FINANCIAL STATEMENTS - KPN

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Past service costs are recognized immediately in the Consolidated Statement of Income, unless the entitlements to the adjusted benefits depend on the employee’s future service (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. Gains or losses on the curtailment or settlement of a defined benefit plan are recognized on the date of the curtailment or settlement. The amount of pension cost included in operating expenses with respect to defined benefit plans consist of service cost, interest cost and amortization of actuarial losses and past service costs less expected return on plan assets, all determined at the beginning of the year, as well as curtailments and settlements. For pension plans that qualify as a defined contribution plan, KPN recognizes contributions as an expense when an employee has rendered service in exchange for those contributions. Recent accounting pronouncement Pension obligations In June 2011, IAS 19 ‘Employee benefits’ was amended (IAS19R) and became effective at January 1, 2013. The impact on KPN’s financial statements will be as follows: ýý Elimination of the corridor approach and recognition of all actuarial gains and losses in Other Comprehensive Income as they occur; ýý Immediate recognition of all past service costs; and ýý Replacement of interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). In addition, KPN has decided to present net interest cost as other financial results as of January 1, 2013, because this will give a better view of the operating expenses related to KPN’s pension plans. IAS 19R will be applied in the financial statements 2013 with restatement of comparative 2012 numbers. At January 1, 2013, all unrecognized cumulative actuarial losses and past service costs will be recognized at once which will reduce equity attributable to equity holders by EUR 1,127 million (net of tax), the net pension provision in the balance sheet will increase by EUR 1,380 million and the deferred tax assets will increase by EUR 253 million. Under IAS 19R, the pension provision in the balance sheet is equal to the defined benefit obligation less the fair value of plan assets of the defined benefit pension plans. The impact of IAS 19R on equity at January 1, 2012 is a reduction of EUR 657 million (net of tax). Pension cost (excluding net interest cost) in 2012 will be EUR 111 million lower as a result of the application of IAS 19R, mainly due to the elimination of amortization of actuarial gains and losses through the income statement (EUR 91 million) and the replacement of interest cost and expected return on plan assets (EUR 20 million expense under IAS 19) with a net interest amount, which will be presented as other financial results. The net interest cost under IAS 19R relating to the pension provision amounts to EUR 36 million in 2012. In 2012, actuarial losses of EUR 672 million were incurred (EUR 542 million net of tax) which under IAS 19R are recognized immediately in equity attributable to equity holders. The effect on Other Comprehensive Income and Total Comprehensive Income in 2012 would have been a decrease of EUR 470 million. The impact of IAS 19R on equity attributable to equity holders can be summarized as follows (in millions of EUR): December 31, 2012 December 31, 2011 Equity attributable to equity holders as per Consolidated Financial Statements 2,410 2,930 IAS 19R impact -1,127 -657 Adjusted equity attributable to equity holders 1,283 2,273 The movement in the IAS 19R impact in 2012 can be summarized as follows (in millions of EUR): Unrecognized actuarial losses/past service cost Tax Net Balance as at December 31, 2011 783 -126 657 Reversal amortization -91 – -91 Adjustment expected return plan assets 16 – 16 Higher tax expense – 3 3 Actuarial losses in 2012 672 -130 542 Balance as at December 31, 2012 1,380 -253 1,127 IAS 19R specifically addresses the incorporation in the valuation of the defined benefit obligation of risk sharing and shared funding between employer and employees (e.g. employee contributions) which are typical for Dutch pension arrangements and which would reduce the defined benefit obligation. From the current wording in IAS 19R, it is unclear how these elements should be included in the valuation of the defined benefit obligation. Therefore, the IFRS Interpretations Committee (IFRIC) has been requested to provide additional guidance. The impact of risk sharing and shared funding on the defined benefit obligation under IAS 19R for KPN’s Dutch pension plans is expected to be limited but will be further determined when additional guidance from the IFRIC becomes available. In the numbers mentioned above, the possible impact of risk sharing and shared funding is not included. The amount of cash contributions to be paid to the pension funds will not be impacted due to the abovementioned changes in accounting for pensions nor the investment policies of these funds as these are determined independently from KPN. KPN has no bank covenants which will be impacted by these new accounting policies nor will they have an impact on KPN’s ability to meet its financial obligations. KPN | Annual Report 2012 99
Consolidated Financial Statements General notes to the Consolidated Financial Statements continued Provisions for retirement benefit obligations Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. KPN recognizes termination benefits when KPN is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value. Other long-term employee obligations These employee benefits include jubilee or other longservice benefits, long-term disability benefits and, if they are not fully payable within 12 months after the end of the period, bonuses and deferred compensation. The expected costs of these benefits are accrued over the period of employment using an accounting method similar to that for defined benefit pension plans, except that actuarial gains and losses and past-service costs are recognized immediately. Provisions for other liabilities and charges Provisions such as asset retirement obligations, restructuring costs and legal claims are recognized when KPN has a present legal or constructive obligation as a result of past events; and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. Statement of Cash Flows The Statement of Cash Flows is prepared using the indirect method. Cash flows denominated in currencies other than the euro are translated at average exchange rates. Cash flows relating to interest and taxes on profits are included in the cash flow from operating activities. The cost of newly acquired Group companies and associated companies, insofar as paid for in cash, is included in the cash flow from investing activities. Cash flows resulting from Group companies acquired or disposed of are disclosed separately. Investments in property, plant and equipment, which are financed by financial leases, are not included in the Consolidated Cash Flow Statement. Recent accounting pronouncements The International Accounting Standards Board (IASB) has issued a number of new standards and interpretations, and amendments to existing standards many of which will become effective on or after January 1, 2013. These have not been applied in preparing these 2012 Consolidated Financial Statements. Interpretations and amendments of the standards will not have material impact on KPN’s Consolidated Financial Statements, except for IAS 19R. The new standards, which may have an effect on the information to be disclosed in KPN’s Consolidated Financial Statements of 2013 are listed below: ýý IAS 19, ‘Employee benefits’ was amended in June 2011 (IAS 19R). For the impact on KPN’s Financial statement refer to the accounting policies for provisions for retirement benefit obligations. ýý IFRS 9, ‘Financial instruments’ This standard is the first step in the process to replace IAS 39, ‘Financial instruments: recognition and measurement’. Since the standard has not yet been endorsed by the European Union, it is uncertain when it needs to be applied by KPN. The remaining uncertainty with respect to subsequent phases of the project makes it impossible to quantify the impact of the new standard on KPN’s financial statements. ýý IFRS 10, ‘Consolidated financial statement’, establishes a single control model that applies to all entities including special purpose entities. The introduction of this new standard will not change KPN’s financial position. ýý IFRS 11, ‘Joint arrangements’, is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the parties to the arrangement rather than its legal form. The introduction of this new standard will not change KPN’s financial position. ýý IFRS 12, ‘Disclosures of interests in other entities’, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is the complement of the two new standards discussed in preceding paragraphs and will become effective at the same time. ýý IFRS 13, ‘Fair value measurement’, becomes the single source of guidance on IFRS for all fair value measurements. The impact of this standard on KPN’s financial statements is being assessed but it is not expected to be material because the standard further clarifies existing requirements. 100 KPN | Annual Report 2012
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FINANCIAL STATEMENTS - KPN

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