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Basis of Preparation of the Consolidated Financial Statements and Summary of Significant Accounting Policies and Practices | 12 Months Ended
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Dec. 31, 2020
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Basis of Preparation of the Consolidated Financial Statements and Summary of Significant Accounting Policies and Practices | 2. Basis of Preparation of the Consolidated Financial Statements and Summary of Significant Accounting Policies and Practices a) Basis of preparation The accompanying consolidated financial statements have been prepared in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IASB”) (hereafter referred to as IFRS). The consolidated financial statements have been prepared on the historical cost basis, except for the derivative financial instruments, the mobile telecommunications towers, the trust assets of post-employment and other employee benefit plans and the investments in equity at fair value through other comprehensive income (OCI), which are presented at their market value. Effective July 1, 2018, the Argentinian economy has been considered to be hyperinflationary in accordance with the criteria in IAS 29 “Financial Reporting in Hyperinflationary Economies” (“IAS 29”). Accordingly, for the Argentinian subsidiaries, we have included, adjustments for hyperinflation and reclassifications as is required by the standard for purposes of presentation of IFRS in the consolidated financial statements. The preparation of these consolidated financial statements under IFRS requires the use of critical estimates and assumptions that affect the amounts reported for certain assets, liabilities, income and expenses, including the main impact generated by the COVID-19 pandemic and the potential effect on the amounts disclosed in the consolidated financial statements. It also requires that management exercise judgment in the application of the Company’s accounting policies. Actual results could differ from these estimates and assumptions. The Mexican peso is the functional currency of the Company’s Mexican operations and the consolidated reporting currency of the Company. i) Changes in Accounting Policies and Disclosures Amendments to IFRS 16 Covid-19 Related Rent Concessions On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted. This amendment had no significant impact on the consolidated financial statements of the Company (See Note 15). Revaluation of telecommunications towers (plant, property and equipment) As of December 31, 2020, the company changed its accounting policy to record the value of the passive infrastructure (towers) of its subsidiaries. With the change, this passive infrastructure was no longer recognized at historical cost and it began to be recognized under the revaluation model (market value). The company considers that the revaluation model represents the actual conditions of the industry of this class of assets and improves its financial position, this allows its shareholders and stakeholders to have the necessary financial information associated with market expectations about this class of assets. The incremental effect on passive infrastructure is Ps.107,152,628. The first time application of an asset revaluation policy is a change in accounting policy that must be treated as a revaluation in accordance with IAS 16, this implies that it is not necessary to restructure the book value of previous periods, therefore, the adoption of this method will be carried out prospectively. ii) Basis of consolidation The consolidated financial statements include the accounts of América Móvil, S.A.B. de C.V. and those subsidiaries over which the Company exercises control. The consolidated financial statements for the subsidiaries were prepared for the same period as the Company´s and applying consistent accounting policies. All of the subsidiary companies operate in the telecommunications sector or related. Subsidiaries are entities over which the Company has control. Control is achieved when the Company has power over the investee, when it is exposed to, or has rights to, variable returns from its involvement with the investee, and has the ability to use its power over the investee to affect the amount of the investor’s returns. Subsidiaries are consolidated on a line by line basis from the date which control is achieved by the Company. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of control. On March 6, 2020, in accordance with a resolution of the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones or IFT), the subsidiaries Teléfonos de México, S.A.B. de C.V. and Teléfonos del Noroeste, S.A. de C.V. created separate companies related to the wholesale services named Red Nacional Última Milla S.A.P.I. de C.V., Servicios de Telecomunicaciones Ultima Milla, S.A. de C.V. and Red Última Milla del Noroeste S.A.P.I. de C.V. The restructuring of Telmex has no impact in the consolidated financial information of the Company. Changes in the Company’s ownership interests in a subsidiary that do not result in the Company losing control over the subsidiary are accounted for as equity transactions. The carrying amounts of the equity attributable to owners of the parent and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the carrying amount of the non-controlling interests and the fair value of the consideration paid or received in the transaction is recognized directly in the equity attributable to the owners. Subsidiaries are deconsolidated from the date which control ceases. When the Company ceases to have control over a subsidiary, it derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts, derecognizes the carrying amount of non-controlling interests in the former subsidiary and recognizes the fair value of any consideration received from the transaction. Any retained interest in the former subsidiary is then remeasured to its fair value. All intra-Company balances and transactions, and any unrealized gains and losses arising from intra-Company transactions, are eliminated in preparing the consolidated financial statements. Non-controlling interests represent the portion of profits or losses and net assets not held by the Company. Non-controlling interests are presented separately in the consolidated statements of comprehensive income and in equity in the consolidated statements of financial position separately from Company’s own equity. Associates: An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not have control or joint control over those decisions. The Company’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment losses. The investments in associated companies in which the Company exercises significant influence are accounted for using the equity method, whereby Company recognizes its share in the net profit (losses) and equity of the associate. The results of operations of the subsidiaries and associates are included in the Company’s consolidated financial statements beginning as of the month following their acquisition and its share of other comprehensive income after acquisition is recognized directly in other comprehensive income. The Company assesses at each reporting date whether there is objective evidence that investment in associates is impaired. If so, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value. The equity interest in the most significant subsidiaries at December 31, 2019 and 2020 is as follows:
Company name |  | Country |  |  | Equity interest at December 31 |
| 2019 |  |  | 2020 |
Subsidiaries: |  |  |  |  |  |  |  |  |  |  |  |
América Móvil B.V. a) |  |  | Netherlands |  |  |  | 100.0 | % |  |  | 100.0 | %
Compañía Dominicana de Teléfonos, S.A. (“Codetel”) b) |  |  | Dominican Republic |  |  |  | 100.0 | % |  |  | 100.0 | %
Sercotel, S.A. de C.V. a) |  |  | Mexico |  |  |  | 100.0 | % |  |  | 100.0 | %
Radiomóvil Dipsa, S.A. de C.V. and subsidiaries (“Telcel”) b) |  |  | Mexico |  |  |  | 100.0 | % |  |  | 100.0 | %
Puerto Rico Telephone Company, Inc. b ) |  |  | Puerto Rico |  |  |  | 100.0 | % |  |  | 100.0 | %
Servicios de Comunicaciones de Honduras, S.A. de C.V. (“Sercom Honduras”) b ) |  |  | Honduras |  |  |  | 100.0 | % |  |  | 100.0 | %
TracFone Wireless, Inc. (“TracFone”) b) |  |  | USA |  |  |  | 100.0 | % |  |  | 100.0 | %
Claro S.A. (Claro Brasil) b) |  |  | Brazil |  |  |  | 98.2 | % |  |  | 98.2 | %
NII Brazil Holding S.A.R.L a) |  |  | Luxembourg |  |  |  | 100.0 | % |  |  | 100.0 | %
Nextel Telecomunicações Ltda b) |  |  | Brazil |  |  |  | 100.0 | % |  |  | 100.0 | %
Telecomunicaciones de Guatemala, S.A. (“Telgua”) b) |  |  | Guatemala |  |  |  | 99.3 | % |  |  | 99.3 | %
Claro Guatemala, S.A. b) |  |  | Guatemala |  |  |  | 100.0 | % |  |  | 100.0 | %
Empresa Nicaragüense de Telecomunicaciones, S.A. (“Enitel”) b) |  |  | Nicaragua |  |  |  | 99.6 | % |  |  | 99.6 | %
Compañía de Telecomunicaciones de El Salvador, S.A. de C.V. (“CTE”) b) |  |  | El Salvador |  |  |  | 95.8 | % |  |  | 95.8 | %
Comunicación Celular, S.A. (“Comcel”) b) |  |  | Colombia |  |  |  | 99.4 | % |  |  | 99.4 | %
Consorcio Ecuatoriano de Telecomunicaciones, S.A. (“Conecel”) b) |  |  | Ecuador |  |  |  | 100.0 | % |  |  | 100.0 | %
AMX Argentina, S.A. b) |  |  | Argentina |  |  |  | 100.0 | % |  |  | 100.0 | %
AMX Paraguay, S.A. b) |  |  | Paraguay |  |  |  | 100.0 | % |  |  | 100.0 | %
AM Wireless Uruguay, S.A. b) |  |  | Uruguay |  |  |  | 100.0 | % |  |  | 100.0 | %
Claro Chile, S.A. b) |  |  | Chile |  |  |  | 100.0 | % |  |  | 100.0 | %
América Móvil Perú, S.A.C b) |  |  | Peru |  |  |  | 100.0 | % |  |  | 100.0 | %
Claro Panamá, S.A. b) |  |  | Panamá |  |  |  | 100.0 | % |  |  | 100.0 | %
Teléfonos de México, S.A.B. de C.V. b) |  |  | Mexico |  |  |  | 98.8 | % |  |  | 98.8 | %
Telekom Austria AG b) |  |  | Austria |  |  |  | 51.0 | % |  |  | 51.0 | %
a) | Holding companies
b) | Operating companies of mobile and fixed services
iii) Basis of translation of financial statements of foreign subsidiaries and associated companies The operating revenues of foreign subsidiaries jointly represent approximately 73%, 71% and 72% of consolidated operating revenues for the years ended December 31, 2018, 2019 and 2020, respectively, and their total assets jointly represent approximately 73% and 75% of consolidated total assets at December 31, 2019 and 2020, respectively. The financial statements of foreign subsidiaries have been prepared under or converted to IFRS in the respective local currency (which is their functional currency) and then translated into the Company’s reporting currency as follows:
| • |  | all monetary assets and liabilities were translated at the closing exchange rate of the period;
| • |  | all non-monetary assets and liabilities at the closing exchange rate of the period;
| • |  | equity accounts are translated at the exchange rate at the time the capital contributions were made and the profits were generated;
| • |  | revenues, costs and expenses are translated at the average exchange rate of the period, except for the operations of the subsidiaries in Argentina, whose economy is considered hyperinflationary since 2018;
| • |  | the consolidated statements of cash flows presented using the indirect method were translated using the weighted-average exchange rate for the applicable period (except for Argentina), and the resulting difference is shown in the consolidated statements of cash flows under the heading “Adjustment to cash flows due to exchange rate fluctuations, net”.
The basis of translation for the operations of the subsidiaries in Argentina are described: In recent years, the Argentina economy has shown high rates of inflation. Although inflation data has not been consistent in recent years and several indexes have coexisted, inflation in Argentina indicates that the three-year cumulative inflation rate exceeded 100% in 2018, which is one of the quantitative references established by IAS 29. As a result, Argentina was considered a hyperinflationary economy in 2018 and the Company applies hyperinflation accounting to its subsidiary whose functional currency is the Argentine peso for financial information for periods ending on or after July 1, 2018, however the calculation of the cumulative impact was measured as of January 1, 2018. In order to restate for hyperinflation its financial statements, the subsidiary used the series of indices defined by resolution JG No. 539/18 issued by the “Federación Argentina de Consejos Profesionales de Ciencias Económicas” (“FACPCE”), based on the National Consumer Price Index (IPC) published by the Instituto Nacional de Estadística y Censos (INDEC) of the Argentine Republic and the Wholesale Internal Price Index (IPIM) published by FACPCE. The cumulative index at December 31, 2020 is 385.8826, while on an annual inflation for 2020 is 36.1%. The main implications are as follows:
| • |  | Adjustment of the historical cost of non-monetary assets and liabilities and equity items from their date of acquisition, or the date of inclusion in the consolidated statements of financial position, to the end of the year, in order to reflect changes in the currency’s purchasing power caused by inflation.
| • |  | The gain on the net monetary position caused by the impact of inflation in the year is included in the consolidated statements of comprehensive income as part of the caption “ Valuation of derivatives, interest cost from labor obligations and other financial items, net” . Items in the statement of comprehensive income and in the statements of cash flows are adjusted by the inflation index since their origination, with a balancing entry, and a reconciling item in the statements of cash flows, respectively.
| • |  | All items in the financial statements of the Argentine company are translated at the closing exchange rate, which at December 31, 2019 and 2020 were 0.3147 and 0.2371, respectively, per argentine peso per Mexican peso.
The difference resulting from the translation process is recognized in equity in the caption “Effect of translation of foreign entities”. At December 31, 2019 and 2020, the cumulative translation adjustment was Ps.(87,367,366) and Ps.(100,926,140), respectively. b) Revenue recognition The Company revenues are derived principally from providing the following telecommunications services and products: wireless voice, wireless data and value-added services, fixed voice, fixed data, broadband and IT services, Pay TV and over-the-top (“OTT”) services. The Company provides fixed and mobile services. These services are offered independently in contracts with customers or together with the sale of handsets (mobile) under the postpaid model. In accordance with IFRS 15 “ Revenues from contracts with customers ” , the transaction price should be assigned to the different performance obligations based on their relative standalone selling price. The Company with respect to the provided services, it has market observable information, to determine the standalone selling price of the services. On the other hand, in the case of the sale of bundled mobile phones sold (including service and handset) by the Company, the allocation of the sales is done based on their relative standalone selling price of each individual component related to the total bundled price. The result is that more equipment revenue is recognized at the moment of a sale and, therefore, less service revenue from the monthly fee are being recognized under IFRS 15. The services provided by the Company are satisfied over the time of the contract period, given that the customer simultaneously receives and consumes the benefits provided by the Company. Such service bundles, voice and data, accomplish the criteria mentioned in IFRS 15 of being substantially similar and of having the same transfer pattern which is why the Company concluded that the revenue from these different services offered to its customers are considered as a single performance obligation with revenue being recognized over time, except for sales of equipment. Under IFRS 15, for tho s e contracts with customers in which generally the sale of equipment and other electronic equipment is a single performance obligation, the Company recognizes the revenue at the moment when it transfers control to the customer which generally occurs when such goods are delivered. The commissions are considered incremental contract acquisition costs that are capitalized and are amortized over the expected period of benefit, during the average duration of customer contracts. Some subsidiaries have loyalty programs where the Company awards credits customer credit awards referred as “points”. The customer can redeem accrued “points” for awards such as devices, accessories or airtime. The Company provides all awards. The consideration allocated to the award credits is identified as a separate performance obligation; the corresponding liability of the award credits is measured at its fair value. The consideration allocated to award credits amount is recognized as a contract liability until the points are redeemed. Revenue is recognized upon redemption of products by the customer. c) Cost of sales The cost of mobile equipment and computers is recognized at the time the client and distributor receive the device which is when the control is are transferred to the customer. d) Cost of services The cost of services represents the costs incurred to properly deliver the services to the customers, it includes the network operating costs and licenses related costs and is accounted at the moment in which such services are provided. e) Commissions to distributors The Company pays commissions to its distributors different than those that acquire customers. Such commissions are recognized in “commercial, administrative and general expenses” in the consolidated statements of comprehensive income at the time in which the distributor either reports an activation or reaches certain number of lines activated or obtained at a certain point of time. f) Cash and cash equivalents Cash and cash equivalents represent bank deposits and liquid investments with maturities of less than three months. These amounts are stated at cost plus accrued interest, which is similar to their market value. The Company also maintains restricted cash held as collateral to meet certain contractual obligations. Restricted cash is presented as part of “Other assets” within other non-current financial assets given that the restrictions are long-term in nature (See Note 9) . g) Equity investments at fair value through OCI and other short-term investments Equity investments at fair value through OCI and other short-term investments are primarily composed of equity investments and other short-term financial investments. Amounts are initially recorded at their estimated fair value. Fair value adjustments for equity investments are recorded through other comprehensive income, and other short-term investment. h) Inventories Inventories are initially recognized at historical cost and are valued using the average cost method without exceeding their net realizable value. The estimate of the realizable value of inventories on-hand is based on their age and turnover. i) Business combinations and goodwill Business combinations are accounted for using the acquisition method, which in accordance with IFRS 3, “ Business acquisitions ”, consists in general terms as follows:
(i) | Identify the acquirer
(ii) | Determine the acquisition date
(iii) | Value the acquired identifiable assets and assumed liabilities
(iv) | Recognize the goodwill or a bargain purchase gain
For acquired subsidiaries, goodwill represents the difference between the purchase price and the fair value of the net assets acquired at the acquisition date. The investment in acquired associates includes goodwill identified on acquisition, net of any impairment loss. Goodwill is reviewed annually to determine its recoverability or more often if circumstances indicate that the carrying value of the goodwill might not be fully recoverable. The possible loss of value in goodwill is determined by analyzing the recovery value of the cash generating unit (or the group thereof) to which the goodwill is associated at the time it was originated. If this recoverable amount is lower than the carrying value, an impairment loss is charged to the results of operations. The recoverable amount is determined based on the higher of fair value less cost of disposal or value in use. For the years ended December 31, 2018, 2019 and 2020, no impairment losses were recognized for goodwill. j) Property, plant and equipment i) Property, plant and equipment are recorded at acquisition cost, net of accumulated depreciation; except for the passive infrastructure of telecommunications towers, which are recognized under the revaluation model as of December 31, 2020. Depreciation is computed on the cost of assets using the straight line method, based on the estimated useful lives of the related assets, beginning the month after they become available for use. Borrowing costs that are incurred for general financing for construction in progress for periods exceeding six months are capitalized as part of the cost of the asset. During the years ended December 31, 2018, 2019 and 2020, borrowing costs that were capitalized amounted to Ps.2,020,288, Ps.2,233,358 and Ps.1,771,613, respectively. In addition to the purchase price and costs directly attributable to preparing an asset in terms of its physical location and condition for operating as intended by management, when required, the cost also includes the estimated costs of dismantling and removal of the asset and for restoration of the site where it is located (See Note 16c). The passive infrastructure of telecommunications towers will be recorded at revalued value, which is its fair value at the time of revaluation less accumulated depreciation; if there is any loss or impairment, it must also be considered within its value. The revaluations will be calculated with sufficient regularity to ensure that the book value, every time, does not differ significantly from that which could be determined using the fair value at the end of the reporting period. The increase resulting from a revaluation is recorded in other comprehensive income (OCI) and is accumulated in equity as a revaluation surplus. To the extent that there is a decrease in revaluation, it will be recognized in profit or loss, except to the extent that it compensates for an existing surplus on the same asset. An annual transfer of the asset revaluation surplus and accumulated earnings is made to the extent that the asset is used, therefore, the surplus is equal to the difference between the depreciation calculated on the revalued value and the one calculated according to its original cost. These transfers do not record in the results for the period. A total transfer of the surplus may be made when the entity disposes of the asset. ii) The net book value of property, plant and equipment is removed from the consolidated statements of financial position at the time the asset is sold or when no future economic benefits are expected from its use or sale. Any gains or losses on the sale of property, plant and equipment represent the difference between net proceeds of the sale and the net book value of the item at the time of sale. These gains or losses are recognized as either other operating income or other operating expenses upon sale. iii) The Company periodically assesses the residual values, useful lives and depreciation methods associated with its property, plant and equipment. If necessary, the effects of any changes in accounting estimates is recognized prospectively, at the closing of each period, in accordance with IAS 8, “ Accounting Policies, Changes in Accounting Estimates and Errors ”. For property, plant and equipment made up of several components with different useful lives, the major individual components are depreciated over their individual useful lives. Maintenance costs and repairs are expensed as incurred. Annual depreciation rates are as follows:
Network infrastructure |  |  | 5%-33% |
Buildings and leasehold improvement |  |  | 2%-33% |
Other assets |  |  | 10%-50% |
iv) The carrying value of property, plant and equipment is reviewed if there are indicators of impairment in such assets. If an asset’s recovery value is less than the asset’s net carrying value, the difference is recognized as an impairment loss. During the years ended December 31, 2018, 2019 and 2020, no impairment losses were recognized. v) Spare parts for network operation are recognized at cost. The valuation of inventory for network considered obsolete, defective or slow-moving, is reduced to their estimated net realizable value. The estimate of the recovery value of inventories is based on their age and turnover. k) Intangibles i) Licenses Licenses to operate wireless telecommunications networks granted by the governments of the countries in which the Company operates are recorded at acquisition cost or at fair value at their acquisition date, net of accumulated amortization. Certain licenses require payments to the governments, such payments are recognized in the cost of service and equipment. The licenses that in accordance with government requirements are categorized as automatically renewable, for a nominal cost and with substantially consistent terms, are considered by the Company as intangible assets with an indefinite useful life. Accordingly, they are not amortized. Licenses are amortized when the Company does not have a basis to conclude that they are indefinite lived. Licenses are amortized using the straight-line method over a period ranging from 3 to 30 years, which represents the usage period of the assets. The Company has conducted an internal analysis on the applicability of the International Financial Reporting Interpretation Committee (“IFRIC”) No. 12 (Service Concession Agreements) and has concluded that its concessions are outside the scope of IFRIC 12. To determine the applicability of IFRIC 12, the Company analyzes each concession or group of similar concessions in a given jurisdiction. As a threshold matter, the Company identifies those government concessions that provide for the development, financing, operation or maintenance of infrastructure used to render a public service, and that set out performance standards, mechanisms for adjusting prices and arrangements for arbitrating disputes. With respect to those services, the Company evaluates whether the grantor controls or regulates (i) what services the operator must provide, (ii) to whom it must provide them and (iii) the applicable price (the “Services Criterion”). In evaluating whether the applicable government, as grantor, controls the price at which the Company provides its services, the Company looks at the terms of the concession agreement according to all applicable regulations. If the Company determines that the concession under analysis meets the Services Criterion, then the Company evaluates whether the grantor would hold a significant residual interest in the concession’s infrastructure at the end of the term of the arrangement. ii) Trademarks Trademarks acquired are measured on initial recognition at cost. The cost of trademarks acquired in a business combination is their fair value at the date of acquisition. The useful lives of trademarks are assessed as either definite or indefinite. Trademarks with finite useful lives are amortized using the straight-line method over a period ranging from 1 to 10 years. Trademarks with indefinite useful lives are not amortized but are tested for impairment annually at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable, if not, the change in useful life from indefinite to definite is made on a prospective basis. iii) Irrevocable rights of use Irrevocable rights of use are recognized according to the amount paid for the right and are amortized over the period in which they are granted. The carrying values of the Company’s licenses and trademarks are reviewed annually and whenever there are indicators of impairment in the value of such assets. When an asset’s recoverable amount, which is the higher of the asset’s fair value, less disposal costs and its value in use (the present value of future cash flows), is less than the asset’s carrying value, the difference is recognized as an impairment loss. iv) Customer relationships The value of customer relations is determined and valued at the time that a new subsidiary is acquired, as determined by the Company with the assistance of independent appraisers and is amortized over a 5-year period. During the years ended December 31, 2018, 2019 and 2020, no significant impairment losses were recognized for licenses, trademarks, irrevocable rights of use or customer relationships. l) Impairment in the value of long-lived assets The Company assesses the existence of indicators of impairment in the carrying value of long-lived assets, investments in associates, goodwill and intangible assets according to IAS 36 “ Impairment of assets ”. When there are such indicators, or in the case of assets whose nature requires an annual impairment analysis (goodwill and intangible assets with indefinite useful lives), the Company estimates the recoverable amount of the asset, which is the higher of its fair value, less disposal costs, and its value in use. Value in use is determined by discounting estimated future cash flows, applying a pre-tax discount rate that reflects the time value of money and taking into consideration the specific risks associated with the asset. When the recoverable amount of an asset is below its carrying value, impairment is considered to exist. In this case, the carrying value of the asset is reduced to the asset’s recoverable amount, recognizing the loss in results of operations for the respective period. Depreciation and/or amortization expense of future periods is adjusted based on the new carrying value determined for the asset over the asset’s remaining useful life. Impairment is computed individually for each asset. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets. In the estimation of impairments, the Company uses the strategic plans established for the separate cash-generating units to which the assets are assigned. Such strategic plans generally cover a period from 3 to 5 years. For longer periods, beginning in the fifth year, projections are based on such strategic plans while applying a constant or declining expected perpetual growth rate. Key assumptions used in value in use calculations The forecasts are made in real terms (net of inflation) and in the functional currency of the subsidiary as of December 31, 2020. Financial forecasts, premises and assumptions are similar to what any other market participant in similar conditions would consider, including impacts from the COVID-19 pandemic. Local synergies, that any other market participant would not have taken into consideration to prepare similar forecasted financial information, have not been included. The assumptions used to develop the financial forecasts were validated for each of the cash generating units (“CGUs”), typically identified by country and by service (in the case of Mexico) taking into consideration the following:
| • |  | Current subscribers and expected growth.
| • |  | Type of subscribers (prepaid, postpaid, fixed line, multiple services)
| • |  | Market environment and penetration expectations
| • |  | New products and services
| • |  | Economic environment of each country
| • |  | Expenses for maintaining the current assets
| • |  | Investments in technology for expanding the current assets
| • |  | Market consolidation and synergies
The foregoing forecasts cou l d differ from the results obtained through time; however, the Company prepares its estimates based on the current situation of each of the CGUs. The recoverable amounts are based on value in use. The value in use is determined based on the method of discounted cash flows. The key assumptions used in projecting cash flows are:
| • |  | Margin on EBITDA is determined by dividing EBITDA (operating income plus depreciation and amortization) by total revenues.
| • |  | Margin on CAPEX is determined by dividing capital expendi t ures (“CAPEX”) by total revenues.
| • |  | Pre-tax weighted average cost of capital (“WACC”) is used to discount the projected cash flows.
As discount rate, the Company uses the WACC which was determined for each of the cash generating units and is described in the following paragraphs. The estimated discount rates to perform the IAS 36 “ Impairment of assets ”, impairment test for each CGU consider market participants assumptions. Market participants were selected taking into consideration size, operations and characteristics of the business that were similar to those of Company. These discount rates do not include inflation. The discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Company and its operating segments. The WACC takes into account both debt and equity costs. The cost of equity is derived from the expected return on investment for each GCU. The cost of debt is based on the interest-bearing borrowings the Company is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Market participant assumptions are important because, not only do they include industry data for growth rates, but also management assesses how the CGU’s position, relative to its competitors, might change over the forecasted period. The most significant forward-looking estimates used for the 2019 and 2020 impairment evaluations are shown below:
|  | Average margin on EBIDTA |  |  | Average margin on CAPEX |  |  | Average pre-tax discount rate (WACC) |
2019 : |  |  |  |  |  |  |  |  |  |  |  |
Europe (7 countries) |  |  | 29.40% - 44.50% |  |  |  | 10.90% - 19.30% |  |  |  | 5.77% - 14.96% |
Brazil (fixed line, wireless and TV) |  |  | 40.43% |  |  |  | 23.50% |  |  |  | 11.00% |
Puerto Rico |  |  | 21.94% |  |  |  | 17.94% |  |  |  | 4.39% |
Dominican Republic |  |  | 47.23% |  |  |  | 16.17% |  |  |  | 13.84% |
Mexico (fixed line and wireless) |  |  | 38.81% |  |  |  | 9.84% |  |  |  | 6.94% |
Ecuador |  |  | 44.98% |  |  |  | 11.65% |  |  |  | 19.85% |
Peru |  |  | 32.51% |  |  |  | 18.51% |  |  |  | 8.86% |
El Salvador |  |  | 44.04% |  |  |  | 25.03% |  |  |  | 16.05% |
Chile |  |  | 26.85% |  |  |  | 18.00% |  |  |  | 4.16% |
Colombia |  |  | 45.58% |  |  |  | 19.25% |  |  |  | 17.27% |
Other countries |  |  | 7.40% - 52.40% |  |  |  | 0.57% - 31.0% |  |  |  | 6.41% - 34.75% |
2020: |  |  |  |  |  |  |  |  |  |  |  |
Europe (7 countries) |  |  | 32.20% - 40.76% |  |  |  | 7.04% - 19.39% |  |  |  | 3.88% - 12.02% |
Brazil (fixed line, wireless and TV) |  |  | 40.67% |  |  |  | 25.36% |  |  |  | 9.50% |
Puerto Rico |  |  | 23.06% |  |  |  | 14.57% |  |  |  | 3.53% |
Dominican Republic |  |  | 47.57% |  |  |  | 13.71% |  |  |  | 8.27% |
Mexico (fixed line and wireless) |  |  | 32.69% |  |  |  | 11.01% |  |  |  | 6.03% |
Ecuador |  |  | 49.23% |  |  |  | 11.14% |  |  |  | 17.50% |
Peru |  |  | 38.72% |  |  |  | 15.43% |  |  |  | 4.76% |
El Salvador |  |  | 45.92% |  |  |  | 21.19% |  |  |  | 14.63% |
Chile |  |  | 26.34% |  |  |  | 13.18% |  |  |  | 3.37% |
Colombia |  |  | 43.45% |  |  |  | 18.19% |  |  |  | 6.44% |
Other countries |  |  | 10.07% - 47.23% |  |  |  | 0.48% - 31.67% |  |  |  | 3.42% - 21.85% |
Sensitivity to changes in assumptions: The implications of the key assumptions for the recoverable amount are discussed below: Margin on CAPEX- The Company performed a sensitivity analysis by increasing its CAPEX by 5% and maintaining all other assumptions the same. The sensitivity analysis would require the Company to adjust the amount of its long-lived assets in its CGUs with potential impairment of approximately Ps.62,548. WACC- Additionally, should the Company increase by 50 base points in WACC per CGU and maintain all other assumptions the same, results without impairment. m) Right-of-use assets The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
i) | Right-of-use assets
The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows:
Assets |  | Useful life
Towers and sites |  | 5 to 12 years
Property |  | 10 to 25 years
Other equipment |  | 5 to 15 years
The right-of-use assets are also subject to impairment test.
ii) | Lease liabilities.
At the commencement date of the lease, the Company recognizes the lease liabilities measured at the present value of the lease payments to be made over the lease term. Lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or rate, and amounts expected to be paid under residual value guarantees. The lease payments also include payments of penalties for early termination of the lease, if the term of the lease reflects that the Company exercises the option to terminate early. The variable lease payments that do not depend on an index or a rate are recognized as an expense in the period on which the event or condition that triggers the payment occurs. In calculating the present value of the lease payments, the Company uses an incremental borrowing rate at the lease commencement date, if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of the lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed payments or change in the assessment to purchase the underlying asset.
iii) | Short-term leases and leases of low value assets.
The Company applies the short-term lease recognition exemption for its leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the recognition exemption lease of low-value assets (that is, below US$ 5,000). Short-term lease payments and leases of low-value assets are recognized as expenses on straight-line basis over the lease term . n) Financial assets and liabilities Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them, with the exception of trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.
Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories:
| • |  | Financial assets at amortized cost (debt instruments)
| • |  | Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)
| • |  | Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments)
| • |  | Financial assets at fair value through profit or loss
Financial assets at amortized cost (debt instruments) The Company measures financial assets at amortized cost if both of the following conditions are met:
| • |  | The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and
| • |  | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding
Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired. The Company’s financial assets at amortized cost includes cash equivalents, loans and receivables. Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments) The Company measures debt instruments at fair value through OCI if both of the following conditions are met:
| • |  | The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling, and
| • |  | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding
For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the statements of profit or loss and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in OCI. Upon derecognition, the cumulative fair value change recognized in OCI is recycled to profit or loss. Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) Upon initial recognition, the Company can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument by instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as other income in the statements of profit or loss when the right of payment has been established, except when the Company benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at fair value through profit or loss are carried in the statements of financial position at fair value with net changes in fair value recognized in the consolidated statements of comprehensive income within “Valuation of derivatives, interest cost from labor obligations and other financial items”. Derecognition of financial assets A financial asset is primarily derecognized when:
| • |  | The rights to receive cash flows from the asset have expired, or
| • |  | The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset
When the Company has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Impairment of financial assets The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). For some trade receivables and contract assets based on available information , the Company applies the simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Company has established a loss rate approach that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment, including the impact by the COVID-19 pandemic. Financial liabilities Initial recognition Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Company’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, and derivative financial instruments. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the statements of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Company has not designated any financial liability as at fair value through profit or loss. Loans and borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statements of profit or loss. Derecognition of financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of comprehensive income. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. o) Transactions in foreign currency Transactions in foreign currency are initially recorded at the prevailing exchange rate at the time of the related transactions. Foreign currency denominated assets and liabilities are subsequently translated at the prevailing exchange rate at the financial statements reporting date. Exchange differences determined from the transaction date to the time foreign currency denominated assets and liabilities are settled or translated at the financial statements reporting date are charged or credited to the results of operations. In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which the Company initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Company determines the transaction date for each payment or receipt of advance consideration. The exchange rates used for the translation of foreign currencies against the Mexican peso are as follows:
|  |  |  | Average exchange rate |  |  | Closing exchange rate at December 31, |
Country or Zone |  | Currency |  | 2018 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  |  | 2020 |
Argentina (1) |  | Argentine Peso (AR$) |  |  | 0.7311 |  |  |  | 0.4110 |  |  |  | 0.3070 |  |  |  | 0.3147 |  |  |  | 0.2371 |
Brazil |  | Real (R$) |  |  | 5.2937 |  |  |  | 4.8907 |  |  |  | 4.1850 |  |  |  | 4.6754 |  |  |  | 3.8387 |
Colombia |  | Colombian Peso (COP$) |  |  | 0.0065 |  |  |  | 0.0059 |  |  |  | 0.0058 |  |  |  | 0.0058 |  |  |  | 0.0058 |
Guatemala |  | Quetzal |  |  | 2.5591 |  |  |  | 2.5023 |  |  |  | 2.7826 |  |  |  | 2.4478 |  |  |  | 2.5596 |
U.S.A. (2) |  | US Dollar |  |  | 19.2397 |  |  |  | 19.2641 |  |  |  | 21.4860 |  |  |  | 18.8452 |  |  |  | 19.9487 |
Uruguay |  | Uruguay Peso |  |  | 0.6274 |  |  |  | 0.5479 |  |  |  | 0.5110 |  |  |  | 0.5051 |  |  |  | 0.4712 |
Nicaragua |  | Cordoba |  |  | 0.6097 |  |  |  | 0.5817 |  |  |  | 0.6257 |  |  |  | 0.5569 |  |  |  | 0.5728 |
Honduras |  | Lempira |  |  | 0.7994 |  |  |  | 0.7806 |  |  |  | 0.8678 |  |  |  | 0.7597 |  |  |  | 0.8215 |
Chile |  | Chilean Peso |  |  | 0.0300 |  |  |  | 0.0275 |  |  |  | 0.0271 |  |  |  | 0.0252 |  |  |  | 0.0281 |
Paraguay |  | Guaraní |  |  | 0.0034 |  |  |  | 0.0031 |  |  |  | 0.0032 |  |  |  | 0.0029 |  |  |  | 0.0029 |
Peru |  | Sol (PEN$) |  |  | 5.8517 |  |  |  | 5.7708 |  |  |  | 6.1483 |  |  |  | 5.6814 |  |  |  | 5.5046 |
Dominican Republic |  | Dominican Peso |  |  | 0.3876 |  |  |  | 0.3737 |  |  |  | 0.3766 |  |  |  | 0.3542 |  |  |  | 0.3416 |
Costa Rica |  | Colon |  |  | 0.0332 |  |  |  | 0.0326 |  |  |  | 0.0366 |  |  |  | 0.0327 |  |  |  | 0.0323 |
European Union |  | Euro |  |  | 22.7101 |  |  |  | 21.5642 |  |  |  | 24.5080 |  |  |  | 21.1311 |  |  |  | 24.3693 |
Bulgaria |  | Lev |  |  | 11.6110 |  |  |  | 11.0257 |  |  |  | 12.5284 |  |  |  | 10.8076 |  |  |  | 12.4594 |
Belarus |  | New Belarusian Ruble |  |  | 9.4451 |  |  |  | 9.2159 |  |  |  | 8.8172 |  |  |  | 8.9420 |  |  |  | 7.5721 |
Croatia |  | Croatian Kuna |  |  | 3.0613 |  |  |  | 2.9069 |  |  |  | 3.2498 |  |  |  | 2.8406 |  |  |  | 3.2279 |
Macedonia |  | Macedonian Denar |  |  | 0.3688 |  |  |  | 0.3504 |  |  |  | 0.3975 |  |  |  | 0.3431 |  |  |  | 0.3950 |
Serbia |  | Serbian Denar |  |  | 0.1920 |  |  |  | 0.1830 |  |  |  | 0.2083 |  |  |  | 0.1795 |  |  |  | 0.2071 |
(1) | Year-end rates are used for the translation of revenues and expenses if IAS 29 “Financial Reporting in Hyperinflationary Economies” is applied.
Financial reporting in hyperinflationary economies Financial statements of Argentina subsidiaries are restated before translation to the reporting currency of the Company and before consolidation in order to reflect the same value of money for all items. Items recognized in the statements of financial position which are not measured at the applicable year-end measuring unit are restated based on the general price index. All non-monetary items measured at cost or amortized cost is restated for the changes in the general price index from the date of transaction or the last hyperinflationary calculation to the reporting date. Monetary items are not restated. All items of shareholders’ equity are restated for the changes in the general price index since their addition or the last hyperinflationary calculation until the end of the reporting period. All items of comprehensive income are restated for the change in a general price index from the date of initial recognition to the reporting date. Gains and losses resulting from the net-position of monetary items are reported in the consolidated statements of operations in financial result in exchange differences. In accordance with IFRS, prior year financial statements were not restated.
(2) | Includes U.S.A., Ecuador, El Salvador, Puerto Rico and Panama.
As of April 2 6 , 2021, the exchange rate between the US dollar and the Mexican Peso was Ps. 19.8695 . The appreciation of the Mexican peso against the US dollar represent 0.4 % with respect to the year-end value. p) Accounts payable, accrued liabilities and provisions Liabilities are recognized whenever (i) the Company has current obligations (legal or assumed) resulting from a past event, (ii) when it is probable the obligation will give rise to a future cash disbursement for its settlement, and (iii) the amount of the obligation can be reasonably estimated. When the effect of the time value of money is significant, the amount of the liability is determined as the present value of the expected disbursements to settle the obligation. The discount rate is determined on a pre-tax basis and reflects current market conditions at the financial statements reporting date and, where appropriate, the risks specific to the liability. Where discounting is used, an increase in the liability is recognized as finance expense. Contingent liabilities are recognized only when it is probable, they will give rise to a future cash disbursement for their settlement. q) Employee benefits The Company has defined benefit pension plans for its subsidiaries Puerto Rico Telephone Company, Teléfonos de Mexico, Claro Brasil, and Telekom Austria. Claro Brasil also has medical plans and defined contribution plans and Telekom Austria provides retirement benefits to its employees under a defined contribution plan. The Company recognizes the costs of these plans based upon independent actuarial computations and are determined using the projected unit credit method. The latest actuarial computations were prepared as of December 31, 2020. Mexico Mexican subsidiaries have the obligation to pay seniority premiums to personnel based on the Mexican Federal Labor Law which also establishes the obligation to make certain payments to personnel who cease to provide services under certain circumstances. Pensions (for Telmex) and seniority premiums are determined based on the salary of employees in their final year of service, the number of years worked at and their age at the moment of retirement. The costs of pensions, seniority premiums and severance benefits, are recognized based on calculations by independent actuaries using the projected unit credit method using financial hypotheses, net of inflation. Telmex has established an irrevocable trust fund and makes annual contributions to that fund. Puerto Rico In Puerto Rico, the Company has noncontributing pension plans for full-time employees, which are tax qualified as they meet Employee Retirement Income Security Act of 1974 requirements. The pension benefit is composed of two elements: (i) An employee receives an annuity at retirement if they meet the rule of 85 (age at retirement plus accumulated years of service). The annuity is calculated by applying a percentage times year of services to the last three years of salary. (ii) The second element is a lump-sum benefit based on years of service ranging from 9 to 12 months of salary. Health care and life insurance benefits are also provided to retirees under a separate plan (post-retirement benefits). Brazil Claro Brasil provides a defined benefit plan and post-retirement medical assistance plan, and a defined contribution plan, through a pension fund that supplements the government retirement benefit for certain employees. Under the defined benefit plan, the Company makes monthly contributions to the pension fund equal to 17.5% of the employee’s aggregate salary. In addition, the Company contributes a percentage of the aggregate salary base for funding the post-retirement medical assistance plan for the employees who remain in the defined benefit plan. Each employee makes contributions to the pension fund based on age and salary. All newly hired employees automatically adhere to the defined contribution plan and no further admittance to the defined benefit plan is allowed. For the defined contribution plan, see Note 18. Austria Telekom Austria provides retirement benefits to its employees under defined contribution and defined benefit plans. The Company pays contributions to publicly or privately administered pension or severance insurance plans on mandatory or contractual basis. Once the contributions have been paid, the Company has no further payment obligations. The regular contributions are recognized as employee expenses in the year in which they are due. All other employee benefit obligations provided in Austria are unfunded defined benefit plans for which the Company records provisions which are calculated using the projected unit credit method. The future benefit obligations are measured using actuarial methods on the basis of an appropriate assessment of the discount rate, rate of employee turnover, rate of compensation increase and rate of increase in pensions. For severance and pensions, the subsidiary recognizes actuarial gains and losses in other comprehensive income. The re-measurement of defined benefit plans relates to actuarial gains and losses only as Telekom Austria holds no plan assets. Interest expense related to employee benefit obligations is reported in “Valuation of derivatives, interests cost from labor obligation and other financial items, net” in the statements of comprehensive income. Other subsidiaries For the rest of the Company’s subsidiaries, there are no defined benefit plans or compulsory defined contribution structures. However, certain subsidiaries make contributions to national pension, social security and severance plans in accordance with the percentages and rates established by the applicable social security and labor laws of each country. Such contributions are made to the entities designated by the countries legislation and are recorded as direct labor expenses in the consolidated statements of comprehensive income as they are incurred. Remeasurements of defined benefit plans, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding net interest and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statements of financial position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur. Re-measurements are not reclassified to profit or loss in subsequent periods. Past service costs are recognized in profit or loss on the earlier of:
(i) | The date of the plan amendment or curtailment, and
(ii) | The date that the Company recognizes restructuring-related costs
Net interest on liability for defined benefits is calculated by applying the discount rate to the net defined benefit liability or asset and it is recognized in the “valuation of derivatives, interest cost from labor obligations and other financial items” in the consolidated statements of comprehensive income. The Company recognizes the changes in the net defined benefit obligation under “Cost of sales and services” and “Commercial, administrative and general expenses” in the consolidated statements of comprehensive income. Paid absences The Company recognizes a provision for the cost of paid absences, such as vacation time, based on the accrual method. r) Employee profit sharing Employee profit sharing is paid by certain subsidiaries of the Company to its eligible employees. The Company has employee profit sharing in Mexico, Ecuador and Peru. In Mexico, employee profit sharing is computed at the rate of 10% on the individual subsidiaries taxable base adjusted for employee profit sharing purposes as provided by law. Employee profit sharing is presented as an operating expense in the consolidated statements of comprehensive income. s) Taxes Income taxes Current income tax payable is presented as a short-term liability, net of prepayments made during the year. Deferred income tax is determined using the liability method based on the temporary differences between the tax values of the assets and liabilities and their book values at the consolidated financial statements reporting date. Deferred tax assets and liabilities are measured using the tax rates that are expected to be in effect in the period when the asset will materialize or the liability will be settled, based on the enacted tax rates (and tax legislation) that have been enacted or substantially enacted at the financial statements reporting date. The value of deferred tax assets is reviewed by the Company at each financial statements reporting date and is reduced to the extent that it is more likely that the Company will not have sufficient future tax profits to allow for the realization of all or a part of its deferred tax assets. Unrecognized deferred tax assets are revalued at each financial statement reporting date and are recognized when it is more likely that there will be sufficient future tax profits to allow for the realization of these assets. Deferred taxes relating to items recognized in Other Comprehensive Income are recognized together with the concept that generated such deferred taxes. Deferred taxes consequence on unremitted earnings from subsidiaries and associates are considered as temporary differences, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Taxes withheld on remitted foreign earnings are creditable against Mexican taxes, thus to the extent that a remittance is to be made, the deferred tax would be limited to the incremental difference between the Mexican tax rate and the rate of the remitting country. As of December 31, 2019 and 2020, the Company has not provided for any deferred taxes related to unremitted foreign earnings. The Company offsets tax assets and liabilities if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. Sales tax Revenues, expenses and assets are recognized net of the amount of sales tax, except:
| • |  | When the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item, as applicable.
| • |  | Receivables and payables that are stated with the amount of sales tax included.
The net amount of sales tax recoverable from, or payable to, the tax authorities is included as part of the current receivables or payables in the consolidated statements of financial position unless they are due in more than a year in which case they are classified as non-current. t) Advertising Advertising expenses are recognized as incurred. For the years ended December 31, 2018, 2019 and 2020, advertising expenses were Ps.26,255,952, Ps.22,810,211 and Ps.19,894,607 respectively, and are presented in the consolidated statements of comprehensive income in the caption “Commercial, administrative and general expenses”. u) Earnings per share Basic and diluted earnings per share are determined by dividing net profit of the year by the weighted-average number of shares outstanding during the year. In determining the weighted average number of outstanding shares, shares repurchased by the Company have been excluded. v) Financial risks The main risks associated with the Company’s financial instruments are: (i) liquidity risk, (ii) market risk (foreign currency exchange risk and interest rate risk) and (iii) credit risk and counterparty risk. The Board of Directors approves the policies submitted by management to mitigate these risks. i) Liquidity risk Liquidity risk is the risk that the Company may not meet its financial obligations associated with financial instruments when they are due. The Company’s financial obligations and commitments are included in Notes 14 and 17. ii) Market risk The Company is exposed to certain market risks derived from changes in interest rates and fluctuations in exchange rates of foreign currencies. The Company’s debt is denominated in foreign currencies, mainly in US dollars and euros, other than its functional currency. In order to reduce the risks related to fluctuations in the exchange rate of foreign currency, the Company uses derivative financial instruments such as cross-currency swaps and forwards to adjust exposures resulting from foreign exchange currency. The Company does not use derivatives to hedge the exchange risk arising from having operations in different countries. Additionally, the Company occasionally uses interest rate swaps to adjust its exposure to the variability of the interest rates or to reduce their financing costs. The Company’s practices vary from time to time depending on judgments about the level of risk, expectations of change in the movements of interest rates and the costs of using derivatives. The Company may terminate or modify a derivative financial instrument at any time. See Note 7 for disclosure of the fair value of derivatives as of December 31, 2019 and 2020. iii) Credit risk Credit risk represents the loss that could be recognized in case the counterparties fail to comply with their contractual obligations. The financial instruments that potentially represent concentrations of credit risk are cash and short-term deposits, trade accounts receivable and financial instruments related to debt and derivatives. The Company’s policy is designed in order to limit its exposure to any one financial institution; therefore, the Company’s financial instruments are contracted with several different financial institutions located in different geographic regions. The credit risk in accounts receivable is diversified because the Company has a broad customer base that is geographically dispersed. The Company continuously evaluates the credit conditions of its customers and generally does not require collateral to guarantee collection of its accounts receivable. The Company monitors on a monthly basis its collection cycle to avoid deterioration of its results of operations. A portion of the Company’s cash surplus is invested in short- term deposits with financial institutions with high credit ratings. iv) Sensitivity analysis for market risks The Company uses sensitivity analysis to measure the potential losses based on a theoretical increase of 100 basis points in interest rates and a 5% fluctuation in exchange rates: Interest rate In the event that the Company’s agreed-upon interest rates at December 31, 2020 increase/(decrease) by 100 basis points and a 5% fluctuation in exchange rates, the net interest expense would increase/(decrease) by Ps.1,476,660 and Ps.(13,417,231), respectively. Exchange rate fluctuations Should the Company’s debt at December 31, 2020 of Ps.628,382,956, suffer a 5% increase/(decrease) in exchange rates, the debt would increase/(decrease) by Ps.31,429,089 and Ps.(31,429,089), respectively. w) Derivative financial instruments Derivative financial instruments are recognized in the consolidated statements of financial position at fair value. Valuations obtained by the Company are compared against those of the financial institutions with which the agreements are entered into, and it is the Company’s policy to compare such fair value to a valuation provided by an independent pricing provider in case of discrepancies. Changes in the fair value of derivatives that do not qualify as hedging instruments are recognized immediately in the line “Valuation of derivatives, interest cost from labor obligations and other financial items, net”. The Company is exposed to interest rate and foreign currency risks, which tries to mitigate through a controlled risk management program that includes the use of derivative financial instruments. The Company principally uses to offset the risk of exchange rate and interest rate fluctuations. Additionally, for the years ended December 31, 2018, 2019 and 2020 certain of the Company’s derivative financial instruments had been designated, and had qualified, as cash flow hedges. The effective portion of gains or losses on the cash flow derivatives is recognized in equity under the heading “Effect for fair value of derivatives”, and the ineffective portion is charged to results of operations of the period. x) Current versus non-current classification The Company presents assets and liabilities in its consolidated statements of financial position based on current/non-current classification. An asset is current when it is either:
(i) | Expected to be realized or intended to be sold or consumed in the normal operating cycle.
(ii) | Held primarily for the purpose of trading.
(iii) | Expected to be realized within twelve months after the reporting period.
(iv) | Cash and cash equivalents unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
A liability is current when:
| • |  | It is expected to be settled in the normal operating cycle.
| • |  | It is held primarily for the purpose of trading.
| • |  | It is due to be settled within twelve months after the reporting period.
| • |  | There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.
The Company classifies all other assets and liabilities, including deferred income tax assets and liabilities, as non-current. y) Presentation of consolidated statements of comprehensive income The costs and expenses shown in the consolidated statements of comprehensive income are presented in combined manner (based on both their function and nature), which allows a better understanding of the components of the Company’s operating income. This classification allows a comparison to the telecommunications industry. The Company presents operating income in its consolidated statements of comprehensive income since it is a key indicator of the Company’s performance. Operating income represents operating revenues less operating costs and expenses.
z) Operating segments Segment information is presented based on information used by management in its decision-making processes. Segment information is presented based on the geographic areas in which the Company operates. The management of the Company is responsible for making decisions regarding the resources to be allocated to the Company’s different segments, as well as evaluating the performance of each segment. Intersegment revenues and costs, intercompany balances as well as investments in shares in consolidated entities are eliminated upon consolidation and reflected in the “eliminations” column in Note 23. None of the segments records revenue from transactions with a single external customer amounting to 10% or more of the revenues. Aa) Convenience translation The consolidated financial statements are stated in thousands of Mexican pesos (“Ps.”); however, solely for the convenience of the readers, the consolidated statement of financial position as of December 31, 2020 and the consolidated statement of comprehensive income and consolidated statement of cash flows for the year ended December 31, 2020 were converted into U.S. dollars at the exchange rate of Ps.19.9487 per U.S. dollar, which was the exchange rate at that date. This arithmetic conversion should not be construed as representations that the amounts expressed in Mexican pesos may be converted into U.S. dollars at that or any other exchange rate . Ab) Significant accounting judgments, estimates and assumptions In preparing its consolidated financial statements, the Company makes estimates concerning a variety of matters. Some of these matters are highly uncertain, and its estimates involve judgments it makes based on the available information. In the discussion below, the Company has identified several of these matters for which its financial statements would be materially affected if either (1) the Company uses different estimates that it could have reasonably used or (2) in the future América Móvil changes its estimates in response to changes that are reasonably likely to occur. The following discussion addresses only those estimates that the Company considers most important based on the degree of uncertainty and the likelihood of a material impact had it used a different estimate. There are many other areas in which the Company uses estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to the financial presentation for those other areas. Estimated useful lives of plant, property and equipment The Company currently depreciates most of its network infrastructure based on an estimated useful life determined upon the expected particular conditions of operation and maintenance in each of the countries in which it operates. The estimates are based on AMX’s historical experience with similar assets, anticipated technological changes and other factors, taking into account the practices of other telecommunications companies. The Company reviews estimated useful lives each year to determine, for each particular class of assets, whether they should be changed. The Company may shorten/extend the estimated useful life of an asset class in response to technological changes, changes in the market or other developments. This results in increased/decreased depreciation expense (See Note 10). Revaluation of passive infrastructure of telecommunications towers The Company recognizes the passive structure of the telecommunication towers at fair value, recognizing the changes in OCI. The discounted cash flow model was used. The Company hired a valuation specialist with industry experience to measure fair values as of December 31, 2020. Impairment of Long-Lived Assets The Company has large amounts of long-lived assets, including property, plant and equipment, intangible assets, investments in affiliates and goodwill on its consolidated statements of financial position. The Company is required to test long-lived assets for impairment when circumstances indicate a potential impairment or, in some cases, at least on an annual basis. The impairment analysis for long-lived assets requires the Company to estimate the recoverable amount of the asset, which is the higher of its fair value (minus any disposal costs) and its value in use. To estimate the fair value of a long-lived asset, the Company typically takes into account recent market transactions or, if no such transactions can be identified, the Company uses a valuation model that requires making certain assumptions and estimates. Similarly, to estimate the value in use of long-lived assets, the Company typically makes various assumptions about the future prospects for the business to which the asset relates, considers market factors specific to that business and estimates future cash flows to be generated by that business. Based on this impairment analysis, including all assumptions and estimates related thereto, as well as guidance provided by IFRS relating to the impairment of long-lived assets different assumptions and estimates could materially impact the Company’s reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in impairment charges, which would decrease net income and result in lower asset values on the consolidated statements of financial position. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. The key assumptions used to determine the recoverable amount for the Company’s CGUs, are further explained in Notes 23, 10 and 11. Deferred Income Taxes The Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of temporary differences resulting from the differing treatment of certain items, such as accruals and amortization, for tax and financial reporting purposes, as well as net operating loss carry-forwards and other tax credits. These items result in deferred tax assets and liabilities as discussed in Note 2 s). The analysis is based on estimates of taxable income in the jurisdictions in which the Company operates and the period on which the deferred tax assets and liabilities will be recovered or settled. If actual results differ from these estimates, or the Company adjusts these estimates in future periods, its financial position and results of operations may be materially affected. In assessing the future realization of deferred tax assets, the Company considers future taxable income, ongoing planning strategies and future results in its operations. In the event that the estimates of projected future taxable income are lowered, or changes in current tax regulations are enacted that would impose restrictions on the timing or extent of the ability to utilize the tax benefits of net operating loss carry-forwards in the future, an adjustment to the recorded amount of deferred tax assets would be made, with a related charge to income. See Note 13. Accruals Accruals are recorded when, at the end of the period, the Company has a present obligation as a result of past events, whose settlement requires an outflow of resources that is considered probable and can be measured reliably. This obligation may be legal or constructive, arising from, but not limited to, regulation, contracts, common practice or public commitments, which have created a valid expectation for third parties that the Company will assume certain responsibilities. The amount recorded is the best estimation performed by the Company’s management in respect of the disbursement that will be required to settle the obligations, considering all the information available at the date of the financial statements, including the opinion of external experts, such as legal advisors or consultants. Accruals are adjusted to account for changes in circumstances for ongoing matters and the establishment of additional accruals for new matters. If the Company is unable to reliably measure the obligation, no accrual is recorded, and information is then presented in the notes to its consolidated financial statements. Because of the inherent uncertainties in these estimations, actual expenditures may be different from the originally estimated amount recognized. See Note 16. The Company is subject to various claims and contingencies related to tax, labor and legal proceedings as described in Note 17b). Labor Obligations The Company recognizes liabilities on its consolidated statements of financial position and expenses in its statements of comprehensive income to reflect its obligations related to its post-retirement seniority premiums, pension and retirement plans in the countries in which it operates and offer defined contribution and benefit pension plans. The amounts the Company recognizes are determined on an actuarial basis that involves estimations and accounts for post-retirement and termination benefits. The Company uses estimates in four specific areas that have a significant effect on these amounts: (i) the rate of return the Company assumes its pension plans will earn on its investments, (ii) the salaries increase rate that the Company assumes it will observe in future years, (iii) the discount rates that the Company uses to calculate the present value of its future obligations and (iv) the expected inflation rate. The assumptions applied are further disclosed in Note 18. These estimates are determined based on actuarial studies performed by independent experts using the projected unit-credit method.

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