity instruments		483		—		—		483		483		—		—		—		—		—		—		483		483
Derivatives (Note 16)		—		2,457		2,541		4,998		—		4,998		—		—		—		—		—		4,998		4,998
Loans to third parties and other financial assets		—		—		—		—		—		—		—		217		11		228		236		228		236
Current financial investments		—		250		238		488		—		488		—		1,399		54		1,453		1,447		1,941		1,935
Loans to third parties		—		—		—		—		—		—		—		1,399		54		1,453		1,447		1,453		1,447
Derivatives (Note 16)		—		250		238		488		—		488		—		—		—		—		—		488		488

Total financial investments		483		2,707		2,779		5,969		483		5,486		—		1,616		65		1,681		1,683		7,650		7,652

Telefónica, S.A. 28


		Financial Statements

2013


	Assets at fair value														Assets at amortized cost
									Measurement hierarchy

Millions of euros	Available-for-sale financial assets		Financial assets held for trading		Hedges		Subtotal assets at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on observable market data		Loans and receivables		Other financial assets		Subtotal assets at amortized cost		Subtotal liabilities at fair value		Total carrying amount		Total fair value
Non-current financial investments		591		1,699		778		3,068		699		2,369		—		13		1		14		14		3,082		3,082
Equity instruments		591		—		—		591		591		—		—		—		—		—		—		591		591
Derivatives (Note 16)		—		1,591		778		2,369		—		2,369		—		—		—		—		—		2,369		2,369
Loans to third parties and other financial assets		—		108		—		108		108		—		—		13		1		14		14		122		122
Current financial investments		—		323		14		337		—		337		—		45		63		108		108		445		445
Loans to third parties		—		—		—		—		—		—		—		45		63		108		108		108		108
Derivatives (Note 16)		—		323		14		337		—		337		—		—		—		—		—		337		337

Total financial investments		591		2,022		792		3,405		699		2,706		—		58		64		122		122		3,527		3,527

Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.

The calculation of the fair values of the Company’s financial debt instruments required an estimate for each currency of a credit spread curve using the prices of the Company’s bonds and credit derivatives.

Telefónica, S.A. 29


		Financial Statements

9.2 Held-for-trading financial assets and hedges

These two categories include the fair value of outstanding derivate financial instruments at December 31, 2014 and 2013 (see Note 16).

9.3 Available-for-sale financial assets.

This category mainly includes the fair value of investments in listed companies (equity instruments) over which the Company does not have significant control or influence. The movement of items composing this category at December 31, 2014 and 2013 are as follows:

December 31, 2014


Millions of euros	Opening balance		Additions		Disposals			Other movements			Fair value adjustments			Closing balance
Banco Bilbao Vizcaya Argentaria, S.A.		382		—		—			(14	)		(21	)		347
Telefónica Czech Republic, a.s.		166		—		(160	)		—			(6	)		—
Telco, S.p.A.		—		—		(270	)		358			(15	)		73
Other companies		43		37		—			—			(17	)		63

Total		591		37		(430	)		344			(59	)		483

December 31, 2013


Millions of euros	Opening balance		Additions		Disposals			Other movements			Fair value adjustments			Closing balance
Banco Bilbao Vizcaya Argentaria, S.A.		316		—		—			(10	)		76			382
Telefónica Czech Republic, a.s.		—		—		—			178			(12	)		166
Portugal Telecom, SGPS, S.A.		84		—		(84	)		—			—			—
Other companies		33		—		—			—			10			43

Total		433		—		(84	)		168			74			591

The impacts shown in the column “Fair value adjustments” on both years include the fair value adjustment, net of tax effect of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA). These impacts are registered in the Equity of the Company (Note 11.2.). The effect, recorded both in 2014 and 2013 under “other movements”, relates to the sale of rights to scrip dividends that the bank distributed in both years.

At December 31, 2014 Telefónica, S.A.’s investment in BBVA represents 0.72% of that company’s share capital.

The investment in Telefónica Czech Republic, a.s., reclassified by the Company under this caption in 2013, has been sold in October 2014 for an amount of 160 million euros. The result of the transaction has been recognised as financial result of the Company.

As a result of the loss of significant influence in its indirect investment in Telecom Italia, S.p.A., as reported at the beginning of Note 8, in December 2014 the net carrying amount of the investment in Telco, S.p.A. has been registered under this caption, being previously recognized as associated company. At this same moment, the Company has reviewed the value of this investment, booking it at the quoted price of Telecom Italia’s shares (0.89 euro per share) minus Telco’s debt. As a result of the valuation, 270 million euros of Financial Expense, third parties has been registered (See Note 19.7).

Telefónica, S.A. 30


		Financial Statements

In October 2013 the contracts of Equity Swap over Portugal Telecom, SPGS, S.A. shares were fully cancelled. These transactions are shown under “Disposals” in the 2013 table above while the impact on the income statement amounted to 33 million euros financial expense in 2013, recognized under “Gain (loss) on available-for-sale financial assets recognized in the period”.

9.4 Other financial assets and loans to third parties

The breakdown of investments included in this category at December 31, 2014 and 2013 is as follows:


Millions of euros	2014		2013
Other non-current financial assets:
Loans to third parties		217		—
Guarantees given		11		13
Other non-current financial assets		—		109
Other current financial assets:
Loans to third parties		1,399		45
Other current financial assets		54		63

Total		1,681		230

9.4.1 Loans to third parties

Current loans to third parties included in 2013 the cost of the financial instrument arranged to partially cover share-based payment schemes involving Telefónica, S.A. shares (Performance & Investment Plan PIP) for 37 million euros. (see Note 19.3).

The full amount within non-current loans in 2014 is the deferred account receivable generated from the sale of Telefónica Czech Republic, a.s. completed on January 28, 2014. This same item amounts to 86 million euros as current loans. The sale agreement contemplates a payment schedule that extends to January 2018.

Additionally, the principal plus the outstanding receivable interests of the bonds of Telco, S.p.A., amounting 1,307 million euros, have been recognised as non-current loans to third parties. In 2013 they appeared as loans to associates (see Note 8) and after considering this investment as available-for-sale it has been classified under loans to third parties. In this regard, the interest accrued on these bonds during 2014 is included under finance revenue, as described in Note 19.6.

9.4.2. Other non-current financial assets

In November 2013, Telefónica, S.A. acquired on the market a bond convertible into Telecom Italia, S.p.A. shares, with a nominal value of 103 million euros. At year end, the bond was priced at 105% its nominal value, and the 5 million-euro impact of this difference was recognised in the profit and loss account under “Fair value of financial instruments”. On June 20, 2014 the sale of this financial asset was completed and the result of the transaction was recognised under the same caption in the profit and loss account.

Telefónica, S.A. 31


		Financial Statements

Note 10. Trade and other receivables

The breakdown of “Trade and other receivables” at December 31, 2014 and 2013 is as follows:


Millions of euros	2014		2013
Trade receivables		2		20
Trade receivables from Group companies and associates		422		425
Other receivables		1		16
Employee benefits receivable		2		1
Tax receivables (Note 17)		654		660

Total		1,081		1,122

“Trade receivables from Group companies and associates” mainly includes amounts receivable from subsidiaries for the impact of the rights to use the Telefónica brand and the monthly office rental fees (see Note 7).

“Trade receivables” and “Trade receivables from Group companies and associates” in 2014 and 2013 include balances in foreign currency equivalent to 267 million and 242 million euros, respectively. In December 2014, there were receivables in US dollars equivalent to 267 million euros (218 million euros in 2013). In addition, in December 2013, there were Czech crowns equivalent to 24 million euros.

These balances gave rise to exchange losses in the income statement of approximately 2 million euros in 2014 (11 million euros of exchange losses in 2013).

Telefónica, S.A. 32


		Financial Statements

Note 11. Equity

11.1 Capital and reserves

a) Share capital

At December 31, 2014, Telefónica, S.A.’s share capital amounted to 4,657,204,330 euros and consisted of 4,657,204,330 fully paid ordinary shares of a single series, per value of 1 euro, all recorded by the book-entry system and traded on the Spanish electronic trading system (“Continuous Market”), where they form part of the “Ibex 35” Index, on the four Spanish Stock Exchanges (Madrid, Barcelona, Valencia and Bilbao) and listed on the London and Buenos Aires Stock Exchanges, and on the New York and Lima Stock Exchanges, through ADSs, American Depositary Shares.

On December 9, 2014, the deed of a share capital increase of 106,179,744 euros was involved, during which 106,179,744 ordinary shares with a par value of 1 euro each were issued, with a charge to reserves, as part of the scrip dividend shareholder remuneration deal. Share capital amounts to 4,657,204,330 euros subsequent to this increase.

With respect to authorizations given regarding share capital, on May 18, 2011, authorization was given at the Annual Shareholders’ Meeting of Telefónica, S.A. for the Board of Directors, at its discretion and in accordance with the Company’s needs, to increase the Company’s capital, at one or several times, within a maximum period of five years from that date, up to a maximum increase of 2,281,998,242.50 euros, equivalent to half of Telefónica, S.A.’s share capital at that date, by issuing and placing new shares, of any type permitted by the Law, with a fixed or variable premium, and, in all cases, in exchange for cash, and expressly considering the possibility that the new shares may not be fully subscribed. The Board of Directors was also empowered to exclude, partially or fully, pre-emptive subscription rights under the terms of Section 506 of the Spanish Enterprises Act.

Furthermore, on June 2, 2010, shareholders voted to authorize the acquisition by the Board of Directors of Telefónica, S.A. treasury shares, up to the limits and pursuant to the terms and conditions established at the Shareholders’ Meeting, within a maximum period of five years from that date. However, it specified that in no circumstances could the par value of the shares acquired, added to that of the treasury shares already held by Telefónica, S.A. and by any of its controlled subsidiaries, exceed the maximum legal percentage at any time (currently 10% of Telefónica, S.A.’s share capital).

In addition, at the May 30, 2014 Shareholders’ Meeting, authorization was given for the Board of Directors to issue debentures, bonds, notes and other fixed-income securities and hybrid instruments, including preferred shares at one or several times within a maximum period of five years from that date. These securities may be in the form of debentures, bonds, promissory notes or any other kind of fixed-income security, or debt instruments of similar category or hybrid instruments whatever may be the forms admitted in law, plain or, in the case of debentures, bonds and hybrid instruments convertible into shares of the Company and/or exchangeable for shares of any of the Group companies, or any other company. This delegation also includes warrants or other similar securities that might give the right to directly or indirectly subscribe or acquire shares of the Company, whether newly issued or outstanding, and which may be paid for by physical delivery or by offset. The aggregated amount of the issuance(s) of securities approved under this delegation of powers may not exceed, at any given time, the sum of 25,000 million or the equivalent in another currency. For promissory notes, the outstanding balance of promissory notes issued under this authorization will be calculated for purposes of the aforementioned limit. Also for purposes of the foregoing limit, in the case of warrants, the sum of the premiums and exercise prices of the warrants for each issuance that is approved under this delegation shall be taken into account.

Telefónica, S.A. 33


		Financial Statements

At December 31, 2014 and 2013, Telefónica, S.A. held the following treasury shares:


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 12/31/14		128,227,971		11.68		11.92		1,528		2.75332	%

(1)	Millions of euros


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 12/31/13		29,411,832		11.69		11.84		348		0.64627	%

(1)	Millions of euros

The movement in treasury shares of Telefónica, S.A. in 2014 and 2013 is as follows:


	Number of shares
Treasury shares at 12/31/12		47,847,809
Acquisitions		113,154,549
Disposals		(131,590,526	)
Treasury shares at 12/31/13		29,411,832
Acquisitions		100,723,415
Disposals		(129,177	)
GESP share plan delivery		(1,778,099	)
Treasury shares at 12/31/14		128,227,971

Acquisitions

The amount of the acquisitions of treasury shares in 2014 and 2013 was 1,176 million euros and 1,216 million euros, respectively.

Disposals

Treasury shares sold in 2014 and 2013 amounted to 1 million euros and 1,423 million euros, respectively. The main transactions were as follows:

•

On March 26, 2013 Telefónica, S.A. reached an agreement with qualified and professional investors whereby the Company disposed of all the treasury shares it held (90,067,896 shares) at a price of 10.80 euros per share.

•

On September 24, 2013 Telefónica, S.A. acquired the remaining shareholders of Telco, S.p.A. 23.8% of the non-convertible bonds issued in 2013 by Telco, S.p.A. The payment of this transaction consisted of the transmission of 39,021,411 treasury shares of the Company (Note 8.5.)

In addition to these disposals, on November 28, 2014, 1,778,099 shares were delivered to Group employees when the second phase of the Global Employee Share Plan (“the GESP”) matured.

Options on treasury shares

At December 31, 2014, Telefónica held 76 million call options on treasury shares (134 million options in 2013) subject to physical delivery at a fix price which are presented as a reduction in equity under the caption

Telefónica, S.A. 34


		Financial Statements

“treasury share instruments”. They are valued at the amount of premium paid, and upon maturity if the call options are exercised the premium is reclassified as treasury shares together with the price paid. If they are not exercised upon maturity their value is recognized directly in reserves.

The Company also has a derivative instrument, to be settled by offset, on a nominal value equivalent to 32 million of Telefónica shares, recognized under “Current interest-bearing debt” in the accompanying balance sheet (derivative instrument on 30 million shares in 2013, recognized under “Current interest-bearing debt”).

b) Legal reserve

According to the text of the Corporate Enterprises Act, companies must transfer 10% of profit for the year to a legal reserve until this reserve reaches at least 20% of share capital. The legal reserve can be used to increase capital by the amount exceeding 10% of the increased share capital amount. Except for this purpose, until the legal reserve exceeds the limit of 20% of share capital, it can only be used to offset losses, if there are no other reserves available. At December 31, 2014, the Company had duly set aside this reserve.

c) Other reserves

“Other reserves” includes:

•

The “Revaluation reserve” which arose as a result of the revaluation made pursuant to Royal Decree-Law 7/1996 dated June 7. The revaluation reserve may be used, free of tax, to offset any losses incurred in the future and to increase capital. From January 1, 2007, it may be allocated to unrestricted reserves, provided that the capital gain has been realized. The capital gain will be deemed to have been realized in respect of the portion on which the depreciation has been recorded for accounting purposes or when the revalued assets have been transferred or derecognized. In this respect, at the end of 2014, an amount of 8 million euros corresponding to revaluations reserves subsequently considered unrestricted has been reclassified to “Other reserves” (7 million euros in 2013). The balance of this reserve at December 31, 2014 and 2013 was 101 million euros and 109 million euros, respectively.

•

Reserve for cancelled share capital: In accordance with Section 335.c) of the Corporate Enterprises Act and to render null and void the right of opposition provided for in Section 334 of the same Act, whenever the Company decreases capital it records a reserve for cancelled share capital for an amount equal to the par value of the cancelled shares, which can only be used if the same requirements as those applicable to the reduction of share capital are met. In 2012, a reserve for cancelled share capital amounting to 84 million euros was recorded, the same amount as the capital reduction made in the year. The cumulative amount of the reserve for cancelled share capital at December 31, 2014 and 2013 was 582 million euros.

•

Pursuant to the provisions of Royal Decree 1514/2007, since 2008, after the distribution of profits for each year, the Company sets aside a non-distributable reserve of 2 million euros for goodwill amortization. The balance of this reserve at December 31, 2014 was 10 million euros. The proposed appropriation of 2014 profit (see Note 3) includes an allocation of 2 million euros to this restricted reserve.

•

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

d) Dividends

Dividends paid in 2014

The Board of Directors’ at its meeting of April 25th, 2014 approved the payment of an interim dividend of 0.4 euros per share outstanding. The dividend was paid on May 7^th, 2014 and the total amount paid was 1,790 million euros.

Telefónica, S.A. 35


		Financial Statements

The Executive Commission of Telefonica, S.A. Board of Directors, at its meeting held on November 14, 2014, agreed to carry out the execution of the free-of-charge capital increase, related to the shareholders compensation by means of a scrip dividend, approved by the Annual General Shareholder´s Meeting held on May 30, 2014.

After this approval, each shareholder received one free allotment right for each Telefónica Share held. Such free allotment rights were traded on the continuous Market in Spain during a period of fifteen calendar days.

Once this trading period ended, the shareholders of 15.8% of the free-of-charge allotment rights have accepted the purchase commitment assumed by Telefónica, S.A. Cash payment to these shareholders was carried into effect on December 8, 2014, assuming an impact on equity of 242 million euros.

The shareholders of 84.2% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Nevertheless, Telefónica, S.A. has waived the subscription of new shares that correspond to the treasury shares, so the final number of shares issued in the capital increase was 106,179,744 shares with a nominal value of 1 euro each.

Dividends paid in 2013

Approval was given at the General Shareholders’ Meeting of May 31, 2013 to pay a gross 0.35 dividend per outstanding share carrying dividend rights, with a charge to unrestricted reserves. The dividend was paid on November 6, 2013 and the total amount paid was 1,588 million euros.

e) Other equity instruments

On September 24, 2014, Telefónica Participaciones, S.A.U., issued 1,500 million euros of bonds necessarily convertible into new and/or existing shares of Telefónica, S.A. at a nominal fixed interest rate of 4.9%, due on September 25, 2017, guaranteed by Telefónica, S.A. The notes could be converted at the option of the noteholders or the issuer at anytime from the 41^st day after the Issue Date up to the 25^th trading day prior to the Maturity Date. The minimum conversion price of the notes will be equal to 11.9 euros per share and the maximum conversion price will be equal to 14.5775 euros per share, resulting in a premium equal to 22.5% over the minimum conversion price.

On the same date, Telefónica, S.A. issued bonds with the same amount and characteristics of the previously detailed bond and a derivative instrument (warrant) in order to hedge the convertion price of the bonds. These bonds were wholly acquired by Telefónica Participaciones, S.A.U. In the balance sheet of Telefónica, S.A. the present value of the coupons has been recorded as debt amounting 215 million euros (217 million euros as of December 31^st, 2014 as seen in Note 15), the warrant has been accounted as long term liabilities to group companies (see Note 15) and the remaining amount of 1,206 million euros has been recorded as “other net equity instruments”.

Telefónica, S.A. 36


		Financial Statements

11.2 Unrealized gains (losses) reserve

The movements in the items composing “Unrealized gains (losses) reserve” in 2014 and 2013 are as follows:

2014


Millions of euros	Opening balance			Valuation at market value			Tax effect of additions		Amounts transferred to income statement		Tax effect of transfers			Closing balance
Available-for-sale financial assets (Note 9.3)		49			(59	)		17		19		(6	)		20
Cash flow hedges (Note 16)		(880	)		(411	)		93		163		(49	)		(1,084	)

Total		(831	)		(470	)		110		182		(55	)		(1,064	)

2013


Millions of euros	Opening balance			Valuation at market value		Tax effect of additions			Amounts transferred to income statement		Tax effect of transfers			Closing balance
Available-for-sale financial assets (Note 9.3)		(34	)		74		(22	)		44		(13	)		49
Cash flow hedges (Note 16)		(1,371	)		588		(177	)		114		(34	)		(880	)

Total		(1,405	)		662		(199	)		158		(47	)		(831	)

Telefónica, S.A. 37


		Financial Statements

Note 12. Financial liabilities

The breakdown of “Financial liabilities” at December 31, 2014 and 2013 is as follows:

2014


	LIABILITIES AT FAIR VALUE
							MEASUREMENT HIERARCHY						LIABILITIES AT AMORTIZED COST

Millions of euros	Financial liabilities held for trading		Hedges		Subtotal financial liabilities at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on other directly observable market data		Trade and other payables		Subtotal liabilities at fair value		TOTAL CARRYING AMOUNT		TOTAL FAIR VALUE
Non-current financial liabilities		2,322		800		3,122		—		3,122		—		45,675		50,313		48,797		53,435
Payable to Group companies and associates		—		—		—		—		—		—		40,728		45,287		40,728		45,287
Bank borrowings		—		—		—		—		—		—		4,027		4,070		4,027		4,070
Bonds and other marketable debt securities		—		—		—		—		—		—		831		867		831		867
Derivatives (Note 16)		2,322		800		3,122		—		3,122		—		—		—		3,122		3,122
Other financial liabilities		—		—		—		—		—		—		89		89		89		89
Current financial liabilities		264		101		365		—		365		—		12,538		11,930		12,903		12,295
Payable to Group companies and associates		—		—		—		—		—		—		11,702		11,107		11,702		11,107
Bank borrowings		—		—		—		—		—		—		759		760		759		760
Bonds and other marketable debt securities		—		—		—		—		—		—		77		63		77		63
Derivatives (Note 16)		264		101		365		—		365		—		—		—		365		365

Total financial liabilities		2,586		901		3,487		—		3,487		—		58,213		62,243		61,700		65,730

Telefónica, S.A. 38


		Financial Statements

2013


	LIABILITIES AT FAIR VALUE
							MEASUREMENT HIERARCHY						LIABILITIES AT AMORTIZED COST

Millions of euros	Financial liabilities held for trading		Hedges		Subtotal financial liabilities at fair value		Level 1: quoted prices		Level 2: Estimates based on other directly observable market inputs		Level 3: Estimates not based on other directly observable market data		Trade and other payables		Subtotal liabilities at fair value		TOTAL CARRYING AMOUNT		TOTAL FAIR VALUE
Non-current financial liabilities		1,223		1,454		2,677		—		2,677		—		44,002		48,226		46,679		50,903
Payable to Group companies and associates		—		—		—		—		—		—		37,583		41,748		37,583		41,748
Bank borrowings		—		—		—		—		—		—		6,079		6,167		6,079		6,167
Bonds and other marketable debt securities		—		—		—		—		—		—		177		148		177		148
Derivatives (Note 16)		1,223		1,454		2,677		—		2,677		—		—		—		2,677		2,677
Other financial liabilities		—		—		—		—		—		—		163		163		163		163
Current financial liabilities		91		4		95		—		95		—		14,756		14,724		14,851		14,819
Payable to Group companies and associates		—		—		—		—		—		—		12,982		13,000		12,982		13,000
Bank borrowings		—		—		—		—		—		—		831		763		831		763
Bonds and other marketable debt securities		—		—		—		—		—		—		943		961		943		961
Derivatives (Note 16)		91		4		95		—		95		—		—		—		95		95
Other financial liabilities		—		—		—		—		—		—		—		—		—		—

Total financial liabilities		1,314		1,458		2,772		—		2,772		—		58,758		62,950		61,530		65,722

Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.

Telefónica, S.A. 39


		Financial Statements

Note 13. Bonds and other marketable debt securities

13.1 The balances and movements in issues of debentures, bonds and commercial paper at December 31, 2014 and 2013 are as follows:

2014


Millions of euros	Non-convertible debentures and bonds			Other marketable debt securities			Total
Opening balance		761			359			1,120
Additions		750			6			756
Depreciation and amortization		(613	)		(361	)		(974	)
Revaluation and other movements		4			2			6
Closing balance		902			6			908
Details of maturities:
Non-current		831			—			831
Current		71			6			77

2013


Millions of euros	Non-convertible debentures and bonds			Other marketable debt securities			Total
Opening balance		1,328			328			1,656
Additions		—			34			34
Depreciation and amortization		(583	)		—			(583	)
Revaluation and other movements		16			(3	)		13
Closing balance		761			359			1,120
Details of maturities:
Non-current		177			—			177
Current		584			359			943

The additions shown in the table of movements for 2014 in the column “Non-convertible debentures and bonds” relate to Telefónica’s bond issuance made on July 24, 2014 amounting to 750 million euros. The bonds are mandatorily exchangeable into ordinary shares of Telecom Italia, S.p.A, maturing on July 24, 2017. The bonds may be exchanged in advance of the transfer of the shares, except under certain circumstances where the company may opt to redeem the bonds in cash. As a result of this transaction, Telefónica, S.A., after the Telco, S.p.A. demerger and the later transfer of the underlying shares of the bonds, would reduce its stake in Telecom Italia, S.p.A, which would be between 8.3% and 9.4% in Telecom Italia, S.p.A, current voting share capital.

Telefónica, S.A. 40


		Financial Statements

Maturities of the nominal amounts of debenture and bond issues at December 31, 2014 and 2013 are as follows:

2014


Millions of euros						Maturity
Name	Interest rate		% interest rate			2015		2016		2017		2018		2019		Subsequent years		TOTAL
DEBENTURES AND BONDS:
MARCH 00		FLOATING		2.80	%(*)		50		—		—		—		—		—		50
Bonds exchangeable into Telecom Italia shares		FIXED		6.00	%		—		—		750		—		—		—		750

Total issues							50		—		750		—		—		—		800

(*)	The applicable interest rate (floating, set annually) is the sterling 10-year swap rate multiplied by 1.0225.

2013



Millions of euros							Maturity
Name	Interest rate			% interest rate			2014 (1)		2015		2016		2017		2018		Subsequent years		TOTAL
DEBENTURES AND BONDS:
JULY 99		ZERO COUPON	(**)		6.39	%		—		—		—		—		—		73		73
MARCH 00		FLOATING			2.065	%(*)		—		50		—		—		—		—		50
NOVEMBER 12		FIX			4.18	%		582		—		—		—		—		—		582

Total issues								582		50		—		—		—		73		705

(*)	The applicable interest rate (floating, set annually) is the sterling 10-year swap rate multiplied by 1.0225.

(**)	Issues of zero-coupon debentures and bonds are shown in the table above at amortized cost.

(1)	For 2014 the figures include a maturity of 582 million euros, without a contractual obligation for these maturities.

Zero-coupon bonds issued in July 99 have been redeemed in July 2014, and accordingly, the closing balance of this concept is zero in 2014 annual accounts.

13.2 At December 31, 2014, Telefónica, S.A. had a corporate promissory note program registered with the CNMV, with the following features:

Millions of euros Amount

Placement
system

Nominal amount of the
Promissory notes

Terms of the
Promissory notes

Placement

500 million; can be increased to 2,000 million

Auctions

100,000 euros

60, 90, 180, 365, 540
and 731 days

Competitive auctions

Tailored

100,000 euros

Between 3 and

731 days

Specific transactions

At December 31, 2014 the outstanding balance on this promissory note program was 6 million euros (359 million euros in 2013).

13.3 The average interest rate during 2014 on debentures and bonds outstanding during the year was 5.15% (4.61% in 2013) and the average interest rate on corporate promissory notes was 0.43% (1.38% in 2013).

Telefónica, S.A. 41


		Financial Statements

Note 14. Interest-bearing debt and derivates

14.1 The balances at December 31, 2014 and 2013 are as follows:

December 31, 2014

Millions of euros

Item

Current

Non-current

Total

Loans with financial entities

759

4,027

4,786

Derivative financial liabilities (Note 16)

365

3,122

3,487

Total

1,124

7,149

8,273

December 31, 2013

Millions of euros

Item

Current

Non-current

Total

Loans with financial entities

831

6,079

6,910

Derivative financial liabilities (Note 16)

2,677

2,772

Total

926

8,756

9,682

14.2 The nominal values of the main interest-bearing debts at December 31, 2014 and 2013 are as follows:

Description

Value Date

Maturity Date

Currency

Limit
12/31/14
(millions)

Balance
(million of euros)

Syndicated loan (1) *

04/21/06

04/21/17

EUR

700

Syndicated loan Tranche A3

07/28/10

07/28/16

EUR

328

Bilateral loan on supplies*

02/22/13

01/31/23

USD

905

571

Bilateral

06/26/14

06/26/17

EUR

2,000

*	Facilities with amortization schedule.

(1)	350 million euros are scheduled to mature on 04/21/15

Description

Value Date

Maturity Date

Currency

Limit
12/31/13
(millions)

Balance
(million of euros)

Syndicated facility *

04/21/06

04/21/17

EUR

700

ECA structured facility *

02/12/10

11/30/19

USD

296

215

Syndicated loan Tranche A2 **

07/28/10

07/28/14

EUR

2,000

Syndicated loan Tranche A3

07/28/10

07/28/16

EUR

2,000

ECA structured facility *

05/03/11

07/30/21

USD

341

247

Bilateral Loan

02/27/12

02/27/15

EUR

200

Syndicated loan Tranche D2

03/02/12

12/14/15

EUR

923

Vendor Loan *

02/21/13

02/21/16

EUR

206

Vendor Loan*

02/22/13

01/31/23

USD

1,001

336

*	Facilities with amortization schedule.

**	1,400 million euros under Tranche A2 were refinanced with forward start facilities dated 02/22/2013 (available from 07/28/2014).

Telefónica, S.A. 42


		Financial Statements

14.3 Maturities of balances at December 31, 2014 and 2013 are as follows:

December 31, 2014



	Maturity
Millions of euros Items	2015		2016		2017		2018		2019		Subsequent years		Closing balance
Loans with financial entities		759		508		2,531		232		427		329		4,786
Derivative financial liabilities (Note 16)		365		147		345		476		357		1,797		3,487

Total		1,124		655		2,876		708		784		2,126		8,273

December 31, 2013



	Maturity
Millions of euros Items	2014		2015		2016		2017		2018		Subsequent years		Closing balance
Loans with financial entities		831		1,228		2,317		1,360		1,064		110		6,910
Derivative financial liabilities (Note 16)		95		215		290		290		562		1,320		2,772

Total		926		1,443		2,607		1,650		1,626		1,430		9,682

14.4

Interest-bearing debt arranged or repaid in 2014 mainly includes the following:

•

On February 7, 2014, Telefónica, S.A. made an early repayment for 923 million euros of its syndicated loan (Tranche D2) dated March 2, 2012 and originally scheduled to mature on December 14, 2015.

•

On February 18, 2014, Telefónica, S.A. signed a 3,000 million euros syndicated revolving credit facility maturing on February 18, 2019. This agreement would enter into effect on February 25, 2014 cancelling the 3,000 million euros syndicated credit facility (Tranche B) signed on July 28, 2010 (originally scheduled to mature in 2015). At December 31, 2014 there was no outstanding amount under this facility and therefore is not mentioned in the table of 14.2 chapter.

•

On June 26, 2014, Telefónica, S.A. signed a 2,000 million euros bilateral loan maturing on June 26, 2017. At the same date it was fully disbursed.

•

During 2014, Telefónica, S.A. made an early repayment for 1,672 million euros of its syndicated loan (tranche A3) dated July 28, 2010 and scheduled to mature originally on July 28, 2016. As of December 31, 2014 the outstanding balance of this financing was 328 million euros (2,000 million euros in 2013).

•

During 2014, Telefónica, S.A. repaid in full its syndicated loan (tranche A2) dated July 28, 2010 totaling 2,000 million euros and scheduled to mature originally on July 28, 2014. At the same time, its forward start facilities (Tranche A2A and A2B) dated February 22, 2013 and available as of July 28, 2014 were fully canceled.

•

During 2014, Telefónica, S.A. drew down an aggregate principal amount of 310 million US dollars (255 million euros) of its bilateral loan on supplies of 1,001 million US dollars (825 million euros) with an outstanding balance at December 31, 2014 amounted to 694 million US dollars (571 million euros).

14.5 Average interest on loans and borrowings

The average interest rate in 2014 on loans and borrowings denominated in euros was 1.048% and 2.250% for foreign-currency loans and receivables.

Telefónica, S.A. 43


		Financial Statements

The average interest rate in 2013 on loans and borrowings denominated in euros was 1.323% and 2.510% for foreign-currency loans and receivables.

14.6 Unused credit facilities

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

At December 31, 2014 and 2013, Telefónica had undrawn credit facilities amounting to 7,445 million euros and 8,873 million euros, respectively.

Financing arranged by Telefónica, S.A. at December 31, 2014 and 2013 is not subject to compliance with financial ratios (covenants).

Telefónica, S.A. 44


		Financial Statements

Note 15. Payable to group companies and associates

15.1 The breakdown at December 31, 2014 and 2013 is as follows:

December 31, 2014



Millions of euros	Non-current		Current		Total
Loans		40,415		11,265		51,680
Trade payables to Group companies and associates		21		152		173
Derivatives (Note 16)		107		12		119
Payable to subsidiaries due to taxation on a consolidated basis		185		273		458

Total		40,728		11,702		52,430

December 31, 2013


Millions of euros	Non-current		Current		Total
Loans		37,273		12,622		49,895
Trade payables to Group companies and associates		53		164		217
Derivatives (Note 16)		—		16		16
Payable to subsidiaries due to taxation on a consolidated basis		257		180		437

Total		37,583		12,982		50,565

Telefónica, S.A. 45


		Financial Statements

The maturity of these loans at the 2014 and 2013 year ends is as follows:

December 31, 2014



Company (Millions of euros)	2015		2016		2017		2018		2019		2020 and subsequent years		Final balance, current and non-current
Telefónica Emisiones, S.A.U.		3,962		6,391		4,774		3,786		3,347		14,897		37,157
Telefónica Europe, B.V.		1,451		—		—		1,104		847		5,035		8,437
Telfisa Global, B.V.		3,913		—		—		—		—		—		3,913
Telefónica Finanzas, S.A.U.		1,837		75		—		—		—		—		1,912
Others		102		—		142		—		—		17		261

Total		11,265		6,466		4,916		4,890		4,194		19,949		51,680

December 31, 2013


Company (Millions of euros)	2014		2015		2016		2017		2018		2019 and subsequent years		Final balance, current and non-current
Telefónica Emisiones, S.A.U.		4,987		2,966		5,971		3,999		3,576		14,431		35,930
Telefónica Europe, B.V.		1,095		797		—		160		1,116		3,707		6,875
Telfisa Global, B.V.		3,455		—		—		—		—		—		3,455
Telefónica Finanzas, S.A.U.		3,085		475		75		—		—		—		3,635

Total		12,622		4,238		6,046		4,159		4,692		18,138		49,895

Financing raised by Telefónica, S.A. through its subsidiary Telefónica Europe, B.V. at December 31, 2014 was 8,437 million euros (6,875 million euros in 2013). This financing entails a number of loans paying market interest rates calculated on a Euribor plus spread basis, with an average interest rate in 2014 of 5.00% (3.90% in 2013). The main source of this financing was the funds obtained through the issuance of undated deeply subordinated reset rate guaranteed securities amounting 5,120 million euros (2,466 million euros in 2013), bonds and debentures amounting 1,530 million euros (1,406 million euros in 2013) and commercial paper amounting 496 million euros (919 million euros in 2013).

The main transactions made in 2014 were following:

•

On March 31, 2014, Telefónica Europe, B.V. issued undated deeply subordinated reset rate guaranteed securities, with the subordinated guarantee of Telefónica, S.A., one of them for an aggregate nominal amount of 750 million euros subject to a call option exercisable by the Issuer from the sixth anniversary of the issuance date and the other for an aggregate nominal amount of 1,000 million euros subject to a call option exercisable by the Issuer from the tenth anniversary of the issuance date. The main terms and conditions of the loan granted to Telefónica, S.A., with the proceeds received from each of the issuances are as follows:

The issuance price was established at 100% of the face value of the loan, in an amount of 1,750 million euros, with long term maturity. For the purpose of calculation on interest rate, this loan is divided into two tranches. The first tranche, related with the amortizing securities nominal amount from the sixth anniversary of the issuance date (750 million euros), will accrue interest at an annual rate of 5.032% as from the issuance date (inclusive) up to March 31, 2020. From March 31, 2020 (inclusive), the loan will accrue a fixed interest rate equal to the applicable 6 year swap rate plus a margin of: (i) 3.836% per year as from March 31, 2020 up to March 31, 2024 (not inclusive); (ii) 4.086% per year as from March 31, 2024 up to March 31, 2040 (not inclusive); and (iii) 4.836% per

Telefónica, S.A. 46


		Financial Statements

year as from March 31, 2040 (inclusive). The second tranche, related with to the amortizing securities nominal amount from the tenth anniversary of the issuance date (1,000 million euros), will accrue interest at an annual rate of 5.907% as from the issuance date (inclusive) up to March 31, 2024. From March 31, 2024 (inclusive), the loan will accrue a fixed interest rate equal to the applicable 10 year swap rate plus a margin of: (i) 4.333% per year as from March 31, 2024 up to March 31, 2044 (not inclusive); (ii) 5.083% per year as from March 31, 2044 (inclusive).

•

On December 4, 2014, Telefónica Europe, B.V. issued undated deeply subordinated reset rate guaranteed securities, with the subordinated guarantee of Telefónica, S.A., for an aggregate nominal amount of 850 million euros and subject to a call option exercisable by the Issuer from the fifth anniversary of the issuance date. The main terms and conditions of the loan granted to Telefónica, S.A., with the proceeds received from each of this issuance is as follows:

The issuance price was established at 100% of the face value of the loan, in an amount of 850 million euros, with long-term maturity. This loan will accrue interest at an annual rate of 4.232% as from the issuance date (inclusive) up to December 4, 2019. From December 4, 2019 (inclusive), it will accrue a fixed rate of interest equal to the applicable 5 year swap rate resettable every five years plus a margin of: (i) 3.838% per year as from December 4, 2019 up to December 4, 2024 (not inclusive); (ii) 4.088% per year as from December 4, 2024 up to December 4, 2039 (not inclusive); and (iii) 4.838% per year as from December 4, 2039 (inclusive).

Financing raised by Telefónica, S.A. through Telefónica Emisiones, S.A.U. at December 31, 2014 was 37,157 million euros (35,930 million euros in 2013). This financing is arranged as loans from these companies on the same terms as those of the issuance programs. The average interest rate in 2014 was 4.69% (5.09% in 2013). The financing arranged includes, as a related cost, the fees or premiums taken to the income statement for the period corresponding to the financing based on the corresponding effective interest rates. Telefónica Emisiones, S.A.U. raised financing in 2014 mainly by tapping the European and US capital markets, issuing the following bonds totaling 2,962 million euros (4,883 million euros in 2013):

Description

Issue date

Maturity date

Amount in
millions
(nominal)

Currency of
issue

Amount in
millions of
euros
(nominal)

Coupon

Telefónica Emisiones, S.A.U.

EMTN bonds

03/26/14

03/26/16

200

EUR

200

Euribor 3M + 0.65

04/10/14

04/10/17

200

EUR

200

Euribor 3M + 0.75

05/27/14

05/27/22

1,250

EUR

1,250

2.242

06/04/14

04/10/17

(*)

100

EUR

100

Euribor 3M + 0.75

10/17/14

10/17/29

800

EUR

800

2.932

SHELF bond

06/23/14

06/23/17

500

USD

412

Libor 3M + 0.65

(*)	Retap bond of the 200 million euros issuance dated on 04/10/14.

Part of the amount owed by Telefónica, S.A. to Telefónica Emisiones, S.A.U. and to Telefónica Europe, B.V. includes restatements to amortized cost at December 31, 2014 and 2013 as a result of fair value interest rate and exchange rate hedges.

Meanwhile, at December 31, 2014, Telefónica, S.A. had raised financing from Telefónica Finanzas, S.A.U., in charge of the integrated cash management of the companies comprising the Telefónica Group in Spain, amounting to 1,912 million euros (3,635 million euros at December 31, 2013) in a series of loans bearing interest at market rates.

Telfisa Global, B.V. centralizes and handles cash management and flows for the Telefónica Group in Latin America, the United States and Europe. The balance payable to this subsidiary is formalized through several

Telefónica, S.A. 47


		Financial Statements

Deposit Agreements accruing interest at market rates and amounting to 3,913 million euros in 2014 (3,455 million euros in 2013).

Financing raised by Telefónica, S.A. through Telefónica Participaciones, S.A.U. at December 31, 2014 totals 217 million euros and it has been shown as “Others” in 2014 chart of movements. This financing corresponds to the actual value of the interests from a bond issuance launched on September 24, 2014 by Telefónica, S.A. and fully subscribed by Telefónica Participaciones, S.A.U. with an average interest rate of 4.90% (see Note 11 e). The nominal value of the previouly mentioned issuance (1,500 million euros) of bonds necessarily convertible into treasury shares has been booked as “Other equity instruments”.

Loans to Group companies under current assets include accrued interest receivable at December 31, 2014 of 917 million euros (1,281 million euros in 2013).

15.2 The balance of “Payable to subsidiaries due to taxation on a consolidated basis” was 458 million euros and 437 million euros at December 31, 2014 and 2013, respectively. This basically includes payables to Group companies for their contribution of taxable income (tax losses) to the tax group headed by Telefónica, S.A. (see Note 17). The current- or non-current classification is based on the Company’s projection of maturities.

The main amounts are those relating to Telefónica Internacional, S.A.U. for 97 million euros (104 million euros in 2013), Telefónica Móviles España, S.A.U. for 101 million euros (116 million euros in 2013) and Latin American Cellular Holdings, S.L for 122 million euros (154 million euros in 2013).

Telefónica, S.A. 48


		Financial Statements

Note 16. Derivate financial instruments and risk management policies

a) Derivative financial instruments

During 2014, the Group continued to use derivatives to limit interest and exchange rate risk on otherwise unhedged positions, and to adapt its debt structure to market conditions.

At December 31, 2014, the total outstanding balance of derivatives transactions was 162,926 million euros (139,000 million euros in 2013), of which 132,950 million euros related to interest rate risk and 29,976 million euros to foreign currency risk. In 2013, 109,389 million euros related to interest rate risk and 29,610 million euros to foreign currency risk.

It should be noted that at December 31, 2014, Telefónica, S.A. had transactions with financial institutions to hedge exchange rate risk for other Telefónica Group companies amounting to 2,420 million euros (1,429 million euros in 2013). At year-end 2014 and 2013, the Company had no transactions to hedge interest rate risk for other Group companies. These external trades are matched by intra-group hedges with identical terms and maturities between Telefónica, S.A. and Group companies, and therefore involve no risk for the Company. External derivatives not backed by identical intragroup transactions consist of hedges on net investment and future acquisitions that, by their nature, cannot be transferred to Group companies and/or transactions to hedge financing raised by Telefónica, S.A. as parent company of the Telefónica Group, which are transferred to Group subsidiaries in the form of financing rather than via derivative transactions.

The breakdown of Telefónica, S.A.’s interest rate and exchange rate derivatives at December 31, 2014, their notional amounts at year end and the expected maturity schedule is as follows:

Telefónica, S.A. 49


		Financial Statements


2014
Millions of euros			Telefonica receives				Telefonica pays
Type of risk	Value in Euros		Carrying		Currency		Carrying		Currency
Euro interest rate swaps		101,258
Fixed to fixed		85		85		EUR		85		EUR
Fixed to floating		45,923		45,956		EUR		45,923		EUR
Floating to fixed		55,200		55,200		EUR		55,200		EUR
Floating to floating		50		50		EUR		50		EUR
Foreign currency interest rate swaps		29,456
Fixed to floating
CHFCHF		520		625		CHF		625		CHF
CZKCZK		418		11,600		CZK		11,600		CZK
GBPGBP		4,866		3,790		GBP		3,790		GBP
JPYJPY		117		17,000		JPY		17,000		JPY
USDUSD		18,674		22,672		USD		22,672		USD
Floating to fixed
CZKCZK		45		1,250		CZK		1,250		CZK
GBPGBP		2,359		1,838		GBP		1,838		GBP
USDUSD		2,457		2,984		USD		2,984		USD
Exchange rate swaps		15,191
Fixed to fixed
EURBRL		466		524		EUR		1,502		BRL
EURCLP		51		47		EUR		37,800		CLP
EURCZK		352		401		EUR		9,759		CZK
Fixed to floating
JPYEUR		95		15,000		JPY		95		EUR
Floating to floating
CHFEUR		515		625		CHF		515		EUR
EURCZK		148		162		EUR		4,114		CZK
EURGBP		519		588		EUR		405		GBP
GBPEUR		829		700		GBP		829		EUR
JPYEUR		167		17,000		JPY		167		EUR
USDEUR		12,049		16,074		USD		12,049		EUR
Forwards		12,435
BRLEUR		2,755		9,312		BRL		2,755		EUR
CLPEUR		14		10,063		CLP		14		EUR
EURBRL		384		372		EUR		1,238		BRL
EURCZK		24		24		EUR		667		CZK
EURGBP		1,646		1,622		EUR		1,282		GBP
EURMXN		225		216		EUR		4,031		MXN
EURUSD		2,939		2,831		EUR		3,569		USD
GBPEUR		2,176		1,725		GBP		2,176		EUR
GBPUSD		57		44		GBP		69		USD
USDBRL		21		25		USD		66		BRL
USDCLP		5		6		USD		3,752		CLP
USDCOP		1		1		USD		2,976		COP
USDEUR		1,884		2,357		USD		1,884		EUR
USDGBP		36		44		USD		28		GBP
USDPEN		2		2		USD		5		PEN
CZKEUR		266		7,352		CZK		266		EUR

Subtotal		158,340

Telefónica, S.A. 50


		Financial Statements

Millions of euros

Notional amounts of structured products with options

Value in euros

Notional

Currency

Interest rate options Caps & Floors

2,236

Caps&Floors

2,236

USD

EUR

1,250

EUR

GBP

963

750

GBP

Currency options

2,350

EURUSD

797

EUR

USDEUR

1,553

1,885

USD

Subtotal

4,586

TOTAL

162,926

The breakdown by average maturity is as follows:


Millions of euros
Hedged underlying item	Notional		Up to 1 year		From 1 to 3 years		From 3 to 5 years		Over 5 years
With underlying instrument
Promissory notes		260		—		60		—		200
Loans		33,111		3,863		6,191		8,597		14,460
in national currency		22,785		2,850		3,500		5,450		10,985
in foreign currencies		10,326		1,013		2,691		3,147		3,475
Debentures and bonds MtM		79,792		8,701		26,511		13,636		30,944
in national currency		34,948		2,750		12,748		8,350		11,100
in foreign currencies		44,844		5,951		13,763		5,286		19,844
Other underlying*		49,763		27,216		11,183		4,370		6,994
CCS		1,201		680		521		—		—
Currency options		3,595		1,323		2,151		121		—
Forward		10,556		10,556		—		—		—
IRS		34,411		14,657		8,511		4,249		6,994

Total		162,926		39,780		43,945		26,603		52,598

(*)	Most of these transactions are related to economic hedges of investments, assets and liabilities of subsidiaries, and provisions for restructuring plans.

Telefónica, S.A. 51


		Financial Statements

The breakdown of Telefónica, S.A.’s derivatives in 2013, their notional amounts at year end and the expected maturity schedule is as follows:

2013


Millions of euros			Telefonica receives				Telefonica pays
Type of risk	Value in Euros		Carrying		Currency		Carrying		Currency
Euro interest rate swaps		81,956
Fixed to fixed		95		95		EUR		95		EUR
Fixed to floating		37,829		37,862		EUR		37,829		EUR
Floating to fixed		43,982		43,982		EUR		43,982		EUR
Floating to floating		50		50		EUR		50		EUR
Foreign currency interest rate swaps		25,254
Fixed to floating
GBPGBP		4,966		4,140		GBP		4,140		GBP
JPYJPY		117		17,000		JPY		17,000		JPY
USDUSD		15,362		21,186		USD		21,186		USD
CHFCHF		509		625		CHF		625		CHF
CZKCZK		46		1,250		CZK		1,250		CZK
Floating to fixed
GBPGBP		2,629		2,192		GBP		2,192		GBP
USDUSD		1,579		2,177		USD		2,177		USD
CZKCZK		46		1,250		CZK		1,250		CZK
Exchange rate swaps		14,941
Fixed to fixed
EURBRL		278		354		EUR		896		BRL
EURCLP		53		50		EUR		37,800		CLP
EURCZK		570		631		EUR		15,641		CZK
Fixed to floating
JPYEUR		95		15,000		JPY		95		EUR
Floating to floating
EURCZK		150		162		EUR		4,114		CZK
EURGBP		485		588		EUR		405		GBP
GBPEUR		829		700		GBP		829		EUR
JPYEUR		167		17,000		JPY		167		EUR
USDEUR		11,799		15,738		USD		11,799		EUR
CHFEUR		515		625		CHF		515		EUR
Forwards		12,319
ARSUSD		—		—		—		—		—
CLPEUR		54		40,200		CLP		54		EUR
BRLEUR		5		19		BRL		5		EUR
EURBRL		149		147		EUR		481		BRL
EURCZK		952		952		EUR		26,100		CZK
EURGBP		3,520		3,493		EUR		2,935		GBP
EURMXN		173		174		EUR		3,119		MXN
EURUSD		2,175		2,214		EUR		2,999		USD
GBPEUR		3,640		3,068		GBP		3,640		EUR
GBPUSD		45		38		GBP		61		USD

Telefónica, S.A. 52


		Financial Statements


EURCLP	5	5	EUR	3,332	CLP
USDBRL	13	18	USD	43	BRL
USDCLP	4	5	USD	2,643	CLP
USDCOP	1	1	USD	2,896	COP
USDEUR	1,565	2,113	USD	1,565	EUR
USDGBP	15	20	USD	12	GBP
USDPEN	1	2	USD	5	PEN
EURPEN	1	1	EUR	5	PEN
EURCOP	1	1	EUR	2,260	COP

Subtotal	134,470

Millions of euros

Notional amounts of structured products with options

Value in Euros

Notional

Currency

Interest rate options Caps & Floors

2,180

Caps&Floors

2,180

USD

EUR

1,250

EUR

GBP

900

544

GBP

Currency options

2,350

GBP/EUR

797

EUR

USD/EUR

1,553

3,422

USD

Subtotal

4,530

TOTAL

139,000

The breakdown by average maturity is as follows:


Millions of euros Hedged underlying item	Notional		Up to 1 year		From 1 to 3 years		From 3 to 5 years		Over 5 years
With underlying instrument
Promissory notes		540		281		—		59		200
Loans		19,935		696		4,983		6,367		7,889
in national currency		10,100		—		3,200		3,050		3,850
in foreign currencies		9,835		696		1,783		3,317		4,039
Debentures and bonds MtM		78,758		4,058		22,830		17,409		34,461
in national currency		35,629		2,605		6,638		12,139		14,247
in foreign currencies		43,129		1,453		16,192		5,270		20,214
Without underlying*		39,767		19,555		4,410		8,597		7,205
CCS		1,050		375		628		47		—
Currency options		3,360		1,010		78		2,272		—
Forward		10,674		10,674		—		—		—
IRS		24,683		7,496		3,704		6,278		7,205

Total		139,000		24,590		32,223		32,432		49,755

(*)	Most of these transactions are related to economic hedges of investments, assets and liabilities of subsidiaries, and provisions for restructuring plans.

Telefónica, S.A. 53


		Financial Statements

The debentures and bonds hedged relate to both those issued by Telefónica, S.A. and intragroup loans on the same terms as the issues of Telefónica Europe, B.V. and Telefónica Emisiones, S.A.U.

The fair value of Telefónica, S.A.’s derivatives portfolio with external counterparties at December 31, 2014 was equivalent to a net liability of 1,999 million euros (net liability of 66 million euros in 2013).

b) Risk management policy

Telefónica, S.A. is exposed to various financial market risks as a result of: (i) its ordinary business activity, (ii) debt incurred to finance its business, (iii) its investments in companies, and (iv) other financial instruments related to the above commitments.

The main market risks affecting Telefónica are as follows:

Exchange rate risk

Foreign currency risk primarily arises in connection with: (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America and in the United Kingdom), and (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt.

Interest rate risk

Interest rate risk arises primarily in connection with changes in interest rates affecting (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of non-current liabilities at fixed interest rates.

Share price risk

Share price risk arises primarily from changes in the value of the equity investments (that may be bought, sold or otherwise involved in transactions), from changes in the value of derivatives associated with such investments, from changes in the value of treasury shares and from equity derivatives.

Other risks

Telefónica, S.A. is also exposed to liquidity risk if a mismatch arises between its financing needs (operating and financial expense, investment, debt redemptions and dividend commitments) and its sources of finance (revenues, divestments, credit lines from financial institutions and capital market operations). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.

Finally, Telefónica is exposed to country risk (which overlaps with market and liquidity risks). This refers to the possible decline in the value of assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where Telefónica, S.A. operates, especially in Latin America.

Risk management

Telefónica, S.A. actively manages these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, the income statement and investments. In this way, Telefónica attempts to protect its solvency, facilitate financial planning and take advantage of investment opportunities.

Telefónica manages its exchange rate risk and interest rate risk in terms of net debt and net financial debt as calculated by them. Telefónica believes that these parameters are more appropriate to understanding its debt position. Net debt and net financial debt take into account the impact of the Group’s cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net debt nor net financial debt as calculated by Telefónica should be considered an alternative to gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of liquidity.

Telefónica, S.A. 54


		Financial Statements

Exchange rate risk

The fundamental objective of the exchange rate risk management policy is that, in event of depreciation in foreign currencies relative to the euro, any potential losses in the value of the cash flows generated by the businesses in such currencies, caused by depreciation in exchange rates of a foreign currency relative to the euro, are offset (to some extent) by savings from the reduction in the euro value of debt denominated in such currencies and/or synthetic debt in such currencies. This objective is also reflected on the decrease of the sensitivity to exchange rate variations of the net debt to OIBDA ratio, in order to protect the Group solvency. The degree of exchange rate hedging employed varies depending on the type of investment. For transactions of purchase or sale of business in currencies other than euro, additional hedges can be made on the estimate prices of the transactions or on estimated cash flows and OIBDA.

Telefónica occasionally takes out dollar-denominated debt to hedge the euro-dollar intermediate component in the relation Euro-Latin American currencies, either in Spain (where such debt is associated with an investment as long as it is considered to be an effective hedge) or in the country itself, where the market for local currency financing or hedges may be inadequate or non-existent.

At December 31, 2014, pound sterling-denominated net debt was approximately 1.82 times the value of our 2014 Operating Income Before Depreciation and Amortization (OIBDA) from the business in the United Kingdom, helping to reduce the sensitivity of the Telefónica Group net debt over OIBDA ratio to changes in the value of the pound sterling against euro. Debt denominated in pound sterling as of December 31, 2014 amounts to 3,043 million euros, lower than 3,342 million as of December 31, 2013.

After the completion of the sale of Telefónica Czech Republic, a.s., the exchange rate risk in Czech Crowns is limited only to deferred price amounts which as of December 31, 2014 are totally hedged.

Exchange rate risk is managed by seeking to minimize the negative impact of any remaining exchange rate exposure on the income statement, regardless of whether there are open positions. Such open position exposure can arise for any of three reasons: (i) a thin market for local derivatives or difficulty in sourcing local currency finance which makes it impossible to arrange a low-cost hedge (as in Argentina and Venezuela), (ii) financing through intra-group loans, where the accounting treatment of exchange rate risk is different from that for financing through capital contributions, and (iii) as the result of a deliberate policy decision, to avoid the high cost of hedges that are not warranted by expectations or high risk of depreciation.

As Telefónica’s direct exposure is counterbalanced by the positions held in subsidiaries, the Company analyses its foreign currency risk exposure at the Group level. To illustrate the sensitivity of exchange gains or losses to variability in exchange rates, assuming the exchange rate position affecting the income statement at the end of 2014 were constant during 2014 and Latin American currencies depreciated against the dollar and the rest of the currencies against the euro by 10%, Telefónica estimates that consolidated exchange losses recorded for 2014 would be a negative 76 million euros. For Telefónica, S.A., assuming only financing arranged with external counterparties, the same change would lead to a decrease in finance costs of 10 million euros. Nonetheless, Telefónica manages its exposure on a dynamic basis to mitigate their impact.

Interest rate risk

The Telefónica Group’s financial expenses are exposed to changes in interest rates. In 2014, the rates applied to the largest amount of short-term debt were mainly based on the Euribor, the Brazilian SELIC, the dollar Libor and the Colombian UVR. Telefónica manages its interest rate risk by entering into derivative financial instruments, primarily swaps and interest rate options.

Telefónica analyzes its exposure to changes in interest rates at the Telefónica Group level. The table illustrates the sensitivity of finance costs and the balance sheet to variability in interest rates at Group and Telefónica, S.A. level.

To calculate the sensitivity of the income statement, a 100 basis point rise in interest rates in all currencies in which there are financial positions at December 31, 2014 has been assumed, as well as a 100 basis point decrease in all currencies (EUR, GBP, USD, etc.) in order to avoid negative rates. The constant position equivalent to that prevailing at the end of 2013 has also been assumed.

Telefónica, S.A. 55


		Financial Statements

To calculate the sensitivity of equity to variability in interest rates, a 100 basis point increase in interest rates in all currencies and terms in which there are financial positions at December 31, 2014 was assumed, as well as a 100 basis point decrease in all currencies and terms (except those below 1% in order to avoid negative rates). Cash flow hedge positions were also considered as they are the only positions where changes in market value due to interest-rate fluctuations are recognized in equity.

In both cases, only transactions with external counterparties have been considered.


	Impact on Consolidated net income (*)			Impact on P/LTelefónica, S.A. (*)			Impact on Consolidated Equity			Impact on Telefónica, S.A. Equity
+100bp		(111	)		(24	)		370			318
-100bp		68			13			(113	)		(67	)

(*)

Impact on results of 100 bp change in all currencies, except the pound sterling, the dollar, the euro and the czech crown.

Share price risk

The Telefónica Group is exposed to changes in the value of equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from convertible or exchangeable instruments issued by Telefónica Group, from treasury shares and from equity derivatives.

According to the Share-based payments plans (see Note 19) the shares to be delivered to employees under such plan may be either the parent company treasury shares, acquired by them or any of its Group companies; or newly-issued shares. The possibility of delivering shares to beneficiaries of the plan in the future, implies a risk since there could be an obligation to hand over a maximum number of shares at the end of each phase, whose acquisition (in the event of acquisition in the market) in the future could imply a higher cash outflow than required on the start date of each phase if the share price is above the corresponding price on the phase start date. In the event that new shares are issued for delivery to the beneficiaries of the plan, there would be a dilutive effect for ordinary shareholders as a result of the higher number of shares delivered under such plan outstanding.

In 2014 a new long-term incentive Plan, called Performance and Investment Plan (PIP), consisting of the delivery of shares of Telefónica, S.A. aimed at members of the Executives of Telefónica Group was launched, furthermore 2014 Ordinary General Shareholders’ Meeting approved a Global incentive Telefónica, S.A. shares purchase Plan for the Employees of the Telefónica Group.

To reduce the risk associated with variations in share price under these plans, Telefónica could acquire instruments that replicate the risk profile of some of these plans as it was done in previous years.

In addition, the Group may use part of the treasury shares of Telefónica, S.A. held at December 31, 2014 to cover shares deliverable under the PIP or the Global Employee Share Plan. The net asset value of the treasury shares could increase or decrease depending on variations in Telefónica, S.A.’s share price.

Liquidity risk

The Telefónica Group seeks to match the schedule for its debt maturity payments to its capacity to generate cash flows to meet these maturities, while allowing for some flexibility. In practice, this has been translated into two key principles:

Telefónica, S.A. 56


		Financial Statements

rigid requirement. When calculating the average maturity for the net financial debt and part of the undrawn credit lines can be considered as offsetting the shorter debt maturities, and extension options on some financing facilities may be considered as exercised, for calculation purposes.

The Telefónica Group must be able to pay all commitments over the next 12 months without accessing new borrowing or tapping the capital markets (although drawing upon firm credit lines arranged with banks), assuming budget projections are met.

Country risk

The Telefónica Group managed or mitigated country risk by pursuing two lines of action (in addition to its normal business practices):

Partly matching assets to liabilities (those not guaranteed by the parent company) in the Telefónica Group’s Latin American companies such that any potential asset impairment would be accompanied by a reduction in liabilities; and,

Repatriating funds generated in Latin America that are not required for the pursuit of new, profitable business development opportunities in the region.

Credit risk

The Telefónica Group trades in derivatives with creditworthy counterparties. Therefore, Telefónica, S.A. generally trades with credit entities whose “senior debt” ratings are of at least “A” or in case of Spanish entities in line with the credit rating of Kingdom of Spain. In Spain, where most of the Group’s derivatives portfolio is held, there are netting agreements with financial institutions, with debtor or creditor positions offset in case of bankruptcy, limiting the risk to the net position. In addition, the CDS (Credit Default Swap) of all the counterparties with which Telefónica, S.A. operates is monitored at all times in order to assess the maximum allowable CDS for operating at any given time. Transactions are generally only carried out with counterparties whose CDS is below the threshold.

For other subsidiaries, particularly those in Latin America, assuming a stable sovereign rating provides a ceiling which is below “A”, trades are with local financial entities whose rating by local standards is considered to be of high creditworthiness.

Meanwhile, with credit risk arising from cash and cash equivalents, the Telefónica Group places its cash surpluses in high quality and highly liquid money-market assets. These placements are regulated by a general framework, revised annually. Counterparties are chosen according to criteria of liquidity, solvency and diversification based on the conditions of the market and countries where the Group operates. The general framework sets: the maximum amounts to be invested by counterparty based on its rating (long-term debt rating); and the instruments in which the surpluses may be invested (money-market instruments).

The Telefónica Group considers credit risk management as a key element to achieve its sustainable business and customer base growth targets in a manner that is consistent with Telefónica Corporate Risk Management Policy. This management approach relies on the active monitoring of the risk assumed and the resources necessary to grant the adequate risk-reward balance in the operations and the separation between the risk ownership areas and risk management areas.

Customer-financing products and those debtors that could cause a material impact on the Group’s consolidated financial statements are subject to specific management practices to mitigate exposure to credit risk, according to the segment and risk profile of the customer.

Uniform policies, procedures, delegation of authority and management practices are established in all Group companies, taking into account benchmark risk management techniques but adapted to the local characteristics of each market. This commercial credit risk management model is embedded into the Group’s decision-making processes, both from a strategic and, especially, day-to-day operating perspective, where credit risk assessment guides the product and services available for the different customer profiles.

Telefónica’s maximum exposure to credit risk is initially represented by the carrying amounts of the assets (see Notes 8 and 9) and the guarantees given by Telefónica.

Telefónica, S.A. 57


		Financial Statements

Telefónica, S.A. provides operating guarantees granted by external counterparties, which are offered during its normal commercial activity. At December 31, 2014, these guarantees amounted to approximately 77 million euros.

Capital management

Telefónica’s corporate finance department, takes into consideration several factors for the evaluation of the Telefónica’s capital structure, with the aim of maintaining the solvency and creating value to the shareholders.

The corporate finance department estimates the cost of capital on a continuos basis through the monitoring of the financial markets and the application of standard industry approaches for calculating weighted average cost of capital, or WACC, so that it can be applied in the valuation of businesses in course and in the evaluation of investment projects. Telefónica also uses as a reference a net financial debt ratio below 2.35x OIBDA in the medium term (excluding items of a non-recurring or exceptional nature), with the objective of protecting the credit rating over the medium term, and making this rating compatible with alternative uses of cash flow that could arise at any time.

These general principles are refined by other considerations and the application of specific variables, such as country risk in the broadest sense, or the volatility in cash flow generation that are considered when evaluating the financial structure of the Telefónica Group and its different areas.

Derivatives Policy

Telefónica’s derivatives policy emphasizes the following points:

•

Derivatives based on a clearly identified underlying.

•

Matching of the underlying to one side of the derivative.

•

Matching the company contracting the derivative and the company that owns the underlying.

•

Ability to measure the derivative’s fair value using the valuation systems available to the Telefónica Group.

•

Sale of options only when there is an underlying exposure.

Hedge accounting

Hedges can be of three types:

•

Fair value hedges

•

Cash flow hedges, which can be set at any value of the risk to be hedged (primarily interest rate and foreign currency) or for a defined range through options.

•

Hedges of net investment in a foreign operation.

Hedges can comprise a combination of different derivatives. There is no reason to suppose management of accounting hedges will be static, with an unchanging hedging relationship lasting right through to maturity. Hedging relationships may change to allow appropriate management that serves our stated principles of stabilizing cash flows, stabilizing net financial income/expense and protecting our share capital. The designation of hedges may therefore be cancelled, before maturity, because of a change in the underlying, a change in perceived risk on the underlying or a change in market view. Derivatives included in these hedges may be reassigned to new hedges where they meet the effectiveness test and the new hedge is well documented. To gauge the efficiency of transactions defined as accounting hedges, we analyze the extent to which the changes in the fair value or in the cash flows attributable to the hedged item would offset the changes in fair value or cash flows attributable to the hedged risk using a linear regression model for both forward- and backward-looking analysis.

Risk management guidelines are issued by the Corporate Finance Department. This department may allow exceptions to this policy where these can be justified, normally when the market is too thin for the volume of transactions required or on clearly limited and small risks.

Telefónica, S.A. 58


		Financial Statements

In 2014 the Company recognized a loss of 0.25 million euros for the ineffective part of cash flow hedges (0.15 million euros in 2013).

The breakdown of the Company’s derivatives with counterparties not belonging to the Telefónica Group at December 31, 2014 and 2013 by type of hedge, their fair value at year end and the expected maturity schedule is as follows:

Telefónica, S.A. 59


		Financial Statements

2014


Millions of euros	Fair value ()**			*Notional amount maturities ()**
Derivatives	Fair value ()**			2015			2016			2017			Subsequent years			Total
Interest rate hedges		(471	)		(1,000	)		2,045			210			(2,928	)		(1,673	)
Cash flow hedges		665			(1,000	)		800			460			3,350			3,610
Fair value hedges		(1,136	)		—			1,245			(250	)		(6,278	)		(5,283	)
Exchange rate hedges		(809	)		4,718			3,141			913			3,799			12,571
Cash flow hedges		(809	)		4,718			3,141			913			3,799			12,571
Interest and exchange rate hedges		(453	)		(221	)		549			228			2,767			3,323
Cash flow hedges		(453	)		(221	)		549			228			2,767			3,323
Net investment Hedges		(65	)		(726	)		(588	)		—			—			(1,314	)
Other derivatives		(201	)		7,385			(111	)		(1,243	)		(1,437	)		4,594
Interest rate		34			7,893			452			(325	)		(1,557	)		6,463
Exchange rate		(192	)		(481	)		(563	)		(168	)		120			(1,092	)
Other		(43	)		(27	)		—			(750	)		—			(777	)

(*)	For interest rate hedges, the positive amount is in terms of fixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency.

(**)	Positive amounts indicate payables.

(***)

The fair value of Telefónica derivatives amounted to a positive MTM (accounts receivable) of 1,999 million euros

2013


Millions of euros	Fair value ()**			*Notional amount maturities ()**
Derivatives	Fair value ()**			2014			2015			2016			Subsequent years			Total
Interest rate hedges		438			(3,460	)		2,155			1,053			(1,590	)		(1,842	)
Cash flow hedges		752			(3,230	)		2,150			—			8,420			7,340
Fair value hedges		(314	)		(230	)		5			1,053			(10,010	)		(9,182	)
Exchange rate hedges		361			70			1,564			3,157			4,726			9,517
Cash flow hedges		361			70			1,564			3,157			4,726			9,517
Interest and exchange rate hedges		(22	)		(405	)		(221	)		549			2,812			2,735
Cash flow hedges		(22	)		(405	)		(221	)		549			2,812			2,735
Net investment Hedges		(111	)		(273	)		—			(588	)		—			(861	)
Other derivatives		(600	)		374			(225	)		(1,273	)		(1,989	)		(3,113	)
Interest rate		(356	)		2,354			(141	)		(710	)		(1,941	)		(438	)
Exchange rate		(244	)		(1,980	)		(84	)		(563	)		(48	)		(2,675	)

(*)	For interest rate hedges, the positive amount is in terms of fixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency.

(**)	Positive amounts indicate payables.

Telefónica, S.A. 60


		Financial Statements

Note 17. Income tax

Pursuant to a Ministerial Order dated December 27, 1989, since 1990 Telefónica, S.A. has filed consolidated tax returns with certain Group companies. The consolidated tax group in 2014 comprised 49 companies.

Amendment of the Corporate Income Tax Law in Spain

Spanish Law 27/2014 of 27 November on Corporate Income Tax stipulates a reduction of the current tax rate for financial year ending in 2014 (30%). It has been set at 28% for financial year ending in 2015, and at 25% for financial year ending in 2016 and following years.

In addition, although a limit is established to offset tax losses carryforwards at 60% for 2016 and at 70% for 2017 and subsequent years, the time limit to offset them, which was 18 years, is removed.

This amendment reduces the tax on Spanish companies’ profits, but also means less can be claimed back on tax losses carried forward from previous years on the balance sheet.

Based on estimates of the taxable profit and recovery of deferred tax assets and liabilities on the balance sheet, the Company has quantified the impact of this change on the 2014 annual accounts, recording a 457 million euro charge under “Corporate income tax” and a reduction in equity amounting 32 million euros.

Tax balances are as follows:


Millions of euros	2014		2013
Tax receivables:		4,943		4,985
Deferred tax assets:		4,289		4,325
Deferred income tax (income)		3,096		3,115
Long-term tax loss carryforwards		1,167		1,203
Deductions		26		7
Current tax receivables (Note 10):		654		660
Withholdings		66		21
Corporate income tax payable		574		617
VAT and Canary Islands general indirect tax refundable		14		22
Tax payable:		254		304
Deferred tax liabilities:		179		262
Current payables to public administrations (Note 18):		75		42
Personnel income tax withholdings		1		4
Corporate income tax payable		12		13
Withholding on investment income, VAT and other		61		24
Social security		1		1

The tax group had unused tax loss carryforwards at December 31, 2014 amounting to 9,557 million euros:

2014/12/31

Total

Less than 1 year

More than 1 year

Tax loss carryforwards

9,557

—

9,557

Total tax credits based on the taxable income recognized in the balance sheet at December 2014 therefore amount to 1,167 million euros (1,203 million euros in 2013).

As of December 2014, non-registered taxable income amounts to 4,889 million euros.

Telefónica, S.A. 61


		Financial Statements

During 2014, Telefónica, S.A., as head of the Telefónica tax group, made payments on account of 2014 income tax amounting to 270 million euros (436 million euros in 2013).

17.1 Movement in deferred tax assets and liabilities

The balances and movements in “Deferred tax assets” and “Deferred tax liabilities” for Telefónica, S.A. at December 31, 2014 and 2013 are as follows:

2014


Millions of euros	Tax credits			Temporary differences, assets			Deductions			Total deferred tax assets			Deferred tax liabilities
Opening balance		1,203			3,115			7			4,325			262
Arising in the year		34			536			—			570			—
Reversal		—			(560	)		(15	)		(575	)		(92	)
Transfers to the tax group’s net position		(70	)		5			34			(31	)		(6	)
Other movements		—			—			—			—			15
Closing balance		1,167			3,096			26			4,289			179

2013


Millions of euros	Tax credits			Temporary differences, assets			Deductions			Total deferred tax assets			Deferred tax liabilities
Opening balance		1,170			3,634			291			5,095			499
Arising in the year		190			744			9			943			41
Reversal		—			(1,215	)		—			(1,215	)		(268	)
Transfers to the tax group’s net position		(157	)		(48	)		(293	)		(498	)		(29	)
Other movements		—			—			—			—			19
Closing balance		1,203			3,115			7			4,325			262

The main items for which Telefónica, S.A. recognizes temporary differences in assets and liabilities are the effects of impairment losses on some of its assets, principally investments (see Note 8).

Telefónica, S.A. 62


		Financial Statements

17.2 Reconciliation of accounting profit to taxable income and income tax expense to income tax payable.

The calculation of the income tax expense and income tax payable for 2014 and 2013 is as follows.


Millions of euros	2014			2013
Accounting profit before tax		1,989			33
Permanent differences		(5,472	)		(4,787	)
Temporary differences:		1,651			3,243
Arising in the year		1,555			2,690
Arising in prior years		96			553
Tax result		(1,832	)		(1,511	)
Gross tax payable		(550	)		(454	)
Tax credits capitalized/disposed of		15			(9	)
Corporate income tax refundable		(536	)		(462	)
Temporary differences for tax valuation		(487	)		(973	)
Temporary differences derived from the consolidation process		(8	)		—
Other effects		437			778
Corporate income tax accrued in Spain		(593	)		(657	)
Foreign taxes		(21	)		27
Income tax		(615	)		(631	)
Current income tax		(561	)		(429	)
Deferred income tax		(54	)		(202	)

The permanent differences relate mainly to changes in investment in Group Companies write-down provisions recorded by the Tax Group companies included in the consolidated corporate income tax return, dividends received and investment write downs with no deferred asset registered.

In addition, they include as a permanent difference the decrease in income tax expense derived from the tax amortization of financial goodwill for foreign shareholding acquisitions made before December 21, 2007. In 2014, this adjustment came to 25 million euros. This impact has been lessened as a result of the entry into force of Law 9/2011 of August 19, 2011 and Law 16/2013 of October 29, 2013, which reduced the deductible portion of goodwill amortization under article 12.5 TRLIS (Corporate Income Tax Act) from 5% to 1% for 2011, 2012, 2013, 2014 and 2015. The effect is temporary: the 4% not amortized over those five years (20% in total) will be recovered by extending the deduction period from the original 20 years to 25 years.

Temporary differences mainly refer to adjustment made to Tax result due to accruals or reversals of non-deductible investment write downs.

In 2014, 76 million euros deductions were offset during the year as the final declaration of 2013 (See Note 17.1.).

The caption “other effects” includes mainly the effect of the tax rate reduction related to the above mentioned amendment of the Corporate Income Tax Law in Spain.

17.3 Tax inspections and tax-related lawsuits

In December 2012 the National Court of Justice issued a ruling on the tax inspection for the years 2001 to 2004, accepting the tax losses incurred by the Group in relation to the transfer of certain interests in TeleSudeste, Telefónica Móviles México and Lycos as tax deductible and rejecting the other allegations. On December 28, 2012 the Company filed an appeal with the Supreme Court.

Also in 2012, the tax inspections for all taxes for the years 2005 to 2007 were completed, with the Company signing consent forms for an income tax payment of 135 million euros and non-consent forms for the items which the Company contests. The tax assessment for which a non-consent form was signed did not require payment of any tax because it only proposed a reduction in unused tax loss carryforwards. An appeal was

Telefónica, S.A. 63


		Financial Statements

filed with the Large Taxpayers Central Office of the Spanish State Tax Agency requesting this tax assessment to be reversed, although no decision on the appeal has been issued to date.

In July 2013, new inspections of various companies in the 24/90 tax group, of which Telefónica, S.A. is the parent, were initiated. The taxes and periods subject to review are corporate income tax for the years 2008 to 2011, VAT, tax withholdings and payments on account in respect of personal income tax, tax on investment income, property tax and non-resident income tax for the second half of 2009 and the years 2010 and 2011.

At 2014 year end, it is not expected that the final outcome of the inspections in progress as well as the assessments and lawsuits in progress or pending, will require any additional significant liabilities to be recognized in Telefónica, S.A.’s annual accounts.

Tax deductibility of financial goodwill (Article 12.5)

Spain added a new Article 12.5 to its Corporate Income Tax Law, which came into force on 1 January 2002. The article concerned the deductibility of tax amortization of financial goodwill arising from the acquisition of non-Spanish companies, which could be amortized over 20 years at 5% per annum.

Telefónica, S.A. has been amortizing financial goodwill from its investments in O2, Cesky Telecom and BellSouth (all predating December 21, 2007) with a cumulative positive impact on consolidated income tax expense since 2004 to 2014 of 784 million euros.

On December 20, 2007 the European Commission challenged Spanish law, on the grounds that this tax benefit constituted state aid. On 28 October 2009 the Commission issued a First Decision ruling that Article 12.5 constituted state aid, although it upheld the legitimacy of operations carried out prior to publication of the commencement of the investigation procedure in the EU’s Official Journal.

On January 12, 2011 the Commission issued a Second Decision ruling that, in the case of acquisitions in non-European Union countries up to May 21, 2011, the system established in the original version of Article 12.5 could still be applied, provided certain conditions were fulfilled.

After the proceedings initiated on July 17, 2013, on October 15, 2014 the Commission declared that the Binding Consultation in connection with financial goodwill on indirect acquisitions also constituted state aid and cast doubt on the applicability of the principle of legitimate expectations acknowledged in the two previous Decisions, and refused to permit the concept for indirect acquisitions.

On November 7, 2014 the European Union General Court issued two rulings overturning the First and Second European Union Decisions, considering that the system permitting amortization of goodwill in Spain did not constitute state aid because it had not been proven that the action taken by the Spanish authorities was selective. The European Commission submitted an appeal against both rulings to the EU’s Court of Justice.

Telefónica, S.A. 64


		Financial Statements

Note 18. Trade and other payables

The breakdown of “Trade and other payables” is as follows:


Millions of euros	2014		2013
Suppliers		140		131
Other payables		121		113
Current income tax liabilities (Note 17)		12		13
Other payables to public administrations (Note 17)		63		29

Total		336		286

Trade payables

In performance of Telefónica’s irrevocable undertaking of 2010 to give Fundación Telefónica a total of 280 million euros, in 2014 the Company made cash payments in the amount of 41 million euros (53 million in 2013). After 2014 amounts disbursed the irrevocable undertaking of 2010 has been fully paid.

Information on deferred payments to third parties. (Third additional provision, “Information requirement” of Law 15/2010 of 5 July).

Telefónica, S.A. has adapted its internal processes and payment schedules to the provisions of Law 15/2010 (amended by Law 31/2014) and Royal Decree 4/2013, amending Law 3/2004, establishing measures against late payment in commercial transactions. Engagement conditions with commercial suppliers in both 2014 and 2013 included payment periods of up to 60, as laid down in said law.

For reasons of efficiency and in line with general practice in the business, the Company has set payment schedules, whereby payments are made on set days. Invoices falling due between two payment days are settled on the following payment date in the schedule. This is not deemed to be a deferred payment.

Information on contracts entered into after Law 15/2010 took effect that exceed the maximum period established in this law is shown in the tables below.

Payments to Spanish suppliers in 2014 and 2013 surpassing the legal limit were due to circumstances or incidents beyond the payment policies, mainly the delay in the billing process (a legal obligation for the supplier), the closing of agreements with suppliers over the delivery of goods or the rendering of services, or occasional processing issues.


	Ejercicio 2014				Ejercicio 2013
Millions of euros	Amount		%		Amount		%
Payments made on time		307		95		298		98
Other		15		5		8		2


Total payments to commercial suppliers		322		100		306		100

Weighted average maturity exceeded (days)		27				17
Deferrals at year-end that exceed the limit		1				2

At the date of authorization for issue of these financial statements, Telefónica had processed the outstanding payments, except in cases where an agreement with suppliers was being handled.

In accordance with the above mentioned criteria, average payment period to suppliers of Telefónica, S.A. in 2014 is 35 days, according to the Company’s best estimates.

Telefónica, S.A. 65


		Financial Statements

Note 19. Revenue and expenses

19.1 Revenue

a) Rendering of services

Telefónica, S.A. has contracts for the right to use the Telefónica brand with Group companies which use the license. The amount each subsidiary must recognize as a cost for use of the license is stipulated in the contract as a percentage of income obtained by the licensor. In 2014 and 2013, “Rendering of services to Group companies and associates” included 553 million euros and 609 million euros, respectively, for this item.

Telefónica, S.A. has signed contracts to provide management support services to Telefónica de España, S.A.U, Telefónica Móviles España, S.A.U., Telefónica O2 Holding, Ltd. and Telefónica Internacional, S.A.U. Revenue received for this concept in 2014 and 2013 amounted to 29 million euros and 16 million euros, in each case, recognized under “Rendering of services to Group companies and associates”.

Revenues also include property rental income amounting to 49 and 52 million euros in 2014 and 2013, respectively, mainly from the lease of office space in Distrito Telefónica to several Telefónica Group companies (see Note 7).

b) Dividends from Group companies and associates

The detail of the main amounts recognized in 2014 and 2013 is as follows:


Millions of euros	2014		2013
Telefónica Internacional, S.A.U.		3,238		4,500
Telefónica de España, S.A.U.		1,999		1,600
Telefónica Europe, plc.		1,304		1,309
Telefónica Móviles España, S.A.U.		994		1,081
Telefónica Brasil, S.A.		255		495
Compañía Inversiones y Teleservicios, S.A.U.		—		440
Sao Paulo Telecommunicaçoes		56		160
Telefónica Czech Republic, a.s.		—		158
Telefónica Móviles Argentina, S.A. y Telefónica Móviles Argentina Holding, S.A.		—		89
Telefónica Gestión de Servicios Compartidos España, S.A.U.		—		55
Other companies		128		191

Total		7,974		10,078

c) Interest income on loans to Group companies and associates

This heading includes the return obtained on loans made to subsidiaries to carry out their business (see Note 8.5). The breakdown of the main amounts is as follows:


Millions of euros	2014		2013
Telefónica Móviles México, S.A. de C.V.		54		100
Telefónica de España, S.A.U.		20		13
Telefónica de Contenidos, S.A.U.		—		56
Telefónica Móviles Argentina, S.A.		8		—
Other companies		25		66

Total		107		235

Telefónica, S.A. 66


		Financial Statements

19.2 “Non-core and other current operating revenues – Group companies” relates to revenues on centralized services that Telefónica, S.A., as head of the Group, provides to its subsidiaries. Telefónica, S.A. bears the full cost of these services and then charges each individual subsidiary for the applicable portion.

19.3 Personnel expenses and employee benefits

The breakdown of “Personnel expenses” is as follows:


Millions of euros	2014		2013
Wages, salaries and other personnel expenses		203		135
Pension plans		8		(1	)
Social security costs		22		20

Total		233		154

In 2014, “Wages, salaries and other personnel expenses” includes 18 million euros of compensation payable during the year (11 million euros in 2013).

Telefónica has reached an agreement with its staff to provide an Occupational Pension Plan pursuant to Legislative Royal Decree 1/2002, of November 29, approving the revised Pension Plans and Funds Law. The features of this plan are as follows:

•

Defined contribution of 4.51% of the participating employees’ base salary. The defined contributions of employees transferred to Telefónica from other Group companies with different defined contributions (e.g. 6.87% in the case of Telefónica de España, S.A.U.) will be maintained.

•

Mandatory contribution by participants of a minimum of 2.2% of their base salary.

•

Individual and financial capitalization systems.

This fund was outsourced to Telefónica subsidiary, Fonditel Entidad Gestora de Fondos de Pensiones, S.A., which has added the pension fund assets to its Fonditel B fund.

At December 31, 2014, 1,896 employees had signed up for the plan (1,833 employees in 2013). This figure includes both employees contributing and those who have ceased to contribute to the plan, as provided for in Royal Decree 304/2004 approving the regulations for Pension Plans and Funds. The cost for the Company amounted to 4 million euros in 2014 (4 million euros in 2013).

In 2006, a Pension Plan for Senior Executives, wholly funded by the Company, was created and complements the previous plan and involves additional defined contributions at a certain percentage of the executive’s fixed remuneration, based on professional category, plus some extraordinary contributions depending on the circumstances of each executive, payable in accordance with the terms of the plan.

Telefónica, S.A. has recorded costs related to the contributions to this executive plan of 9 million euros in 2014 (8 million euros in 2013).

In 2014, some executives left this Pension Plan for Senior Executives, leading to the recovery of the cost of the contributions corresponding to these executives amounting to 4 million euros (12 million euros in 2013).

No provision was made for this plan as it has been fully externalized.

The share-based payment plans are the following:

Long-term incentive plan based on Telefónica, S.A. shares: “Performance and Investment Plan”

At the General Shareholders’ Meeting held on May 18, 2011, a new long-term share-based incentive plan called “Performance and Investment Plan” (the “Plan” or “PIP”) was approved for Telefónica Group directors and executive officers.

Telefónica, S.A. 67


		Financial Statements

to this end. The plan includes an additional condition regarding compliance by all or part of the Participants with a target investment and holding period of Telefónica, S.A. shares through each phase (“Co-Investment”).

The term of the plan is five years and it is divided into three phases.

The first phase expired on June 30, 2014. The maximum number of shares assigned to this phase of the plan was 5,545,628 shares assigned on July 1, 2011, with a fair value of 8.28 euros per share. Delivery of shares was not required at the end of the phase according to the general conditions of the plan; therefore, managers did not receive any shares.

For the first phase of the Plan, Telefónica, S.A. acquired a derivative instrument from a financial institution with the same features of the plan and its cost was 37 million euros. At the maturity date of this phase of the plan, the derivative instrument was also cancelled and registered in reserves.

Regarding the second and third allocations of shares under this plan, the maximum number of shares assigned (including the amount of co-investment) and the number of shares outstanding at December 31, 2014 is as follows:


	No. of shares assigned		No. of shares assigned at 12/31/14		Unit fair value		End date
2nd phase July 1, 2012		7,347,282		6,007,909		5.87		June 30, 2015
3rd phase July 1, 2013		7,020,473		6,494,041		6.40		June 30, 2016

From the total number of shares assigned, 2,061,032 and 2,219,790 shares were assigned to employees of Telefónica, S.A. in phases 2 and 3, respectively.

At the General Shareholders’ Meeting held on May 30, 2014, the second long-term share-based incentive plan called “Performance and Investment Plan” (the “Plan” or “PIP”) was approved for Telefónica Group directors and executive officers. This plan will take effect following completion of the first “Performance Investment Plan”.

Under this Plan, a certain number of shares of Telefónica, S.A. will be delivered to participants selected by the Company who have opted to take part in the scheme and meet the requirements and conditions stipulated to this end. The plan includes an additional condition regarding compliance by all or part of the Participants with a target investment and holding period of Telefónica, S.A. shares through each phase (“Co-Investment”).

The term of the plan is five years and it is divided into three phases.

On October 1st 2014, the assignment of shares corresponding to the first phase was completed. On October 1st, 2015 and 2016 the assignments for phases second and third will be done.

The maximum number of shares assigned (including the amount of co-investment) and the number of shares outstanding at December 31, 2014 is as follows:

No. of shares
assigned

No. of shares assigned
at 12/31/14

Unit fair value

End date

1st phase October 1, 2014

6,927,953

6,918,686

6.82

September 30, 2017

Out of the total figure of shares assigned at 12/31/2014, 2,769,606 shares correspond to employees of Telefónica, S.A.

Telefónica, S.A. share plan: “Global Employee Share Plan” (GESP)

In addition to PIP share plans, during 2012 to 2014 period there has been another incentive plan based on Telefónica, S.A. shares. The plan’s share holding period came to an end in December 2014. More than 21,000 employees on the scheme were rewarded with a total of 1,778,099 shares from Telefónica, valued at approximately 20 million euros at the time they were delivered (see Note 11.1).

Telefónica, S.A. 68


		Financial Statements

Likewise, the Telefónica, S.A. Ordinary General Shareholders’ Meeting on May 30, 2014 approved a new voluntary plan for incentivized purchases of shares for the employees of the Group, which at the date of preparation of these annual accounts is pending to be implemented.

19.4 Average number of employees in 2014 and 2013 and number of employees at year-end:

2014


Professional category	Employees at 12/31/14						Average no. of employees in 2014
Professional category	Females		Males		Total		Females		Males		Total
General managers and chairmen		—		1		1		—		1		1
Directors		57		154		211		57		147		204
Managers		137		144		281		131		140		271
Project Managers		161		113		274		157		107		264
University graduates and experts		93		56		149		90		54		144
Administration, clerks, advisors		106		8		114		120		8		128

Total		554		476		1,030		555		457		1,012

2013


Professional category	Employees at 12/31/13						Average no. of employees in 2013
Professional category	Females		Males		Total		Females		Males		Total
General managers and chairmen		—		1		1		—		1		1
Directors		58		103		161		55		101		156
Managers		96		108		204		87		100		187
Project Managers		140		132		272		132		125		257
University graduates and experts		88		69		157		83		63		146
Administration, clerks, advisors		151		8		159		145		10		155

Total		533		421		954		502		400		902

In 2014 continued the concentration in the Headquarters of some activities that had previously been developed in the different regions of the Telefonica Group, a fact that explains the increase in headcount with respect to 2013.

19.5 External services.

The items composing “External services” are as follows:


Millions of euros	2014		2013
Rent		11		11
Independent professional services		174		169
Marketing and advertising		74		80
Other expenses		43		69

Total		302		329

On December 19, 2007, Telefónica, S.A. signed a rental contract with a view to establishing the headquarters of the “Telefónica Corporate University”. The contract included construction and refurbishment of certain facilities by the lessor. On October 31, 2008, some of the facilities were partially accepted and thus the lease period commenced. The lease period is for 15 years (until 2023), renewable for another five.

Telefónica, S.A. 69


		Financial Statements

Future minimum rentals payable under non-cancellable operating leases without penalization at December 31, 2014 and 2013 are as follows:


					From 1 to 3
Millions of euros	Total		Up to 1 year		years		From 3 to 5 years		Over 5 years
Future minimum rentals 2014		52		5		10		11		26
Future minimum rentals 2013		53		5		10		11		27

19.6 Finance revenue

The items composing “Finance revenue” are as follows:


Millions of euros	2014		2013
Dividends from other companies		4		7
Other finance revenue		180		172

Total		184		179

The interests rendered in 2014 by the bonds acquired to Telco, S.p.A. (49 million euros) are included within“other finance revenue” because after the loss of significant influence detailed in Note 9, this financial asset has been reclassified to current credits to third parties.

19.7 Finance costs

The breakdown of “Finance costs” is as follows:


Millions of euros	2014		2013
Interest on borrowings from Group companies and associates		2,034		1,971
Finance costs payable to third parties and gains (losses) on interest rates of financial hedges		262		741

Total		2,296		2,712

The breakdown by Group company of debt interest expenses is as follows:


Millions of euros	2014		2013
Telefónica Europe, B.V.		431		238
Telefónica Emisiones, S.A.U.		1,550		1,712
Other companies		53		21

Total		2,034		1,971

Other companies includes financial costs with Telefónica Finanzas, S.A.U. and Telfisa Global, B.V. related to current payables for specific cash needs.

The amount included as “Finance costs payable to third parties and gain (losses) on interest rarte of financial hedges” refers to fair value effects in the valuation of derivative instruments described in Note 16.

Telefónica, S.A. 70


		Estados financieros

19.8 Exchange differences:

The breakdown of exchange losses recognized in the income statement is as follows:


Millions of euros	2014		2013
On current operations		33		37
On loans and borrowings		66		813
On derivatives		1,062		769
On other items		16		8

Total		1,177		1,627

The breakdown of exchange gains recognized in the income statement is as follows:


Millions of euros	2014		2013
On current operations		61		22
On loans and borrowings		545		270
On derivatives		656		1,197
On other items		11		56

Total		1,273		1,545

The change in exchange gains and losses is basically due to the fluctuations in the main currencies the Company works with which have been significantly strengthened against euro in 2014, reversing 2013 trend: Brazilian real strengthening by 0.2% (weakening by 16.54% in 2013), US dollar strengthening by 13.6% (weakening by 4.33% in 2013) and the pound sterling strengthening by 7.04% (weakening by 2.11% in 2013). The impact of Czech crown exchange-rate in 2014 is not significant (weakening by 8.33% in 2013). These impacts are offset by the hedges contracted to mitigate exchange rate fluctuations.

19.9 Impairment losses on disposal of financial instruments with third parties

The amount included under this caption corresponds to the change in valuation of Telco, S.p.A. investments as described in Note 9.

Telefónica, S.A. 71


		Financial Statements

Note 20. Other information

a) Financial guarantees

At December 31, 2014, Telefónica, S.A. had provided financial guarantees for its subsidiaries and investees to secure their transactions with third parties amounting to 45,742 million euros (42,535 million euros at December 31, 2013). These guarantees are measured as indicated in Note 4.g).


Millions of euros
Nominal Amount	2014		2013
Debentures and bonds		41,814		38,780
Loans and other payables		3,432		2,776
Other marketable debt securities		496		979

Total		45,742		42,535

The debentures, bonds and equity instruments in circulation at December 31, 2014 issued by Telefónica Emisiones, S.A.U., Telefonica Europe, B.V., Telefónica Finanzas México, S.A. de C.V. and Telefónica Participaciones, S.A.U., were guaranteed by Telefónica, S.A. The nominal amount guaranteed was equivalent to 41,814 million euros at December 31, 2014 (38,780 million euros at December 31, 2013). During 2014, Telefónica Emisiones, S.A.U. issued debt instruments on capital markets for an equivalent of 2,962 million euros (4,883 million euros in 2013) and 4,055 million euros matured during 2014 (3,354 million euros during 2013); Telefonica Europe, B.V. issued undated subordinated securities by an equivalent to 2,600 million euros and Telefónica Participaciones, S.A.U. issued notes mandatorily convertible into Telefónica, S.A. shares by 1,500 million euros.

The main loans and other debts guaranteed by Telefónica, S.A. at December 31, 2014 are: credit facilities obtained by Telefónica Finanzas, S.A. from the European Investment Bank, whose outstanding principal at December 31, 2014 was equivalent to 665 million euros (707 million euros at December 31, 2013); a financing agreement entered into with China Development Bank (CDB) and Industrial and Commercial Bank of China (IDBC) on August 28, 2012 by Telefónica Europe, B.V., whose outstanding principal at December 31, 2014 was 844 million US dollars (equivalent to 695 million euros); and a financing agreement entered into with China Development Bank on January 5, 2012 by Telefónica Europe, B.V., whose outstanding principal at December 31, 2014 was 375 million US dollars (equivalent to 309 million euros). During 2014, approximately 57 million euros was paid by Telefónica Finanzas, S.A.U. according to the repayment schedule of the financings.

“Other marketable debt securities” includes the guarantee of Telefónica, S.A. relating to the commercial paper issue program of Telefonica Europe, B.V. The outstanding balance of commercial paper in circulation issued through this program at December 31, 2014 was 496 million euros (720 million euros at December 31, 2013). On June 30, 2014 Telefonica Finance USA, LLC, fully redeemed the remaining preferred shares (59 million euros).

b) Litigation

Telefónica and its Group companies are party to several lawsuits or proceedings that are currently in progress in the law courts and administrative and arbitration bodies of the various countries in which the Telefónica Group is present.

Telefónica, S.A. 72


		Financial Statements

Considering the reports of the Company’s legal advisors regarding these proceedings, it is reasonable to assume that this litigation or cases will not materially affect the financial position or solvency of Telefónica Group.

Among unresolved cases or those underway in 2014 (see Note 17 for details of tax-related cases), the following are of special note:

Appeal against the European Commission Ruling of July 4, 2007 against Telefónica de España’s broadband pricing policy

On July 9, 2007, Telefónica, S.A. was notified of the Decision issued by the European Commission (the “EC”) imposing on Telefónica, S.A. and Telefónica de España, S.A.U. (“Telefónica de España”) a fine of approximately 152 million euros for breach of the former Article 82 of the Treaty Establishing the European Community for not charging equitable prices to whole and retail broadband access services. The court ruled in favor of the EC accusing Telefónica of applying a margin squeeze between the prices it charged competitors to provide regional and national wholesale broadband services and its retail broadband prices using ADSL technology between September 2001 and December 2006.

On September 10, 2007, Telefónica, S.A. and Telefónica de España filed an appeal to overturn the decision before the General Court of the European Union. The Kingdom of Spain, as an interested party, also lodged an appeal to overturn the decision. Meanwhile, France Telecom and the Spanish Association of Bank Users (AUSBANC) filed requests to intervene, which the General Court admitted.

In October 2007, Telefónica, S.A. presented a guarantee for an indefinite period of time to secure the principal and interest.

A hearing was held on May 23, 2011, at which Telefónica, S.A. presented its case. On March 29, 2012, the General Court ruled rejecting the appeal by Telefónica, S.A. and Telefónica de España, confirming the sanction imposed by the EC. On June 13, 2012, an appeal against this ruling was lodged before the European Court of Justice.

On September 26, 2013, the Attorney General presented its conclusions to the court stating a possible breach of the principle of non-discrimination with respect to the sanction and a defective application of the principle of full jurisdiction by the General Court, requesting the return of the lawsuit to the court of first instance.

On July 10, 2014, the European Union Court of Justice dismissed the appeal, maintaining the fine imposed for abuse of dominant position (margin squeeze) on wholesale prices charged by Telefónica and Telefónica de España, for broadband access in Spain. This ended the appeal process. Telefónica de España, S.A.U. has disboursed the amounts derived from this litigation.

Appeal against the Decision of the European Commission dated January 23, 2013 to sanction Telefónica for the infringement of Article 101 of the Treaty on the functioning of the European Union

On January 19, 2011, the EC initiated formal proceedings to investigate whether Telefónica, S.A. and Portugal Telecom SGPS, S.A. (“Portugal Telecom”) had infringed on European Union anti-trust laws with respect to a clause contained in the sale and purchase agreement of Portugal Telecom’s ownership interest in Brasilcel, N.V., a joint venture in which both were venturers and owner of Brazilian company Vivo.

On January 23, 2013, the EC passed a ruling on the formal proceedings. The ruling imposed a fine on Telefónica of 67 million euros, as the EC ruled that Telefónica and Portugal Telecom committed an infraction as stipulated in Article 101 of the Treaty on the Functioning of the European Union for having entered into the agreement set forth in Clause Nine of the sale and purchase agreement of Portugal Telecom’s ownership interest of Brasilcel, N.V.

On April 9, 2013, Telefónica filed an appeal for annulment of this ruling with the European Union General Court. On August 6, 2013, the General Court notified Telefónica of the response issued by the European Commission, in which the EC reaffirmed the main arguments of its ruling and, specially, that Clause Nine is a competition restriction. On September 30, 2013, Telefónica filed its reply. On December 18, 2013, the European Commission filed its appeal. During 2014 there has not been no significant advances in this lawsuit.

Telefónica, S.A. 73


		Financial Statements

Judicial appeals against the decisions by the Conselho Administrativo de Defesa Econômica (CADE) regarding the acquisition by Telefónica, S.A. of stakes in Portugal Telecom, SGPS S.A. and Telco, S.p.A.

On December 4, 2013, the Brazilian Antitrust Regulator, CADE, announced the two following decisions:

To approve, with the restrictions mentioned below, the acquisition by Telefónica of the entire participation held by Portugal Telecom, SGPS S.A., and PT Móveis - Serviços de Telecomunicações, SGPS, S.A., (the “PT Companies”) in Brasilcel, N.V., which controlled the Brazilian mobile company, Vivo Participações, S.A. (“Vivo”):

•

The entry of a new shareholder in Vivo, sharing the control of Vivo with Telefónica in conditions identical to those that were applicable to the PT Companies when they had a participation in Brasilcel N.V., or

•

That Telefónica ceases to have any direct or indirect financial interest in TIM Participações S.A.

To impose on Telefónica a fine of 15 million Brazilian reais, for having allegedly breached the spirit and the goal of the agreement signed between Telefónica and CADE (as a condition to the approval of Telefónica’s original acquisition of an interest in Telecom Italia, S.p.A. in 2007), due to the subscription of non-voting shares of Telco on a recent capital increases. This decision also requires Telefónica to divest such non-voting shares of Telco.

The fine imposed by CADE on Telefónica, S.A. relates to the agreement reached on September 24, 2013, between Telefónica and the other shareholders of the Italian company Telco, S.p.A. (which holds a 22.4% stake with voting rights of Telecom Italia S.p.A.) whereby Telefónica subscribed and paid out a share capital increase in Telco, S.p.A., through a cash contribution of 324 million euros, in exchange for shares with non-voting rights in Telco, S.p.A. As a result of this capital increase, the interest held by Telefónica in the voting share capital of Telco remained unchanged (46.18%), although its interest in the total share capital of Telco stand at 66%.

On July 9, 2014, Telefónica filed a judicial appeal against both decisions, requesting they be overturned citing numerous procedural improprieties (the rulings were issued before Telefónica presented its allegations) and a clear lack of legal grounds. At the same time, it requested the decisions be rendered null as CADE has not provided any proof that Telefónica’s actions undermine competition or infringe on applicable legislation. In this respect, the decision regarding the acquisition by Telefónica of PT Companies’ indirect stake in Vivo Participações, S.A. was issued three years after the deal was approved by the Brazilian telecommunications regulator (“ANATEL”). The transaction was completed - prior approval by the CADE was not required at the time - immediately after ANATEL’s approval on September 27, 2010.

b) Commitments

Atento

As a result of the sale agreement of Atento by Telefónica, announced on October 12, 2012 and ratified on December 12, 2012, both companies have signed a Master Service Agreement which regulates Atento’s relationship with the Telefónica Group as a service provider for a period of nine years.

By virtue of this Agreement, Atento become Telefónica’s preferred Contact Centre and Customer Relationship Management (CRM) service provider, stipulating annual commitments in terms of turnover which updates in line with inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group.

In the case of an eventual failure to meet the annual turnover commitments that could result in a compensation, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the Contract Centre’s business margin to the final calculation.

Lastly, the Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.

Telefónica, S.A. 74


		Financial Statements

Share purchase Agreement for the acquisition of Distribuidora de Televisión Digital, S.A. (DTS)

On June 2, 2014, Telefónica de Contenidos, S.A.U. (“Telefónica Contenidos”) executed a share purchase agreement, jointly and severally guaranteed by Telefónica, S.A., with Promotora de Informaciones, S.A. for the acquisition of a 56% of the share capital of Distribuidora de Televisión Digital, S.A. (DTS) for amount of 750 million euros. The closing of this purchase agreement is subject to obtaining the relevant authorization of the competition authorities.

Moreover, on July 4, 2014, Telefónica de Contenidos acquired 22% of the share capital of DTS owned by Mediaset España Comunicación, S.A. (“Mediaset”) for an amount of 295 million euros. Furthermore, a payment of an amount of 30 million euros was satisfied as consideration for the waiver of Mediaset’s pre-emptive rights relating the stake held by PRISA in DTS referred in the paragraph above.

Pursuant to the agreement, Mediaset will receive an amount of 10 million euros in the event that Telefónica de Contenidos closes the acquisition of the 56% stake of DTS held by PRISA and, in that case, an amount of up to 30 million euros depending on the evolution of the Pay-TV customers in Spain of the Telefónica Group during the 4 years following the closing of such acquisition.

Agreement with the shareholders of Telco, S.p.A.

On June 16, 2014, the three Italian shareholders of Telco, S.p.A. requested the initiation of the process of “demerger” (spin off) of the company, as provided in the shareholders’ agreement. Implementation of the demerger, approved by the General Meeting of Shareholders of Telco, S.p.A. held on July 9, 2014, remains subject to obtaining the required anti-trust and telecommunications approvals (including those from Brazil and Argentina). Once the aforementioned approvals are obtained, this decision will be implemented by transferring all the current stake of Telco, S.p.A. in Telecom Italia, S.p.A. (“Telecom Italia”) to four newly created companies. The share capital of each of these companies will belong in its entirety to each of the shareholders of Telco, S.p.A. and each of these companies will receive a number of shares of Telecom Italia proportional to the current economic stake in Telco of each respective shareholder.

The application process of the aforementioned anti-trust and telecommunications approvals (including those in Brazil and Argentina), to proceed to the “demerger” (spin off) of Telco started, once the corresponding corporate documents were entered into in Italy. On December 22, 2014, ANATEL (Brazilian Telecommunications Regulator) approved the “demerger” (spin off) subject to compliance with certain obligations (see Note 8), although CADE (Brazilian Conselho Administrativo de Defesa Econômica) and CNDC (Comisión Nacional de Defensa de la Competencia of Argentina) have not rendered any decision yet.

Furthermore, on July 24, 2014, Telefónica issued 750 million euros bonds mandatorily exchangeable into ordinary shares of Telecom Italia maturing on July 24, 2017, representing, as of that date, 6.5% of its current voting share capital. The bonds may be exchanged in advance of the transfer of the shares, except under certain circumstances where the Company may opt to redeem the bonds in cash.

It is also significant that, within the framework of the GVT transaction and its holding company GVT Participações, SA, Vivendi, S.A. will acquire 1,110 million ordinary shares owned by Telefónica in Telecom Italia.

Agreement for the Acquisition of Global Village Telecom, S.A. and its holding company GVT Participações, S.A.

On September 19, 2014, Telefónica, S.A. signed an agreement with Vivendi S.A. for the acquisition by Telefónica Brasil, S.A. of Global Village Telecom, S.A. and its holding company GVT Participações, S.A. (jointly “GVT”) for a cash consideration of 4,663 million euros, and a payment in shares representing 12.0% of the share capital of Telefónica Brasil, S.A., after its combination with GVT.

As part of the agreement, Vivendi, S.A. will acquire from Telefónica 1,110 million ordinary shares in Telecom Italia currently representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.’s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. under the agreement referred to above).

Telefónica, S.A. 75


		Financial Statements

The cash payment for this transaction is expected to be financed via a capital increase by Telefónica Brasil S.A., which Telefónica S.A. intends to subscribe in proportion to its current stake in Telefónica Brasil, S.A. and intends to fund, in turn, via a capital increase.

The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval). On December 22, 2014, ANATEL approved the acquisition of GVT subject to compliance with certain obligations, although the resolution about the acquisition by Vivendi, S.A. of the 1,110 million of ordinary shares of Telecom Italia is still pending. Meanwhile, CADE continues to analyze the process.

d) Directors’ and senior executives’ compensations and other benefits

Board of Directors’ compensation

The compensation of Telefónica members of the Board of Directors is governed by Article 35 of the Bylaws, which states that the compensation amount that the Company may pay to all of its Directors as remuneration and attendance fees shall be fixed by the shareholders at the General Shareholders’ Meeting. The Board of Directors shall determine the exact amount to be paid within such limit and the distribution thereof among the directors. This compensation, as established in said article of the Bylaws, is compatible with other professional or employment compensation accruing to the Directors by reason of any executive or advisory duties that they perform for the Company, other than the supervision and collective decision-making duties inherent in their capacity as Directors.

Accordingly, the shareholders, at the Annual General Shareholders Meeting held on April 11, 2003, set the maximum gross annual amount to be paid to the Board of Directors at 6 million euros, including a fixed payment and fees for attending meetings of the Board of Director’s Advisory or Control Committees. Total compensation paid to Telefónica’s Directors for discharging their duties in 2014 amounted to 3,486,935 euros in fixed compensation and attendance fees.

The compensation of Telefónica, S.A. directors in their capacity as members of the Board of Directors, the Executive Commission and/or the Advisory and Control Committees consists of a fixed amount payable monthly, and fees for attending the meetings of the Board’s Advisory or Control Committees. Executive Directors other than the Chairman do not receive any amounts for their directorships, but only the corresponding amounts for discharging their executive duties as stipulated in their respective contracts.

The tables below presents the fixed amounts established in 2014 for membership to Telefónica’s Board of Directors, Executive Commission and Advisory or Control Committees and the attendance fees of the Advisory or Control Committees:

Compensation of members of the Board of Directors and Board Committees


Amounts in euros
Position	Board of Directors		Executive Committee		*Advisory or Control Committees ()**
Chairman		240,000		80,000		22,400
Vice Chairman		200,000		80,000		—
Executive		—		—		—
Proprietary		120,000		80,000		11,200
Independent		120,000		80,000		11,200
Other external		120,000		80,000		11,200

(*)	In addition, the amounts paid for attendance to each of the Advisory or Control Committee’s meetings is 1,000 euros.

Individual breakdown

Appendix II provides a detail by individual, by compensation item, of the compensation and benefits paid by Telefónica, S.A. and other companies of the Telefónica Group to members of the Company’s Board of Directors in 2014.

Telefónica, S.A 76


		Financial Statements

e) Related-party transactions

Significant shareholders

The main transactions between Telefónica, S.A. and its significant shareholders – always concluded at arm’s length – are as follows: The figures refer to Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and subsidiaries pertaining to its consolidated group and Caja de Ahorros y Pensiones de Barcelona, (la Caixa) and subsidiaries pertaining to its consolidated group: Their stake in Telefónica as of December 31, 2014 is 6.25% and 5.25%, respectively.


Millions of euros
2014	BBVA		la Caixa
Financial expenses		8		2
Receipt of services		4		3

Total expenses		12		5

Financial revenues		4		19
Dividends received (1)		14		—

Total revenues		18		19

Financing transactions		1,107		1,173
Guarantees granted		68		8
Time deposits		302		21
Dividends distributed (2)		194		98

(1)	As of December 31, 2014 Telefónica holds 0.72% investment in BBVA (See Note 9.3.).

(2)	Additionaly to the amount included in this line, it should be considered the shares received by la Caixa, in relation with the scrip dividend paid on December 2014.


Millions of euros
2013	BBVA		la Caixa
Financial expenses		2		1
Receipt of services		3		2

Total expenses		5		3

Financial revenues		8		8
Dividends received		14		—

Total revenues		22		8

Financing transactions		1,568		1,671
Guarantees granted		—		—
Time deposits		310		214
Dividends distributed		108		89

In addition, the nominal value of derivatives held with BBVA and la Caixa in 2014 amounted to 23,233 and 1,221 million euros, respectively (12,268 million euros held with BBVA and 1,200 million euros held with la Caixa in 2013). As explained in Derivatives policy in Note 16, this figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying.

Group companies and Associates

Telefónica, S.A. is a holding company for various investments in companies in Latin, Spain and the rest of Europe which do business in the telecommunications, media and entertainment sectors.

The balances and transactions between the Company and these subsidiaries (Group and Associated Companies) at December 31, 2014 and 2013 are detailed in the notes to these individual financial statements.

Telefónica, S.A. 77


		Cuentas Anuales 2012

Directors and senior executives

During the financial year to which these accompanying annual financial statements refer, the Directors and senior executives did not perform any transactions with Telefónica or any Telefónica Group company other than those in the Group’s normal trading activity and business.

Compensation and other benefits paid to members of the Board of Directors and senior executives, are detailed in Note 20.d and Appendix II to these financial statements.

Certain members of Telefónica, S.A.’s Board of Directors are also board members of Abertis Infraestructuras, S.A., parent of Abertis. Telefónica signed agreements with Abertis, through its subsidiary Abertis Tower, S.A.U., by virtue of which Telefónica Spain sold 1,725 and 690 mobile phone towers in 2014 and 2013, respectively, generating a gain of 193 million euros in 2014 and a gain of 70 million euros in 2013.

An agreement has also been signed through which Abertis Tower, S.A.U. leases certain space in the aforesaid infrastructures for Telefónica Móviles España, S.A.U. to install its communications equipment.

f) Auditors’ fees

The fees accrued in 2014 and 2013 to the various member firms of the EY international organization (previously Ernst & Young), to which Ernst & Young, S.L. (the auditors of Telefónica, S.A. in 2014 and 2013) belongs, amounted to 3.6 million euros and 3.19 million euros, respectively, broken down as follows.


Millions of euros	2014		2013
Audit services		3.38		2.90
Audit-related services		0.22		0.29

Total		3.60		3.19

EY has not provided the Company with tax advice or other services except as disclosed above.

g) Environmental matters

Telefónica has an integrated Green ICT and Environment strategy with three common goals. The first concerns environmental risk management, the second promoting internal eco-efficiency, and the third unlocking business opportunities to offer end-to-end telecommunications services that support a low-carbon economy.

The Group has an Environmental Policy covering all its companies, as well as a Global Environmental Management System to ensure compliance with local environmental laws and continuously improve management processes. The Climate Change and Energy Efficiency Office is also responsible for rolling out processes to boost energy efficiency and shrink the Group’s carbon footprint.

h) Trade and other guarantees

The Company is required to issue trade guarantees and deposits for concession and spectrum tender bids and in the ordinary course of its business. No significant additional liabilities in the accompanying financial statements are expected to arise from guarantees and deposits issued (see Note 20 a.).

Telefónica, S.A. 78


		Financial Statements

Note 21. Cash flow analysis

Cash flows from/(used in) operating activities

The net result before tax in 2014 amounted to 1,989 million euros (see the income statement), adjusted by items recognized in the income statement that did not require an inflow or outflow of cash in the year.

These adjustments relate mainly to:

•

Impairments to investments in Group companies, associates and other investments of 3,679 million euros (impairment in 2013 of 7,998 million euros).

•

Declared dividends as income in 2014 for 7,974 million euros (10,078 million euros in 2013), interest accrued on loans granted to subsidiaries of 107 million euros (235 million euros in 2013) and a net financial expense of 2,535 million euros (2,491 million euros in 2013), adjusted initially to include only movements related to cash inflows or outflows during the year under “Other cash flows from operating activities.”

“Other cash flows from operating activities” amounted to 8,222 million euros (6,017 million euros in 2013). The main items included are:

Net interest paid:

Payments of net interest and other financial expenses amounted to 1,872 million euros (1,664 million euros in 2013), including:

•

Net payments external credit entities of 10 million euros (174 million euros in 2013), and

•

Interest and hedges paid to Group companies of 1,862 million euros (1,838 million euros in 2013). The main payments in 2014 were to Telefónica Emisiones, S.A.U., for 1,682 million euros, and to Telefónica Europe, B.V., for 362 million euros.

Dividends received:

The main receipts relate to:


Millions of euros	2014		2013
Telefónica de España, S.A.U.		1,999		1,600
Telefónica Móviles España, S.A.U.		994		1,080
Telefónica Europe, plc.		1,304		1,309
Telefónica Czech Republic, a.s.		—		147
Telefónica Internacional, S.A.U.		4,500		1,500
Compañía de Inversiones y Teleservicios, S.A.U.		440		—
Telefónica Brasil, S.A. (Telesp)		199		398
Sao Paulo Telecommunicaçoes		54		141
Other dividend collections		260		253

Total		9,750		6,428

In addition to the dividends recognized as income in 2014 (see Note 19.1) and collected in the same period, this caption also includes dividends from 2013 collected in 2014.

Income tax collected: Telefónica, S.A. is the parent of its consolidated Tax Group (see Note 17) and therefore it is liable for filing income tax with the Spanish Treasury. It subsequently informs companies included in the Tax Group of the amounts payable by them. Payments of totaling 270 million euros were made in 2014 (436 million in 2013), as disclosed in Note 17. In this regard, the main amounts passed on to subsidiaries of the tax group were as follows:

Telefónica, S.A. 79


		Financial Statements

•

Telefónica Móviles España, S.A.U.: collection of 156 million euros, corresponding to: 35 million euros for the 2013 income tax settlement, 59 million in payments of account of 2014 income tax and 62 million euros of the third payment of account of 2013 income tax that has been paid in 2014.

In 2013, rebilling amounted to 648 million euros, corresponding mainly to: 311 million euros for the 2012 income tax settlement and 326 million in payments of account of 2013 income tax.

•

Telefónica de España, S.A.U.: collection of 322 million euros, corresponding to: 66 million euros for the 2013 income tax settlement, 140 million in payments of account of 2014 income tax and 116 million euros of the third payment of account of 2013 income tax that has been paid in 2014.

In 2013, rebilling amounted to 931 million euros, corresponding mainly to: 362 million euros for the 2012 income tax settlement and 531 million in payments of account of 2013 income tax.

Cash flows from/(used in) investing activities

“Payments on investments” under “Cash flows from/(used in) investing activities” included a total payment of 5,704 million euros (2,938 million euros in 2013). The main transactions to which these payments refer are as follows:

•

Capital increases: the main disbursements correspond to Telfin Ireland, Ltd- amounting to 3,700 million euros, Telefónica de Contenidos, S.A.U. amounting to 400 million euros and Telefónica Digital Holding, S.A.U. amounting to 268 million euros. These capital increases, as well as other minor disbursements of this same concept are disclosed fully in Note 8.1.a.

•

550 million euro loans awarded and paid out in 2014 to Telefónica de España, S.A.U. and 134 million euro loan awarded and paid to Telefónica Whosale Services II, S.A.U.,

All transactions are fully described in Note 8.5.

Proceeds from disposals totaling 2,680 million euros in 2014 (2,791 million euros in 2013) includes:

•

Proceeds from the sale of Telefónica Czech Republic, a.s. totaling 2,163 million euros.

•

The proceeds from the maturity of debentures and bonds issued by Telefónica Emisiones, S.A.U. amounting to 211 million euros.

Cash flows from/(used in) financing activities

This caption includes the following items:

Net payments for equity instruments of 21 million euros (244 million euros in 2013), relating to the net amount of treasury shares acquired in 2014 and the proceeds, netted of commisiones, from issuance of the bonds exchangeable into treasury shares included as “other equity instruments”(Note 11 e) with a net amount of 1,182 million euros.

ii.

Proceeds from financial liabilities:

Telefónica, S.A. 80


		Financial Statements

Debt issues: The main collections comprising this heading are as follows:


Millions of euros	2014		2013
Issue exchangeable into ordinary shares of Telecom Italia, S.p.A.		750		—
Bilateral credit (Note 14.4)		2,000		—
EKN credit facility (Note 14.2)		—		407
Telefónica Emisiones, S.A.U. (Note 15)		2,918		4,352
Telefónica Europe, B.V. (Note 15)		2,600		3,078
Telfisa Global, B.V. financing (Note 15)		580		1,633
Commercial paper issued by Telefónica Europe, B.V.		—		153
Vendor Financing		380		—
Commercial paper (Note 13)		—		31
Export Development Canadá Loan		185		—
Kutxabank Loan		125		—
Other collections		500		473

Total		10,038		10,127

Prepayments and redemption of debt: The main payments comprising this heading are as follows:


Millions of euros	2014		2013
Preferred shares bonds (Note 13)		582		582
€8bn syndicated loan (Note 14)		3,672		4,000
Telefónica Europe, B.V. (Note 15)		929		1,500
Telefónica Finanzas, S.A.U.		1,799		2,081
Telefónica Emisiones, S.A.U. (Note 15)		4,059		3,594
Citibank Loan		923		—
Commercial paper issued by Telefónica Europe, B.V.		423		—
Commercial paper		355		—
Banco Sabadell Loan		200		—
Export Development Canadá Loan		206		—
Other payments		392		274

Total		13,540		12,031

The commercial paper transactions with Telefónica Europe, B.V. are stated at their net balance as recognized for the purposes of the cash flow statement, being high-turnover transactions where the interval between purchase and maturity never exceeds six months.

The financing obtained by the Company from Telefónica Finanzas, S.A.U. and Telfisa Global, B.V. relates to the Group’s integrated cash management (see Note 15). These amounts are stated net in the cash flow statement as new issues or redemptions on the basis of whether or not at year-end they represent current investment of surplus cash or financed balances payable.

iii.

Payments of dividends for 2,001 million euros (1,588 million euros in 2013) as described in Note 11.1. d). The difference between the figure of Dividends shown in this Note and in Note 11 is caused by withholding taxes deducted in the payment to certain major shareholders, and despite the reimbursement of the amounts has been requested to Tax Authorities, the cash has not been received until 2015.

Telefónica, S.A. 81


		Financial Statements

Note 22. Events after the reporting period

The following events regarding the Company took place between the reporting date and the date of preparation of the accompanying financial statements:

Financing

•

On January 9, 2015 Telefónica Europe, B.V. made an early repayment for 844 million US dollars (695 million euros) of its bilateral loan on supplies signed on August 28, 2012 and originally scheduled to mature on October 31, 2023. This loan was guaranteed by Telefónica, S.A.

•

On January 15, 2015, Telefónica Emisiones, S.A.U. redeemed 1,250 million US dollars (1,068 million euros) of its notes, issued on July 6, 2009. The notes were guaranteed by Telefónica, S.A.

•

On January 30, 2015, the 375 and 100 million euros loan facilities arranged between Telefónica Finanzas S.A.U. and the European Investment Bank (EIB) matured as scheduled. These loans were guaranteed by Telefónica, S.A.

•

On February 19, 2015, Telefónica, S.A. signed a 2,500 million euros syndicated credit facility maturing in 2020, with two twelve month extension options requiring mutual agreement of the parties (which could extend the maturity to as late as 2022). This agreement entered into effect on February 26, 2015 and allowed us to cancel in advance the syndicated loan facility of Telefónica Europe, B.V. dated on March 2, 2012 with two tranches of 756 million euros and 1,469 million pounds sterling originally scheduled to mature in 2017. On the same date, Telefónica S.A. signed an amendment to its 3,000 million euros syndicated credit facility arranged on February 18, 2014 maturing in 2019 in which the parties mutually agreed two twelve month extension options (which could extend the maturity to as late as 2021).

Exclusive negotiations with Hutchison Whampoa Group

On January 23, 2015 Telefónica and Hutchison Whampoa Group agreed to enter into exclusive negotiations for the potential acquisition by the latter of Telefónica’s subsidiary in the UK (O2 UK) for an indicative price in cash (firm value) of £10.25bn (approximately €13.5bn); composed of (i) an initial amount of £9.25bn (approximately €12.2bn) which would be paid at closing and (ii) an additional deferred payment of £1.0bn (approximately €1.3bn) to be paid once the cumulative cash flow of the combined company in the UK has reached an agreed threshold.

The exclusivity period will last several weeks, allowing Telefónica and Hutchison Whampoa Group to negotiate definitive agreements, while Hutchison Whampoa Group completes its due diligence over Telefónica’s subsidiary in the UK (O2 UK).

Telefónica, S.A. 82


		Financial Statements

Note 23. Additional note for English translation

These annual financial statements were originally prepared in Spanish and were authorized for issue by the Company’s Directors in the meeting held on February 23, 2015. In the event of a discrepancy, the Spanish-language version prevails.

Telefónica, S.A. 83


		Financial Statements

Appendix I: Details of subsidiaries and associates at December 31, 2014


MILLIONS OF EUROS	%OWNERSHIP							INCOME (LOSS)
NAME AND CORPORATE PURPOSE	Direct			Indirect		Capital		Reserves			Dividends		From operations			For the year			Gross carrying amount
Telefónica Europe plc (UNITED KINGDOM)		100.00	%		—		13		14.339			1,304		(6	)		1,292			25,458
Wireless communications services operator
Wellington Street, Slough, SL1 1YP
Telefónica Internacional, S.A.U. (SPAIN)		100.00	%		—		2,839		470			3,238		(53	)		2,640			8,132
Holding company
Gran Vía, 28 - 28013 Madrid
Telefónica Móviles España, S.A.U. (SPAIN)		100.00	%		—		423		498			994		1,054			718			5,775
Wireless communications services provider
Distrito Telefónica, Ronda de la Comunicación s/n, Madrid 28050
Telfin Ireland Limited (IRELAND)		100.00	%		—		—		8,556			—		—			160			8,191
Intragroup financing
28/29 Sir John Rogerson’s Quay, Dublin 2
O2 (Europe) Ltd. (UNITED KINGDOM)		100.00	%		—		1,239		4,776			—		—			18			2,764
Holding company
Wellington Street, Slough, SL1 1YP
Telefónica Móviles México, S.A. de C.V. (MEXICO) (1)		100.00	%		—		4,369		(2,947	)		—		(24	)		(147	)		4,117
Holding company
Prolongación Paseo de la Reforma 1200 Col. Cruz Manca, México D.F. CP.05349
Telefónica de España, S.A.U. (SPAIN)		100.00	%		—		1,024		1,513			1,999		2,419			1,607			2,303
Telecommunications service provider in Spain
Gran Vía, 28 - 28013 Madrid
Telefónica de Contenidos , S.A.U. (SPAIN)		100.00	%		—		226		441			—		(11	)		9			2,642
Organization and operation of multimedia service-related activities and businesses
Distrito Telefónica, Ronda de la Comunicación s/n, Madrid 28050
Telefónica Datacorp, S.A.U. (SPAIN)		100.00	%		—		700		84			50		(43	)		(23	)		1,343
Holding company
Gran Via, 28 - 28013 Madrid
Telfisa Global, B.V. (NETHERLANDS)		100.00	%		—		—		727			—		(4	)		11			712
Integrated cash management, consulting and financial support for Group companies
Strawinskylaan 1259 ; tower D ; 12th floor 1077 XX - Amsterdam
Ecuador Cellular Holdings, B.V. (NETHERLANDS)		100.00	%,		—		—		595			—		—			—			581
Holding company
Strawinskylaan 3105, Atium 7th, Amsterdam
Telefónica Chile Holdings B.V. (NETHERLANDS)		100.00	%		—		—		1,464			—		—			8			473
Holding company
Herikerbergwebr 238, 1101CM – 23393, 1100DW - Amsterdam Zuidoost (Netherlands)
Compañía de Inversiones y Teleservicios, S.A. (SPAIN)		100.00	%		—		24		93			—		(13	)		9			256
Holding company
Distrito Telefónica, Ronda de la Comunicación s/n, Madrid 28050
Panamá Cellular Holdings, B.V. (NETHERLANDS)		100.00	%		—		—		2			—		—			(1	)		52
Holding company
Strawinskylaan 3105, Atium 7th, Amsterdam

*	continue with this information

Telefónica, S.A. 84


		Financial Statements


MILLIONS OF EUROS	%OWNERSHIP							INCOME (LOSS)
NAME AND CORPORATE PURPOSE	Direct			Indirect		Capital		Reserves			Dividends		From operations			For the year			Gross carrying amount
* on the previous page.

Teléfonica de Costa Rica TC, S.A. (COSTA RICA)		100.00	%		—		264		(113	)		—		(30	)		(30	)		264
Holding company
Plaza Roble, Edificio Los Balcones 4to. Piso, San José
Telefónica Global Technology, S.A. (SPAIN)		100.00	%		—		16		93			—		9			2			181
Global management and operation of IT systems
Gran Vía, 28 - 28013 Madrid
Telefónica Capital, S.A. (SPAIN)		100.00	%		—		7		131			—		—			4			110
Finance company
Gran Via, 28 - 28013 Madrid
Seguros de Vida y Pensiones Antares, S.A. (SPAIN)		100.00	%		—		51		62			10		15			13			69
Life insurance, pensions and health insurance
Ronda de la Comunicación, s/n Distrito Telefónica Edificio Oeste 1, planta 9- 28050 Madrid
Telefónica Digital Holdings, S.L. (SPAIN)		100.00	%		—		10		243			—		(293	)		(296	)		423
Holding company
Ronda de la Comunicación, s/n Distrito Telefónica Edificio Central - 28050 Madrid
Taetel, S.L. (SPAIN)		100.00	%		—		28		6			—		—			—			28
Acquisition, ownership and disposal of shares and stakes in other companies
Gran Via, 28 - 28013 Madrid
Telefónica Gestión de Servicios Compartidos España, S.A. (SPAIN)		100.00	%		—		8		26			—		(8	)		1			24
Management and administrative services rendered
Gran Via, 28 - 28013 Madrid
Lotca Servicios Integrales, S.L. (SPAIN)		100.00	%		—		17		(6	)		—		1			(1	)		17
Holding and operation of aircraft and aircraft leases
Gran Via, 28 - 28013 Madrid
Telefónica Ingeniería de Seguridad, S.A. (SPAIN)		100.00	%		—		12		9			—		(24	)		(24	)		38
Security services and systems
Ramón Gómez de la Serna, 109-113 posterior - 28035 Madrid
Compañía Española de Tecnología, S.A. (SPAIN)		100.00	%		—		5		4			—		—			—			14
Promotion of business initiatives and holding of real estate assets
Gran Vía, 28 - 28013 Madrid
Telefónica Finanzas, S.A.U. (TELFISA) (SPAIN)		100.00	%		—		3		69			—		(2	)		15			13
Integrated cash management, consulting and financial support for Group companies
Ronda de la Comunicación, s/n – 28050 Madrid
Centro de Investigación y Experimentación de la Realidad Virtual, S.L. (SPAIN)		100.00	%		—		—		—			—		—			—			10
Design of communications products
Vía de Dos Castillas, 33 - Comp. Ática Ed. 1, 1ª Plta. Pozuelo de Alarcón - 28224 Madrid
Telefónica International Wholesale Services II, S.L. (SPAIN)		100.00	%		—		—		(94	)		—		(41	)		(36	)		25
Telecommunications service provider and operator
Ronda de la Comunicación, s/n – 28050 Madrid
Telefónica Investigación y Desarrollo, S.A.U. (TIDSA) (SPAIN)		100.00	%		—		6		20			—		6			7			6
Telecommunications research activities and projects Telecomunicaciones
Ronda de la Comunicación, s/n – 28050 Madrid

*¹	continue with this information

Telefónica, S.A. 85


		Financial Statements


MILLIONS OF EUROS	%OWNERSHIP								INCOME (LOSS)
NAME AND CORPORATE PURPOSE	Direct			Indirect			Capital		Reserves		Dividends		From operations			For the year		Gross carrying amount
*¹ on the previous page.

Telefonica Luxembourg Holding S.à.r.L. (LUXEMBOURG)		100.00	%		—			3		76		—		—			—		4
Holding company
26, rue Louvingny, L-1946- Luxembourg
Venturini España, S.A. (SPAIN)		100.00	%		—			3		2		—		—			—		4
Property leasing
Avda. de la Industria, 17 Tres Cantos - 28760 Madrid
Fisatel Mexico, S.A. de C.V. (MEXICO)		100.00	%		—			195		1		—		(1	)		7		196
Integrated cash management, consulting and financial support for Group companies
Boulevard Manuel Avila Camacho, 24 -16ª Plta. - Lomas de Chapultepec - 11000 Mexico D.F.
Terra Networks Marocs S.A.R.L.		100.00	%		—			—		—		—		—			—		—
Dormant Company
332 Boulevard Brahim Roudani, Casablanca
Telefónica Participaciones, S.A (SPAIN)		100.00	%		—			—		—		—		—			—		—
Integrated cash management, consulting and financial support for Group Companies
Gran Via, 28 - 28013 Madrid
Telefónica Emisiones, S.A.. (SPAIN)		100.00	%		—			—		5		—		(2	)		1		—
Integrated cash management, consulting and financial support for Group Companies
Gran Via, 28 - 28013 Madrid
Telefónica Europe, B.V. (NETHERLANDS)		100.00	%		—			—		5		1		(1	)		1		—
Fund raising in capital markets
Strawinskylaan 1259 ; tower D ; 12th floor 1077 XX – Amsterdam
Telefónica Internacional USA Inc. (EE.UU.)		100.00	%		—			—		1		—		—			—		—
Financial advisory services
1221 Brickell Avenue suite 600 - 33131 Miami – Florida
Telefónica Latinoamérica Holding, S.L. (SPAIN)		94.59	%		5.41	%		198		2,012		—		—			21		1,762
Holding company
Ronda de la Comunicación, s/n Distrito Telefónica - 28050 Madrid
Telefónica International Wholesale Services, S.L. (SPAIN)		92.51	%		7.49	%		230		85		19		11			2		213
International services provider
Ronda de la Comunicación, s/n Distrito Telefónica - 28050 Madrid
Corporation Real Time Team, S.L. (SPAIN)		87.96	%		12.04	%		—		—		—		—			—		12
Internet design, advertising and consulting
Plaza Canalejas, 3 – 28014 Madrid
Telefónica Móviles Argentina Holding, S.A. (ARGENTINA)		75.00	%		25.00	%		298		584		—		416			227		856
Holding company
Ing Enrique Butty 240, piso 20-Capital Federal-Argentina

Telefónica, S.A. 86


		Financial Statements


MILLIONS OF EUROS	%OWNERSHIP								INCOME (LOSS)
NAME AND CORPORATE PURPOSE	Direct			Indirect			Capital		Reserves			Dividends		From operations			For the year			Gross carrying amount
Telefónica International Wholesale Services America, S.A. (URUGUAY) (1)		74.36	%		25.64	%		562		(487	)		—		(23	)		(23	)		325
Provision of high bandwidth communications services
Luis A. de Herrera, 1248 Piso 4 – Montevideo
Telefonica Centroamérica Inversiones, S.L (SPAIN)		60.00	%		—			1		989			19		—			26			651
Holding company
Distrito Telefónica. Avda. Ronda Comunicación, s/n. - 28050 Madrid
Comtel Comunicaciones Telefónicas, S.A. (VENEZUELA)		65,14	%		34,86	%		—		(94	)		—		(41	)		(36	)		—
Holding company
Torre Edicampo, Avda. Francisco de Miranda, Caracas 1010
Telefónica América, S.A (SPAIN).		50.00	%		50.00	%		—		—			—		—			—			—
Investment managament and gestion of companies in the telecomunications sector
Distrito Telefónica. Avda. Ronda Comunicación, s/n. - 28050 Madrid
Aliança Atlântica Holding B.V. (NETHERLANDS)		50.00	%		43.99	%		40		2			—		—			—			22
Portfolio company
Strawinskylaan 1725 – 1077 XX – Amsterdan
Sao Paulo Telecomunicaciones Participaçoes, Ltda (BRAZIL)		44.72	%		55.28	%		3,889		(185	)		56		(14	)		306			3,092
Holding company
Rua Martiniano de Caravalho, 851 20º andar, parte, Sao Paolo
*Telefónica Brasil, S.A. (BRAZIL) (1)()**		24.68	%		49.28	%		15,194		(1,167	)		255		1,682			1,634			9,823
Wireline telephony operator in Sao Paulo
Sao Paulo
Colombia Telecomunicaciones, S.A. ESP (COLOMBIA) (1)		18.51	%		51.49	%		485		(1,309	)		—		203			313			272
Wireless operator
Calle 100, Nº 7-33, Piso 15, Bogotá,Colombia
Pléyade Peninsular, Correduría de Seguros y Reaseguros del grupo Telefónica, S.A. (SPAIN)		16.67	%		83.33	%		—		—			1		4			5			—
Distribution, promotion or preparation of insurance contracts,operating as a broker
Distrito Telefónica, Avda. Ronda de la Comunicación, s/n Edificio Oeste 1 – 28050 Madrid
Telefónica Móviles Argentina, S.A. (SPAIN) (2)		15.40	%		84.60	%		N/D		N/D			N/D		N/D			N/D			139
Wireless communications and services operator
Ing Enrique Butty 240, piso 20-Capital Federal-Argentina
Telefónica Gestión de Servicios Compartidos, S.A. (ARGENTINA)		4.99	%		95.00	%		—		5			—		4			2			—
Management and administrative services rendered
Av. Ing. Huergo 723 PB - Buenos Aires
Inversiones Telefónica Móviles Holding, Ltd. (CHILE)		3.11	%		96.89	%		971		17			—		—			138			89
Holding company
Miraflores, 130 - 12º - Santiago de Chile

Telefónica, S.A. 87


		Financial Statements


MILLIONS OF EUROS	%OWNERSHIP								INCOME (LOSS)
NAME AND CORPORATE PURPOSE	Direct			Indirect			Capital		Reserves			Dividends		From operations			For the year			Gross carrying amount
Telefónica de Argentina, S.A. (1) (ARGENTINA)		1.80	%		98.20	%		185		212			—		68			19			23
Telecommunications service provider
Av. Ingeniero Huergo, 723, PB - Buenos Aires
Telefónica Venezolana, C.A. (VENEZUELA) (1)		0.09	%		99.91	%		616		(99	)		—		170			(2	)		123
Wireless operator
Av. Francisco de Miranda, Edif Parque Cristal, Caracas 1060
Telefónica Factoring España, S.A. (SPAIN)		50.00	%		—			5		2			—		14			12			3
Factoring
Zurbano, 76, 8 Plta. - 28010 Madrid
Telefónica Factoring México, S.A. de C.V. SOFOM ENR (MEXICO)		40.50	%		9.50	%		2		—			—		—			1			1
Factoring
México D.F.
Telefónica Factoring Perú, S.A.C. (PERÚ)		40.50	%		9.50	%		1		1			—		—			2			1
Factoring
Ciudad de Lima
Telefónica Factoring Colombia, S.A. (COLOMBIA)		40.50	%		9.50	%		1		1			—		2			1			1
Factoring
Bogotá
Telefónica Factoring Chile, S.A. (CHILE)		40.50	%		9.50	%		—		—			—		1			1			—
Factoring
Ciudad y Comuna de Santiago.
Telefónica Factoring Do Brasil, Ltd. (BRASIL)		40.00	%		10.00	%		1		(2	)		—		(1	)		10			1
Factoring
Avda. Paulista, 1106 – Sao Paulo
*Jubii Europe N.V. (NETHERLANDS) ()**		32.10	%		—			N/D		N/D			—		N/D			N/D			13
Internet portal - In liquidation
Richard Holkade 36, 2033 PZ Haarlem – PAISES BAJOS
Torre de Collçerola, S.A. (SPAIN)		30.40	%		—			6		—			—		—			—			2
Operation of telecommunicatios mast and technical assistance and consulting services.
Ctra. Vallvidrera-Tibidabo, s/nº - 08017 Barcelona
Other investments		N/D			N/D			N/D		N/D			28		N/D			—			355
Total group companies and associates													7,974								82,005

(1)	Consolidated data.

(2)	Data included in Telefónica Móviles Argentina Holding as consolidated figures.

(*)	Companies listed on international stock exchanges at December 31, 2014.

Telefónica, S.A. 88


		Financial Statements

Appendix II: Board of Director’s Compensation

TELEFÓNICA, S.A.

(Euros)


Director	Wage / Compensation¹		Fixed payment²		Attendance fees³		Short term variable compensation⁴		Fixed payments Board Committees⁵		Other items⁶		Total
Mr. César Alierta Izuel		2,230,800		240,000		—		3,050,000		80,000		155,110		5,755,910
Mr. Isidro Fainé Casas		—		200,000		—		—		80,000		8,000		288,000
Mr. José María Abril Pérez		—		200,000		3,000		—		91,200		—		294,200
Mr. Julio Linares López		—		200,000		16,000		—		45,733		—		261,733
Mr. José María Alvarez-Pallete López		1,923,100		—		—		2,900,000		—		128,415		4,951,515
Mr. Fernando de Almansa Moreno-Barreda		—		120,000		14,000		—		33,600		8,000		175,600
Ms. Eva Castillo Sanz⁷		1,264,000		—		—		1,463,712		—		53,554		2,781,266
Mr. Carlos Colomer Casellas		—		120,000		24,000		—		147,200		8,000		299,200
Mr. Peter Erskine		—		120,000		17,000		—		124,800		—		261,800
Mr. Santiago Fernández Valbuena		—		—		—		—		—		—		—
Mr. Alfonso Ferrari Herrero		—		120,000		35,000		—		158,400		8,000		321,400
Mr. Luiz Fernando Furlán		—		120,000		—		—		—		—		120,000
Mr. Gonzalo Hinojosa Fernández de Angulo		—		120,000		30,000		—		158,400		8,000		316,400
Mr. Pablo Isla Álvarez de Tejera		—		120,000		6,000		—		22,400		—		148,400
Mr. Antonio Massanell Lavilla		—		120,000		13,000		—		56,000		8,000		197,000
Mr. Ignacio Moreno Martínez		—		120,000		15,000		—		33,600		—		168,600
Mr. Javier de Paz Mancho		—		120,000		9,000		—		113,600		—		242,600
Mr. Chang Xiaobing		—		120,000		—		—		—		—		120,000

1	Wage: Non-variable compensation accrued by the Director for discharging executive duties.

2	Fixed Payment: Cash compensation with a predefined payment frequency, accruable or not over time and accrued by the Director for membership to the Board of Directors, irrespective of affective attendance by the Director at Board Meetings.

3	Attendance fees: Amounts payable for attendance to meetings of the Advisory or Control Committees.

Short-term variable compensation (bonus): Variable amount linked to the performance or achievement of individual or group objectives (quantitative or qualitative) for a period equal to or up to a year, corresponding to 2013 and paid in 2014. Concerning the bonus referred to 2014, to be paid during 2015, the Executive Directors will perceive the following amounts: Mr. César Alierta Izuel, 4,027,486 euros and Mr. José María Álvarez-Pallete López, 3,471,965 euros. In January 2015, Ms. Eva Castillo received variable remuneration of 1,200,000 euros corresponding to fiscal year 2014.

Fixed Payment Board Committees: Cash compensation with a predefined payment frequency, accruable or not over time and accrued by the Director for membership to the Executive Committee or Advisory or Control Committees of Telefónica, S.A., irrespective of effective attendance to meetings of said Committees.

6	Other items: Includes, inter alia, amounts paid for membership of the Regional Advisory Committees in Spain (Valencia, Andalusia and Catalonia) and other “in- kind compensation” (such as general medical insurance and dental coverage), paid by Telefónica, S.A.

On February 26, 2014, Ms. Eva Castillo Sanz ceased to hold office as Chair of Telefónica Europe, although she continued to fulfill duties at the Telefónica Group other than those inherent in her capacity as Director through December 31, 2014. The table above setting forth the total remuneration received by the directors during the fiscal year includes the remuneration received by Ms Eva Castillo Sanz through December 31, 2014. After that date, Ms. Eva Castillo Sanz stopped performing any duties other than those inherent in her capacity as Director, and received 2,405,000 euros in January 2015 as compensation for the aforementioned termination, and the sum of 862,475 euros in settlement of her participation in the “Performance & Investment Plan” (equal to the value of the Telefónica, S.A. shares to which she was entitled for participating in such plan), for the two cycles covering 2012-2015 and 2013-2016.

Telefónica, S.A. 89


		Financial Statements

In addition, to detail the amounts included in the preceding table, the following table presents the specific compensation paid to Directors of Telefónica for membership of the various Advisory or Control Committees in 2014, including both fixed payments and fees for attending meetings:

TELEFÓNICA, S.A. ADVISORY OR CONTROL COMMITEES

(Euros)


Director	Audit and Control		Nomination, Compensation and Corporate Governance		Regulation		Service Quality and Customer Service		Innovation		Strategy		Institutional Affaires		TOTAL 2014
Mr. César Alierta Izuel		—		—		—		—		—		—		—		—
Mr. Isidro Fainé Casas		—		—		—		—		—		—		—		—
Mr. José María Abril Pérez		—		—		—		—		14,200		—		—		14,200
Mr. Julio Linares López		—		—		—		—		17,133		16,200		28,400		61,733
Mr. José María Álvarez-Pallete López		—		—		—		—		—		—		—		—
Mr. José Fernando de Almansa Moreno-Barreda		—		—		15,200		—		—		16,200		16,200		47,600
Ms. Eva Castillo Sanz		—		—		—		—		—		—		—		—
Mr. Carlos Colomer Casellas		33,400		18,200		—		12,200		27,400		—		—		91,200
Mr. Peter Erskine		—		19,200		—		—		15,200		27,400		—		61,800
Mr. Santiago Fernández Valbuena		—		—		—		—		—		—		—		—
Mr. Alfonso Ferrari Herrero		21,200		31,400		15,200		12,200		—		16,200		17,200		113,400
Mr. Luiz Fernando Furlán		—		—		—		—		—		—		—		—
Mr. Gonzalo Hinojosa Fernández de Angulo		20,200		19,200		26,400		12,200		—		15,200		15,200		108,400
Mr. Pablo Isla Álvarez de Tejera		—		17,200		11,200		—		—		—		—		28,400
Mr. Antonio Massanell Lavilla		21,200		—		—		23,400		12,200		—		12,200		69,000
Mr. Ignacio Moreno Martínez		22,200		—		14,200		12,200		—		—		—		48,600
Mr. Francisco Javier de Paz Mancho		—		—		14,200		12,200		—		—		16,200		42,600
Mr. Chang Xiaobing		—		—		—		—		—		—		—		—

Telefónica, S.A. 90


		Financial Statements

On the other hand, the following table presents an individual breakdown of the amounts received from other Telefónica Group companies other than Telefónica, S.A., by Company’s Directors for discharging executive duties or for membership of the companies’ governing bodies and/or Advisory Boards of such companies:

OTHER TELEFÓNICA GROUP COMPANIES

(Euros)


Director	Wage / Compensation¹		Fixed payment²		Attendance fees³		Short term variable compensation⁴		Fixed payments Board Committees⁵		Other items⁶		Total
Mr. César Alierta Izuel		—		—		—		—		—		—		—
Mr. Isidro Fainé Casas		—		—		—		—		—		—		—
Mr. José María Abril Pérez		—		—		—		—		—		—		—
Mr. Julio Linares López		—		—		—		—		—		200,000		200,000
Mr. José María Álvarez-Pallete López		—		—		—		—		—		—		—
Mr. José Fernando de Almansa Moreno-Barreda		—		162,557		—		—		—		120,000		282,557
Ms. Eva Castillo Sanz		—		3,876		—		—		—		—		3,876
Mr. Carlos Colomer Casellas		—		—		—		—		—		10,000		10,000
Mr. Peter Erskine		—		—		—		—		—		151,056		151,056
Mr. Santiago Fernández Valbuena (*)		1,177,811		—		—		1,318,677		—		260,799		2,757,287
Mr. Alfonso Ferrari Herrero		—		69,628		—		—		—		120,000		189,628
Mr. Luiz Fernando Furlán		—		94,455		—		—		—		140,000		234,455
Mr. Gonzalo Hinojosa Fernández de Angulo		—		21,895		—		—		—		60,000		81,895
Mr. Pablo Isla Álvarez de Tejera		—		—		—		—		—		—		—
Mr. Antonio Massanell Lavilla		—		—		—		—		—		10,000		10,000
Mr. Ignacio Moreno Martínez		—		—		—		—		—		—		—
Mr. Francisco Javier de Paz Mancho		—		128,383		—		—		—		120,000		248,383
Mr. Chang Xiaobing		—		—		—		—		—		—		—

1	Wage: Non-variable compensation accrued by the Director for discharging executive duties of any Telefónica Group company.

2	Fixed Payment: Cash compensation with a predefined payment frequency, accruable or not over time and accrued by the Director for membership to the Board of Directors, irrespective of affective attendance by the Director at Board Meetings of any Telefónica Group company.

3	Attendance fees: Amounts payable for attendance to meetings of the Board of Directors or similar bodies of any Telefónica Group company.

Other items: Includes, inter alia, amounts paid for membership of Regional and Business Advisory Committees (Europe –from June 2014 is the Advisory Committee of Spain-, Latam and Digital-removed in June 2014) and other “in- kind compensation” (such as general medical insurance and dental coverage), paid by any Telefónica Group Company.

(*)	It is hereby stated for the record that Executive Director Mr. Santiago Fernández Valbuena collects his remuneration in Brazilian reais, and accordingly, the stated amount of his remuneration may vary, depending on the exchange rate applicable at any particular time.

Telefónica, S.A. 91


		Financial Statements

Furthermore, as explained in the Compensation policy section, Executive Directors receive a series of employee benefits. The following table presents a breakdown of contributions made in 2014 by the Company to long-term savings schemes (Pension Plans and Pension Plan for Senior Executives):

LONG-TERM SAVINGS SCHEMES

(Euros)


Director	Contributions 2014
Mr. César Alierta Izuel		1,023,193
Mr. José María Álvarez-Pallete López		550,436
Ms. Eva Castillo Sanz		393,796
Mr. Santiago Fernández Valbuena		935,010

The following table presents a breakdown of the long-term savings schemes, comprising contributions to Pension Plans and the Pension Plan:

(Euros)


Director	Contributions to Pension Plans		Contributions to Benefits Plan¹
Mr. César Alierta Izuel		8,402		1,014,791
Mr. José María Álvarez-Pallete López		9,468		540,968
Ms. Eva Castillo Sanz		8,402		385,394
Mr. Santiago Fernández Valbuena		109,167		825,843

Contributions to the Pension Plan for Executives set up in 2006, funded exclusively by the Company to complement the existing Pension Plan. It entails defined contributions equivalent to a certain percentage of the Director´s fixed remuneration in accordance with their professional category within the Telefónica Group´s organization.

It is also stated for the record that in February 2015, the golden parachute provisions included in the four-year contract of the Executive Chairman, Mr. César Alierta Izuel, were replaced by an extraordinary one-time contribution of 35.5 million euros to a benefit plan, as part of the company’s policy of reducing indemnity provisions, in line with best corporate governance practices. After this extraordinary contribution, Telefónica, S.A. will not contribute any additional annual amounts to the Benefit Plan for Officers with respect to for Mr. Alierta Izuel. Such contribution would be received by Mr. Alierta Izuel in the same instances established in the benefit plan for officers (plan de previsión social de directivos) (PPSD) applicable to the other officers.

Life insurance premiums paid in 2014 are as follows:

LIFE INSURANCE PREMIUMS

(Euros)


Director	Life insurance premiums
Mr. César Alierta Izuel		73,952
Mr. José María Álvarez-Pallete López		19,935
Ms. Eva Castillo Sanz		9,667
Mr. Santiago Fernández Valbuena		8,050

Telefónica, S.A. 92


		Financial Statements

Regarding share-based payment plans (those exclusively for Executive Directors), there were two long-term variable compensation plans in place in 2014:

The first Plan is the so-called “Performance & Investment Plan” (“PIP”), approved at the General Shareholders’ Meeting of May 18, 2011 whose first phase began in 2011 and ended in July 2014, second phase began in 2012 and will end in July 2015, and third phase began in 2013 and will end in July 2016.

It is hereby stated that regarding the first phase of this Plan (2011-2014), the general terms for the delivery of shares were not met. Therefore, no shares were delivered to Executive Directors.

The number of shares assigned and the maximum possible number of shares to be received by the Directors of Telefónica for discharging executive duties in each phase, if the co-investment requirement established in the Plan and the maximum target TSR established for each phase are met, are as follows:

FIRST PIP- Second phase / 2012-2015


Directors	Theoretical shares assigned		Maximum number of shares*
Mr. César Alierta Izuel		324,417		506,901
Mr. Julio Linares López(1)		13,878		21,686
Mr. José María Álvarez-Pallete López		188,131		293,955
Mr. Santiago Fernández Valbuena		103,223		161,287

(1)	The number of shares assigned to Mr. Linares was calculated in proportion to the time he discharged executive duties as Chief Operating Officer –COO- (from July 1, 2012 to September 17, 2012) during the second phase of the Plan.

*	Maximum possible number of shares to be received if the “co-investment” requirement and maximum target TSR are met.

FIRST PIP- Third phase / 2013-2016


Directors	Theoretical shares assigned		Maximum number of shares*
Mr. César Alierta Izuel		324,000		506,250
Mr. José María Álvarez-Pallete López		192,000		300,000
Mr. Santiago Fernández Valbuena		104,000		162,500

*	Maximum possible number of shares to be received if the “co-investment” requirement and maximum target TSR are met.

It is further stated for the record that, as of December 31, 2014, a maximum of 149,787 shares and 162,500 shares had been allocated to Ms. Eva Castillo Sanz for her participation in the Performance & Investment Plan, for the two cycles of 2012-2015 and 2013-2016, respectively, and that, as stated above, in January 2015, she received 862,475 euros (equivalent to the value of shares of Telefónica S.A. that corresponded for her participation in this Plan) in settlement of her participation in the aforementioned plan.

The second plan, called as well “Performance & Investment Plan” (“PIP”), approved at the General Shareholders’ Meeting of May 30, 2014 whose first phase began in 2014 and will end in October 2017, second phase will begin in 2015 and will end in October 2018, and third phase will begin 2016 and will end in October 2019.

It is hereby stated that the number of shares assigned and the maximum possible number of shares to be received by the Directors of Telefónica for discharging executive duties in each phase, if the co-investment requirement established in the second Plan and the maximum target TSR established for each phase are met, are as follows:

Telefónica, S.A. 93


		Financial Statements

SECOND PIP- First phase / 2014-2017


Directors	Theoretical shares assigned		Maximum number of shares*
Mr. César Alierta Izuel		324,000		506,250
Mr. José María Álvarez-Pallete López		192,000		300,000
Mr. Santiago Fernández Valbuena		104,000		162,500

*	Maximum possible number of shares to be received if the co-investment requirement and maximum target TSR are met.

In addition, to reinforce Telefónica’ s status as a global employer, with a common remuneration culture throughout the Company, to encourage all Group employees to take an equity interest, and to motivate employees and boost their loyalty, at the Company’s General Shareholders’ Meeting of May 18, 2011, shareholders approved a Telefónica, S.A. share incentive purchase plan (2012-2014), the “Global Employee Share Plan” (“GESP”) for all employees of the Group worldwide (including executives and Executives Directors).

Under this plan, employees that meet the qualifying requirements are offered the possibility of acquiring Telefónica, S.A. shares, for a period of up to 12 months (the acquisition period), with this company assuming the obligation of giving participants a certain number of shares free of charge. The maximum sum each employee can assign to this plan is 1,200 euros, while the minimum is 300 euros. Employees who remain at the Telefónica Group and retain their shares for an additional year after the acquisition period (the consolidation period) will be entitled to receive one free share per share acquired and retained until the end of the consolidation period.

The Executive Directors that decided to take part in this Plan (2012-2014) contributing the maximum (i.e. 100 euros a month, over 12 months), had acquired a total of 626 shares (including free shares received under the general terms and conditions of the Plan).

It should be noted that the external Directors do not receive and did not receive in 2014 any compensation in the form of pensions or life insurance, nor do they participate in the share-based payment plans linked to Telefónica’s share price (except as indicated for Ms. Castillo and Mr. Linares in the above tables).

In addition, the Company does not grant and did not grant in 2014 any advances, loans or credits to the Directors, or to its top executives, thus complying with the requirements of the U.S.A. Sarbanes-Oxley Act, which is applicable to Telefónica as a listed company in that market.

Telefónica, S.A. 94


		Financial Statements

Senior executives’ compensation

Meanwhile, the Executives considered as Senior Executives⁽¹⁾ of the Company in 2014, excluding those that are also members of the Board of Directors, have received a total amount of 10,525,981 euros in 2014.

In addition, the contributions by the Telefónica Group in 2014 with respect to the Benefits Plan for Senior Executives described in Note on “Revenue and Expenses” for these Executives amounted to 1,240,757 euros. Contribution to the Pension Plan amounted to 163,065 euros and compensation in kind (including life and other insurance premiums such us general medical and dental insurance) to 122,689 euros.

Also, regarding the first “Performance and Investment Plan” (“PIP”) composed for three phases (2011-2014; 2012-2015; 2013-2016) approved at the General Shareholders’ Meeting of May 18, 2011, it is hereby stated that regarding the first phase of the Plan (2011-2014), the general terms for the delivery of shares were not met. Therefore, no shares were delivered to the Executives.

The number of shares assigned at the beginning of the phase to the Executives considered Senior Executives of the Company in the second phase (2012-2015) is 294,136 shares and 322,520 shares in the third phase (2013-2016).

Regarding the second “Performance and Investment Plan” (“PIP”) composed for three phases (2014-2017; 2015-2018; 2016-2019) approved at the General Shareholders’ Meeting of May 30, 2014, the number of shares assigned at the beginning of the phase to the Executives considered Senior Executives of the Company in the first phase (2014-2017) is 356,624 shares.

Finally, regarding the “Global Employee Share Plan” (“GESP”) (2012-2014), the Executives taking part and contributing the maximum (i.e. 100 euros a month, over 12 months), have acquired a total of 677 shares (including free shares received under the general terms and conditions of the Plan).

(1)

For these purposes, Senior Executives are understood to be individuals who perform senior management functions reporting directly to the management bodies, or their executive committees or CEOs. Additionally, and for the purposes of annual remuneration, the person in charge of the internal audit is included.

It is hereby stated that Mr. Matthew Key ceased to be part of the Senior Executives of the Company on February 26, 2014, having perceived in January 2015 (date of his departure from the Group), in accordance with the conditions laid down, in that day, in his contract, an amount of 15,150,969 euros as a result of the termination in the performance of executive functions in the Telefónica Group.

Telefónica, S.A. 95


		Financial Statements

Management report 2014

This Management Report has been prepared taking into consideration the ‘Guidelines on the preparation of annual corporate governance reports for listed companies’, published by CMNV in July 2013.

Business Model

The Telefónica Group is one of the world’s leading mobile and fixed communications services providers. Its strategy is to become a leader in the new digital world and transform the possibilities it brings into reality.

Telefonica’s aim is to reinforce its position as an active player in the digital world capable of seizing all the opportunities afforded by its global scale and its industrial and strategic alliances.

On February 26, 2014, the Board of Directors of Telefónica, S.A. approved the implementation of a new organizational structure focused on clients and which incorporates the digital offering as the main focus of commercial policies. The structure gives greater visibility to local operators, bringing them closer to the corporate decision-making center, simplifying the Group’s global structure and strengthening cross-cutting areas to improve flexibility and agility in decision making.

From January 1 2014 on, and due to the implementation of this new organizational structure, the new organizational structure is composed of Telefónica Spain, Telefónica Brazil, Telefónica Germany, Telefónica United Kingdom and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries in Argentina, Chile, Peru, Colombia, Mexico, Venezuela & Central America, Ecuador and Uruguay). These segments include all the information related to fixed, mobile, DSL, internet TV, as well as other digital services appropriate to each country. Any services not specifically included in these new segments are part of “Other companies and eliminations”.

The Telefónica’s Group’s strategy aims to:

•

Improve the customer experience in order to continue increasing accesses.

•

Lead growth:

•

Drive forward the penetration of smart phones in all markets in order to raise the growth rate of mobile data by monetizing their increasingly widespread use.

•

Defend our competitive positioning, and leverage our customer knowledge.

•

Develop the growth opportunities that have arisen in an increasingly digital context, such as media, financial services, cloud, security, advertising, M2M, e-Health, etc.

•

Capture the opportunity in the business segment.

•

Continue working on the transformation of the Group’s operating model:

•

Increase the modernization of networks in markets where we operate through technological advances and the acquisition of spectrum.

•

Maximize the benefits of economies of scale to increase efficiency.

•

Simplify the operative model.

•

Reduce legacy cost, especially legacy network costs.

In addition, Telefónica maintains an industrial alliance with China Unicom. Furthermore, in order to potentially unlock the value of Telefónica’s scale, the “Partners” program was created in 2011, and now includes five operators (Bouygues, Etisalat, Sunrise, Megafon and O2 CZ). The Telefónica Partners Program

Telefónica, S.A. 96


		Financial Statements

is an initiative that makes available to selected operators and under commercial terms a host of services that allows partners to leverage on Telefónica’s scale and to cooperate on key business topics (digital services, roaming, services to multinationals, procurement, devices, etc.).

Elsewhere, in 2014 Telefónica’s portfolio was restructured through the acquisition of E-Plus by Telefónica Deutschland to form the leading operator in the European. Also we are in process of acquire GVT by Telefónica Brazil, once regulatory approval has been obtained.

Additional information

Telefónica, S.A. have adapted their internal processes and payment schedules to the provisions of Law 15/2010 (amended by the Law 31/2014) and of Royal Decree-Law 4/2013, amending the Law 3/2004, which establishes measures against late payment in commercial transactions. Engagement conditions with commercial suppliers in 2014 included payment periods of up to 60 days, according to the terms agreed between the parties. For efficiency purposes, the Company has defined payment schedules with suppliers, whereby payments are made on set days. Payments to Spanish suppliers in 2014 and 2013 surpassing the established legal limit were the result of circumstances or incidents beyond the payment policies, mainly the delay in the billing process (a legal obligation for the supplier), closing of agreements with suppliers over the delivery of goods or the rendering of services, or occasional processing issues. According to the criteria previously commented, the average payment period to suppliers of the Telefónica, S.A. in Spain at December 31, 2014, according to the best estimations, amounts to 35 days.

The Company has a governance system, which applies to Telefónica’s entire structure. Pursuant to the Company’s commitment to its shareholders, the Board of Directors, supported by its Committees, manages the Company’s business in accordance with the corporate governance rules laid down primarily in the Corporate By-laws, in the Regulation of the General Shareholders’ Meeting, and in the Regulation of the Board of Directors.

Telefónica’s Board of Directors consists of 18 directors and is responsible for overseeing and controlling the Company’s activity. It has sole powers regarding general strategy and policies on corporate governance, corporate social responsibility, remuneration of the Board and senior management, shareholder remuneration, and strategic investments.

In order to strengthen the corporate governance of the Company, the Board of Directors of Telefónica, S.A. has eight committees (including the Executive Commission) which are charged with examining and overseeing areas of particular relevance. Pursuant to its regulation, the Board also confers responsibility for day-to-day management of the businesses to Telefónica’s executive bodies (primarily through the Executive Committee) and management team.

Telefónica, S.A. 97


		Financial Statements

Economic results of Telefónica, S.A.

Telefónica, S.A. obtained net profit of 2,604 million euros in 2014. Highlights of the 2014 income statement include:

•

Revenue from operations, amounting to 8,727 million euros has decreased year on year, primarily due to the lower dividend distributions from Group companies and associates. The most significant variation comes from Telefónica Internacional, S.A.U. with 3,238 million euros (4,500 million euros in 2013), Compañía de Inversiones y Teleservicios, S.A.U. distributed 440 million euros in 2013 and there has been no distribution in 2014 and Telefónica Czech Republic, a.s. which distributed 158 million euros in 2013 and its sale has been completed in January 2014, therefore no new dividends have been received from this subsidiary in 2014.

•

The figure of “Impairment and gains (losses) on disposal of financial instruments” amounting to 3,679 million euros has decreased considerably compared to 2013 due to impairment charges recognized to investments in Telefónica Brasil, S.A. and Sao Paulo Telecomunicaçoes, S.A. totalling 735 million euros (in 2013 the write down was 3,863 million euros).

•

Net financial expense totaled 2,535 million euros in 2014, compared to 2,491 million euros in 2013. This was mainly due to finance costs with Group companies and associates, of which the largest came from Telefónica Europe, B.V. amounting to 431 million euros (238 million euros in 2013), Telefónica Emisiones, S.A.U. totalling 1,550 million euros (1,712 million euros in 2013) and the impact of the change in the valuation of Telco, S.p.A as “available for sale” financial asset (270 million euros in 2014 and no impact in the previous year).

Telefónica, S.A. 98


		Financial Statements

Investment activity

2014

2013

Telefónica, S.A. 99


		Financial Statements

On November 5, 2013, Telefónica announced that it had reached an agreement to sell 65.9% of the capital of Telefónica Czech Republic,a.s. (“Telefónica Czech Republic”) to PPF Group N.V.I. (“PPF”) for, approximately, 306 Czech crowns/share (around 2,467 million euros at the agreement date). This consideration is to be settled in two tranches:

(i)

2,063 million euros in cash on completion of the sale; and

(ii)

404 million euros in cash as a deferred payment over four years.

Subsequent to the transaction, Telefónica held a stake of 4.9% in Telefónica Czech Republic until the date of the sale.

The agreed price for the stake being sold, updated at year end exchange rates, were reclassified to the “Non-current assets held for sale” until the pertinent authorisations were received from the regulators. The market value of the 4.9% stake that it is retained totaling 178 million euros has been reclassified to the “Equity instruments” heading under non-current financial assets.

On September 24, 2013, Telefónica and the other shareholders of the Italian company Telco, S.p.A. (which holds a 22.4% stake with voting rights of Telecom Italia, S.p.A.) reached an agreement whereby Telefónica, S.A. subscribed and paid out a share capital increase in Telco, S.p.A., through a cash contribution of 324 million euros, in exchange for shares with voting rights in Telco, S.p.A.. As a result of this capital increase, the interest held by Telefónica in the voting share capital of Telco, S.p.A. remains unchanged (i.e. 46.18 %, as Telefónica currently holds), although its interest in the total share capital of Telco, S.p.A. is increased to 66%.

Assessment of impairment of investments in group companies, joint ventures and associates

(b) write down of 559 million euros for Telefónica Brasil, S.A. (2,948 million euros in 2013) and 176 million euros for Sao Paulo Telecomunicaçoes, S.A. (915 million euros in 2013).

(c) write down of 92 million euros for Telco, S.p.A. (359 million euros in 2013), the owner of a stake in Telecom Italia.

(d) write down of 126 million euros for Telefónica México, S.A. de C.V. (211 million euros in 2013).

(e) write down of 300 million euros for Telefónica Digital Holding, S.A.U. (166 million euros in 2013).

In 2013, a write down recognised for Telefónica Czech Republic of 643 million euros was also included.

Telefónica, S.A. 100


		Financial Statements

Telefónica, S.A. 101


		Financial Statements

Share price performance

The main European stock markets made gains in 2014 thanks to the general fall in risk aversion amid a gradual economic recovery in the US and to a lesser extent in Europe, and announcements of stimulus packages by central banks. The Ibex-35 (+3.7%) outperformed its peers (EStoxx-50 +1.2%; DAX +2.7%; CAC-40 -0.5%; FTSEMIB +0.2% and FTSE-100 -2.7%) on the strength of better macroeconomic prospects in Spain and a lower yield on the Spanish 10-year bond, which closed the year at 1.5% (a far cry from the 4.1% observed at year-end 2013), bringing the spread over German bonds to 104.8 basis points (218.3 at the end of 2013).

The European telecommunications sector posted profitability of 7.5%, outstripping the general DJ Stoxx 600 index by 3.1 p.p. (+4.4%), as a result of: i) corporate consolidation transactions in a number of markets, ii) better business fundamentals, driven by macroeconomic improvements and the first positive signals arising from technological transformation; monetization of mobile data and fiber, iii) expectations of a regulatory environment more conducive to investment by the new European Commission, iv) high dividend yields, and v) attractive valuations.

Against this backdrop, Telefónica shares rose by 0.7%, with total shareholder return of 7.0% including dividends distributed in 2014, to close the year at 11.92 euros per share. This was thanks to successful implementation of the strategy to transform Telefónica into a Digital Telco, stronger competitive positioning due to consolidation in major markets, and a gradual improvement in the trend in results, offsetting the negative currency effect observed mostly in Latin America.

By company, the best performances were produced by operators that began the year with valuation levels below the standard for the sector and that were exposed to potential corporate transactions: Orange (+57.2% - expectations of consolidation in its domestic market-) and Telecom Italia (+22.3% - expectations of consolidation in Brazil and Italy). KPN closed the year with up 12.2%, Deutsche Telekom was up +6.6%, BT up +5.8% and Telefónica Deutschland up +0.7%. The negative side of things featured Portugal Telecom (-72.7% - failed investments in Banco Espirito Santo commercial paper and the adjustment to the exchange ratio of its merger with Oi as a result) and Vodafone (-7.6% after returning part of the Verizon Wireless divestment to its shareholders).

At the 2014 year end, Telefónica featured among the world’s ten largest telecommunications companies by market cap (55,514 million euros). Daily trading volume in Telefónica shares on Spain’s continuous market was 33.6 million shares.

Telefónica, S.A. 102


		Financial Statements

Research, development and innovation

Telefónica remains firmly committed to technological innovation as an essential tool for achieving competitive advantages, trying to anticipate market trends and differentiating its products. By introducing new technologies and developing new products and business processes, we seek to become a more effective, efficient and customer-oriented Group.

Telefónica has developed an open innovation model for the management of technological innovation to boost the application of technical research in the development of new commercial products and services. Telefónica focuses on certain applied research and development (R&D) priorities that are aligned with its strategy. Open innovation initiatives driving this model include the creation of a venture capital fund and involvement in business collaboration forums, among others. The model also promotes the use of knowledge developed at technology centers, universities and start-ups, among other sources, and encourages innovation in conjunction with other agents (e.g. customers, universities, public administrations, suppliers, content providers and other companies), making them “technological partners.” Within this open innovation strategy, the Open Future program was reinforced during 2014. This program is designed to connect entrepreneurs, startups, investors and public and private organizations from all over the world with a view to fostering innovation and developing viable projects.

Telefónica believes it cannot rely solely on acquired technology to differentiate its products from those of its competitors and to improve its market positioning. It is also important to encourage R&D initiatives in an effort to achieve this differentiation and make inroads in other innovation activities. The Group’s R&D policy is geared towards:

•

developing new products and services in order to win market share;

•

boosting customer loyalty;

•

increasing revenue;

•

enhancing innovation management;

•

improving business practices;

•

increasing the quality of infrastructure services to improve customer service and reduce costs;

•

promoting global products;

•

supporting open innovation; and

•

creating value from the technology generated.

In 2014, the technological innovation projects undertaken focused on sustainable innovation, process efficiency, creation of new revenue streams, customer satisfaction, consolidation of operations in new markets and technological leadership.

Technical innovation activities are a key part of Telefónica’s strategy of creating value through latest-generation network communications and services.

In 2014, projects were undertaken to promote greater access to information technology, new services focused on new internet business models, advanced user interfaces, TV distribution, multimedia content and other added-value services leveraging on the potential of the new infrastructures. These initiatives, among others, were undertaken based on our objective of rapidly identifying emerging technologies that could have a relevant impact on our businesses and pilot testing these technologies in new services, applications and platform prototypes.

Telefónica, S.A. 103


		Financial Statements

Most of our R&D activities are carried out by Telefónica Investigación y Desarrollo, S.A.U. (Telefónica I+D), a wholly-owned subsidiary, which works mainly for the lines of business. In its operations, Telefónica I+D receives the assistance of other companies and universities. Telefónica I+D’s mission is centered on enhancing the Company’s competitive positioning by leveraging technological innovation and product development. Telefónica I+D undertakes experimental and applied research and new product development with the overriding goal of broadening the range of services offered and reducing operating costs.

Telefónica I+D’s technological innovation activities focus on two big areas:

•

Telefónica I+D’s works on new networks, primarily in collaboration with Telefónica’s Global Resources team. These activities are related to radio access technologies and fiber; network virtualization technologies, in line with the technology trend known as software defined networks (SDN); and network optimization and zero touch developments making networks more flexible and moldable and able to adapt dynamically to new digital consumer and service requirements.

•

R&D activities to develop new products and services are conducted as part of the digital services strategy. These activities include the following:

•

Natural P2P communication of the future, using the Internet, Web 2.0 and smartphones.

•

Video and multimedia services (combining text, audio, images and video) offering a user experience in all connected devices.

•

Advanced solutions in emerging ITC businesses such as cloud computing, security, financial services or e-health.

•

M2M (machine-to-machine) service management associated with energy efficiency and mobility and with the Internet of Things and their adoption in the urban and industrial scenario, and as a service creation enabler.

•

Making use of user communication profiles to exploit opportunities to operate different products and business models (marketing campaigns, target marketing, contextual services, churn reduction, cross-selling, etc.).

Telefónica I+D’s also boasts scientific work groups with a more medium- to long-term focus and aims to look into opportunities relating to new networks and services and solutions to the technological challenges that arise.

In 2014, Telefónica in collaboration with the Chilean government launched a new R&D center in Chile, with focus on Internet of Things and Big Data, in the field of Smart Cities, Smart Industry and Smart Agro.

At December 31, 2014, Telefónica I+D had 652 employees (689 employees in 2013).

Total I+D expense in the Group for 2014 amounted to 1,111 million euros, up 6.2% from the 1,046 million euros incurred in 2013 (1,071 million euros in 2012). This expense represents 2.2%, 1.8% and 1.7% of the Group’s consolidated revenue for 2014, 2013 and 2012, respectively. These figures were calculated using guidelines of the Organization for Economic Co-operation and Development (OECD).

During 2014, Telefónica filed 27 new patent applications, all of them registered through the Spanish Patent and Trademark Office (OEPM), of which 25 are European applications (EP) and 2 are International applications (PCT). Additionally 2 utility models were filed, also through OEPM.

Telefónica, S.A. 104


		Financial Statements

Environment

Objectives and policies related to environmental management and the control of environmental risks

Telefónica has an Environmental Policy applicable to all its companies, and a Global Environmental Management System that ensures compliance with environmental aspects and extends a culture of environmental responsibility to customers. Currently over 50% of the Group companies, which represent 70% of global billing, have Environmental Management Systems in accordance with ISO 14001, certified by an external entity.

Telefónica’s environmental risks are controlled and managed by the Company’s global risk management model. Although the environmental aspects of telecommunication operations are low-intensity, the extremely disperse geography makes environmental management based on processes absolutely essential.

Telefónica has a global team of environmental management experts, who address environmental issues at local level.

Guidelines

Telefónica’s activities are regulated, in environmental matters, by local laws, especially in activities related to the network infrastructure. These activities entail obtaining environmental permits for operations, waste management, noise control, and the monitoring of electromagnetic fields, among others.

The Global Environmental Management System guarantees compliance with environmental legislation at local level, and enables checks to be extended to suppliers and contractors.

Main initiatives aimed at improving environmental quality and management results

Among the main initiatives carried out by the Group to effectively manage the environmental aspects of its operations, is the optimal selection of sites for the rollout of the network, always promoting the sharing of infrastructure with other operators (over 34,000 sites in 2014), and the development of technical adaptations to reduce the visual impact of mobile telephony antennae.

Waste produced by networks and customers, especially waste from electric and electronic equipment, is handled by approved managers in due adherence to environmental legislation and always in the following order: reduce, reuse, recycle. All group companies have waste management schemes and recycling and/or reuse initiatives to manage customer waste.

The Climate Change and Energy Efficiency Office is responsible for rolling out processes to boost energy efficiency and shrink Telefónica’s carbon footprint. The company has a structured corporate governance model and an energy manager in each country for proper management of energy and carbon. Telefónica has corporate targets for the reduction of energy and emissions: 30% of electricity consumption in the network by 2015 and 30% of CO2 by 2020; both measured by equivalent customer access. In 2014 a new energy/financial target was introduced to reduce Telefónica’s energy bill by 50 million euros by 2017 through energy-efficiency measures. In 2014 Telefónica was recognized by the Carbon Disclosure Project, the largest climate change investment index worldwide, as a sectoral leader in terms of management of energy and carbon.

These initiatives enabled Telefónica to extend its environmental responsibility to residential customers and companies, and to meet the ongoing demand by investors and shareholders for responsible environmental management.

Telefónica, S.A. 105


		Financial Statements

Human Resources

Social objectives and policies

At Telefónica people are important and are the core of the business, representing one of the Group’s greatest assets. The aim is to build capacities in people, the culture and the organisation in order to become a Digital Telco.

Our vision is based on three main pillars:

•

To construct and develop people’s capacity and ensure the company’s diversity strategy in its recruiting, empowering the best professionals and future leaders.

•

To accelerate the transformation of Telefónica, raising awareness regarding the necessity and urgency of this transformation.

•

To encourage the productivity of employees with a headcount that is more adapted to the business and ensures the correct management of the company’s simplification process.

Employee training

Just like in the rest of Telefonica´s business operation units, in Telefónica S.A. employee training is an absolute priority, in these times of deep change and evolution fir the company. In 2014 most of the L&D efforts where devoted to transforming the company into a “Digital Telco”, leveraging on specific training programs by Universitas Telefonica.

Universitas Telefonica operates at two levels: on premises and virtual programs. On premises programs are delivered both at our campus in Barcelona where more than 500 executives from TSA participated in our leadership transformation programs, plus 250 mid managers more, trained in our local offices in Madrid and Brazil. In all cases the programs are focused in Telefonica´s transformation and delivered by Universitas Telefonica mostly internal faculty.

On the other hand, Universitas Telefonica operates also virtually through its on-line learning platform. In 2014 all on-line contents related to the digital transformation where promoted, resulting in a 30% increase of the use of our on-line learning services, incorporating new units like TGS and CCDO for a much broader use of the on-line learning platform.

In 2014, over 37,000 training hours were carried out. For the Company, managing knowledge is a priority. In 2014, the cost of training amounted to over 1 million euros.

Equality in Diversity at Telefónica

Diversity is a competitive advantage. Having a team of professionals that accurately reflects the societies in which we operate, allows us to better understand our clients and surprise them with new products that fit their needs. It also makes it possible to offer them high quality services, which subsequently have an impact on our profits.

Our Business Principles include the fundamental right to equality:

“We promote equal opportunities and we treat all individuals fairly and impartially, without discriminating on the basis of race, color, nationality, ethnic origin, religion, gender, sexual orientation, marital status, age, disability or family responsibilities.”

Telefónica, S.A. 106


		Financial Statements

However the concept of diversity goes much further, it is a fundamental value. The reasons why diversity is a critical management factor for us are many. But from these we can highlight, first, the need to use all of our talent, and second, the importance of other market segments, of other non-traditional groups with a large purchasing capacity, such as women, handicapped individuals, elderly, etc. The intended impact is achieved through proper management of employee diversity; these employees come from over 24 countries (four of which are represented on the Board of Directors) and which belong to more than 100 nationalities.

The headcount distribution by gender and professional scales has been disclosed in Note 19.4.

Telefónica has a “Women in Leadership” programme that seeks to establish a solid network of female leaders that extends throughout Telefónica’s European companies. These initiatives seek to promote female talent among the leaders in the sector.

Telefónica is committed to society and makes important investments in innovation related to social innovation and initiatives in favour of the disabled. Among other initiatives, we would highlight the “Telefónica Ability Awards” which recognise the companies or institutions that have incorporated the disabled into their value chains, and developed sustainable business models that integrate solutions, products, and services that meet the needs of disabled people and promote their incorporation into society.

Talent management

Talent is a global asset, and at Telefónica we boost it through benchmark training programmes, promoting diversity and facilitating ways to achieve a work-life balance. Developing the talent of our employees, giving them opportunities of personal and professional development, and supporting their personal growth constantly are the distinctive purposes at Telefónica.

The evaluation of talent lets us have a map of the management talent of the whole Company, as well as a structured succession plan. This is a fundamental tool of differential management and boosts a meritocratic culture which should facilitate decision-making on aspects such as development, organisation, pay, etc.

Occupational health and safety

One of Telefónica’s priorities is to offer its staff the best possible working conditions at their place of work or when they are on the move.

As per its Business Principles, Telefónica ensures staff work in a safe environment. Appropriate mechanisms are therefore in place to avoid workplace accidents, injuries and illness associated with professional activities by fully complying with prevailing regulations, implementing safe working procedures, providing training and managing occupational risks.

The Occupational Risk Management System ensures worker health and safety is at the heart of all Telefónica’s processes and services; offering an end-to-end model for rolling out joint action, procedures and policies. This system enables Telefónica to identify and disseminate practices that are proven to have an impact on staff welfare and therefore on reducing accident rates.

Telefónica, S.A. 107


		Financial Statements

Liquidity and capital resources

Financing

The main financing transactions carried out in the bond market in 2014 are as follows:

Nominal amount (millions)

Description

Issue date

Maturity date

Currency

Euros ⁽¹⁾

Currency of
issue

Coupon

Telefónica Emisiones, S.A.U.⁽²⁾

EMTN bonds

03/26/14

03/26/16

200

EUR

Euribor 3M + 0.65

04/10/14

04/10/17

200

EUR

Euribor 3M + 0.75

05/27/14

05/27/22

1,250

EUR

2.242

06/04/14

04/10/17

⁽³⁾

100

EUR

Euribor 3M + 0.75

10/17/14

10/17/29

800

EUR

2.932

SHELF bond

06/23/14

06/23/17

500

412

USD

Libor 3M + 0.65

Telefónica, S.A.

Bond mandatory exchangeable into Telecom Italia ordinary shares

07/24/14

07/24/17

750

EUR

6.00

(1)	Exchange rate as at December 31, 2014.

(2)	Guaranteed by Telefónica, S.A.

(3)	Retap bond of the 200 million euros issuance dated on April 10, 2014.

The main financing transactions carried out in the bank market in 2014 are as follows:

Item

Limit

Currency

Outstanding
balance (millions
of euros)

Arrangement Date

Maturity date

Telefónica, S.A.

Syndicated Tanche B (1)

3,000

EUR

—

02/18/14

02/18/19

Bilateral loan

2,000

EUR

2,000

06/26/14

06/26/17

(1)	On 02/18/14 a syndicated credit revolving facility for 3,000 million euros was signed, entering into effect on 02/25/14, canceling the syndicated credit facility dated on 07/28/10 scheduled to mature originally on 07/28/15.

Available funds

At December 31, 2014, available funds from undrawn lines of credit in different financial institutions totaled 7,445 million euros. Out of this figure, around 6,841 million euros have a maturity longer than 12 months. Additionally, cash and cash equivalents other than Telefónica’s share in Telco, S.p.A’s bond with a nominal amount of 1,225 million euros, as of December 31, 2014 amount to 4,584 million euros.

Additional information on sources of liquidity and undrawn lines of credit available to the Company, on liquidity risk management, on the Company’s debt levels, and on capital management is provided in Notes 13, 14, 15 and 16 of the financial statements.

Contractual commitments

Note 19.5 to the financial statements provides information on firm commitments giving rise to future cash outflows and associated with operating leases, primarily.

Telefónica, S.A. 108


		Financial statements

Credit risk management

The credit risk in Telefónica, S.A. mainly refers to the one associated with financial derivative instruments arranged with different entities. The detailed description of how those risks are managed and hedged is included in Note 16.

Credit rating

At December 31, 2014, Telefónica, S.A.’s long-term issuer default rating is “BBB+/stable outlook” from Fitch, “Baa2/negative outlook” from Moody’s and “BBB/stable outlook” from Standard & Poor’s. The most recent updates on these ratings were issued by Standard and Poor’s on May 19, 2014, Fitch on March 21, 2014 and Moody’s on July 25, 2013. The only change in the long-term issuer default rating and outlook for Telefónica, S.A. during 2014 was that Standard and Poor’s revised the outlook to “stable” from “negative” on May 19, 2014.

In 2014, among the measures taken to help to protect the credit rating, it is noteworthy an intensive and prudent financing activity together with a conservative liquidity policy, the implementation of a scrip dividend (instead of cash only dividend) in November 2014, a portfolio rationalization through the total or partial sale of certain assets such as Telefonica Ireland, Telefónica Czech Republic and China Unicom, the issuance of financial instruments with high equity content to finance the E-Plus acquisition (such as bond mandatorily convertible into Telefónica shares) and the issuance of undated deeply subordinated securities as a solvency protection measure to mitigate negative impacts on our consolidated financial statements deriving from unforeseen events such as the devaluation in Venezuela.

Dividend policy

Telefónica, S.A.’s dividend policy is revised yearly based on the Group’s earnings, cash generation, solvency, liquidity, flexibility to make strategic investments, and shareholder and investor expectations. Given circumstances in 2014, it was resolved to pay a dividend, via scrip dividend of approximately 0.35 euros per share in November 2014, and the Board announced its intention to take corporate actions to approve another cash dividend of 0.40 euros per share in the second quarter of 2015.

In November 2014, Telefónica launched a scrip dividend issue to allow shareholders to choose to receive new shares in place of a cash dividend (which may be replaced by selling the associated subscription rights to the Company at a pre-established price), while enabling the Company to reduce its debt, depending on the take-up rate of the conversion.

Telefónica, S.A. 109


		Financial Statements

Treasury shares

Telefónica has performed, and may consider performing, transactions with treasury shares and financial instruments or contracts that confer the right to acquire treasury shares or assets whose underlying is Company shares.

Treasury share transactions will always be for legitimate purposes, including:

•

Undertaking treasury share acquisitions approved by the Board of Directors or pursuant to General Shareholders’ Meeting resolutions.

•

Honoring previous legitimate commitments assumed.

•

Covering requirements for shares to allocate to employees and management under stock option plans.

•

Other purposes in accordance with prevailing legislation. In the past, treasury shares purchased on the stock market were exchanged for other shares-securities (as in the case of preferred capital securities), swapped for stakes in other companies (e.g. China Unicom or Telco S.p.A.), or acquired to reduce the number of shares in circulation (by redeeming the shares acquired), thereby boosting earnings per share.

Treasury share transactions will not be performed in any event based on privileged information or in order to intervene in free price formation. In particular, any of the conduct referred to in Articles 83.ter.1 of the Spanish Securities Market Law and 2 of Royal Decree 1333/2005 of November 11 implementing the Spanish Securities Market Law, with regards to market abuse will be avoided.

At December 31, 2014 and 2013, Telefónica, S.A. held the following treasury shares:


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 14/12/31		128,227,971		11.68		11.92		1,528		2.75332	%

(1)	Millions of euros


			Euros per share
	Number of shares		Acquisition price		Trading price		Market value (1)		%
Treasury shares at 13/12/31		29,411,832		11.69		11.84		348		0.64627	%

(1)	Millions of euros

The movement in treasury shares of Telefónica, S.A. in 2014 and 2013 is as follows:


	Number of shares
Treasury shares at 12/12/31		47,847,809
Acquisitions		113,154,549
Disposals		(131,590,526	)
Treasury shares at 13/12/31		29,411,832
Acquisitions		100,723,415
Disposals		(129,177	)
GESP share plan delivery		(1,778,099	)
Treasury shares at 14/12/31		128,227,971

Telefónica, S.A. 110


		Financial Statements

Acquisitions

The amount paid to acquire treasury shares in 2014 and 2013 was 1,176 million euros and 1,216 million euros, respectively.

Disposals

Treasury shares sold in 2014 and 2013 amounted to 1 million euros and 1,423 million euros, respectively. The main transactions were as follows:

•

In addition to these disposals, on November 28, 2014, 1,778,099 shares were delivered to Group employees when the second phase of the Global Employee Share Plan (“the GESP”) matured.

Options on treasury shares

At December 31, 2014, Telefónica held 76 million call options on treasury shares subject to physical delivery at a fix price (134 million options on treasury shares at December 31, 2013) which are presented as a reduction in equity under the caption “treasury share instruments”. They are valued at the amount of premium paid, and upon maturity if the call options are exercised the premium is reclassified as treasury shares together with the price paid. If they are not exercised upon maturity their value is recognized directly in reserves.

The Company also has a derivative on Telefónica shares, to be settled by offset, which has increased from 30 million shares in 2013 to 32 million shares in 2014, and is recognized under “Derivatives” (financial liabilities, current) both in 2014 and 2013.

Lastly, details of the applicable conditions and time periods governing any resolutions of the General Shareholders’ Meeting to purchase and/or transfer treasury shares are provided hereon.

At Telefónica’s Ordinary General Shareholders’ Meeting held on June 2, 2010, the shareholders granted the Board of Directors authorization (with express powers to delegate duties to the Executive Commission, Executive Chairman, Chief Operating Officer, or any other individual to which the Board of Directors confers powers for the same purpose) for the derivative acquisition by Telefónica, S.A. – either directly or through any of the subsidiaries of which it is the controlling company – at any time and as many times as it deems appropriate, of fully-paid treasury shares through purchase and sale, exchange or any other legal transaction.

The minimum price or consideration for the acquisition shall be equal to the par value of the treasury shares acquired, and the maximum acquisition price or consideration for the acquisition shall be equal to the listing price of the treasury shares acquired by the Company on an official secondary market at the time of the acquisition.

Such authorization is granted for 5 years as from the date of the General Shareholders’ Meeting and is expressly subject to the limitation that the par value of the treasury shares acquired pursuant to this authorization added to those already held by Telefónica, S.A. and any of its controlled subsidiaries shall at no time exceed the maximum amount permitted by the Law (currently 10% of Telefónica, S.A.’s share capital).

The aforesaid authorization granted to acquire treasury shares may be used in whole or in part to acquire shares of Telefónica, S.A. that it must deliver or transfer to directors or employees of the Company or of Group companies, directly or as a result of the exercise by them of option rights, all within the framework of duly approved compensation systems linked to the trading price of the Company’s shares.

Telefónica, S.A. 111


		Financial Statements

Risks and Uncertainties Facing the Company

The Telefónica Group’s business is conditioned by a series of intrinsic risk factors that affect exclusively the Group, as well as a series of external factors that are common to businesses of the same sector. The main risks and uncertainties facing the Company which could affect its business, financial position, reputation, corporate image and brand and its results of operations, must be considered jointly with the information in the financial statements, and are as follows:

Group-related risks

Worsening of the economic and political environment could negatively affect Telefónica’s business.

Telefónica’s international presence enables the diversification of its activities across countries and regions, but it is affected by various legislations, as well as the political and economic environments of the countries in which it operates. Any adverse developments or even uncertainties in this regard, including exchange-rate or sovereign-risk fluctuations, may adversely affect the business, financial position, cash flows and/or the performance of some or all of the Group’s financial indicators.

With respect to the economic environment, the Telefónica Group’s business is impacted by overall economic conditions in each of the countries in which it operates. Economic conditions may adversely affect the level of demand of existing and prospective customers, as they may no longer deem critical the services offered by the Group. Factors such as high debt levels, ongoing restructuring of the banking sector, the implementation of pending structural reforms and continued fiscal austerity measures could hinder more dynamic growth in Europe and, in turn, the consumption and volume of demand for the Group’s services, which could materially adversely affect the Group’s business, financial condition, results of operations and cash flows.

The soft economic recovery in Europe together with low inflation rates, and the risk of deflation, has led and may still lead to monetary and fiscal easing from key players, with a view to creating a relatively benign scenario for Europe. In this region, the Telefónica Group generated 23.9% of its total revenues in Telefónica Spain, 14.0% in the Telefónica United Kingdom and 11.0% in Telefónica Germany in 2014.

In addition, the Group’s business may be affected by other possible effects from the economic crisis, including possible insolvency of key customers and suppliers.

In Latin America, the most important challenge is the exchange-rate risk in Venezuela and Argentina, given the negative impact that depreciation in their currencies could have on cash flows from both countries. International financial conditions may be unfavorable and may lead to potential periods of volatility linked to the evolution of the developed financial markets (especially long-term interest rates in the United States affected by the U.S. Federal Reserve’s intervention that are not discounted in the market), an (a key region for Latin America) and slow progress with structural reforms projects in the majority of these countries limiting potential for higher growth rates. Among the most significant macroeconomic risk factors in the region are the high inflation rates, negative economic growth and high internal and external funding needs in Venezuela. These funding needs are significant and are affected by the recent fall in oil prices, which is the main and almost sole source of foreign currency in the country. These factors are affecting Venezuela’s competitiveness and may result in a currency devaluation. Other risks in the region are Argentina’s high level of inflation coupled with a phase of economic slowdown and weak public finances. Moreover, the recent decline in the prices of oil and other commodities could have a negative impact on the external accounts of countries such as Brazil, Chile, Peru and Colombia.

In relation to the political environment, the Group’s investments and operations in Latin America could be affected by a series of risks related to economic, political and social factors in these countries, collectively denominated “country risk”. For the year ended December 31, 2014, Telefónica Hispanoamérica and Telefónica Brazil represented 26.1% and 22.3% of the Telefónica Group’s revenues, respectively. Moreover, approximately 9.6% of the Group’s revenues in the telephony business are generated in countries that do not have investment grade status (in order of importance, Argentina, Venezuela, Ecuador, Nicaragua, Guatemala, El Salvador and Costa Rica), and other countries are only one notch away from losing this threshold. It is also significant that, despite clear improvements in Brazil, the uncertainty surrounding the political situation, fiscal policy stimuli and a relatively high inflation rate could result in a rating downgrade that, depending on the

Telefónica, S.A. 112


		Financial Statements

extent of such downgrade, could result in strong exchange-rate volatility due to an outflow of investments, especially in relation to fixed-income.

“Country risk” factors include the following:

•

government regulation or administrative policies may change unexpectedly, including changes that modify the terms and conditions of licenses and concessions and their renewal (or delay their approvals), which could negatively affect the Group’s business in such countries;

•

abrupt exchange-rate fluctuations may occur mainly due to high levels of inflation and both fiscal and external deficits with the resulting exchange-rate overvaluation. This movement could lead to strong exchange-rate depreciation in the context of a floating exchange rate regime, a significant devaluation off the back of abandoning fixed exchange rates regimes or the introduction of varying degrees of restrictions on capital movement. For example, in Venezuela, the official U.S. dollar to bolívar fuerte exchange rate is established by the Central Bank of Venezuela and the Minister of Finance, with an alternative market for attracting foreign currency through the Complementary System for Administration of Foreign Currency (Sistema Complementario de Administración de Divisas or “SICAD”) regular and selective auctions. In February 2015, a new Exchange Rate Agreement was established, including the regulations for the Foreign Exchange Marginal System (SIMADI), and the Central Bank of Venezuela published on February 18, 2015 a weighted average exchange rate equal to 172.1 bolívares to the U.S. dollar for the markets referred to in chapters II and IV of such Exchange Rate Agreement. Additionally, the acquisition or use of foreign currencies by Venezuelan or Argentinean companies (in some cases) to pay foreign debt or dividends is subject to the pre-authorization of the relevant authorities. Also, the Argentinean peso, despite its recent stability, continues to be under the threat of a sustained accelerated depreciation against the U.S. dollar;

•

governments may expropriate or nationalize assets, make adverse tax decisions or increase their participation in the economy and in companies;

•

economic-financial downturns, political instability and civil disturbances may negatively affect the Telefónica Group’s operations in such countries; and

•

maximum limits on profit margins may be imposed in order to limit the prices of goods and services through the analysis of cost structures. For example, in Venezuela, a maximum profit margin has been introduced that will be set annually by the Superintendence for Defense of Socioeconomic Rights.

Any of the foregoing may adversely affect the business, financial position, results of operations and cash flows of the Group.

The Group’s financial condition and results of operations may be adversely affected if it does not effectively manage its exposure to foreign currency exchange rates, interest rates or financial investment risks.

At December 31, 2014, 70% of the Group’s net debt (in nominal terms) was pegged to fixed interest rates for a period greater than one year, while 27% was denominated in a currency other than the euro.

To illustrate the sensitivity of financial expenses to a change in short-term interest rates at December 31, 2014: (i) a 100 basis points increase in interest rates in all currencies in which Telefónica has a financial position at that date would lead to an increase in financial expenses of 111 million euros, (ii) whereas a 100 basis points decrease in interest rates in all currencies except the euro, the U.S. dollar and the pound sterling (these to zero rates in order to avoid negative rates), would lead to a reduction in financial expenses of 68 million euros. These calculations were made using the same balance position in each currency and same balance position equivalent at such date and bearing in mind the derivative financial instruments arranged.

Telefónica, S.A. 113


		Financial Statements

weakening of the Venezuelan bolivar and the Argentinean peso. These calculations were made using the same balance position in each currency with an impact on profit or loss at such date, including derivative instruments in place. For the year ended December 31, 2014, 22.8% of the Telefónica Group’s operating income before depreciation and amortization (OIBDA) was concentrated in Telefónica Brazil, 26.2% in Telefónica Hispanoamérica and 11.2% in the Telefónica United Kingdom.

The Telefónica Group uses a variety of strategies to manage these risks, mainly through the use of financial derivatives, which themselves also expose us to risk, including counterparty risk. Furthermore, the Group’s risk management strategies may not achieve the desired effect, which could adversely affect the Group’s business, financial condition, results of operations and cash flows.

Existing or worsening conditions in the financial markets may limit the Group’s ability to finance, and consequently, the ability to carry out its business plan.

The performance, expansion and improvement of the Telefónica Group’s networks, the development and distribution of the Telefónica Group’s services and products, the development and implementation of the Company’s strategic plan, the development and implementation of new technologies or the renewal of licenses as well as expansion of our business in countries where we operate may require a substantial amount of financing.

The performance of financial markets in terms of liquidity, cost of credit, access and volatility, continues to be overshadowed by persisting uncertainty regarding certain factors such as the pace of economic recovery, the health of the international banking system and concerns regarding the burgeoning deficits of some European countries. The worsening international financial market credit conditions caused by some of these factors could make it more difficult and more expensive to refinance existing financial debt or arrange new debt if necessary, and more difficult to raise funds from the Group’s shareholders, and may negatively affect the Group’s liquidity. At December 31, 2014, gross financial debt scheduled to mature in 2015 amounted to 8,491 million euros (which includes the net position of derivative financial instruments and certain current payables), and gross financial debt scheduled to mature in 2016 amounted to 8,407 million euros. Despite having covered gross debt maturities of 2015, 2016 and part of 2017 by available cash and lines of credit at December 31, 2014, possible difficulties in maintaining the current safety margin, or the risk that this could be significantly and unexpectedly exhausted, could force Telefónica to use resources allocated for other investments or commitments for payment of its financial debt, which could have a negative effect on the Group’s businesses, financial position, results of operations or cash flows.

In 2013 the Telefónica Group issued bonds mainly (i) in euro totaling 3,250 million euros with an average coupon of 3.690%; (ii) in dollars totaling 2,000 million U.S. dollars with an average coupon of 3.709%; and (iii) in Swiss Francs totaling 225 million Swiss francs with an annual coupon of 2.595%. The Telefónica Group also issued undated deeply subordinated securities in euros totaling 1,750 million euros with an average coupon of 6.902%; and in sterling pounds totaling 600 million sterling pounds with a coupon of 6.750%. In 2014 the Telefónica Group issued bonds mainly in the European market with a maturity of eight years totaling 1,250 million euros with an annual coupon of 2.242%, and bonds with a fifteen-year maturity totaling 800 million euros with an annual coupon of 2.932%. In addition, the Telefónica Group issued undated deeply subordinated securities in 2014 totaling 2,600 million euros with an average coupon of 5.075%.

Despite having its gross debt maturities profile covered for more than two years, obtaining financing on the international capital markets could also be restricted, in terms of access and cost, if Telefónica’s credit ratings are revised downwards, either due to lower solvency or operating performance, or as a result of a downgrade in the rating for Spanish sovereign risk by rating agencies. Any of these situations could have a negative impact on the Group’s ability to meet its debt maturities.

Moreover, market conditions could make it harder to renew existing undrawn credit lines, 8% of which, at December 31, 2014, were scheduled to mature prior to December 31, 2015.

In addition, the impact of the sovereign debt crisis and the rating downgrades in certain Eurozone countries should be taken into account. Any deterioration in the sovereign debt markets, doubts about developments in European projects (such as implementation of the banking union project, the results of the elections in Europe, including Spain among others, or progress towards fiscal integration), as well as further credit restrictions by the banking sector could have an adverse effect on the Telefónica Group’s ability to access funding and/or

Telefónica, S.A. 114


		Financial Statements

liquidity, which could have a significant adverse effect on the Group’s businesses, financial position, results of operations and cash flows.

Risks Relating to the Group’s Industry

The Group operates in a highly regulated industry which requires government concessions for the provision of a large part of its services and the use of spectrum, which is a scarce and costly resource.

The telecommunications sector is subject to laws and regulations in different countries, and additionally, many of the services the Group provides require the granting of a license, concession or official approval, which usually requires certain obligations and investments to be made, such as those relating to spectrum availability. Among the main risks of this nature are those related to spectrum regulation and licenses/concessions, rates, universal service regulation, regulated wholesale services over fiber networks, privacy, functional separation of businesses and network neutrality.

Thus, as the Group provides most of its services under licenses, authorizations or concessions, it is vulnerable to administrative bodies’ decisions, such as economic fines for serious breaches in the provision of services and, potentially, revocation or failure to renew these licenses, authorizations or concessions, or the granting of new licenses to competitors for the provisions of services in a specific market.

In this regards, the Telefónica Group pursues its license renewals in the terms referred in their respective contractual conditions, though it cannot guarantee that it will always complete this process successfully or under the most beneficial terms for the Group. In many cases complying with certain obligations is required, including, among others, minimum specified quality, service and coverage standards and capital investment. Failure to comply with these obligations could result in the imposition of fines, revision of the contractual terms, or even the revocation of the license, authorization or concession. Additionally, the Telefónica Group could be affected by regulatory actions carried out by the antitrust authorities. These authorities could prohibit certain actions, such as new acquisitions or specific practices, create obligations or lead to heavy fines. Any such measures implemented by the competition authorities could result in economic and/or reputational loss for the Group, in addition to a loss of market share and/or harm to the future growth of certain businesses.

Regulation of spectrum and government concessions

In Europe, the amendments by the EU Parliament to the Commission’s proposal on the “Digital Single Market” (the “DSM”) package of measures are currently being discussed by the European Council. The “DSM” measures include important measures affecting, inter alia, spectrum regulation. Although these measures are not yet final, they could have significant implications as they include new provisions on secondary markets, criteria to apply at auctions, renewals and terms of licenses, etc.

In addition, the main allocation criteria for the 700 MHz band of “Digital Dividend II” (the second spectrum allocation process from television operators to electronic communications services) will be defined in the coming years. This could require new cash outflows ahead of the Group’s previously anticipated schedule (it is expected that the spectrum will be available between 2018 and 2021).

Nevertheless, Germany will be the first country in Europe to award spectrum in the 700 MHz band. On January 29, 2015, the German regulator (“BNetzA”) published respective final decisions on the spectrum allocation proceedings and on the auction conditions of the 700 MHz and 1500 MHz bands. The auction will also include the spectrum corresponding to GSM licenses – the entire 900 MHz band and most of the 1800 MHz band (which will expire at the end of 2016) –. Interested bidders may submit applications by March 6, 2015. The auction (Simultaneous Multi-Round Auction) will take place in the second quarter of 2015.

On July 4, 2014, BNetzA adopted a decision concerning the frequency aspects of the Telefónica Deutschland Holding AG merger with E-Plus Mobilfunk GmbH & Co KG (“E-Plus”). BNetzA has instructed Telefónica Deutschland (the surviving entity after the merger takes place) to anticipate the termination of its rights of use in the 900 / 1800 MHz bands by December 31, 2015, (instead of December 31, 2016), if Telefónica Deutschland (the surviving entity) does not reacquire these frequencies at the above-mentioned auction proceeding. Both Telefónica Deutschland and E-Plus have legally challenged this BNetzA decision on August 4, 2014. The German regulator also announced that, once the auction of spectrum mentioned above mentioned is over, it will

Telefónica, S.A. 115


		Financial Statements

perform a frequency distribution analysis, and determine whether any additional action is needed, particularly in the area of the 2GHz spectrum band granted to Telefonica Deutschland.

In addition, and within the framework of the conditions imposed by the European Commission in connection with the merger, the surviving entity of the merger is obliged to offer up to 2x10 MHz in the 2600 MHz as well as up to 2x10 MHz in the 2100 MHz spectrum band to one potential new mobile network operator. This offer is open to any potential new mobile network operator that had declared a respective interest by December 31, 2014, and to the operator with whom Telefónica Deutschland has signed the network access agreement (Drillisch Group).

On December 26, 2014, the Spanish Government adopted a law in which it delayed, to a maximum period ended on April 1, 2015, the effective delivery of the frequencies in the 800 MHz spectrum which are part of the “Digital Dividend” (the spectrum allocation process from television operators to electronic communications services), and which were expected to be delivered on January 1, 2015 to the already awarded mobile operators. The license term has been extended accordingly to April 24, 2031.

In the United Kingdom a significant increase in the annual license fees charged for the use of the spectrum in 900 MHz and 1800 MHz bands has been proposed by the regulator (the Office of Communications (“Ofcom”)). The outcome of it remains uncertain. Separately, the United Kingdom Government announced recently an agreement with the United Kingdom mobile operators, including Telefonica UK, under which the mobile operators would accept a 90% geographic coverage obligation for voice and text services. Given the agreement, Ofcom has agreed to consider the impact of the geographic coverage obligation on its valuation of annual fees for 900 MHz and 1800 MHz spectrum. This is expected to delay Ofcom’s decision. In addition, on November 7, 2014, Ofcom released a public consultation on the award of 2.3 GHz and 3.4 GHz bands that is expected to take place in late 2015 or early 2016.

In Latin America, spectrum auctions are expected to take place implying potential cash outflows to obtain additional spectrum or to meet the coverage requirements associated with these licenses. Specifically, the procedures expected to take place in 2015 are:

•

Peru: The government announced plans to auction the 700 MHz spectrum band in the first half of 2015 (three blocks of 2x15 MHz have been defined).

•

Costa Rica: Costa Rica’s government has communicated its intention to auction spectrum in the 1800 MHz and AWS bands during 2015.

•

Mexico: The Federal Institute of Telecommunications (Instituto Federal de Telecomunicaciones) (“IFT”) published its Annual Program for Frequency Use and Development 2015. The program specifies IFT’s intention to award Advanced Wireless Services “AWS” concessions during the course of 2015.

Further to the above, certain administrations may not have announced their intention to release new spectrum and may do so during the year. The above does not include processes announced via general statements by administrations, which involve bands not key to Telefónica’s needs. Telefónica may also seek to acquire spectrum on the secondary market should opportunities arise.

In Argentina, on December 1, 2014, the Secretary of Communication through Resolution 85/2014 officially awarded Telefónica Argentina the block 1710-1720/2110-2120 for a period of 15 years and the 700 MHz block (703-713/758-768 MHz) is expected to be officially transferred to Telefónica Argentina during 2015.

In the state of São Paulo, Telefónica Brasil provides local and national long-distance Commuted Fixed Telephony Service (CFTS) under the public regime, through a concession agreement, which will be in force until 2025. In this regard, in June 27, 2014, as established in the concession agreement, the National Telecommunications Agency (Agência Nacional de Telecomunicações) (“ANATEL”) issued a public consultation for the revision of the concession agreement. Such public consultation revising the concession agreement ended on December 26, 2014 and allowed contributions on certain topics such as service universalization, rates and fees and quality of services, among others. Definitive conditions will be published in 2015.

Telefónica, S.A. 116


		Financial Statements

Additionally, in Colombia the Information and Communication Technologies (“ITC”) Ministry issued a Resolution on March 27, 2014 to renew 850 MHz/1900 MHz licenses for 10 additional years. The reversion of assets and the liquidation of the concession contract will be discussed until May 2015, taking into consideration the terms of the contract, and the Constitutional Court’s review of Law 422 of 1998, which established the reversion of only the radio-electric frequencies.

In Peru, an application for partial renewal of the concessions for the provision of the fixed-line service for another five years has been issued, although assurance has been given by the “Ministry of Transport and Communications” (Ministerio de Transportes y Comunicaciones) in previous renewals, that the concession will remain in force until November 2027. Also, a new law has been enacted establishing mobile virtual network operator (MVNOs) and Rural Mobile Infrastructure Operators (RMIOs) in the Peruvian market.

In Mexico, in light of the constitutional reform resulting from the “Pact for Mexico” political initiative, it is expected that a publicly-owned wholesale network, which will offer wholesale services in the 700 MHz band, will be created. As of today, the funding and the marketing model of this project have not yet been determined.

Telefónica Móviles Chile, S.A. was awarded spectrum on the 700 MHz (2x10 MHz) band in March 2014. A third party provider opposed this allocation of spectrum on the basis that it would exceed the limit spectrum of 60 MHz established by a judgment of the Supreme Court of January 27, 2009. This cap was established for the AWS auction held in 2009, but not for subsequent auctions (2600 MHz and 700 MHz). In a judgment on December 31, 2014, the court of appeals rejected the third party claim. Consequently, the regulator is in a position to adopt a Decree awarding the concession to Telefónica.

The consolidated investment in spectrum acquisitions and renewals in 2014 amounted to 1,294.2 million euros.

The Company’s failure to obtain sufficient or appropriate spectrum capacity in the jurisdictions discussed above or any others in which it operates or its inability to assume the related costs, could have an adverse impact on its ability to launch and provide new services and on the Company’s ability to maintain the quality of existing services, which may adversely affect the Group’s business, financial condition, results of operations and cash flows.

Regulation of wholesale and retail charges

In terms of roaming, the regulated “Eurotariffs” were reduced on July 1, 2014 (in the wholesale market, the price of data was reduced by 67%, the price of call by 50%; and in the retail market, the price of data was reduced by 55%, the price of outgoing voice call by 21%, the price of incoming voice call by 28% and the price of outgoing texts by 25%), as per the regulation approved in 2012. The structural roaming solutions which could lead to a price decrease in the intra-European Union roaming services also took effect in July 2014. Furthermore, the package of DSM measures mentioned above, which is under discussion, also includes a proposal to eliminate European Union roaming charges as of a yet to be determined date. However, the European Parliament proposed the “end of roaming” by December 15, 2015 in a proposal known as “Roaming Like at Home”.

The decreases in wholesale mobile network termination rates (“MTR”) in Europe are also noteworthy. In the United Kingdom, wholesale MTRs have been reduced to 0.845 ppm (pence/minute) from April 1, 2014 (representing a 0.3% reduction compared to the previous rates). In a consultation document published in June 2014, Ofcom has proposed a further reduction to 0.545 ppm, from April 1, 2015.

In Germany, on September 3, 2014, the BNetzA adopted a proposal to reduce MTRs. The new prices will gradually decrease to 0.0172 euro/minute from December 1, 2014, and in a second stage, from 0.0172 euro/minute to 0.0166 euro/minute from December 1, 2015 until the end of November 2016. The European Commission has requested that the German regulator withdraw or amend its latest decision on mobile termination rates, in force as at the date of this Annual Report. There is a risk that the European Commission will initiate infringement proceedings against Germany, and rates may be further reduced.

Telefónica, S.A. 117


		Financial Statements

termination. From November 1, 2014, a symmetric fixed termination rate (“FTR”) of 0.0817 euro cents/minute applies, based on pure bottom-up long run incremental costs (“BU-LRIC”) meaning that billing must be entirely conducted on a “per second” basis, without a peak/off-peak differentiation. The decision therefore eliminates the asymmetry in FTRs that existed since 2006 when alternative network operators were allowed to charge up to 30% above Telefónica’s per minute local FTR. It also brings forth an important reduction in average termination prices for Telefónica (by 80%) in comparison to the former applicable tariffs.

In Latin America, there are also moves to review MTRs leading to these being reduced. Thus, for example, developments in Mexico are among the most relevant, where the IFT has declared the América Móvil Group a preponderant operator in the telecommunications market. As a result, on March 26, 2014, it introduced, among others, special regulations on asymmetric interconnection rates. In that sense, the Federal Telecommunications and Broadcasting law, effective as of August 13, 2014, imposed several obligations on the preponderant operator, which are quite extensive and, in principle, potentially significantly beneficial to Telefónica’s competitive position, particularly with regards to the measures imposed on preponderant operators (to the extent they nominally retain such qualification). With regards to MTR, Telefónica México filed an administrative appeal against the 2011 resolutions of the Federal Telecommunications Commission of México (Cofetel) regarding mobile network termination rates (representing a 61% reduction compared to the previous rates). As of the date of this Annual Report, no ruling has been made on this appeal. Recently, IFT determined the mobile termination rates for 2012, and Telefónica México filed an injunction against this rate. Once these appeals have been concluded, the rates applied may be further reduced retroactively. As of the date of this Annual Report, IFT has not approved the termination rates for 2013, 2014 or 2015 for Telefónica México.

In Brazil, at the end of 2012, ANATEL launched the “Plano Geral de Metas de Competição” (“PGMC”) regarding fixed-mobile rate adjustment reductions until February 2016 and amending the previous reduction conditions (75% of the 2013 rate in 2014 and 50% of the 2013 rate in 2015). In order to complement reductions and approach the cost of the services according to a financial cost model, on July 7, 2014, ANATEL published reference values for MTR taking effect from 2016 to 2019. Such reductions are approximately 44% per year. Furthermore, there are several legislative initiatives that aim to abolish the basic fee of fixed-telephony service. “Price protection” practices (reimbursement of differences in prices of a product to customers if this falls within a relative short period of time) may also have a negative impact in Telefónica Brasil, in both economic and image terms.

In Chile, a tariff decree was issued to set fixed-line termination charges for the 2014-2019 periods. The new tariff entered into effect on May 8, 2014 and applies a reduction of 37% in prices against those charged for the period prior to such tariff. A tariff decree has been issued for mobile networks covering the 2014-2019 five-year period. Such tariff decree entered into effect on January 25, 2014 and implies a reduction of 74.7% with respect to the previous rates. After a review by the general comptroller (Contraloría General) an additional 1.7% reduction was approved on May 27, 2014.

In Ecuador the rate-related risks relate to a reduction in rural and urban telephony charges, a reimbursement of top-up balances, as well as rounding to the nearest minute.

The implementation of the Enabling Act (Ley Habilitante) in Venezuela also confers full powers to the President to implement price control measures. Under this Act, in January 2014, an organic fair price law was issued, which caps the revenue of related enterprises at 30% of their operating costs. In relation to MTRs with the national operator of reference (Compañía Anónima Nacional Teléfonos de Venezuela) (“CANTV”), these have been reduced by 6% compared to the previous rates. In November 2014, near the end of the term allowing the enactment of laws autonomously granted to the President of the Republic, new important decree-laws were enacted, in particular, the Reform of the Law on Foreign Investment, in which, among other things, new requirements for the return of foreign investment were established; the Reform of the Antitrust Law, which was predominantly aimed at enhancing monopoly control regulation and increasing penalties for infringement; and the Reform of the Exchange Crimes Law, which increased economic sanctions.

Telefónica, S.A. 118


		Financial Statements

such reduction being as compared to the previous year). This regulatory measure also imposes asymmetric MTRs to the dominant provider (the América Móvil Group), imposing the final rate established in the glide path from 2015 to 2017. The CRC also regulated the charges for national roaming and the SMS termination rates, setting a reduction of 41.5% in 2015, 39.6% in 2016 and 43.3% in 2017 (each such reduction being as compared to the previous year).

Regulation of universal services

Further to its formal obligation to review the scope of the Universal Service Directive (the set of basic electronic communication services whose provision is guaranteed to any user requesting it, regardless of its location, with a specified quality at an affordable price), the European Commission is expected to undertake a public consultation in the months following the date of this Annual Report, which may include both the potential inclusion of broadband in its scope and a possible reduction of some of the current universal service obligations. Depending on the terms that will be set forth in the new regulation, implementation at a local level could lead to higher costs for both the universal service provider and the operators forced to finance the universal service.

The last Plano Geral de Metas de Universalização (“PGMU”) was published in Brazil on June 30, 2011 and applies to the 2011-2015 period. This sets goals for public phones, low cost fixed-lines and coverage density in rural and poor areas with 2.5GHz/450 MHz. Also according to such PGMU, the assets assigned to the provision of the services described in the public concession agreement are considered reversible assets. In 2014, ANATEL issued a public consultation with its proposals for the 2015-2020 period universalization targets. The agency’s proposal focuses on reducing the distance between public telephones and backhaul’s expansion.

Regulation of fiber networks

In December 2014, the Spanish National Regulatory & Competition Authority (Comisión Nacional de los Mercados y la Competencia) has conducted a public consultation on the regulatory obligations for broadband market regulation in Spain. As a result of this consultation, the new regulation that will apply to NGN (Next Generation Networks) could be approved in the fourth quarter of 2015 and will last for at least three years. This could increase Telefónica’s regulatory obligations in Spain and the ability of other operators to compete in such market.

In Colombia, the regulatory authority CRC published a regulatory project for transmission capacity between municipalities through fiber networks or connectivity to impose open network and elements access through a mandatory offer for those enterprises that have overcapacity and have some unused installed network elements. This project will be discussed in the first half of 2015.

Regulations on privacy

In Europe, a new Data Protection Regulation is undergoing the European legislative process which, as the date of this Annual Report, is not expected to end before mid-2015. This could lead to certain critical provisions laid down in the current draft of the regulation (presently under debate) being worded in such a way that stops or hinders Telefónica from launching some services, that focus on the processing of personal data.

In Brazil, triggered by the approval of Civil Rights Framework for Internet Governance, which provides certain generic rules about data protection, the Ministry of Justice could in the near future, adopt the final version of the Draft Personal Data Protection Act. This could lead to a greater number of obligations for operators in relation to the collection of personal data of telecom services users and further restrictions on the treatment of such data.

Regulation of functional separation

Telefónica, S.A. 119


		Financial Statements

market power and vertically-integrated operators to separate their wholesale and retail businesses at a functional level. They would therefore be required to offer equal wholesale terms to third-party operators that acquire these products.

Regulation of network neutrality

In Europe, national regulators are seeking to strengthen their supervision of operators with regard to the blocking of access, discrimination of applications or Internet service quality. The European Parliament and the Council are simultaneously debating the draft of the European DSM Regulation proposed by the European Commission that, among other things, deals with the principle of network neutrality. The regulation of network neutrality could directly affect possible future business models of Telefónica and may affect the network management or differentiation of characteristics and quality of Internet access service.

Telefónica is present in countries where net neutrality has already been ruled, such as Chile, Colombia, Peru and more recently Brazil, but this remains a live issue and with varying degrees of development in other countries where it operates. In Germany, the Economy Minister withdrew a draft law that it published on June 20, 2013, to regulate net neutrality, especially with regard to the blocking and discrimination of content and Internet services. It plans to submit a new draft after the EU has settled on a position on net neutrality within the DSM approach, which might occur in early 2015. In addition, one German region (Bundesland of Thuringia) has passed a new law (which applies only in such region) with the aim that broadcasting and tele-media may not be blocked, limited or treated differently from other data traffic.

If changes to regulation such as those described above, or otherwise, occur in the various jurisdictions where the Telefónica Group operates, it could have a material adverse effect on its business, financial condition, results of operations and cash flows.

The Telefónica Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

The Telefónica Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, the Group’s international operations are subject to the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) and the United Kingdom Bribery Act of 2010 (the “Bribery Act”), and economic sanction programs, including those administered by the United Nations, the European Union and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Telefónica Group’s business, it may deal with entities, the employees of which are considered foreign officials for purposes of the FCPA. In addition, economic sanctions programs restrict the Group’s business dealings with certain sanctioned countries, individuals and entities.

Although the Group has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Group’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Group’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which the Group or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could have a material adverse effect on the Group’s business, reputation, results of operations and financial condition.

Customers’ perceptions of services offered by the Company may put it at a disadvantage compared to competitors’ offerings.

Customers’ perceptions of the assistance and services offered are critical to operating in highly-competitive markets. The ability to predict and respond to the changing needs and demands of customers affects the Company’s competitive position relative to other technology sector companies, and its ability to extract the value generated during this process of transformation. Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

Company may not be able to adequately foresee and respond to technological changes and sector trends.

Telefónica, S.A. 120


		Financial Statements

In a sector characterized by rapid technological change, it is essential to be able to offer the products and services demanded by the market and consider the impacts of changes in the life cycle of technical assets, secure margins and select the right investments to make.

The Telefónica Group operates in markets that are highly competitive and subject to constant technological development. Therefore, as a consequence of both of these characteristics, it is subject to the effects of actions by competitors in these markets and to its ability to anticipate and adapt, in a timely manner, to constant technological changes, changes in customer preferences that are taking place in the industry, as well as economic, political and social circumstances.

Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

New products and technologies arise constantly, and their development can render obsolete the products and services the Telefónica Group offers and the technology it uses. This means that Telefónica must invest in the development of new products, technology and services so it can continue to compete effectively with current or future competitors, and which may result in the decrease of the Group’s profits and revenue margins. In this respect, margins from traditional voice and data business are shrinking, while new sources of revenues are deriving from mobile Internet and connectivity services that are being launched. Research and development costs amounted to 1,111 million euros and 1,046 million euros in 2014 and 2013, respectively; representing an increase of 6.2% from 1,046 million euros in 2013. These expenses represented 2.2% and 1.8% of the Group’s consolidated revenue, respectively. These figures have been calculated using the guidelines established in the Organization for Economic Cooperation and Development (OECD) manual. One technology that telecommunications operators, including Telefónica (in Spain and Latin America), are focused on is the new FTTx-type network, which offers broadband access using optical fiber with superior services, such as Internet speed of up to 100MB or HD television services. However, substantial investment is required to deploy these networks, which entails fully or partially substituting copper loop access with optic fiber. While an increasing demand for the capabilities offered by these new networks to end users exists, the high level of the investments requires a continuous analysis of the return on investment.

The explosion of the digital market and entry of new players in communications market, such as MVNOs, Internet companies or device manufacturers, may cause the loss of value of certain assets, and affect the Group’s ability to generate income. Therefore, it is necessary to update the business model, encouraging the pursuit of incomes and additional efficiencies to those followed traditionally. Failure to do so adequately could have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

In addition, the ability of the Telefónica Group’s IT systems (operational and backup) to respond the Company’s operating requirements is a key factor to be taken into account with respect to the commercial development, customer satisfaction and business efficiency.

The Company depends on its suppliers.

The existence of critical suppliers in the supply chain, especially in areas such as network infrastructure, information systems or handsets, with a high concentration in a small number of suppliers, poses risks that may affect the Company’s operations, and may cause legal contingencies or damages to the Company’s image in the event that inappropriate practices are produced by a participant in the supply chain.

As of December 31, 2014, the Telefónica Group depended on six handset suppliers and 11 network infrastructure suppliers, which together accounted for 80% of the awarded contracts for the year then ended. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own stock shortfalls and business requirements.

If these suppliers fail to deliver products and services to the Telefónica Group on a timely basis, it could jeopardize network deployment and expansion plans, which in some cases could adversely affect the Telefónica Group’s ability to satisfy its license terms and requirements, or otherwise have an adverse impact on the Group’s business, financial condition, results of operations and cash flows.

Unanticipated network interruptions can lead to quality loss or the interruption of the service.

Telefónica, S.A. 121


		Financial Statements

Unanticipated network interruptions as a result of system failures, including those due to network, hardware or software, stealing of infrastructure elements or cyber-attacks, which affect the quality of or cause an interruption in the Telefónica Group’s service, could lead to customer dissatisfaction, reduced revenues and traffic, costly repairs, penalties or other measures imposed by regulatory authorities and could harm the Telefónica Group’s image and reputation.

Telefónica attempts to mitigate these risks through a number of measures, including backup systems and protective systems such as firewalls, virus scanners and other physical and logical security. However, these measures are not always effective. Although the Telefónica Group has insurance policies to cover these types of incidents, and the claims and loss in revenue caused by service interruptions to date have been covered by these policies, these policies may not be sufficient to cover all possible monetary losses.

The telecommunications industry may be affected by the possible effects of electromagnetic fields, emitted by mobile devices and base stations, may have on human health.

In some countries, there is a concern regarding potential effects of electromagnetic fields, emitted by mobile devices and base stations, on human health. This public concern has caused certain governments and administrations to take measures that have hindered the deployment of the infrastructures necessary to ensure quality of service, and affected the deployment criteria of new networks and digital services such as smart meters development.

There is a consensus between certain expert groups and public health agencies, including the World Health Organization (WHO), that states that currently there are no established risks associated with exposure to low frequency signals in mobile communications. However, the scientific community is still investigating this issue especially with respect to mobile devices. Exposure limits for radio frequency suggested in the guidelines of the Protection of Non-Ionizing Radiation Protection Committee (ICNIRP) have been internationally recognized. The mobile industry has adopted these exposure limits and works to request authorities worldwide to adopt these standards.

Worries about radio frequency emissions may discourage the use of mobile devices and new digital services, which could cause the public authorities to implement measures restricting where transmitters and cell sites can be located, how they operate, the use of mobile telephones and the massive deployment of smart meters and other products using mobile technology. This could lead to the Company being unable to expand or improve its mobile network.

The adoption of new measures by governments or administrations or other regulatory interventions in this respect, and any future assessment on the adverse impact of electromagnetic fields on health, may negatively affect the business, financial conditions, results of operations and cash flows of the Telefónica Group.

Possible regulatory, business, economic or political changes could lead to asset impairment.

The Telefónica Group reviews on an annual basis, or more frequently when the circumstances require it, the value of assets and cash-generating units, to assess whether their carrying values can be supported by the future expected cash flows, including, in some cases synergies allowed for in acquisition costs. Potential changes in the regulatory, business, economic or political environment may result in the need to introduce changes to estimates made and to recognize impairment in goodwill, intangible assets or fixed assets. Although the recognition of impairments of property, plant and equipment, intangible assets and financial assets results in a non-cash charge on the income statement, it could adversely affect the results of the Telefónica Group’s operations. In this respect, the Telefónica Group has experienced impairments on certain of its investments, affecting its results of operations in the year in which they were experienced. For example, with respect to the investment in Telco, S.p.A. (“Telco”), value adjustments were made in fiscal years 2013 and 2014 with a negative impact of 267 million euros and 464 million euros, respectively.

The Telefónica Group’s networks carry and store large volumes of confidential, personal and corporate data, and its Internet access and hosting services may lead to claims for illegal or illicit use of the Internet.

Telefónica, S.A. 122


		Financial Statements

data in both business and consumer segments. Despite its best efforts to prevent it, the Telefónica Group may be found liable for any loss, transfer, or inappropriate modification of the customer data or general public data stored on its servers or transmitted through its networks, any of which could involve many people and have an impact on the Group’s reputation, or lead to legal claims and liabilities that are difficult to measure in advance.

In addition, the Telefónica Group’s Internet access and hosting servers could lead to claims for illegal or unlawful use of the Internet. Telefónica, like other telecommunications providers, may be held liable for any loss, transfer or inappropriate modification of the customer data stored on its servers or carried by its networks.

In most countries in which the Telefónica Group operates, the provision of its Internet access and hosting services (including the operation of websites with shelf-generated content) are regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to a website) as part of the struggle against some illegal or illicit uses of the Internet, notably in Europe.

Any of the foregoing could have an adverse impact on the business, financial position, results of operations and cash flows of the Group.

Telefónica and Telefónica Group companies are party to lawsuits, tax claims, antitrust and other legal proceedings.

Telefónica and Telefónica Group companies are party to lawsuits, tax claims and other legal proceedings in the ordinary course of their businesses, the financial outcome of which is unpredictable. An adverse outcome or settlement in these or other proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, results of operations, reputation and cash flows. In particular, regarding tax and antitrust claims, the Telefónica Group has open judicial procedures in Peru concerning the clearance of previous years’ income tax, for which a contentious-administrative appeal is currently pending; as well as in Brazil, with CADE’s (Conselho Administrativo de Defesa Ecônomica) resolution with regard to the acquisition of a 50% stake in Vivo and with certain open tax procedures, primarily relating to the CIMS (a Brazilian tax on telecommunication services). Further details on these matters are provided in the Note 17 and 20 of the financial statements.

Telefónica, S.A. 123


		Financial Statements

Trend evolution

Telefónica is an integrated diversified telecommunications group that offers a wide range of services, mainly in Europe and Latin America. Its core business is the provision of fixed and mobile telephony, broadband, internet, data, pay TV and value-added services, among others. The Group’s operations in 25 countries, managed through a regional organization geared towards certain businesses in global units, enable it to leverage the strong local positioning, as well as the advantages afforded by its scale.

As a multinational telecommunications company that operates in regulated markets, Telefónica is subject to different laws and regulations in each of the jurisdictions in which it provides services. Among other developments, Telefónica may face pressure from regulatory initiatives in some European countries regarding tariffs, the reform of rights of spectrum use and allocation, issues related to the quality of service, and the regulatory treatment of new broadband infrastructure deployments.

Telefónica faces intense competition in the vast majority of the markets where it operates in, and is therefore subject to the effects of actions taken by its competitors. The intensity of the competition may deepen which could have an impact on tariff structures, consumption, market share and commercial activity and negatively affect the number of customers, revenues and profitability.

However, Telefónica believes that it is in a strong competitive position in most of the markets where it operates, which it expects to help enable it to continue taking advantage of the growth opportunities that arise in these markets, such as by boosting both fixed and mobile broadband services and by furthering the development of services beyond connectivity, information technology services and related businesses.

In 2014, Telefónica took a further step towards its transformation into a leading digital telecommunications company, in a sector which we believe still offers excellent growth potential. Digital capacities were boosted, new products were developed, and new business models were set up. This was achieved as a result of a transformation drive implemented throughout the Company.

2013 marked a turning point with the launch of a multinational program, “Be More”, focused on transformation and growth and the deleveraging of our business in Ireland, Czech Republic and 40% of Central America. This program aims to take advantage of our customer insight, the capture of future Business to Business (B2B) opportunities, further data monetization of our services and reinforcing our video business. In addition, we will seek to simplify our operating model and increase investments in fiber and LTE, transforming the IT in our operating business. In 2014, we made progress in the transformation process of Telefónica, simplifying the Company and building the bases for a new organization, simplifying operations, making provisions for a leaner staffing at a number of group operators and making key changes to our structure.

We believe that both the completion of the consolidation of our operations in Germany and the acquisition of GVT in Brazil (which is still pending approval by the regulator), which entail structural changes to the Company’s positioning in two of its largest markets, points to, and strengthens, our capacity for future growth.

The pace of addition of high-value customers was stepped up in 2014, with more than 21 million new smartphones, 1.5 million new Pay TV accesses and 927 new fiber accesses. We believe these figures indicate a growing generalization of usage-intensive data and content services.

Intense commercial activity in the area of high-value services was attributable mainly to greater investment, which allowed us to double the size of our FTTH network to 14.7 million premises passed, securing LTE coverage of 41% of the outdoor population in the regions where we operate, thereby increasing the number of LTE base stations to more than 20 thousand in 2014 (2.2X compared to 2013).

Telefónica Spain showed a change in trend due to the in-depth transformation process rolled out by the company to steady the pace of the year-on-year fall in revenue, with the assistance of intense commercial activity, especially in terms of fiber and Pay TV. “Movistar Fusión” continued to grow steadily mainly as a result of the offering of the new bundled portfolio including TV in almost all our portfolio with a competitive price from 60 euros/month, which continued to attract customers to value-added offers.

Telefónica, S.A. 124


		Financial Statements

Telefónica United Kingdom continued to work on the deployment of its LTE network, reaching 58% outdoor coverage at year-end, keeping the focus on offering a positive network experience and an exclusive content proposition to 4G customers. The operator is still migrating its high-value customers to LTE, with a view to boosting the network experience and customer satisfaction. Telefónica United Kingdom continues to deliver a good commercial performance with its “Refresh” offer, helping improve the market distribution dynamics towards more efficient channels.

On August 29, 2014 the Company was given the green light from the European Commission to purchase the E-Plus Group, and the transaction was completed on October 1, 2014. The E-Plus Group has been part of Telefónica Deutschland since that date. The new company is intent on becoming Germany’s leading digital telecommunications company, and aims to secure synergies of more than 5 billion euros of present value, mainly produced by the network, customer service, overheads and new opportunities for generating income.

Telefónica Germany continued to perform well in 2014, mainly in the mobile contract segment, thanks to a strategy focusing on data monetization. This performance was achieved against a more competitive backdrop with growing demand for LTE offers and terminals. Year-on-year revenue stabilized, and mobile revenue rose again year-on-year.

As part of the transformation process, embarked by the Group, a significant provision was recorded for E-Plus in connection with the planned downsizing of its staffing, which aims to lay the foundations for future growth.

In Brazil, we consolidated the leadership in the higher-value mobile segments, maintaining our dominance of the market. The Company was awarded one of the three blocks of radioelectric spectrum for LTE auctioned in the 700 MHz band (2x10 MHz) on September 30, 2014, for the minimum reserve price of the block (approximately 619 million euros). This gave Telefónica Brazil the spectrum it needed to expand the 4G services in the medium and long term, and accelerate adoption of data (in 2014, data revenue accounted for 38.6% of the total).

In the fixed business, fiber deployment was key, with 14.7 million premises passed by December 2014, and the number of connected homes gradually rose to 1.8 million.

On September 19, 2014 the Company entered into an agreement with Vivendi to purchase GVT, with a view to creating an integrated operator with national coverage focused on higher-value customers to give a major boost to the Company’s market positioning. The purchase is pending approval by the regulator.

Strong commercial activity by Telefónica Hispanoamérica, along with robust investment to improve service quality, continued to drive steady year-on-year growth of revenue and OIBDA, especially in Mexico, Colombia and Peru.

In summary, in the context of intense competition and regulatory pressure on pricing, Telefónica aims to continue strengthening its business model to make it more efficient and capture the synergies arising from the integrated approach of businesses, processes and technologies, while focusing even more on the client and staying ahead of trends in the new digital world.

Telefónica, S.A. 125


		Financial Statements

Events after the reporting period

The following events regarding the Company took place between the reporting date and the date of preparation of the accompanying financial statements:

Financing

•

On January 15, 2015, Telefónica Emisiones, S.A.U. redeemed 1,250 million US dollars (1,068 million euros) of its notes, issued on July 6, 2009. The notes were guaranteed by Telefónica, S.A.

•

Exclusive negotiations with Hutchison Whampoa Group

Telefónica and Hutchison Whampoa Group agreed to enter into exclusive negotiations for the potential acquisition by the latter of Telefónica’s subsidiary in the UK (O2 UK) for an indicative price in cash (firm value) of £10.25bn (approximately €13.5bn); composed of (i) an initial amount of £9.25bn (approximately €12.2bn) which would be paid at closing and (ii) an additional deferred payment of £1.0bn (approximately €1.3bn) to be paid once the cumulative cash flow of the combined company in the UK has reached an agreed threshold.

Telefónica, S.A. 126


		Financial Statements

Annual Corporate Governance Report for Listed Companies

A.	Ownership structure

A.1.

Complete the following table on the company’s share capital:


Date of last modification	Share capital (€)		Number of shares		Number of voting rights
2014-12-09		4,657,204,330.00		4,657,204,330		4,657,204,330

Indicate whether different types of shares exist with different associated rights:

A.2.

List the direct and indirect holders of significant ownership interests in your organization at year-end, excluding directors:


Name or corporate name of shareholder	Number of direct voting rights		Number of indirect voting rights		% of total voting rights
Banco Bilbao Vizcaya Argentaria, S.A.		291,194,876		13,132		6.25	%
Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”		0		244,647,885		5.25	%
Blackrock, Inc.		0		177,257,649		3.81	%


Name or corporate name of indirect holder	Through: Name or corporate name of the direct holder	Number of voting rights
Banco Bilbao Vizcaya Argentaria, S.A.	BBVA Seguros, S.A. de Seguros y Reaseguros		13,132
Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”	Caixabank, S.A.		244,604,533
Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”	Vidacaixa, S.A. Seguros y Reaseguros		43,352
Blackrock, Inc	Blackrock Investment Management (UK)		177,257,649

Indicate the most significant movements in the shareholder structure during the year:


Name or corporate name of shareholder	Date of transaction		Description of transaction
—		—		—

Telefónica, S.A. 127


		Financial Statements

A.3.

Complete the following tables on company directors holding voting rights through company shares:


Name or corporate name director	Number of direct voting rights		Number of indirect voting rights		% of total voting rights
Mr. César Alierta Izuel		4,545,928		0		0.10	%
Mr. Isidro Fainé Casas		523,414		0		0.01	%
Mr. José María Abril Pérez		97,288		111,481		0.00	%
Mr. Julio Linares López		430,923		1,941		0.01	%
Mr. José María Álvarez-Pallete López		335,260		0		0.01	%
Mr. José Fernando de Almansa Moreno-Barreda		19,562		0		0.00	%
Ms. Eva Castillo Sanz		99,863		0		0.00	%
Mr. Carlos Colomer Casellas		49,360		63,190		0.00	%
Mr. Peter Erskine		73,111		0		0.00	%
Mr. Santiago Fernández Valbuena		111,210		0		0.00	%
Mr. Alfonso Ferrari Herrero		603,105		20,057		0.01	%
Mr. Luiz Fernando Furlán		35,031		0		0.00	%
Mr. Gonzalo Hinojosa Fernández de Angulo		47,725		197,474		0.01	%
Mr. Pablo Isla Álvarez de Tejera		9,067		0		0.00	%
Mr. Antonio Massanell Lavilla		2,413		0		0.00	%
Mr. Ignacio Moreno Martínez		13,076		0		0.00	%
Mr. Francisco Javier de Paz Mancho		57,024		0		0.00	%


Name or company name of indirect shareholder	Through: Name or company name of direct shareholder	Number of voting rights
Mr. José María Abril Pérez	Other shareholders of the company		111,481
Mr. Julio Linares López	Other shareholders of the company		1,941
Mr. Carlos Colomer Casellas	Other shareholders of the company		63,190
Mr. Alfonso Ferrari Herrero	Other shareholders of the company		20,057
Mr. Gonzalo Hinojosa Fernández de Angulo	Other shareholders of the company		197,474

% of total voting rights held by the Board of Directors
			0,16	%

Telefónica, S.A. 128


		Financial Statements

Complete the following tables on share options held by directors:


Name or corporate name of director	Number of direct voting rights		Number of indirect voting rights		Equivalent number of shares		% total voting rights
Mr. César Alierta Izuel		972,417		0		1,519,401		0.02	%
Mr. Julio Linares López		13,878		0		21,686		0.00	%
Mr. José María Álvarez-Pallete López		572,131		0		893,955		0.01	%
Mr. Santiago Fernández Valbuena		1,311,223		0		1,486,287		0.03	%

A.4.

Indicate, as applicable, any family, commercial, contractual or corporate relationships between owners of significant shareholdings, insofar as these are known by the company, unless they are insignificant or arise from ordinary trading or exchange activities:


Name or company name of related party	Type of relationship	Brief description
—	—		—

A.5.

Indicate, as applicable, any commercial, contractual or corporate relationships between owners of significant shareholdings, and the company and/or its group, unless they are insignificant or arise from ordinary trading or exchange activities:


Name or company name of related party	Type of relationship	Brief description
Banco Bilbao Vizcaya Argentaria, S.A.	Corporate	Joint shareholding with Telefónica Móviles España, S.A.U. in Mobipay España, S.A.
Banco Bilbao Vizcaya Argentaria, S.A.	Corporate	Joint shareholding of Banco Bilbao Vizcaya Argentaria, S.A. (or any of its Group Companies), with Telefónica, S.A. and with Caixabank, S.A., in Telefónica Factoring España, S.A., Telefónica Factoring Perú, S.A.C. (TFP), Telefónica Factoring Colombia, S.A., Telefónica Factoring do Brasil, Ltda., Telefónica Factoring México, S.A. de C.V., SOFOM, E.N.R., and Telefónica Factoring Chile, S.A.
Fundación Bancaria Caixa d’ Estalvis i Pensions de Barcelona, “la Caixa”	Corporate	Joint shareholding of Caixabank, S.A. with Telefónica, S.A. and with Banco Bilbao Vizcaya Argentaria, S.A. (or any of its Group Companies), in Telefónica Factoring España, S.A., Telefónica Factoring Perú, S.A.C., Telefónica Factoring Colombia, S.A., Telefónica Factoring do Brasil, Ltda., Telefónica Factoring México, S.A. de C.V., SOFOM, E.N.R., and Telefónica Factoring Chile, S.A.
Fundación Bancaria Caixa d’ Estalvis i Pensions de Barcelona, “la Caixa”	Corporate	Joint shareholding of Finconsum, Establecimiento Financiero de Crédito, S.A.U. (subsidiary of CaixaBank, S.A.) with Telefónica, S.A., in Telefónica Consumer Finance, Establecimiento Financiero de Crédito, S.A.

Telefónica, S.A. 129


		Financial Statements


Fundación Bancaria Caixa d’ Estalvis i Pensions de Barcelona, “la Caixa”		Corporate		Joint shareholding of Caixa Card 1 Establecimiento Financiero de Crédito, S.A.U. with Telefónica Digital España, S.L., and with Banco Santander, S.A., in Yaap Digital Services, S.L.

Telefónica, S.A. 130


		Financial Statements

A.6.

Indicate whether any shareholders’ agreements have been notified to the company pursuant to Articles 530 and 531 of the Corporate Enterprises Act (Ley de Sociedades de Capital, hereinafter “LSC” in Spanish). Provide a brief description and list the shareholders bound by the agreement, as applicable:

Yes


Shareholders bound by agreement
Telefónica, S.A.
China Unicom (Hong Kong) Limited

% of share capital affected
			1.38%

Brief description of the agreement:

See Section H “Other Information of Interest”, Note 3 to Section A.6.

Indicate whether the company is aware of the existence of any concerted actions among its shareholders. Give a brief description as applicable:


Shareholders involved in concerted action	% of share capital affected		Brief description of the concerted action
—		—		—

Expressly indicate any amendments to or termination of such agreements or concerted actions during the year:

—

A.7.

Indicate whether any individuals or bodies corporate currently exercise control or could exercise control over the company in accordance with Article 4 of the Spanish Securities’ Market Act (Ley del Mercado de Valores). If so, identify:


Name or corporate name
—


Remarks
—

Telefónica, S.A. 131


		Financial Statements

A.8.

Complete the following tables on the company’s treasury shares:

At year end:


Number of shares held directly	Number of shares held indirectly (*)		% of total share capital
128,227,971		0		2.75	%

(*) Through:


Name or corporate name of direct shareholder	Number of shares held directly
—		—

Total

Give details of any significant changes during the year, in accordance with Royal Decree 1362/2007:


Date of notification	Total number of direct shares acquired		Total number of indirect shares acquired		% of total share capital
2014/01/29		47,122,215		0		1.04	%
2014/07/01		46,011,480		0		1.01	%

A.9.

Give details of the applicable conditions and time periods governing any resolutions of the General Shareholders’ Meeting authorizing the Board of Directors to repurchase or transfer the treasury shares:

At Telefónica’s Ordinary General Shareholders’ Meeting held on May 30, 2014, the shareholders resolved to renew the authorization granted at the General Shareholders’ Meeting of June 2, 2010, for the derivative acquisition of treasury stock, either directly or through Group companies, in the terms literally transcribed below:

“A) To authorize, pursuant to the provisions of Section 144 et seq., of the Spanish Companies Act (Ley de Sociedades de Capital), the derivative acquisition by Telefónica, S.A. -either directly or through any of the subsidiaries- at any time and as many times as it deems appropriate, of its own fully-paid in shares through purchase and sale, exchange or any other legal transaction.

The minimum price or minimum value consideration shall be equal to the par value of the shares of its own stock acquired, and the maximum acquisition price or maximum value consideration shall be equal to the listing price of the shares of its own stock acquired by the Company on an official secondary market at the time of the acquisition.

Such authorization is granted for a period of 5 years as from the date of this General Shareholders’ Meeting and is expressly subject to the limitation that the par value of the Company’s own shares acquired directly or indirectly pursuant to this authorization added to those already held by Telefónica, S.A. and any of its subsidiaries shall at no time exceed the maximum amount permitted by the Law at any time, and the limitations on the acquisition of the Company’s own shares established by the regulatory Authorities of the market on which the shares of Telefónica,S.A. are traded shall also be observed.

It is expressly stated for the record that the authorization granted to acquire shares of its own stock may be used in whole or in part to acquire shares of Telefónica, S.A. that it must deliver or transfer to directors or employees of the Company or of companies of its Group, directly or as a result of the exercise by them of their option rights, all within the framework of duly approved compensation systems referencing the listing price of the Company’s shares.

Telefónica, S.A. 132


		Financial Statements

B) To authorize the Board of Directors, as broadly as possible, to exercise the authorization granted by this resolution and to implement the other provisions contained therein; such powers may be delegated by the Board of Directors to the Executive Commission, the Executive Chairman of the Board of Directors, the Chief Operating Officer or any other person expressly authorized by the Board of Directors for such purpose.

C) To deprive of effect, to the extent of the unused amount, the authorization granted under Item III on the Agenda by the shareholders at the Ordinary General Shareholders Meeting of the Company on June 2, 2010”.

A.10.

Indicate, as applicable, any restrictions on the transfer of securities and/or any restrictions on voting rights. In particular, indicate any type of restrictions that could impose obstacles to the takeover of the company by means of share purchases on the market:

Yes

Description of the restrictions

See Section H “Other Information of Interest”, Note 4 to Section A.10

A.11.

Indicate whether the General Shareholders’ Meeting has agreed to take neutralization measures to prevent a public takeover bid by virtue of the provisions of Act 6/2007.

If applicable, explain the measures adopted and the terms under which these restrictions may be lifted:

—

A.12.

Indicate whether the company has issued securities not traded in a regulated market of the European Union.

Yes

If so, identify the various classes of shares and, for each class of shares, the rights and obligations they confer.

The shares of Telefónica, S.A. are traded on the Spanish Continuous Markets, as well as on the markets of New York, London, Lima and Buenos Aires, and all shares have the same characteristics, rights and obligations.

On the stock markets of New York and Lima, Telefónica, S.A.’s shares are traded via American Depositary Shares (ADSs), representing each ADS one share in the Company.

Telefónica, S.A. 133


		Financial Statements

B.	General Shareholders’ Meeting

B.1.

Indicate the quorum required for constitution of the General Shareholders’ Meeting established in the company’s By-laws. Describe how it differs from the system of minimum quorums established in the Corporate Enterprises Act (Ley de Sociedades de Capital, hereinafter “LSC” in Spanish).

B.2.

Indicate and, as applicable, describe any differences between the company’s system of adopting corporate resolutions and the framework established in the LSC:

Describe how they differ from the rules established in the LSC.

—

B.3.

Indicate the rules governing amendments to the company’s By-laws. In particular, indicate the majorities required to amend the By-laws and, if applicable, the rules for protecting shareholders’ rights when changing the By-laws.

The Articles of Association and the Rules of Procedure of the Telefónica General Meeting of Shareholders award to the General Meeting of Shareholders the power to amend the Articles of Association (articles 15 and 5, respectively), referring otherwise to the applicable legal provisions.

The procedure to amend the Articles of Association is set down in articles 285 and thereafter in the Corporate Enterprises Act, and requires approval by the General Meeting of Shareholders with the majorities foreseen in articles 194 and 201 of the aforementioned Act. In particular, if the General Meeting is held to deliberate amendments to the Articles of Association, including capital increases and decreases, eliminating or limiting the right to first refusal to buy shares, and the transformation, merger, spin-off and global conveyance of assets and liabilities and transferring the registered office abroad, shall be necessary, at the first call, these decisions require the attendance of shareholders or representatives of shareholders representing at least fifty percent of the subscribed capital with voting rights. If there is not a sufficient quorum, a General Meeting will be held where the attendance of at least twenty five percent of the subscribed stock capital with voting rights. Where the shareholders in attendance represent less than fifty percent of the subscribed capital with voting rights, the decisions referred to in the paragraph above may only be validly adopted with the vote in favour of at least two thirds of the capital presented or represented at the Meeting.

Pursuant to the provisions of article 286 of the Corporate Enterprises Act, in the event the Articles of Association are amended, the Directors or, where applicable, the partners tabling the proposal must write the full text of their proposal amendment, and a written report to justify the change, which must be made available to the shareholders for the General Meeting called to deliberate on said amendment.

Furthermore, and pursuant to article 287 of the Corporate Enterprises Act, the announcement of a meeting of the General Assembly should explicitly state with due clarity the points to be amended, and mention the right of all partners to examine the full text of the proposal amendment and the report at the company’s headquarters, and to request the delivery or sending of said documents free of charge.

Article 291 of the Corporate Enterprises Act set out that where changes to the Articles of Association involve new obligations for the partners the affected parties must give their consent to the decision. Equally, if the amendment directly or indirectly affects a class of shareholders, or part thereof, the provisions of article 293 of the aforementioned Act must be applied.

Telefónica, S.A. 134


		Financial Statements

The voting procedure on proposals is governed by article 197 bis of the Corporate Enterprises Act and by Telefónica’s internal regulations (in particular, article 23 of the Rules of Procedure of the General Assembly). These states, i.a., that in case of amending the Articles of Association, each substantially independent article of group of articles shall be voted on separately.

B.4.

Indicate the attendance figures for the General Shareholders’ Meetings held during the year:


	Attendance data
Date of general meeting							% remote voting
Date of general meeting	% attending in person			% by proxy			Electronic means			Other			Total
2013/05/31		6.53	%		47.35	%		0.01	%		0.59	%		54.48	%
2014/05/30		5.66	%		48.65	%		0.01	%		0.48	%		54.80	%

B.5.

Indicate whether the bylaws impose any minimum requirement on the number of shares required to attend the General Shareholders’ Meetings:

Yes


Number of shares required to attend the General Shareholders’ Meetings
			300

B.6.

Indicate whether decisions involving a fundamental corporate change (“subsidiarization”, acquisitions/disposals of key operating assets, operations that effectively entail the company’s liquidation…) must be submitted to the General Shareholders’ Meeting for approval or ratification even when not expressly required under company law.

Yes

—

B.7.

Indicate the address and mode of accessing corporate governance content on your company’s website as well as other information on General Meetings which must be made available to shareholders on the website.

Telefónica complies with applicable legislation and best practices in terms of the content of its website concerning Corporate Governance. In this respect, it fulfills both the technical requirements for access to the Company’s website and the requirements on the content thereof (including information on the General Shareholders’ Meetings) through direct access from the homepage of Telefónica, S.A. (www.telefónica.com) in the section “Shareholders and Investors” (http://www.telefonica.com/en/shareholders-investors/jsp/home/home.jsp), which includes not only all of the information that is legally required, but also information that the Company considers to be of interest.

All the available information included on the Telefónica website, except for certain specific documents, is available in two languages: spanish and english.

Telefónica, S.A. 135


		Financial Statements

C.	Company management structure

C.1.

Board of Directors

C.1.1.

List the maximum and minimum number of directors included in the bylaws:


Maximum number of directors			20
Minimum number of directors			5

C.1.2.

Complete the following table with board members’ details:

Name or corporate name of director

Representative

Position on the
board

Date of first
appointment

Date of last
appointment

Election procedure

Mr. César Alierta Izuel

—

Chairman

1997/01/29

2012/05/14

Resolution
approved at General
Shareholders’ Meeting

Mr. Julio Linares López

—

Vice Chairman

2005/12/21

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Mr. José María Abril Pérez

—

Vice Chairman

2007/07/25

2013/05/31

Resolution
approved at General
Shareholders’ Meeting

Mr. Isidro Fainé Casas

—

Vice Chairman

1994/01/26

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Mr. José María Álvarez-Pallete López

—

Chief Operating
Officer

2006/07/26

2012/05/14

Resolution
approved at General
Shareholders’ Meeting

Mr. Peter Erskine

—

Director

2006/01/25

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Ms. Eva Castillo Sanz

Director

2008/01/23

2013/05/31

Resolution
approved at General
Shareholders’ Meeting

Mr. Luiz Fernando Furlán

—

Director

2008/01/23

2013/05/31

Resolution
approved at General
Shareholders’ Meeting

Mr. Chang Xiaobing

—

Director

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Mr. José Fernando de Almansa Moreno-Barreda

—

Director

2003/02/26

2013/05/31

Resolution

approved at General
Shareholders’ Meeting

Mr. Gonzalo Hinojosa Fernández de Angulo

—

Director

2002/04/12

2012/05/14

Resolution
approved at General
Shareholders’ Meeting

Mr. Carlos Colomer Casellas

—

Director

2001/03/28

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Mr. Antonio Massanell Lavilla

—

Director

1995/04/21

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

Mr. Pablo Isla Álvarez de Tejera

—

Director

2002/04/12

2012/05/14

Resolution
approved at General
Shareholders’ Meeting

Mr. Ignacio Moreno Martínez

—

Director

2011/12/14

2012/05/14

Resolution
approved at General
Shareholders’ Meeting

Mr. Santiago Fernández Valbuena

—

Director

2012/09/17

2013/05/31

Resolution
approved at General
Shareholders’ Meeting

Mr. Alfonso Ferrari Herrero

—

Director

2001/03/28

2011/05/18

Resolution
approved at General
Shareholders’ Meeting

*	continue with this information

Telefónica, S.A. 136


		Financial Statements

* on the previous page.

Mr. Francisco Javier de Paz Mancho

Director

2007/12/19

2013/05/31

Resolution
approved at General
Shareholders’ Meeting

Total number of directors

Indicate any board members who left during this period:

—

C.1.3.

Complete the following tables on board members and their respective categories:

EXECUTIVE DIRECTORS


Name or corporate name of director	Committee proposing appointment	Post held in the company
Mr. César Alierta Izuel	Nominating, Compensation and Corporate Governance Committee		Executive Chairman
Mr. José María Álvarez-Pallete López	Nominating, Compensation and Corporate Governance Committee		Chief Operating Officer (C.O.O.)
Mr. Santiago Fernández Valbuena	Nominating, Compensation and Corporate Governance Committee		Chief Strategy Officer

Total number of executive directors			3
% of the board			16.67	%

EXTERNAL PROPRIETARY DIRECTORS


Name or Corporate Name Director	Committe proposing appointment	Name or corporate name of significant shareholder represented or proposing appointment
Mr. José María Abril Pérez	Nominating, Compensation and Corporate Governance Committee		Banco Bilbao Vizcaya Argentaria, S.A.
Mr. Ignacio Moreno Martínez	Nominating, Compensation and Corporate Governance Committee		Banco Bilbao Vizcaya Argentaria, S.A.
Mr. Isidro Fainé Casas	Nominating, Compensation and Corporate Governance Committee		Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”
Mr. Antonio Massanell Lavilla	Nominating, Compensation and Corporate Governance Committee		Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”
Mr. Chang Xiaobing	Nominating, Compensation and Corporate Governance Committee		China Unicom (Hong Kong) Limited

Total number of proprietary directors			5
% of the board			27.78	%

Telefónica, S.A. 137


		Financial Statements

INDEPENDENT EXTERNAL DIRECTORS


Name or Corporate name of Director		Profile
Mr. Alfonso Ferrari Herrero		Industrial Engineer. He was formerly Executive Chairman of Beta Capital, S.A. and senior manager at Banco Urquijo.
Mr. Francisco Javier de Paz Mancho		Graduate in Information and Advertising. Law Studies. IESE Business Management Program. Formerly Chairman of the State- owned company MERCASA.
Mr. José Fernando de Almansa Moreno-Barreda		Law Graduate. Joined the diplomatic corps in 1974 and was appointed by His Majesty the King Juan Carlos I as Chief of the Royal Household in 1993, with the rank of Minister, and is currently Personal Adviser to His Majesty the King Juan Carlos I.
Mr. Gonzalo Hinojosa Fernández de Angulo		Industrial Engineer. He was formerly Chairman and CEO of Cortefiel Group
Mr. Carlos Colomer Casellas		Graduate in Economics. He was Chairman of the Colomer Group until 2013
Mr. Pablo Isla Álvarez de Tejera		Law Graduate. Member of the Body of State Lawyers (on sabbatical). Chairman and CEO of Inditex, S.A.
Mr. Peter Erskine		Psychology Graduate. He was General manager of Telefónica Europe until 2007. Currently Chairman of Ladbrokes, Plc.
Mr. Luiz Fernando Furlán		Degrees in chemical engineering and business administration, specializing in financial administration. From 2003 to 2007 he was Minister of Development, Industry and Foreign Trade of Brazil.

Total number of independent directors		8

% of the board		44.44%

List any independent directors who receive from the company or group any amount or payment other than standard director remuneration or who maintain or have maintained during the period in question a business relationship with the company or any group company, either in their own name or as a significant shareholder, director or senior manager of an entity which maintains or has maintained the said relationship.

Yes

If applicable, include a statement from the board detailing the reasons why the said director may carry on their duties as an independent director.


Name or corporate name Director	Description relationship	Reasons
Mr. Carlos Colomer Casellas	Mr. Carlos Colomer Casellas is an independent Director of Abertis Infraestructuras, S.A., parent company of Abertis Group, which has made certain transactions with Telefónica Group (transmission and leasing of mobile phone towers). Described in detail in section H “Other Information of Interest “(Note 16 paragraph D.5)	According to the assessment made attending the nature ,the transactions are not liable , by its object and specialty, to generate any ability to influence by one party over the other; attending to the amount, from the point of view of Telefónica and Abertis inmaterial;- and attending to the fact that Mr. Colomer Casellas is an Independent Director in Abertis Infraestructuras, S.A., the Board of Directors of Telefónica, S.A. considers that those transactions constitute a not suitable transaction in order to condition in any way the independence of Mr. Colomer Casellas.

Telefónica, S.A. 138


		Financial Statements

Other External Directors


Name or corporate name of director	Committee notifying or proposing appointment
Mr. Julio Linares López		Nominating, Compensation and Corporate Governance Committee
Ms. Eva Castillo Sanz		Nominating, Compensation and Corporate Governance Committee
Total number of Other External Directors		2
% of the board		11.11	%

List the reasons why these cannot be considered proprietary or independent directors and detail their relationships with the company, its executives or shareholders.


Name or corporate name Director		Reasons
Mr. Julio Linares López		On September 17, 2012, Mr. Julio Linares López resigned from his post as Chief Operaring Officer (C.O.O.) of Telefónica, S.A. and his managerial post in the Telefónica Group and therefore went from being an Executive Director to being classified in the “Other External Directors” category.
Ms. Eva Castillo Sanz		On February 26, 2014, Ms. Eva Castillo Sanz resigned from her executive position as Chairwoman of Telefónica Europe, to being classified in the “Other External Directors” category.

List any changes in the category of each director which have occurred during the year.

Name or corporate name of director

Date of change

Previous classification

Current classification

Ms. Eva Castillo Sanz

2014/02/26

Executive Director

Other External Directors

C.1.4.

Complete the following table on the number of female directors over the past four years and their category:


	Number of female directors								% of total directors of each type
	Year 2014		Year 2013		Year 2012		Year 2011		Year 2014			Year 2013			Year 2012			Year 2011
Executive		0		1		1		0		0.00	%		25.00	%		25.00	%		0.00	%
Proprietary		0		0		0		0		0.00	%		0,00	%		0.00	%		0.00	%
Independent		0		0		0		1		0.00	%		0,00	%		0.00	%		12.50	%
Other External		1		0		0		0		50.00	%		0,00	%		0.00	%		0.00	%
Total:		1		1		1		1		5.56	%		5.56	%		5.56	%		5.56	%

Telefónica, S.A. 139


		Financial Statements

C.1.5.

Explain the measures, if applicable, which have been adopted to ensure that there is a sufficient number of female directors on the board to guarantee an even balance between men and women.

Explanation of Measures

The search for women who meet the necessary professional profile is a question of principle and, in this regard, it is clear that Telefónica has taken this concern on board. In this regard, it should be noted that, on January 23, 2008, the Board of Directors unanimously agreed to coopt, at the proposal of the Nominating, Compensation and Corporate Governance Committee, Ms. Eva Castillo Sanz as Director of Telefónica. This appointment was ratified by the Ordinary General Shareholders’ Meeting of Telefónica held on April 22, 2008, and having been re-elected for that position by the Ordinary General Shareholders’ Meeting held on May 31, 2013.

Likewise, on December 19, 2007, the Board of Directors unanimously agreed, following a recommendation from the Nominating, Compensation and Corporate Governance Committee, to appoint Ms. María Luz Medrano Aranguren as Vice General Counsel of the Board of Directors of Telefónica.

Article 10.3.of the Regulations of the Board of Directors stipulates that the Board of Directors and the Nominating, Compensation and Corporate Governance Committee shall ensure, within the scope of their respective powers, that the candidates chosen are persons of recognized caliber, qualifications and experience, who are willing to devote a sufficient portion of their time to the Company, and shall take extreme care in the selection of the persons to be appointed as Independent Directors.

Therefore, the selection procedure described above is based exclusively on the personal merits of the candidates (“recognized caliber, qualifications and experience”) and their ability to dedicate themselves to the functions of members of the Board, so there is no implicit bias capable of impeding the selection of women directors, if, within the potential candidates, there are women candidates who meet the professional profile sought at each moment.

C.1.6.

Explain the measures taken, if applicable, by the Nomination Committee to ensure that the selection processes are not subject to implicit bias that would make it difficult to select female directors, and whether the company makes a conscious effort to search for female candidates who have the required profile.

Explanation of measures

In accordance with Article 10.3 of the Board Regulations, the Board of Directors and the Nominating, Compensation and Corporate Governance Committee shall ensure, within the scope of their respective powers, that the candidates chosen are persons of recognized caliber, qualifications and experience, who are willing to devote a sufficient portion of their time to the Company.

When, despite the measures taken, there are few or no female directors, explain the reasons:

Explanation of reasons

All the measures and processes agreed and adopted by the Board of Directors and by the Nominating, Compensation and Corporate Governance Committee to ensure the number of females on the Board guarantees an even balance and to ensure that the selection processes are not subject to implicit bias that would make it difficult to select female directors have been implemented and initiated by the Company. Nevertheless, in the year 2014, there has been no circumstance to alter the current composition of the Board.

C.1.7.

Explain how shareholders with significant holdings are represented on the board.

Telefónica, S.A. 140


		Financial Statements

As stated in Section C.1.3 of this Annual Corporate Governance Report, at December 31, 2014, the group of External Directors of Telefónica, S.A. was composed of 15 members (of a total of 18 Board members), of whom 5 are Proprietary Directors, 8 are Independent Directors and 2 falls under the “Other External Directors” category.

Of the five Proprietary Directors, two act in representation of Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona “la Caixa”, which holds 5.25% of the capital of Telefónica, S.A., two act in representation of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), which holds 6.25% of the capital, and one acts in representation of China Unicom (Hong Kong) Limited (China Unicom) which holds a 1.38% stake.

C.1.8.

Explain, when applicable, the reasons why proprietary directors have been appointed upon the request of shareholders who hold less than 5% of the share capital:

Name or corporate name of shareholder

Reasons

China Unicom (Hong Kong) Limited

As explained in Section H “Other Information of Interest”, Note 3 to Section A.6 of this report, on January 23, 2011, expanding on their existing strategic alliance, Telefónica, S.A. and China Unicom (Hong Kong) Limited (“China Unicom”) signed an extension to their Strategic Partnership Agreement, in which both companies agreed to strengthen and deepen their strategic cooperation in certain business areas, and committed to investing the equivalent of 500 million US dollars in ordinary shares of the other party. Telefónica also agreed to propose the appointment of a board member nominated by China Unicom in the next General Shareholders’ Meeting, in accordance with prevailing legislation and the Company’s By-laws.

The General Shareholders’ Meeting held on May 18, 2011 approved the appointment of China Unicom’s nominee, Mr. Chang Xiaobing, as member of the Board of Directors in accordance with the addendum to the Strategic Partnership Agreement signed in January 2011. This commitment to China Unicom is a consequence of the Strategic Partnership, which is intended to strengthen Telefónica’s position in the global communications market.

Provide details of any rejections of formal requests for board representation from shareholders whose equity interest is equal to or greater than that of other shareholders who have successfully requested the appointment of proprietary directors. If so, explain why these requests have not been entertained:

C.1.9.

Indicate whether any director has resigned from office before their term of office has expired, whether that director has given the board his/her reasons and through which channel. If made in writing to the whole board, list below the reasons given by that director:


Name of director		Reasons for resignation
—		—

Telefónica, S.A. 141


		Financial Statements

C.1.10.

Indicate what powers, if any, have been delegated to the Chief Executive Officer:


Name or corporate name of director		Brief description
Mr. César Alierta Izuel – Executive Chairman (Chief Executive Officer)		The Chairman of the Company, as the Executive Chairman, has been expressly delegated all the powers of the Board of Directors, except those that cannot be delegated by Law, by the Corporate By-laws, or by the Regulations of the Board of Directors which establishes, in Article 5.4, the competencies that the Board of Directors reserves itself, and may not delegate. Article 5.4 specifically stipulates that the Board of Directors reserves the power to: (i) approve the general policies and strategies of the Company; (ii) evaluate the performance of the Board of Directors, its Committees and the Chairman; (iii) appoint Senior Executives, as well as determine the remuneration of Directors and Senior Executives; and (iv) decide on strategic investments.

Mr. José María Álvarez-Pallete López (Chief Operating Officer)		The Chief Operating Officer (C.O.O) has been delegated those powers of the Board of Directors related to the management of the business and the performance of the highest executive functions over all the Company’s business areas, except those which cannot be delegated by Law, under the Corporate By-laws or according to the Regulations of the Board of Directors.

Telefónica, S.A. 142


		Financial Statements

C.1.11.

List the directors, if any, who hold office as directors or executives in other companies belonging to the listed company’s group:


Name or corporate name of Director	Corporate name of the group company	Post
Mr. Alfonso Ferrari Herrero	Telefónica del Perú, S.A.A.	Director
	Telefónica Chile, S.A.	Acting Director
Mr. Francisco Javier de Paz Mancho	Telefónica de Argentina, S.A.	Director
	Telefónica Brasil, S.A.	Director
	Telefónica Gestión de Servicios Compartidos, S.A.	Chairman
Mr. Gonzalo Hinojosa Fernández de Angulo	Telefónica del Perú, S.A.A.	Director
	Telefónica Brasil, S.A.	Director
Mr. José Fernando de Almansa Moreno-Barreda	Telefónica Móviles México, S.A. de C.V.	Director
Mr. Luiz Fernando Furlán	Telefónica Brasil, S.A.	Director
Ms. Eva Castillo Sanz	Telefónica Deutschland Holding, A.G.	Chairwoman of the Supervisory Board
D. Santiago Fernández Valbuena	Colombia Telecomunicaciones, S.A. E.S.P.	Director
	Telefónica América, S.A.	Chairman
	Telefónica Brasil, S.A.	Vice Chariman
	Telefónica Capital, S.A.	Sole Director
	Telefónica Chile, S.A.	Acting Director
	Telefónica Internacional, S.A.U.	Chairman
	Telefónica Móviles México, S.A. de C.V.	Vice Chairman
	Fonditel Pensiones, Entidad Gestora de Fondos de Pensiones, S.A. (E. G. F. P.)	Chairman

Telefónica, S.A. 143


		Financial Statements

C.1.12.

List any company board members who sit on the boards of directors of other non-group companies that are listed on official securities markets in Spain, insofar as these have been disclosed to the company.


Name or corporate name Director	Name of listed company	Post
Mr. César Alierta Izuel	China Unicom (Hong Kong) Limited	Director
	International Consolidated Airlines Group, S.A. (“IAG”)	Director
Mr. Isidro Fainé Casas	Banco Portugués de Investimento, S.A. (BPI)	Director
	The Bank of East Asia	Director
	Abertis Infraestructuras, S.A.	First Vice Chairman
	Repsol, S.A.	First Vice Chairman
	Caixabank, S.A.	Chairman
	Suez Environnement Company	Director
Mr. Carlos Colomer Casellas	Abertis Infraestructuras, S.A.	Director
	Inversiones Mobiliarias Urquiola, S.A. SICAV	Chairman
	Ahorro Bursatil, S.A. SICAV	Chairman
Ms. Eva Castillo Sanz	Bankia, S.A.	Director
D. Pablo Isla Alvarez de Tejera	Inditex, S.A.	Chairman-CEO
D. Luiz Fernando Furlán	Brasil Foods, S.A. (BRF)	Director
	AGCO Corporation	Director
D. Ignacio Moreno Martínez	Secuoya, Grupo de Comunicación, S.A.	Director
D. Santiago Fernández Valbuena	Ferrovial, S.A.	Director
D. Peter Erskine	Ladbrokes, Plc	Chairman
D. Antonio Massanell Lavilla	Boursorama, S.A.	Director
	Caixabank, S.A.	Vice Chairman
	Banco Portugués de Investimento, S.A. (BPI)	Director
D. Chang Xiaobing	China United Network Communications Limited	Chairman
	China Unicom (Hong Kong) Limited	Chairman-CEO

C.1.13.

Indicate and, where appropriate, explain whether the company has established rules about the number of boards on which its directors may sit:No

Telefónica, S.A. 144


		Financial Statements

C.1.14.

Indicate the company’s general policies and strategies that are reserved for approval by the Board of Directors in plenary session:


Investment and financing policy		Yes
Design of the structure of the corporate group		Yes
Corporate governance policy		Yes
Corporate social responsibility policy		Yes
Strategic or business plans, management targets and annual budgets		Yes
Remuneration and evaluation of senior officers		Yes
Risk control and management, and the periodic monitoring of internal information and control systems		Yes
Dividend policy, as well as the policies and limits applying to treasury stock		Yes

C.1.15.

List the total remuneration paid to the Board of Directors in the year:


Board remuneration (thousands of euros)			25,528
Amount of total remuneration corresponding to accumulated pension rights (thousands of euros)			1,375

Total board remuneration (thousands of euros)			26,903

C.1.16.

List any members of senior management who are not executive directors and indicate total remuneration paid to them during the year:


Name or corporate name		Position(s)
Mr. Ignacio Cuesta Martín-Gil		Director Internal Audit
Mr. Ramiro Sánchez de Lerín García-Ovies		General Counsel and Secretary of the Board of Directors
Mr. Ángel Vilá Boix		General Manager of Finance and Corporate Development
Mr. Guillermo Ansaldo Lutz		General manager of Global Resources
Mr. Eduardo Navarro de Carvalho		Chief Commercial Digital Officer (CCDO)


Total remuneration received by senior management (in thousands of euros)			26,766

Telefónica, S.A. 145


		Financial Statements

C.1.17.

List, if applicable, the identity of those directors who are likewise members of the boards of directors of companies that own significant holdings and/or group companies:


Name or corporate name of Director	Name or corporate name of significant shareholder	Post
Mr. Isidro Fainé Casas	Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”	Chairman Criteria Caixaholding, S.A.
		Chairman Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”
		Chairman Caixabank, S.A.
Mr. Antonio Massanell Lavilla	Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”	Director Boursorama, S.A.
		Vice Chairman Caixabank, S.A.
		Non Executive Chairman Cecabank, S.A.
		Director Banco Portugués de Investimento, S.A. (BPI)
		Director Sociedad de Gestión de Activos procedentes de la Restructuración Bancaria (SAREB)
		Chairman Barcelona Digital Centre Tecnológic
		Director Mediterranea Beach & Golf Community, S.A.
Mr. José Fernando de Almansa Moreno-Barreda	Banco Bilbao Vizcaya Argentaria, S.A.	Acting Director Grupo Financiero BBVA Bancomer, S.A. de C.V.
Mr. José Fernando de Almansa Moreno-Barreda	Banco Bilbao Vizcaya Argentaria, S.A.	Acting Director BBVA Bancomer, S.A.

List, if appropriate, any relevant relationships, other than those included under the previous heading, that link members of the Board of Directors with significant shareholders and/or their group companies:


Name or company name of director with relationship	Name or company name of significant shareholder with relationship	Description of relationship
Mr. Cesar Alierta Izuel	Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”	Trustee of Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”
Mr. José María Abril Pérez	Banco Bilbao Vizcaya Argentaria, S.A.	Early retirement. Formerly General Manager of Wholesale and Investment Banking.
Mr. Ignacio Moreno Martínez	Banco Bilbao Vizcaya Argentaria, S.A.	Formerly General Manager of Chairman’s Office.

Telefónica, S.A. 146


		Financial Statements

C.1.18.

Indicate whether any changes have been made to the board regulations during the year:

Description of amendments

—

C.1.19.

Indicate the procedures for appointing, re-electing, appraising and removing directors. List the competent bodies and the processes and criteria to be followed for each procedure.

Selection and appointment

Telefónica’s Bylaws state that the Board of Directors shall be composed of a minimum of five members and a maximum of twenty, to be appointed at the General Shareholders’ Meeting. The Board of Directors may, in accordance with the Corporate Enterprises Act and the Company Bylaws, provisionally co-opt Directors to fill any vacancies.

In this regard, on certain occasions that it is essential due to vacancies after the Annual General Meeting, is appropriate in accordance with the provisions of the Corporate Enterprises Act, to the appointment by cooptation; submitting to ratification such appointment at the next General Meeting of Shareholders held.

Also, in all cases, proposed appointments of Directors must follow the procedures set out in the Company’s Bylaws and Regulations of the Board of Directors and be preceded by the appropriate favorable report by the Nominating, Compensation and Corporate Governance Committee and in the case of independent Directors, by the corresponding proposal by the Committee.

Therefore, in exercise of the powers delegated to it, the Nominating, Compensation and Corporate Governance Committee must report, based on criteria of objectivity and the best interests of the Company, on proposals to appoint, re-appoint or remove Company Directors, taking into account the skills, knowledge and experience required of candidates to fill the vacancies.

In line with the provisions of its Regulations, the Board of Directors, exercising the right to fill vacancies by interim appointment and to propose appointments to the shareholders at the General Shareholders’ Meeting, shall ensure that, in the composition of the Board of Directors, external or non-executive Directors represent an ample majority over executive Directors. Similarly, the Board shall ensure that the total number of independent Directors represents at least one third of the total number of Board members.

Similarly the nature of each Director shall be explained by the Board of Directors to the shareholders at the General Shareholders’ Meeting at which the appointment thereof must be made or ratified. Furthermore, such nature shall be reviewed annually by the Board after verification by the Nominating, Compensation and Corporate Governance Committee, and reported in the Annual Corporate Governance Report.

In any case, and in the event of re-election or ratification of Directors by the General Shareholders’ Meeting, the report of the Nominating, Compensation and Corporate Governance Committee, or in the case of independent Directors, the proposal of said Committee, will contain an assessment of the work and effective time devoted to the post during the last period in which it was held by the proposed Director.

Lastly, both the Board of Directors and the Nominating, Compensation and Corporate Governance Committee shall ensure, within the scope of their respective powers, that those proposed for the post of Director should be persons of recognized caliber, qualifications and experience, who are willing to devote the time and effort necessary to carrying out their functions, and shall take extreme care in the selection of persons to be appointed as independent Directors.

Re-election

Telefónica, S.A. 147


		Financial Statements

The Directors may be re-elected for one or more subsequent similar initial periods.

As with appointments, proposals for the reappointment of Directors must be preceded by the corresponding report by the Nominating, Compensation and Corporate Governance Committee, and in the case of independent Directors, by the corresponding proposal by the Committee.

Evaluation

In accordance with the Regulations of the Board of Directors, the latter reserves expressly the duty to approve on a regular basis its functioning and the functioning of its Committees, it being the duty of the Nominating, Compensation and Corporate Governance Committee to organize and coordinate, together with the Chairman of the Board of Directors, the regular assessment of said Body.

In accordance with the above, it should be noted that the Board of Directors and its Committees carry out a periodic evaluation of the operation of the Board of Directors and of the Committees thereof in order to determine the opinion of Directors regarding the workings of these bodies and to establish any proposals for improvements to ensure the optimum working of the company’s governing bodies.

Removal or dismissal

Directors’ shall cease to hold office when the term for which they were appointed expires, or when so resolved by the shareholders at the General Shareholders’ Meeting in the exercise of the powers legally granted to them.

The Board of Directors shall not propose the removal of any independent Director prior to the end of the Bylaw-mandated period for which they have been appointed, unless there are due grounds therefore acknowledged by the Board alter a report from the Nominating, Compensation and Corporate Governance Committee. Specifically, due grounds shall be deemed to exist when the Director has failed to perform the duties inherent to his position.

The removal of independent Directors may also be proposed as a result of Takeover Bids, mergers or other similar corporate transactions that represent a change in the structure of the Company’s capital.

C.1.20.

Indicate whether the board has evaluated its performance during the year:

Yes

Explain, if applicable, to what extent this evaluation has prompted significant changes in its internal organization and the procedures applicable to its activities:

Description of amendments

Telefónica, S.A. 148


		Financial Statements

In a meeting on February 26, 2014 the Nominating, Compensation and Corporate Governance Committee revised and analyzed the results of Telefónica, S.A.’s evaluation of the performance in 2013 of the Board of Directors and its Committees and of the Company’s General Meeting, concluding that, on the whole, they were highly satisfied with the organization and activities of these governing bodies.

Furthermore, and as a result of this evaluation, certain improvement points were identified. In view of this and after an exhaustive examination and analysis of the results obtained, the Board followed the Nominating, Compensation and Corporate Governance Committee’s proposal and approved the suggested improvements described hereon in order to optimize the operation of the Company’s governing bodies:

Continue to work towards ensuring the earliest possible submission of the documentation and information needed to examine and analyze in advance matters tabled for discussion at Board meetings, whenever possible

ii)

Oversee all necessary measures in order to ensure the General Shareholders’ Meetings of the Company are conducted normally.

iii)

Conduct a detailed review of the 2014 Action Plans review of each Board Committees, to avoid duplication in the subjects treated by them.

C.1.21.

Indicate the cases in which directors must resign.

In accordance with Article 12 of the Regulations of the Board of Directors, Directors must tender their resignation to the Board of Directors and formalize such resignation in the following cases:

a)	When they cease to hold the executive positions to which their appointment as Directors is linked, or when the reasons for which they were appointed no longer exist.

b)	When they are affected by any of the cases of incompatibility or prohibition established by Law.

c)	When they are severely reprimanded by the Nominating, Compensation and Corporate Governance Committee for having failed to fulfill any of their obligations as Directors.

d)	When their remaining on the Board might affect the Company’s credit or reputation in the market or otherwise jeopardize its interests.

The conditions listed above under Recommendation C.1.19 “Removal” above must also be taken into consideration.

C.1.22.

Indicate whether the duties of chief executive officer fall upon the Chairman of the Board of Directors. If so, describe the measures taken to limit the risk of powers being concentrated in a single person:

Yes

Measures for limiting risk

•

The Company’s Articles of Association (article 32) and the Rules of Procedure of the Board of Directors (article 17) cover and regulate the role of the Lead Director, whose functions and tasks include the following:

a) To coordinate the work of External Directors appointed by the Company to defend the interests of all company shareholders and represent the concerns of said Directors.

b) To request the Chairman of the Board of Directors call a meeting of the Board when appropriate

Telefónica, S.A. 149


		Financial Statements

under Good Governance practices.

c) Consequently, to request the inclusion of certain matters on the Agenda of meetings of the Board of Directors.

d) To direct the Board of Directors when it evaluates the Chairman of the Board.

Mr. Alfonso Ferrari Herrero was appointed as Lead Director by the Board of Directors in its meeting of May 31, 2013.

•

At its meeting on the 17th of September 2012 the Company Board of Directors agreed to appoint Mr. José María Álvarez Pallete-López as Chief Operating Officer of Telefónica, S.A., reporting directly to the Chairman and with responsibilities for all of the Business Units in Telefónica Group. Between the 19th of December 2007 and the 17th of September 2012, the Chief Operating Officer of the Company was Mr. Julio Linares López.

•

Equally, pursuant to the provisions of article 28 of the Rules of Procedure of the Board of Directors, any Member of the Board can urge that a meeting of the Board of Directors be called when he deems necessary, or request the inclusion on the Agenda of any matters he considers pertinent.

•

Otherwise, as per the Rules of Procedure of the Board of Directors, the Chairman must at all times act in accordance with the guidelines set by the General Meeting of Shareholders and the Board of Directors.

•

In the same manner, all decisions of particular importance to the Company are submitted for prior approval to the Board of Directors or the Executive Committee, depending on the case in question.

•

It also states that the Board of Directors has exclusive competence over certain matters, such as: general policy and strategies; evaluation of the Board, its Committees and its Chairman, appointment of Senior Managers; remuneration of Board Members and Senior Managers; and strategic investments, without prejudice to the powers of the General Meeting of Shareholders under the law, Bylaws and Regulations of the General Meeting.

•

Additionally, reports and proposals from certain Committees of the Board of Directors are required to take some decisions.

•

Finally, it is important to highlight that the Chairman does not have a casting vote on the Board of Directors.

Telefónica, S.A. 150


		Financial Statements

Indicate, and if necessary, explain whether rules have been established that enable any of the independent directors to convene board meetings or include new items on the agenda, to coordinate and voice the concerns of external directors and oversee the evaluation by the Board of Directors.

Yes

Explanation of rules

Subsequent to the Ordinary General Shareholders’ Meeting on May 31, 2013, the Company’s By-laws (Article 32) and, since June 2013, the Regulations of the Board of Directors (Article 17), set forth and regulate the position of Lead Director (Consejero Independiente Coordinador), the duties and tasks of which include:

a) Coordinating the work of the External Directors appointed by the Company, in defense of the interests of all shareholders of the Company, and hearing the concerns of such directors.

b) Requesting the Chairman of the Board of Directors call a meeting of the Board of Directors when appropriate in accordance with good governance rules.

c) In said instances, requesting the inclusion of certain items on the agenda for meetings of the Board of Directors.

d) Directing the evaluation by the Board of Directors of its Chairman.

In its meeting of May 31, 2013, the Board also appointed the Chairman of the Nominating, Compensation and Corporate Governance Committee, Mr. Alfonso Ferrari Herrero, as Lead Director.

C.1.23.

Are qualified majorities, other than legal majorities, required for any type of decisions?:

If applicable, describe the differences.

Description of differences

—

C.1.24.

Indicate whether there are any specific requirements, apart from those relating to the directors, to be appointed Chairman.

Yes

Telefónica, S.A. 151


		Financial Statements

Description of requirements

In order for a Director to be appointed Chairman, said Director must have served on the Board for at least three years prior to any such appointment. However, such length of service shall not be required if the appointment is made with the favorable vote of at least 85 percent of the members of the Board of Directors.

C.1.25.

Indicate whether the Chairman has the casting vote:

C.1.26.

Indicate whether the bylaws or the regulations of the Board of Directors set any age limit for directors:

C.1.27.

Indicate whether the bylaws or the regulations of the Board of Directors set a limited term of office for independent directors:

C.1.28.

Indicate whether the bylaws or board regulations stipulate specific rules on appointing a proxy to the board, the procedures thereof and, in particular, the maximum number of proxy appointments a director may hold. Also indicate whether only one director of the same category may be appointed as a proxy. If so, give brief details.

In accordance with Article 19 of the Regulations of the Board of Directors, Directors must attend meetings of the Board in person, and when unable to do so in exceptional cases, they shall endeavor to ensure that the proxy they grant to another member of the Board includes, as far as is practicable, appropriate instructions. Such proxies may be granted by letter or any other means that, in the Chairman’s opinion, ensures the certainty and validity of the proxy granted.

Article 34.4 of the By-laws also establishes that all Directors who are absent may grant a proxy in writing to another Director who is in attendance, with the right to speak and to vote, at the meeting or session to which the proxy refers. The Director granting the proxy shall endeavor, to the extent possible, to include voting instructions in the proxy document.

Moreover, the Article 529 quater of the Corporate Enterprises Act states that the Non-Executive Directors may only delegate their representation to another Non-Executive Director.

C.1.29.

Indicate the number of board meetings held during the year and how many times the board has met without the Chairman’s attendance. Attendance will also include proxies appointed with specific instructions.


Number of board meetings			14
Number of Board meetings held without the Chairman’s attendance			0

Indicate the number of meetings of the various board committees held during the year:

Telefónica, S.A. 152


		Financial Statements


Number of meetings of the Executive or Delegated Committee			18
Number of meetings of the Audit and Compliance Committee			11
Number of meetings of the Nominating, Compensation and Corporate Governance Committee			11
Number of meetings of the Regulation Committee			5
Number of meetings of the Service Quality and Customer Service Committee			2
Number of meetings of the Institutional Affairs Committee			6
Number of meetings of the Strategy Committee			5
Number of meetings of the Innovation Committee			5

C.1.30.

Indicate the number of board meetings held during the year with all members in attendance. Attendance will also include proxies appointed with specific instructions:


Directors’ attendance	11
% of attendances of the total votes cast during the year	98.81	%

C.1.31.

Indicate whether the consolidated and individual financial statements submitted for authorization by the board are certified previously.

Identify, where applicable, the person(s) who certified the company’s individual and consolidated financial statements prior to their authorization for issue by the board.


Name		Position
—		—

C.1.32.

Explain the mechanisms, if any, established by the Board of Directors to prevent the individual and consolidated financial statements it prepares from being laid before the General Shareholders’ Meeting with a qualified Audit Report:

Through the Audit and Control Committee, the Board of Directors plays an essential role in supervising the preparation of the Company’s financial information, controlling and coordinating the various players that participate in this process.

To achieve this objective, the Audit and Control Committee’s work addresses the following basic issues:

Supervising the process of preparing and submitting regulated financial information. With respect thereto, it shall be responsible for supervising the preparation and completeness of the financial information relating to the Company and the Group, reviewing compliance with regulatory requirements, the proper determination of the scope of consolidation, and the correct application of accounting standards, informing the Board of Directors thereof.

Monitoring the effectiveness of the Company’s internal control and risk management systems, and to discuss with the auditors significant weaknesses in the internal control system detected during the audit. With respect thereto, it shall be responsible for proposing to the Board of Directors a risk control and management policy.

Establishing and maintaining appropriate relations with the Auditor in order to receive, for review by the Committee, information on all matters that could jeopardize the Auditor’s independence, as well as any other matters relating to the audit procedure, and such other communications as may be provided for in auditing legislation and in technical auditing regulations.

Telefónica, S.A. 153


		Financial Statements

well as information regarding additional services of any kind provided to such entities by the Auditor or by the persons or entities related thereto pursuant to the provisions of prevailing regulations.

4)	Issuing on an annual basis, prior to the issuance of the audit report, a report stating an opinion regarding the independence of the Auditor. This report must in all cases include an opinion on the provision of the additional services referred to in the previous paragraph.

5)	Supervising internal audit, in particular:

To ensure the independence and efficiency of the internal audit function;

To propose the selection, appointment and removal of the person responsible for internal audit;

To propose the budget for such service;

To review the internal audit work plan and its annual activities report;

To receive periodic information on its activities; and

To verify that the senior executive officers take into account the conclusions and recommendations of its reports.

The Audit and Control Committee verifies both the periodical financial information and the Annual Financial Statements, ensuring that all financial information is drawn up according to the same professional principles and practices. To this effect, the Audit and Control Committee meets whenever appropriate, holding eleven (11) meetings in 2014.

Furthermore, the External Auditor participates regularly in the Audit and Control Committee meetings, when called to do so by the Committee, to explain and clarify different aspects of the audit reports and other aspects of its work. Additionally and when requested by the Committee, other members of the management of the Company and its subsidiaries have attended Committee meetings to explain specific matters that are directly within their scope of competence. In particular, managers from the finance, as well as those in charge of internal audit, have attended these meetings. The members of the Committee have held separate meetings with each of these when it was deemed necessary to closely monitor the preparation of the Company’s financial information.

The above notwithstanding, Article 40 of the Regulations of the Board of Directors establishes that the Board of Directors shall endeavor to prepare the final financial statements in a manner that will give no for the Auditor to qualify its opinion. However, whenever the Board considers that it should maintain its standards, it shall publicly explain the contents and scope of the discrepancies.

C.1.33.

Is the Secretary of the board also a director?

C.1.34.

Explain the procedures for appointing and removing the Secretary of the board, indicating whether their appointment and removal have been notified by the Nomination Committee and approved by the board in plenary session.

Appointment and removal procedure

In accordance with Article 15 of the Regulations of the Board of Directors, the Board of Directors, upon the proposal of the Chairman, and after a report from the Nominating, Compensation and Corporate Governance Committee, shall appoint a Secretary to the Board, and shall follow the same procedure for approving his/her removal.

Telefónica, S.A. 154


		Financial Statements


Does the Nomination Committee propose appointments?			Yes
Does the Nomination Committee advise on dismissals?			Yes
Do appointments have to be approved by the board in plenary session?			Yes
Do dismissals have to be approved by the board in plenary session?			Yes

Is the Secretary of the board entrusted in particular with the function of overseeing corporate governance recommendations?

Yes

Remarks

The Secretary to the Board shall, at all times, attend to the formal and substantive legality of the Board’s actions, and the conformance thereof to the Corporate By-laws, the Regulations for the General Shareholders’ Meeting and of the Board, and ensure that these actions are in line with the corporate governance recommendations assumed by the Company at any given time (Article 15 of the Regulations of the Board).

C.1.35.

Indicate and explain, where applicable, the mechanisms implemented by the company to preserve the independence of the auditor, financial analysts, investment banks and rating agencies.

With regards to the independence of the External Auditor of the Company, Article 40 of the Regulations of the Board of Directors establishes that the Board shall, through the Audit and Control Committee, establish a stable and professional relationship with the Company’s Auditor, strictly respecting the independence thereof.

The Audit and Control Committee has a fundamental responsibility, as specified in Article 22 of the Regulations of the Board, to establish and maintain appropriate relations with the Auditor in order to receive, for review by the Committee, information on all matters that could jeopardize the Auditor’s independence, as well as any other matters relating to the audit procedure, and such other communications as may be provided for in auditing legislation and in technical auditing regulations.

In any event, the Audit and Control Committee must receive, on an annual basis, written confirmation from the Auditor of its independence vis-à-vis the entity or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by the Auditor or by the persons or entities related thereto pursuant to the provisions of prevailing legislation.

The Committee must also issue on an annual basis, prior to the issuance of the audit report, a report stating an opinion regarding the independence of the External Auditor. This report must in all cases include an opinion on the provision of the additional services referred to in the previous paragraph.

In addition, in accordance with Article 22 of the Regulations of the Board of Directors, it is the Audit and Control Committee that proposes to the Board of Directors, for submission to the shareholders at the General Shareholders’ Meeting, the appointment of the Auditor as well as, if necessary, the appropriate terms for the hiring thereof, the scope of its professional engagement and the revocation or non-renewal of its appointment.

Likewise, the External Auditor has direct access to the Audit and Control Committee and participates regularly in its meetings, in the absence of the Company’s management team when this is deemed necessary. To this effect, and in keeping with US legislation on this matter, the External Auditor must inform the Audit and Control Committee at least once a year on the most significant generally accepted auditing policies and practices followed in the preparation of the Company’s financial and accounting information affecting key elements in the financial statements which may have been discussed with the management team, and of all relevant communications between the Auditor and the Company’s management team.

Telefónica, S.A. 155


		Financial Statements

In accordance with internal company regulations and in line with the requirements imposed by US legislation, the engagement of any service from the Company’s External Auditors must always have the prior approval of the Audit and Control Committee. Moreover, the engagement of non-audit services must be done in strict compliance with the Auditing Act (Ley de Auditoría de Cuentas) and the Sarbanes-Oxley Act published in the United States and subsequent regulations. For this purpose, and prior to the engagement of the Auditors, the Audit and Control Committee studies the content of the work to be performed, evaluating any situations that may jeopardize the External Auditor’s independence, and specifically supervises the percentage the fees paid for such services represent in the total revenue of the auditing firm. In this respect, the Company reports the fees paid to the External Auditor, including those paid for non-audit services, in its Notes to the Financial Statements, in accordance with prevailing legislation.

C.1.36.

Indicate whether the company has changed its external audit firm during the year. If so, identify the incoming audit firm and the outgoing auditor:

Explain any disagreements with the outgoing auditor and the reasons for the same:

C.1.37.

Indicate whether the audit firm performs other non-audit work for the company and/or its group. If so, state the amount of fees paid for such work and the percentage they represent of the fees invoiced to the company and/or its group.

C.1.38.

Indicate whether the audit report on the previous year’s financial statements is qualified of includes reservations. Indicate the reasons given by the Chairman of the Audit Committee to explain the content and scope of those reservations or qualifications.

C.1.39.

Indicate the number of consecutive years during which the current audit firm has been auditing the financial statements of the company and/or its group. Likewise, indicate how many years the current firm has been auditing the accounts as a percentage of the total number of years over which the financial statements have been audited:


	Company			Group
Number of consecutive years		10			10

	Company			Group
Number of years audited by current audit firm/Number of years the company’s financial statements have been audited (%)		31.30	%		41.70	%

C.1.40.

Indicate and give details of any procedures through which directors may receive external advice:

Yes

Telefónica, S.A. 156


		Financial Statements

Procedures

Article 27 of the Regulations of the Board of Directors stipulates that in order to receive assistance in the performance of their duties, the Directors or any of the Committees of the Board may request that legal, accounting, financial or other experts be retained at the Company’s expense. The engagement must necessarily be related to specific problems of a certain significance and complexity that arise in the performance of their duties.

The decision to retain such services must be communicated to the Chairman of the Board of Directors and shall be formalized through the Secretary to the Board, unless the Board of Directors does not consider such engagement to be necessary or appropriate.

C.1.41.

Indicate whether there are procedures for directors to receive the information they need in sufficient time to prepare for meetings of the governing bodies:

Yes

Procedures

The Company adopts the measures necessary to ensure that the Directors receive the necessary information, specially drawn up and geared to preparing the meetings of the Board and its Committees, sufficiently in advance. Under no circumstances shall such a requirement not be fulfilled, on the grounds of the importance or the confidential nature of the information, apart from in absolutely exceptional cases.

In this regard, at the beginning of each year the Board of Directors and its Committees set the calendar of ordinary meetings to be held during the year. The calendar may be amended by resolution of the Board itself, or by decision of the Chairman, in which case the Directors shall be made aware of the amendment as soon as practicable.

Also, and in accordance with Recommendation 18 of the Unified Good Governance Code (2013 revised version), at the beginning of the year the Board and its Committees prepare an Action Plan detailing the activities to be carried out and their timing for each year, as per their assigned powers and duties.

Likewise, all the meetings of the Board and the Board Committees have a pre-established agenda, which is communicated at least three days prior to the date scheduled for the meeting together with the call for the session. For the same purpose, the Directors are sent the documentation related to the agenda of the meetings sufficiently in advance. Such information is subsequently supplemented with the written documentation and presentations handed out to the Directors at the meeting.

To provide all the information and clarifications necessary in relation to certain points deliberated, the Group’s senior executive officers attend nearly all the Board and Committee meetings to explain the matters within their competencies.

Furthermore, and as a general rule, the Regulations of the Board of Directors expressly establish that Directors are granted the broadest powers to obtain information about all aspects of the Company, to examine its books, records, documents and other data regarding corporate transactions. Exercising of this right to receive information shall be channeled through the Chairman or Secretary to the Board of Directors, who shall respond to the requests made by the Directors, providing them with the requested information directly or offering them the proper contacts at the appropriate level of the organization.

C.1.42.

Indicate and, where appropriate, give details of whether the company has established rules obliging directors to inform the board of any circumstances that might harm the organization’s name or reputation, tendering their resignation as the case may be:

Yes

Details of rules

Telefónica, S.A. 157


		Financial Statements

In accordance with Article 12 of the Regulations of the Board of Directors, Directors must tender their resignation to the Board of Directors and formalize such resignation when their remaining on the Board might affect the Company’s credit or reputation in the market or otherwise jeopardizes its interests.

Likewise, Article 31.h) of the Regulations establishes that Directors must report to the Board any circumstances related to them that might damage the credit or reputation of the Company as soon as possible.

C.1.43.

Indicate whether any director has notified the company that they have been indicted or tried for any of the offences stated in Article 213 of the LSC.

Indicate whether the Board of Directors has examined this matter. If so, provide a justified explanation of the decision taken as to whether or not the director should continue to hold office or, if applicable, detail the actions taken or to be taken by the board.


Decision/action taken		Justified explanation
—		—

C.1.44.

List the significant agreements entered into by the company which come into force, are amended or terminate in the event of a change of control of the company due to a takeover bid, and their effects.

1.- On April 29, 2013, Telefónica, S.A. and TLK Investment, CV (a company forming part of the Guatemalan business group Corporación Multi-Inversiones) (“CMI”) signed an agreement to establish a joint venture between Telefónica and CMI, Telefónica Centroamérica Inversiones, S.L.U. (“TCI”). Telefónica contributed its assets in Central America (excluding assets in Costa Rica) and CMI made a monetary contribution of 500,000,000 US dollars. As a result of these contributions, Telefónica holds 60% and CMI 40% of TCI’s share capital. This arrangement was completed on August 2, 2013.

Telefónica and CMI also entered into a Shareholders’ Pact in TCI, which includes a change of control clause stipulating that if there was a change of control of CMI or Telefónica, the other party would be fully entitled to: (i) exercise the right to acquire (call option) the entire stake held in TCI by the shareholder over which control has changed at the date control changed; or (ii) exercise the right to sell (put option) the entire stake the former held in TCI to the latter. In both cases, the purchase price of the stake shall be TCI’s market value calculated by an independent expert.

For the purposes of the Shareholders’ Pact, a change of control shall be: (i) in the case of CMI, when the last natural person or corporate body controlling CMI ceases to do so; and (ii) for Telefónica, when a natural person or corporate body not controlling Telefónica assumes control. In both instances, “control” shall be as specified in the International Financing Reporting Standards (IFRS).

2.- On February 18, 2014, Telefónica, SA, as borrower, and a group of credit institutions as lenders, with The Royal Bank of Scotland PLC as bank agent, signed a syndicated loan agreement in an aggregate amount up to three thousand (3,000) million euros (the “Facility Agreement”).

As provided in the Facility Agreement, in the event of a change of control in Telefónica, S.A., the lenders entitities may, under certain circumstances, require the early cancellation of the Facility Agreement.

Telefónica, S.A. 158


		Financial Statements

appointment of the majority of the members of the board, or on the financial and operating policies of the company.

C.1.45.

Identify, in aggregate form and provide detailed information on agreements between the company and its officers, executives and employees that provide indemnities for the event of resignation, unfair dismissal or termination as a result of a takeover bid or other.


Number of beneficiaries			48
Type of beneficiary

Executive Directors, Senior Executive Officers and other Employees
Description of the resolution

With regard to Executive Directors and the conditions for termination of their contracts, since 2006, in line with typical market practices, the Company policy applicable to Executive Directors provides for compensation equivalent to two years’ worth of remuneration, calculated based on the last fixed payment and the arithmetical average of the total for the last two annual variable payments, in the event their contract is terminated for reasons attributable to the Company or objective circumstances, such as a change in control of the Company. Otherwise, if the contract is terminated because of a failure attributable to the Executive Director, he is entitled to no compensation whatsoever.

Therefore, the contracts executed since 2006 have followed the criteria stated above regarding the compensation rules.

In the case of contracts signed before 2006, the compensation due to Executive Directors, pursuant to their contracts, does not follow the policy outlined above, but rather is based on the Director’s personal and professional circumstances and when he signed the contract. In these cases, the financial compensation agreed to for contract termination, where applicable, may be up to a maximum of four times annual remuneration depending on the time the Director has been with the Company. Each annual payment includes the last fixed payment and the arithmetical average of the sum of the two last variable annual payments under the contract.

Requiring the Executive Chairman, as of the date of issuance of this Report, the Chairman has no golden parachute provision.

As regards the Company’s Senior Management (excluding Executive Directors), their contracts recognise an entitlement to financial compensation, as indicated below, in the event they are terminated for a reason attributable to the Company and, in certain cases, for objective circumstances such as a change in control of the Company. Otherwise, if the contract is terminated because of a failure attributable to the Senior Manager, he is entitled to no compensation whatsoever. However, it should be noted that, in certain cases, the compensation to which the Senior Manager is entitled, depending on his contract, is not governed by these general rules but instead by his personal and professional circumstances and when he signed his contract. The financial compensation agreed for termination of the contract, where applicable, consists of a maximum of three annual payments plus one more depending on length of service with the Company. The annual payment includes the last fixed payment and the arithmetical average of the sum of the last two variable annual payments under the contract.

Employment contracts that link employees to the Company under a standard employment relationship do not contain a compensation clause for termination of the contract. As such, the employee is entitled, where applicable, to the compensation established under employment legislation. Notwithstanding the above, certain Company employees, depending on their level and length of service, their personal and professional circumstances and when they signed their contracts, have a recognised contractual entitlement to receive compensation, in some cases, under the same conditions as set out in the paragraph above, generally consisting of one and a half annual payments. This annual payment includes the last fixed payment and the arithmetical average of the sum of the last two variable annual payments under the contract.

Telefónica, S.A. 159


		Financial Statements

Indicate whether these agreements must be reported to and/or authorized by the governing bodies of the company or its group:


	Board of Directors		General Shareholders’ Meeting
Body authorizing clauses		Yes		No
Is the General Shareholders’ Meeting informed of such clauses?				Yes

C.2.

Board committees

C.2.1.

Give details of all the board committees, their members and the proportion of proprietary and independent directors:

EXECUTIVE COMMISSION


Name	Post		Type
Mr. César Alierta Izuel		Chairman		Executive
Mr. Isidro Fainé Casas		Vice Chairman		Proprietary
Mr. José María Abril Pérez		Vice Chairman		Proprietary
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Carlos Colomer Casellas		Member		Independent
Mr. Francisco Javier de Paz Mancho		Member		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Mr. José María Álvarez-Pallete López		Member		Executive
Mr. Peter Erskine		Member		Independent


% of executive directors	22.00	%
% of proprietary directors	22.00	%
% of independent directors	56.00	%
% of Other External Directors	0.00	%

AUDIT AND CONTROL COMMITTEE


Name	Post		Type
Mr. Carlos Colomer Casellas		Chairman		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Antonio Massanell Lavilla		Member		Proprietary
Mr. Ignacio Moreno Martínez		Member		Proprietary


% of executive directors	0.00	%
% of proprietary directors	40.00	%
% of independent directors	60.00	%
% of Other External Directors	0.00	%

Telefónica, S.A. 160


		Financial Statements

NOMINATING, COMPENSATION AND CORPORATE GOVERNANCE COMMITTEE


Name	Position		Type
Mr. Alfonso Ferrari Herrero		Chairman		Independent
Mr. Carlos Colomer Casellas		Member		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Mr. Pablo Isla Álvarez de Tejera		Member		Independent
Mr. Peter Erskine		Member		Independent


% of executive directors	0.00	%
% of proprietary directors	0.00	%
% of independent directors	100.00	%
% of Other External Directors	0.00	%

REGULATION COMMITTEE


Name	Position		Type
Mr. Gonzalo Hinojosa Fernández de Angulo		Chairman		Independent
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Francisco Javier de Paz Mancho		Member		Independent
Mr. José Fernando de Almansa Moreno-Barreda		Member		Independent
Ms. Eva Castillo Sanz		Member		Other External
Mr. Ignacio Moreno Martínez		Member		Proprietary


% of executive directors	0.00	%
% of proprietary directors	17.00	%
% of independent directors	67.00	%
% of Other External Directors	17.00	%

SERVICE QUALITY AND CUSTOMER SERVICE COMMITTEE


Name	Position		Type
Mr. Antonio Massanell Lavilla		Chairman		Proprietary
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Carlos Colomer Casellas		Member		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Ms. Eva Castillo Sanz		Member		Other External
Mr. Ignacio Moreno Martínez		Member		Proprietary
Mr. Francisco Javier de Paz Mancho		Member		Independent


% of executive directors	0.00	%
% of proprietary directors	29.00	%
% of independent directors	57.00	%
% of Other External Directors	14.00	%

Telefónica, S.A. 161


		Financial Statements

INSTITUTIONAL AFFAIRS COMMITTEE


Name	Post		Type
Mr. Julio Linares López		Chairman		Other External
Mr. José Fernando de Almansa Moreno-Barreda		Member		Independent
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Mr. Antonio Massanell Lavilla		Member		Proprietary
Mr. Francisco Javier de Paz Mancho		Member		Independent


% of executive directors	0.00	%
% of proprietary directors	17.00	%
% of independent directors	67.00	%
% of Other External Directors	17.00	%

STRATEGY COMMITTEE


Name	Position		Type
Mr. Peter Erskine		Chairman		Independent
Mr. Alfonso Ferrari Herrero		Member		Independent
Mr. Gonzalo Hinojosa Fernández de Angulo		Member		Independent
Mr. José Fernando de Almansa Moreno-Barreda		Member		Independent
Ms. Eva Castillo Sanz		Member		Other External
Mr. Julio Linares López		Member		Other External


% executive directors	0.00	%
% proprietary directors	0.00	%
% independent directors	67.00	%
% of Other External Directors	33.00	%

INNOVATION COMMITTEE


Name	Position		Type
Mr. Carlos Colomer Casellas		Chairman		Independent
Mr. Antonio Massanell Lavilla		Member		Proprietary
Mr. José María Abril Pérez		Member		Proprietary
Mr. Peter Erskine		Member		Independent
Mr. Julio Linares López		Member		Other External


% executive directors	0.00	%
% proprietary directors	40.00	%
% independent directors	40.00	%
% of Other External Directors	20.00	%

C.2.2.

Complete the following table on the number of female directors on the various board committees over the past four years:

Telefónica, S.A. 162


		Financial Statements


	Number of female directors
	Year 2014 Number %			Year 2013 Number %			Year 2012 Number %			Year 2011 Number %
Executive Committee		0			0			0			0
Audit and Control Committee		0			0			0			0
Nomination, Compensation and Corporate Governance Committee		0			0			0			0
Regulation Committee		1 (16.67	%)		1 (14.29	%)		1 (20.00	%)		1 (16.67	%)
Service Quality and Customer Service Committee		1 (14.29	%)		1 (14.29	%)		1 (16.67	%)		1 (16.67	%)
Institutional Affairs Committee		0			0			0			0
Strategy Committee		1 (16.67	%)		1 (16.67	%)		1 (20.00	%)		1 (20.00	%)
Innovation Committee		0			0			0			0

C.2.3.

Indicate whether the Audit Committee is responsible for the following:


To supervise the preparation process, monitoring the integrity of financial information on the company and, if applicable, the group, and revising compliance with regulatory requirements, the adequate boundaries of the scope of consolidation and correct application of accounting principles		Yes

To regularly review internal control and risk management systems, so main risks are correctly identified, managed and notified		Yes

To safeguard the independence and efficacy of the internal audit function; propose the selection, appointment, reappointment and removal of the head of internal audit; propose the department’s budget; receive regular report-backs on its activities; and verify that senior management are acting on the findings and recommendations of its reports		Yes

To establish and supervise a mechanism whereby staff can report, confidentially and, if necessary, anonymously, any irregularities they detect in the course of their duties, in particular financial or accounting irregularities, with potentially serious implications for the firm		Yes

To submit to the board proposals for the selection, appointment, reappointment and removal of the External Auditor, and the engagement conditions		Yes

To receive regular information from the External Auditor on the progress and findings of the audit program and check that senior management are acting on its recommendations		Yes

To ensure the independence of the External Auditor		Yes

C.2.4.

Describe the organizational and operational rules and the responsibilities attributed to each of the board committees.

See Section H “Other Information of Interest”, Note 14 to Section C.2.4.

C.2.5.

Indicate, as appropriate, whether there are any regulations governing the board committees. If so, indicate where they can be consulted, and whether any amendments have been made during the year. Also indicate whether an annual report on the activities of each committee has been prepared voluntarily.

The organization and operation of the Board of Directors Committees are governed by the Regulations of the Board of Directors. Also, and particularly, the Executive Commission is regulated in Article 38 of the Corporate By-laws, the Audit and Control Committee in Article 39 of the Corporate By-laws, and the Nominating, Compensation and Corporate Governance Committee in the Article 40 of the Corporate By-laws These documents are available for consultation on the Company’s website.

Telefónica, S.A. 163


		Financial Statements

the year detailing the issues discussed at their meetings and highlighting certain aspects regarding their powers and duties, composition and operation.

C.2.6.

Indicate whether the composition of the Executive Committee reflects the participation within the board of the different types of directors.

Yes

Telefónica, S.A. 164


		Financial Statements

D.	Related-party and intragroup transactions

D.1.

Identify the competent body and explain, if applicable, the procedures for approving related-party or intragroup transactions.

Competent body

Board of Directors

Procedures

As per Article 5 of the Regulations of the Board of Directors, the Board reserves the power to approve, inter alia, transactions entered into by the Company with related parties.

In this regard, and pursuant to Article 38 of the Regulations of the Board of Directors, the Board of Directors shall examine the transactions that the Company enters into, either directly or indirectly, with Directors, with significant shareholders or shareholders represented on the Board of Directors, or with persons related thereto.

The performance of such transactions shall require the authorization of the Board of Directors, on the recommendation of the Nominating, Compensation and Corporate Governance Committee, unless they are transactions or operations that form part of the customary or ordinary activity of the parties involved that are performed on an arm’s-length basis and in insignificant amounts for the Company.

The transactions referred to in the preceding sub-section shall be assessed from the point of view of equal treatment of shareholders and the arm’s-length basis of the transaction, and shall be included in the Annual Corporate Governance Report and in the periodic public information of the Company upon the terms provided by law.

Explain if the authority to approve related-party transactions has been delegated to another body or person

The powers to approve transactions entered into by the Company with related parties, may be adopted, by the Executive Commission in urgent cases and subsequently ratified by the Board of Directors (pursuant to Article 5.4.C of the Regulations of the Board of Directors).

Telefónica, S.A. 165


		Financial Statements

D.2.

List any relevant transactions, by virtue of their amount or importance, between the company or its group of companies and the company’s significant shareholders:

Name or corporate name of significant shareholder

Name or corporate name of the
company or its group company

Nature of the
relationship

Type of transaction

Amount
(Thousands
of euros)