ACCT homework

4/9/2018 Form F-1

https://www.sec.gov/Archives/edgar/data/1639920/000119312518063434/d494294df1.htm 201/264

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Notes to the 2017 consolidated financial statements 1. Corporate information

Spotify Technology S.A. (the “Company”) is a private limited company incorporated and domiciled in Luxembourg. The Company’s registered office is 42-44 avenue de la Gare, L1610, Luxembourg.

The principal activity of the Company and its subsidiaries (the “Group”) is music streaming. The Group’s premium service (“Premium Service”) provides users with unlimited online and offline high-quality streaming access to its catalog. The Premium Service offers a commercial-free music experience. The Group’s ad-supported service (“Ad-Supported Service,” and together with its Premium Service, its “Service”) has no subscription fees and provides users with limited on-demand online access to the catalog. The Group depends on securing content licenses from a number of major and minor content owners and other rights holders in order to provide its service.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a) Basis of preparation

The consolidated financial statements of Spotify Technology S.A. comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and have been prepared on a historical cost basis, except for securities, long term investment, convertible senior notes (“Convertible Notes”), and derivative financial instruments, which have been measured at fair value.

The consolidated financial statements have been prepared on the basis of a full retrospective application of IFRS 15, Revenue from Contracts with Customers, with an adoption date as of January 1, 2017.

The preparation of the consolidated financial statements in conformity with IFRS requires the application of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies. The areas involving a greater degree of judgment or complexity, or areas in which assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3.

The consolidated financial statements provide comparative information in respect of the previous periods.

(b) Unaudited pro forma equity and net loss per share

In January 2018, the Group entered into an exchange agreement with holders of outstanding Convertible Notes, pursuant to which the Group exchanged the Convertible Notes, plus accrued interest, for ordinary shares. Due to the terms and conditions of the exchange agreement the ordinary shares are recorded as a liability until a direct listing is completed. Upon a direct listing the fair value of the shares will be reclassified to equity. The unaudited pro forma consolidated statement of financial position as of December 31, 2017 has been prepared assuming the exchange agreement and a direct listing were consummated as of December 31, 2017.

The unaudited pro forma basic and diluted net loss per share assumes the exchange agreement and direct listing were consummated as of the beginning of the period and therefore assumes the shares issued upon conversion of the Convertible Notes were outstanding from January 1, 2017. The unaudited pro forma basic and diluted net loss per share also has been computed to give effect to the shares issued upon conversion of the Convertible Notes on December 15, 2017 and December 27, 2017 disclosed in Note 18 as if they were outstanding from January 1, 2017.

The numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to eliminate the losses resulting from the fair value movements on Convertible Notes (see Note 9) as they were assumed to have converted upon a direct listing at the beginning of the period. See Note 11.

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4/9/2018 Form F-1

https://www.sec.gov/Archives/edgar/data/1639920/000119312518063434/d494294df1.htm 202/264

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Notes to the 2017 consolidated financial statements (c) Basis of consolidation

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

(d) Investment in associates and joint ventures

An associate is an entity over which the Group has significant influence but not control or joint control.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The Group accounts for its investments in associates and joint ventures using the equity method whereby the investment is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the associates and joint ventures since the acquisition date.

The Group determines, at each reporting date, whether there is objective evidence that the investment in its associated companies or joint ventures is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount and the carrying amount of the investment. Any gain or loss resulting from the dilution of the Group’s interest in associates and joint ventures where significant influence and joint control, respectively, is retained is recognized in the consolidated statement of operations in “Share in earnings of associates and joint ventures.”

(e) Foreign currency translation

Functional and reporting currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates. The consolidated financial statements are presented in Euro, which is the Group’s reporting currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in the consolidated statement of operations within finance income or finance costs.

Group companies

The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into Euro as follows:

• Assets and liabilities are translated at the closing rate at the reporting date;

• Income and expenses for each statement of operation are translated at average exchange rates; and

• All resulting exchange differences are recognized in other comprehensive income/(loss).

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4/9/2018 Form F-1

https://www.sec.gov/Archives/edgar/data/1639920/000119312518063434/d494294df1.htm 203/264

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Notes to the 2017 consolidated financial statements Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the operation and translated at the closing rate at each reporting date.

(f) Revenue recognition

Accounting policies for the Group’s revenues are explained in Note 4.

(g) Advertising credits

Advertising credits are issued to certain rights holders that are not transferable and that allow them to include advertisement on the Ad-Supported Service that promote their artists and the Spotify service, such as the availability of a new single or album on Spotify. These are issued in conjunction with the Group’s royalty arrangements for nil consideration. There is no revenue recognized as the advertising credits are mutually beneficial to both the rights holders and the Group and do not meet the definition of a revenue contract under IFRS 15, Revenue from Contracts with Customers.

(h) Business combinations

Business combinations are accounted for using the acquisition method. Identifiable assets acquired and liabilities assumed are measured initially at their fair values at the acquisition date. The excess of the consideration transferred, and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recognized as goodwill.

Acquisition-related costs, other than those incurred for the issuance of debt or equity instruments, are charged to the consolidated statement of operations as they are incurred.

(i) Cost of revenue

Cost of revenue consists predominately of royalty and distribution costs related to content streaming. The Group incurs royalty costs paid to certain music record labels, music publishers, and other rights holders for the right to stream music to the Group’s users. Royalties are typically calculated using negotiated rates in accordance with license agreements and are based on either subscription and advertising revenue earned, user/usage measures, or a combination of these. The determination of the amount of the rights holders’ liability is complex and subject to a number of variables, including the revenue recognized, the type of content streamed and the country in which it is streamed, the service tier such content is streamed on, identification of the appropriate license holder, size of user base, ratio of Ad-Supported Users to Premium Subscribers, and any applicable advertising fees and discounts, among other variables. Some rights holders have allowed the use of their content on the platform while negotiations of the terms and conditions are ongoing. In such situations, royalties are calculated using estimated rates. In certain jurisdictions, rights holders have several years to claim royalties for musical compositions and therefore estimates of the royalties payable are made until payments are made. The Group has certain arrangements whereby royalty costs are paid in advance or are subject to minimum guaranteed amounts. An accrual is established when actual royalty costs to be incurred during a contractual period are expected to fall short of the minimum guaranteed amounts. For minimum guarantee arrangements for which the Group cannot reliably predict the underlying expense, the Group will expense the minimum guarantee on a straight-line basis over the term of the arrangement. The Group also has certain royalty arrangements where the Group would have to make additional payments if the royalty rates were below those paid to other similar licensors (most favored nation clauses). For rights holders with this clause, a comparison is done of royalties incurred to date plus estimated royalties payable for the remainder of the period to estimates of the royalties payables to other appropriate rights holders, and the shortfall, if any, is recognized on a straight-line basis over the period of the applicable most favored nation clause. An accrual and expense is recognized when it is probable that the Group

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Notes to the 2017 consolidated financial statements will make additional royalty payments under these terms. The expense related to these accruals is recognized in cost of revenue. Cost of revenue also includes credit card and payment processing fees for subscription revenue, customer service, certain employee compensation and benefits, cloud computing, streaming, facility, and equipment costs, as well as amounts incurred to produce content for the service.

(j) Research and development expenses

Research and development expenses are primarily comprised of costs incurred for development of products related to the Group’s platform and service, as well as new advertising products and improvements to the Group’s mobile app, desktop, and streaming services. The costs incurred include related employee compensation and benefits, facility costs, and consulting costs.

(k) Sales and marketing expenses

Sales and marketing expenses are primarily comprised of employee compensation and benefits, events and trade shows, public relations, branding, consulting expenses, customer acquisition costs, advertising, the cost of working with record labels and artists to promote the availability of new releases on the Group’s platform, and the costs of providing free trials of the Premium Service. Expenses included in the costs of providing free trials are primarily derived from per user royalty fees determined in accordance with the rights holder agreements.

(l) General and administrative expenses

General and administrative expenses are comprised primarily of employee compensation and benefits for functions such as finance, accounting, analytics, legal, human resources, consulting fees, and other costs including facility and equipment costs.

(m) Income tax

The tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statement of operations except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

(i) Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date.

(ii) Deferred tax

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

• Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and

that affects neither accounting nor taxable profit or loss;

• Temporary differences related to investments in subsidiaries, associates, and joint ventures to the extent that the Group is able

to control the timing of the reversal of the temporary differences, and it is probable that they will not reverse in the foreseeable future; and

• Taxable temporary differences arising on the initial recognition of goodwill.

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Notes to the 2017 consolidated financial statements

Deferred tax assets are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if certain criteria are met.

(iii) Uncertain tax positions

In determining the amount of current and deferred income tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes, interest or penalties may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities. Such changes to tax liabilities will impact tax expense in the period that such a determination is made.

(n) Property and equipment

Property and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes any expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the Group.

The Group adds to the carrying amount of an item of property and equipment the cost of replacing parts of such an item if the replacement part is expected to provide incremental future benefits to the Group. All repairs and maintenance are charged to the consolidated statement of operations during the period in which they are incurred.

Depreciation is charged so as to allocate the cost of assets less their residual value over their estimated useful lives, using the straight-line method as follows:

• Property and equipment: 3 to 5 years

• Leasehold improvements: shorter of the lease term or useful life

The assets’ residual values, useful lives, and depreciation methods are reviewed annually and adjusted prospectively if there is an indication of a significant change. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the consolidated statement of operations when the asset is derecognized.

(o) Intangible assets

Acquired intangible assets other than goodwill comprise acquired developed technology and patents. At initial recognition, intangible assets acquired in a business combination are recognized at their fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses.

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Notes to the 2017 consolidated financial statements The Group recognizes internal development costs as intangible assets only when the following criteria are met: the technical feasibility of completing the intangible asset exists, there is an intent to complete and an ability to use or sell the intangible asset, the intangible asset will generate probable future economic benefits, there are adequate resources available to complete the development and to use or sell the intangible asset, and there is the ability to reliably measure the expenditure attributable to the intangible asset during its development.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, typically 2 to 5 years and are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least annually. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization of intangible assets is recognized in the consolidated statement of operations in the expense category consistent with the function of the intangible assets.

(p) Goodwill

Goodwill is the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. Goodwill is tested annually for impairment, or more regularly if certain indicators are present. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the operating segments that are expected to benefit from the synergies of the combination and represent the lowest level at which the goodwill is monitored for internal management purposes. Goodwill is evaluated for impairment by comparing the recoverable amount of the Group’s operating segments to the carrying amount of the operating segments to which the goodwill relates. If the recoverable amount is less than the carrying amount an impairment charge is determined.

The recoverable amount of the operating segments is based on fair value less costs of disposal. The Group believes reasonable estimates and judgments have been used in assessing the recoverable amounts.

(q) Impairment of non-financial assets

Assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized in the consolidated statement of operations consistent with the function of the assets, for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows. Prior impairments of non-financial assets (other than goodwill) are reviewed for possible reversal each reporting period.

(r) Financial instruments

(i) Financial assets

Initial recognition and measurement

The Group’s financial assets are comprised of cash and cash equivalents, short term investments, trade and other receivables, a long term investment, restricted cash, and other non-current assets. All financial assets are recognized initially at fair value plus transaction costs that are attributable to the acquisition of the financial asset. Purchases and sales of financial assets are recognized on the settlement date; the date that the Group receives or delivers the asset. The Group classifies its financial assets primarily as cash and cash equivalents, receivables and available for sale financial assets. Receivables are non-derivative financial assets, other than short term and long term investments described below, with fixed or determinable payments that are not quoted in an active market. They are included in current assets except for those with maturities greater than 12 months after the reporting period.

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Notes to the 2017 consolidated financial statements

For more information on receivables, refer to Note 15.

Short term investments classified as available for sale financial assets are those that are neither classified as held for trading nor designated at fair value through the consolidated statement of operations. The securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions (therefore not recognized at amortized cost). These are classified as current assets.

Long term investments classified as available for sale financial assets are those that are neither classified as held for trading nor designated at fair value through the consolidated statement of operations. The security within this category is intended to be held for an indefinite period of time and for strategic investment purposes. It is classified as a non-current asset.

Subsequent measurement

After initial measurement, available for sale financial assets are measured at fair value with unrealized gains or losses recognized in other comprehensive income and credited in other reserves within equity until the investment is derecognized, at which time, the cumulative gain or loss is recognized in finance income/ costs, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available for sale reserve to the consolidated statement of operations in finance costs. Interest earned whilst holding available for sale financial assets is reported as interest income using the effective interest method.

Derecognition

Financial assets are derecognized when the rights to receive cash flows from the asset have expired, or the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full.

Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset is considered impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flow of that asset. Evidence of impairment include that debtors, individually or collectively, default in payments or other indications that they experience significant financial difficulty, including the probability of entering bankruptcy or other financial reorganization, or a significant or prolonged decline in the fair value of an investment below its cost. ‘Significant’ is evaluated against the original cost of the investment and ‘prolonged’ against the period in which the fair value has been below its original cost.

If there is evidence of impairment for any of the Group’s financial assets carried at amortized cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of operations.

In the case of investments classified as available for sale, the impairment is assessed based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated statement of operations.

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Notes to the 2017 consolidated financial statements

Future interest income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income.

For impairment losses recognized, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the consolidated statement of operations.

(ii) Financial liabilities

Initial recognition and measurement

The Group’s financial liabilities are comprised of trade and other payables, other liabilities (borrowings and finance lease payments), Convertible Notes, and derivative liabilities (contingent options and warrants). All financial liabilities are recognized initially at fair value and, in the case of Convertible Notes and borrowings, net of directly attributable transaction costs.

The Group accounts for the Convertible Notes in accordance with IAS 39, Financial Instruments: Recognition and Measurement, ‘fair value option’. Under this approach, the Convertible Notes are accounted for in their entirety at fair value, with any change in fair value after initial measurement being recorded in the consolidated statement of operations and the transaction costs were effectively immediately expensed.

The Group accounts for the warrants as a financial liability at fair value. In accordance with IAS 32, Financial Instruments: Presentation, the Group determined that the warrants were precluded from equity classification, because while they contain no contractual obligation to deliver cash or other financial instruments to the holders other than the Company’s own shares, the exercise prices of the warrants are in US$ and not the Company’s functional currency. Therefore, the warrants do not meet the requirements that they be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Subsequent measurements

Other financial liabilities

After initial recognition, payables and borrowings are subsequently measured at amortized cost using the effective interest method. The effective interest method amortization is included in finance costs in the consolidated statement of operations. Gains and losses are recognized in the consolidated statement of operations when the liabilities are derecognized.

Payables and borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

Fees paid to secure loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. The fee is deferred until the drawdown occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as pre-payment for liquidity services and amortized over the period of the facility.

Financial liabilities at fair value through profit or loss

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Notes to the 2017 consolidated financial statements

After initial recognition, financial liabilities at fair value through the profit or loss are subsequently remeasured at fair value at the end of each reporting period with changes in fair value recognized in finance income or finance costs in the consolidated statement of operations.

Derecognition

Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled, or expires.

(iii) Fair value measurements

For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Group would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Group’s market assumptions. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

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

• Level 2: other techniques for which inputs are based on quoted prices for identical or similar instruments in markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the asset or liability

• Level 3: techniques which use inputs that have a significant effect on the recognized fair value that require the Group to use its own

assumptions about market participant assumptions

The Group maintains policies and procedures to determine the fair value of financial assets and liabilities using what it considers to be the most relevant and reliable market participant data available. It is the Group’s policy to maximize the use of observable inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Group utilizes unobservable inputs based upon the assumptions market participants would use in valuing the asset or liability. In determining the fair value of financial assets and liabilities employing Level 3 inputs, the Group considers such factors as the current interest rate, equity market, currency and credit environments, expected future cash flows, the probability of certain future events occurring, and other published data. The Group performs a variety of procedures to assess the reasonableness of its fair value determinations including the use of third parties.

(iv) Foreign exchange forward contracts

Beginning in 2017, the Group began entering into multiple foreign exchange forward contracts. The Group designated certain foreign exchange forward contracts as cash flow hedges when all the requirements in IAS 39 Financial Instruments are met. The Group recognizes the activities from these cash flow hedges as either assets or liabilities on the statement of financial position and are measured at fair value at each reporting period. The Group reflects the gain or loss on the effective portion of a cash flow hedge as a component of equity and subsequently reclassifies cumulative gains and losses to revenues or cost of

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Notes to the 2017 consolidated financial statements

revenues, depending on the risk hedged, when the hedged transactions are settled. If the hedged transactions become probable of not occurring, the corresponding amounts in other reserves are immediately reclassified to finance income or costs. Foreign exchange forward contracts that do not meet the requirements in IAS 39 Financial Instruments to be designated as a cash flow hedge, are classified as derivative instruments not designated for hedging. The Group measures these instruments at fair value with changes in fair value recognized in finance income or costs. Refer to Note 22.

(s) Cash and cash equivalents

Cash and cash equivalents comprise cash on deposit at banks and on hand and short term deposits with a maturity of three months or less from the date of purchase that are not subject to restrictions. Cash deposits that have restrictions governing their use are classified as restricted cash, current or non- current, based on the remaining length of the restriction.

The Group classifies highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short term deposits as defined above.

(t) Short term investments

The Group invests in a variety of instruments, such as commercial paper, money market funds, corporate debt securities, collateralized reverse purchase agreements, and government and government agency debt securities. Part of these investments are held in short duration fixed income portfolios. The average duration of these portfolios is two years. All investments are governed by an investment policy and are held in highly-rated counterparties. Separate credit limits are assigned to each counterparty in order to minimize risk concentration.

These investments are classified as available for sale securities and are carried at fair value with the unrealized gains and losses reported as a component of equity. Management determines the appropriate classification of investments at the time of purchase and reevaluates the available for sale designations as of each reporting date. The available for sale debt securities with maturities greater than twelve months are classified as short term when they are intended for use in current operations. The cost basis for investments sold is based upon the specific identification method.

(u) Long term investment

Long term investment consists of a non-controlling equity interest in a private company. The investment is classified as an available for sale financial asset and carried at fair value through other comprehensive income. Refer to Note 22.

(v) Share capital

Ordinary shares are classified as equity.

Equity instruments are initially measured at the fair value of the cash or other resources received or receivable, net of the direct costs of issuing the equity instruments.

For the years ended December 31, 2012, 2013, and 2015, the Group issued equity instruments that were part of a compound transaction whereby additional shares would be issued to the shareholders upon the occurrence of

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Notes to the 2017 consolidated financial statements certain events (see Note 16). The embedded derivatives were separated from the host contract and the resulting derivative liabilities were initially measured at fair value. The derivative liabilities are remeasured at fair value through the consolidated statement of operations at each reporting period. The difference between the consideration received for the equity instruments and the fair value of the embedded derivatives represents the equity components of the transaction. Transaction costs are allocated to the liability derivatives and equity components in proportion to their initial carrying amounts.

(w) Share-based payments

Employees of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in consideration for equity instruments.

The cost of equity-settled transactions with employees is determined by the fair value at the date of grant using an appropriate valuation model. The cost is recognized in the consolidated statement of operations, together with a corresponding credit to other reserves in equity, over the period in which the performance and service conditions are fulfilled. The cost of equity-settled transactions with non-employees for which services are rendered over a vesting period is determined by the average fair value over the period the services are received.

The cumulative expense recognized for equity-settled transactions with employees at each reporting date until the vesting date reflects the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense for a period represents the movement in cumulative expense recognized at the beginning and end of that period, and is recognized in employee shared-based payments. When the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for modifications that increase the total fair value of the share-based payment transaction or are otherwise beneficial to the grantee as measured at the date of modification. There have been no material modifications to any share-based payment transactions during 2015, 2016, and 2017.

Social costs are payroll taxes associated with employee salaries and benefits, including share-based compensation. Social costs in connection with granted options and restricted stock units are accrued over the vesting period based on the intrinsic value of the award that has been earned at the end of each reporting period. The amount of the liability reflects the amortization of the award and the impact of expected forfeitures. The social cost rate at which the accrual is made generally follows the tax domicile within which other compensation charges for a grantee are recognized.

The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 17.

(x) Employee benefits

The Group provides defined contribution plans to its employees. The Group pays contributions to publicly and privately administered pension insurance plans on a mandatory or contractual basis. The Group has no further payment obligations once the contributions have been paid. Contributions to defined contribution plans are expensed when employees provide services. The Group’s post-employment schemes do not include any defined benefit plans.

(y) Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

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Notes to the 2017 consolidated financial statements (z) Leases

At inception of an arrangement, the Group determines whether the arrangement is or contains a lease. The Group leases certain items of property and equipment. Leases in which substantially all the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of operations on a straight-line basis over the period of the leases.

Leases of property and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the repayment of the liability and finance charges. The corresponding lease obligations, net of finance charges, are included in borrowings. The interest element of the finance cost is charged to the consolidated statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term.

New and amended standards and interpretations adopted by the Group

In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which establishes principles for reporting information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations. The Group adopted IFRS 15, and all related amendments, on January 1, 2017 on a full retrospective basis. The 2015 and 2016 comparatives, in respect of IFRS 15, have been presented on a full retrospective basis as required. For further discussion of the Group’s adoption of IFRS 15, see Note 4.

In January 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) which amended IAS 12, Income Taxes. The amendments primarily were issued to clarify the recognition of deferred tax assets for unrealized losses related to debt instruments measured at fair value. The Group adopted these amendments on January 1, 2017 and it did not have a material impact on the consolidated financial statements.

In January 2016, the IASB issued Disclosure Initiative (Amendments to IAS 7) which amended IAS 7, Statement of Cash Flows. The amendments require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The Group adopted these amendments on January 1, 2017 and it did not have a material impact on the consolidated financial statements. The enhanced presentation requirements under the amendments are disclosed in Note 22.

New standards and interpretations issued not yet effective

Recently issued new or revised/amended standards and interpretations effective for the Group on or after January 1, 2018, are as follows:

In July 2014, the IASB published the final version of IFRS 9, Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9, Financial Instruments. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but

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Notes to the 2017 consolidated financial statements restatement of comparative information may only be done if possible without the use of hindsight. Upon adoption, the Group will designate its long term investment as an equity instrument measured at fair value through other comprehensive income with gains and losses remaining in other comprehensive income without recycling to profit or loss upon derecognition. Upon adoption on January 1, 2018, the Group does not expect IFRS 9, Financial Instruments to have any additional material impact on the consolidated financial statements.

In January 2016, the IASB published IFRS 16, Leases, its new leasing standard, which will replace the current guidance in IAS 17, Leases, and related interpretations IFRIC 4, SIC-15 and SIC-27. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The standard applies to annual periods beginning on or after January 1, 2019, with earlier application permitted. The Group expects the valuation of right-of-use assets and lease liabilities, previously described as operating leases, to be the present value of its forecasted future lease commitments. The Group will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Since the Group has a significant amount of minimum lease commitments (see Note 23), the new standard is expected to have a material impact on the consolidated statement of financial position upon adoption. The Group is continuing to assess the impact of the new standard.

In June 2016, the IASB issued three amendments to IFRS 2, Share-based Payment, in relation to the classification and measurement share-based payment transactions. The amendments are intended to eliminate diversity in practice in three main areas: (i) the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction, (ii) the classification of a share-based payment transaction with net settlement features for withholding tax obligations, and (iii) the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. The amendments are effective for accounting periods beginning on or after January 1, 2018. The amendments are required to be applied without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Group does not expect the amendments to IFRS 2, Share-based Payment, to have any material impact on the consolidated financial statements.

There are no other IFRS or IFRIC interpretations that are not effective that are expected to have a material impact.

3. Critical accounting estimates and judgments

The preparation of the consolidated financial statements requires management to make judgments, estimates, and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and equity in the consolidated financial statements and the accompanying disclosures. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events.

Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

The areas where assumptions and estimates are significant to the consolidated financial statements are:

(i) The Group measures the cost of equity-settled transactions with employees and non-employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is estimated using a model which requires the determination of the appropriate inputs. The assumptions and models used for estimating the fair value of share-based payment transactions are disclosed in Note 17.

(ii) The fair value of the Group’s Convertible Notes, warrants, contingent options, and long term investment are estimated using valuation

techniques using inputs based on management’s judgment

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Notes to the 2017 consolidated financial statements

and conditions that existed at each reporting date. The assumptions and models used for estimating the fair value of the instruments are disclosed in Note 22.

(iii) The Group has fiscal loss carry-forwards. At period end, the Group investigates the possibility of recognizing deferred tax assets with regard

to the loss carry-forwards. Deferred tax assets related to loss carry-forwards are recognized only in those cases where it is probable and there is convincing evidence that the Group will generate future taxable income to which the loss carry-forward can be utilized. See Note 10.

(iv) In business combinations, the Group allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. See Note 5.

(v) In accordance with the accounting policy described in Note 2, the Group annually performs an impairment test regarding goodwill. The fair

value of the operating segments is estimated using valuation techniques using inputs based on management’s judgment and conditions that existed at the testing date. The assumptions and models used for estimating the fair value are disclosed in Note 13.

(vi) The Group’s agreements and arrangements with rights holders for the content used on its platform are complex. Some rights holders have allowed the use of their content on the platform while negotiations of the terms and conditions are ongoing. In certain jurisdictions, rights holders have several years to claim royalties for musical composition and therefore estimates of the royalty accruals are based on available information and historical trends. The determination of royalty accruals involves significant judgements, assumptions, and estimates of the amounts to be paid. See Note 20.

(vii) Management makes significant estimates and assumptions when determining the amounts to record for provision for legal contingencies.

See Note 21.

The areas requiring a higher degree of judgment in applying accounting principles or complexity are:

(i) The Group determined that three of its equity arrangements included embedded derivatives due to the existence of a downside protection

clause. The evaluation of the embedded derivatives for separation from the equity instrument required significant judgment and the consideration of whether the embedded derivative was closely related to the host contract. See Notes 16 and 22.

4. Revenue recognition

Adoption of IFRS 15, Revenue from Contracts with Customers

On January 1, 2017, the Group adopted IFRS 15, and all related amendments, using the full retrospective transition method. The standard establishes principles for reporting information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

The main change in accounting policies as a result of the application of IFRS 15 is explained below. Such a change is made in accordance with the transitional provisions of IFRS 15.

The Group provides discounted trial periods for Premium Services where the cost of providing the service exceeds the amount received from the customer. Under IFRS 15, these arrangements meet the definition of a contract with a customer and therefore consideration received for discounted trial periods is recognized in revenue and the related costs are recognized as costs of revenue. Previously, the net loss relating to discounted trial periods was included in sales and marketing and no revenue or cost of revenue was recorded. The loss relating to free trials continues to be classified in sales and marketing.

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Notes to the 2017 consolidated financial statements The following tables summarize the adjustments posted in the Group’s consolidated financial statements due to the retrospective application of IFRS 15.

Impact on consolidated statement of operations

Impact of IFRS 15

2015

Pre-adoption Adjustments 2015

Post-adoption (in € millions) Revenue 1,929 11 1,940 Cost of revenue 1,664 50 1,714

Gross profit 265 (39) 226

Sales and marketing 259 (40) 219 Operating loss (236) 1 (235)

Loss before tax (226) 1 (225) Income tax expense 5 — 5

Net loss attributable to owners of the parent (231) 1 (230)

Impact of IFRS 15

2016

Pre-adoption Adjustments 2016

Post-adoption (in € millions) Revenue 2,933 19 2,952 Cost of revenue 2,483 68 2,551

Gross profit 450 (49) 401

Sales and marketing 418 (50) 368 Operating loss (350) 1 (349)

Loss before tax (536) 1 (535) Income tax expense 4 — 4

Net loss attributable to owners of the parent (540) 1 (539)

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Notes to the 2017 consolidated financial statements

Impact of IFRS 15

2017

Pre-adoption Adjustments 2017

Post-adoption (in € millions) Revenue 4,066 24 4,090 Cost of revenue 3,163 78 3,241

Gross profit 903 (54) 849

Sales and marketing 621 (54) 567 Operating loss (378) — (378)

Loss before tax (1,233) — (1,233) Income tax expense 2 — 2

Net loss attributable to owners of the parent (1,235) — (1,235)

The impact to the opening equity attributable to owners of the parent is not material.

Revenue from contracts with customers

(i) Disaggregated revenue

The Group discloses revenue by reportable segment and geographic area in Note 6.

(ii) Performance obligations

Subscription revenue

The Group generates subscription revenue from the sale of the Premium Service in which customers can listen on-demand and offline. Premium Services are sold directly to end users and through partners who are generally telecommunications companies that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. The Group satisfies its performance obligation, and revenue from these services is recognized, on a straight-line basis over the subscription period. Typically, Premium Services are paid in advance.

Premium partner services are based on a per-subscriber rate in a negotiated partner agreement and may include minimum guarantees for the number of subscriptions that will be purchased from the Group. Under these arrangements, a premium partner may bundle the Premium Service with its existing product offerings or offer the Premium Service as an add-on. Payment is remitted to the Group through the premium partner. When a minimum guarantee is within an agreement and the partner is not expected to meet the commitment, management has concluded the revenue is constrained to the revenue amounts for the actual subscriptions sold in a given period. The Group therefore only recognizes the associated revenue when it is highly probably that this will not result in a significant reversal of revenue when the uncertainty is resolved. The Group assesses the facts and circumstances, including whether the partner is acting as a principal or agent, of all partner revenue arrangements and then recognizes revenues either gross or net. Premium partner services, whether recognized gross or net, have one material performance obligation being the delivery of the Premium Service.

Advertising revenue

The Group’s advertising revenue is primarily generated through display, audio, and video advertising delivered through advertising impressions. The Group enters into arrangements with advertising agencies that purchase advertising on its platform on behalf of the agencies’ clients. These advertising arrangements are typically sold

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Notes to the 2017 consolidated financial statements on a cost-per-thousand basis and are evidenced by an Insertion Order (“IO”) that specifies the terms of the arrangement such as the type of ad product, pricing, insertion dates, and number of impressions in a stated period. Revenue is recognized over time based on the number of impressions delivered. IOs may include multiple performance obligations as they generally contain several different advertising products that each represent a separately identifiable promise within the contract. For such arrangements, the Group allocates revenue to each performance obligation on a relative stand-alone selling price basis. The Group determines stand-alone selling prices based on the prices charged to customers. The Group also may offer cash rebates to advertising agencies based on the volume of advertising inventory purchased. These rebates are estimated based on expected performance and historical data and result in a reduction of revenue recognized.

Additionally, the Group generates revenue through arrangements with certain suppliers to distribute advertising inventory on their ad exchange platforms for purchase on a cost-per-thousand basis. Revenue is recognized over time when impressions are delivered on the platform.

(iii) Contract liabilities

The following table provides information about contract liabilities from contracts with customers.

January 1,

2015 December 31,

2015 December 31,

2016 December 31,

2017 (in € millions) Contract liabilities

Deferred advertising revenue 1 2 1 1 Deferred subscription revenue 62 90 148 215

63 92 149 216

Deferred revenue is mainly comprised of subscription fees collected for services not yet performed and therefore revenue has not been recognized. Revenue is recognized over time as the services are performed. The increase in deferred revenue in 2016 and 2017 is a result of an increase in the number of Premium Subscribers. This balance will be recognized as revenue as the services are performed, which is generally expected to occur over a period up to a year.

Revenue recognized that was included in the contract liability balance at the beginning of the years ended December 31, 2016 and 2017 is €92 million and €149 million, respectively.

As permitted under IFRS 15, the Group does not disclose unsatisfied (or partially unsatisfied) performance obligations when the related contract has a duration of one year or less. The Group also applies the practical expedient under the transitional provisions of IFRS 15 and does not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Group expects to recognize that amount as revenue for the year ended December 31, 2016.

5. Business combinations

Acquisition in 2015

During 2015, the Group acquired the operations of one business. The acquisition is accounted for under the acquisition method. The total purchase consideration is €7 million, all of which was recorded in goodwill. The acquisition did not have a material impact on the Group’s total revenue or net loss for the year ended December 31, 2015.

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Notes to the 2017 consolidated financial statements Included in the arrangements are payments that are contingent on continued employment. The payments are remuneration for post-combination services and are automatically forfeited if employment terminates. A total of €2 million of post-combination cash pay-outs will be recorded as compensation expense over the service period of three years.

Acquisitions in 2016

During 2016, the Group acquired the operations of three separate businesses. The acquisitions were accounted for under the acquisition method. The total purchase consideration was €8 million, of which €7 million was recorded to goodwill, and €1 million to acquired intangibles assets.

Included in the arrangements are payments that are contingent on continued employment. The payments are recognized as remuneration for post- combination services and are automatically forfeited if employment terminates. A total of €3 million of post-combination cash pay-outs will be recorded as compensation expense over the service periods of up to three years.

The results of operations for each of the acquisitions have been included in the Group’s consolidated statements of operations since the respective dates of acquisitions. Actual and pro forma revenue and results of operations for the acquisitions have not been presented because they do not have a material impact to the consolidated revenue and results of operations, either individually or in aggregate.

Acquisitions in 2017

During 2017, the Group acquired the operations of five separate businesses. The acquisitions were accounted for under the acquisition method. The total purchase consideration paid was €85 million, of which €52 million was in cash and €33 million in equity. Of the total purchase consideration, €71 million has been recorded to goodwill, €17 million to acquired intangible assets, €4 million to deferred tax liabilities, and €1 million to tangible assets.

The goodwill of €71 million represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including an experienced workforce and expected future synergies.

Included in the arrangements are payments that are contingent on continued employment. The payments are recognized as remuneration for post- combination services and are automatically forfeited if employment terminates. A total of up to €22 million of post-combination cash pay-outs will be recorded as compensation expense over service periods of up to three years.

Included in one of the arrangements are 61,880 restricted stock awards that are contingent on continued employment and are accounted for as equity- settled share-based payment transactions. A total of €6 million of post-combination expense will be recorded over the service period of two and three- years from the acquisition date if not forfeited by the employees (see Note 17).

The results of operations for each of the acquisitions have been included in the consolidated statements of operations since the respective acquisition dates. Actual and pro forma revenue and results of operations for the acquisitions have not been presented because they do not have a material impact to the consolidated revenue and results of operations, either individually or in aggregate.

6. Segment information

The Group has two reportable segments: Premium and Ad-Supported. The Premium Service is a paid service in which customers can listen on-demand and offline. Revenue is generated through subscription fees. The Ad-

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Notes to the 2017 consolidated financial statements Supported Service is free to the user. Revenue is generated through the sale of advertising. Royalty costs are primarily recorded in each segment based on specific rates for each segment agreed with rights holders. The remaining royalties which are not specifically associated to either of the segments are allocated based on user activity or the revenue recognized in each segment. No operating segments have been aggregated to form the reportable segments.

Key financial performance measures of the segments including revenue, cost of revenue, and gross profit are as follows:

2015 2016 2017 (in € millions) Premium Revenue 1,744 2,657 3,674 Cost of revenue 1,487 2,221 2,868

Gross profit 257 436 806

Ad-Supported Revenue 196 295 416 Cost of revenue 227 330 373

Gross (loss)/profit (31) (35) 43

Consolidated Revenue 1,940 2,952 4,090 Cost of revenue 1,714 2,551 3,241

Gross profit 226 401 849

Reconciliation of gross profit

General expenditures, finance income, finance costs, taxes, and share in (losses)/earnings of associates and joint ventures are not allocated to individual segments as these are managed on an overall group basis. The reconciliation between reportable segment gross profit and loss to consolidated loss before tax is as follows:

2015 2016 2017 (in € millions) Segment gross profit 226 401 849 Research and development (136) (207) (396) Sales and marketing (219) (368) (567) General and administrative (106) (175) (264) Finance income 36 152 118 Finance costs (26) (336) (974) Share in (losses)/earnings of associates and joint ventures — (2) 1

Loss before tax (225) (535) (1,233)

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Notes to the 2017 consolidated financial statements Revenue by country

2015 2016 2017 (in € millions) United States 741 1,173 1,577 United Kingdom 268 342 444 Luxembourg 1 1 3 Other countries 930 1,436 2,066

1,940 2,952 4,090

Premium revenues are attributed to a country based on where the membership originates. Advertising revenues are attributed to a country based on where the campaign is viewed. There are no countries that make up greater than 10% of total revenue included in “Other countries”.

Non-current assets by country

Non-current assets for this purpose consists of property and equipment.

2016 2017 (in € millions) Sweden 12 32 United States 50 28 United Kingdom 19 6 Other countries 4 7

85 73

As of December 31, 2016 and 2017, the Group held no property and equipment in Luxembourg.

7. Personnel expenses

2015 2016 2017

(in € millions, except

employee data) Wages and salaries 163 231 348 Social costs 45 38 136 Contributions to retirement plans 7 12 17 Share-based payments 28 53 65 Other employee benefits 16 39 48

259 373 614

Average full-time employees 1,534 2,084 2,960

8. Auditor remuneration

2015 2016 2017 (in € millions) Audit and audit related fees 3 4 5

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Notes to the 2017 consolidated financial statements 9. Finance income and costs

2015 2016 2017 (in € millions) Finance income Fair value movements on derivative liabilities (Note 22) 26 23 97 Interest income 2 5 19 Other financial income — — 2 Foreign exchange gains 8 124 —

36 152 118

Finance costs Fair value movements on derivative liabilities (Note 22) (14) (48) (303) Fair value movements on Convertible Notes (Note 22) — (245) (524) Interest, bank fees and other costs (1) (5) (4) Foreign exchange losses (11) (38) (143)

(26) (336) (974)

10. Income tax

2015 2016 2017 (in € millions) Current tax expense/(benefit) Current year 5 5 6 Changes in estimates in respect to prior year (1) (1) 1

4 4 7

Deferred tax expense/(benefit) Temporary differences — (1) (5) Change in recognition of deferred tax 1 — — Change in tax rates — 1 —

1 — (5)

Income tax expense 5 4 2

There is no income tax related to components of other comprehensive loss for any of the periods presented.

The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience.

In 2017, the Group had recognized no current income tax expense for provisions and have cumulatively recorded liabilities of €6 million for income tax provisions at December 31, 2017, of which €5 million is reasonably expected to be resolved within twelve months.

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Notes to the 2017 consolidated financial statements A reconciliation between the reported tax expense for the year, and the theoretical tax expense that would arise when applying the statutory tax rate in Luxembourg of 29.22%, 29.22%, and 27.08% on the consolidated loss before taxes for the years ended December 31, 2015, 2016, and 2017, respectively, is shown in the table below:

2015 2016 2017 (in € millions) Loss before tax (225) (535) (1,233) Tax using the Luxembourg tax rate (66) (156) (334) Effect of tax rates in foreign jurisdictions 10 15 (10) Permanent differences 8 12 15 Change in unrecognized deferred taxes 52 132 329 Other 1 1 2

Income tax expense 5 4 2

The major components of deferred tax assets and liabilities are comprised of the following:

2016 2017 (in € millions) Intangible assets — (4) Share-based compensation 1 4 Tax losses carried forward — 3 Property and equipment 1 3 Other 1 —

Net Tax 3 6

A reconciliation of net deferred tax is shown in the table below:

2016 2017 (in € millions) At January 1 4 3 Movement recognized in consolidated statement of operations 1 5 Movement recognized in consolidated statement of changes in equity (2) 2 Movement due to acquisition — (4)

At December 31 3 6

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Reconciliation to balance sheet 2016 2017 (in € millions) Deferred tax assets 3 9 Deferred tax liabilities — 3

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Notes to the 2017 consolidated financial statements Deferred tax assets have not been recognized in respect of the following items, because it is not probable that future taxable profit will be available against which the Group can use the benefits.

2016 2017 (in € millions) Intangible assets 41 74 Share-based compensation 2 115 Tax losses carried forward 197 258 Unrealized losses 18 114 Property and equipment 6 4 Foreign tax credits 4 4 Other 4 12

272 581

At December 31, 2017, no deferred tax liability has been recognized on investments in subsidiaries. The Company has concluded it has the ability and intention to control the timing of any distribution from its subsidiaries and will only do so in a tax advantageous manner. It is not practicable to calculate the unrecognized deferred tax liability on investments in subsidiaries.

Tax loss carry-forwards as at December 31, 2017, were expected to expire as follows:

Expected expiry 2018-2026 2027 and

onwards Unlimited Total (in € millions) Tax loss carry-forwards — 439 912 1,351 Foreign Tax Credits 4 — — 4

The Group has significant net operating loss carry-forwards in the United States, Luxembourg, and Sweden. In certain jurisdictions, if the Group is unable to earn sufficient income or profits to utilize such carry-forwards before they expire, they will no longer be available to offset future income or profits.

In Sweden, utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation if there is an ownership change within the meaning of Chapter 40, paragraphs 10-14, of the Swedish Income Tax Act (the “Swedish Income Tax Act”). In general, an ownership change, as defined by the Income Tax Act results from a transaction or series of transactions over a five-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain categories or individuals, businesses or organizations.

In addition, in the United States, utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation if there is an ownership change within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change, as defined by Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Since the Group formation, the Group has raised capital through the issuance of capital stock on several occasions, and the Group may continue to do so, which, combined with current or future shareholders’ disposition of ordinary shares, may or may not have resulted in such an ownership change. Such an ownership change may limit the amount of net operating loss carry- forwards that can be utilized to offset future taxable income.

The Group’s most significant tax jurisdictions are Sweden and the U.S. (both at the federal level and in various state jurisdictions). Because of its tax loss and tax credit carry-forwards, substantially all of the Group’s tax years remain open to federal, state, and foreign tax examination. Certain of the Group’s subsidiaries are currently under examination by the Swedish, U.S. and other foreign tax authorities for tax years from 2008-2016. These examinations may lead to adjustments to the Group’s taxes.

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Notes to the 2017 consolidated financial statements 11. Loss per share

Basic loss per share is computed using the weighted-average number of outstanding ordinary shares during the period. Diluted loss per share is computed using the weighted-average number of outstanding ordinary shares and excludes all potential ordinary shares outstanding during the period, as their inclusion would be anti-dilutive. The Group’s potential ordinary shares consist of incremental shares issuable upon the assumed exercise of stock options and warrants, and the incremental shares issuable upon the assumed vesting of unvested restricted stock units and restricted stock awards. The computation of loss per share is as follows:

2015 2016 2017 (in € millions, except share and per share data) Basic and diluted Net loss attributable to owners of the parent (230) (539) (1,235) Shares used in computation:

Weighted-average ordinary shares outstanding 141,946,600 148,368,720 151,668,769

Basic and diluted net loss per share attributable to owners of the parent (1.62) (3.63) (8.14)

Potential dilutive securities that are not included in the diluted per share calculations because they would be anti-dilutive are as follows:

2015 2016 2017 Employee options 9,192,120 10,976,480 14,646,720 Restricted stock units 627,480 501,480 195,937 Restricted stock awards 79,360 — 61,880 Warrants — 5,120,000 6,720,000

The potential ordinary shares issuable relating to the contingent options and Convertible Notes are issuable only upon specified contingent events. As the specified contingent events have not occurred, these contingently dilutive shares are not considered in the calculation of dilutive EPS. For further details, see Notes 16 and 18.

Unaudited pro forma net loss per share

The unaudited pro forma basic and diluted loss per share assumes the exchange agreement and direct listing was consummated as of the beginning of the period and therefore assumes the shares issued upon exchange of the Convertible Notes were outstanding from January 1, 2017. The unaudited pro forma basic and diluted net loss per share also has been computed to give effect to the shares issued upon exchange of the Convertible Notes on December 15, 2017 and December 27, 2017 disclosed in Note 18 as if they were outstanding from January 1, 2017.

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Notes to the 2017 consolidated financial statements The numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to reverse the losses resulting from the fair value movements on Convertible Notes (see Note 9) as they were assumed to have been exchanged on January 1, 2017. The computation of pro forma net loss per share is as follows (in € millions, except share and per share data):

2017 Basic and diluted Net loss attributable to owners of the parent (1,235) Pro forma adjustment for:

Fair value movements on Convertible Notes (Note 9) 524

Pro forma net loss attributable to owners of the parent (711)

Weighted-average ordinary shares outstanding used in computing basic net loss per share 151,668,769 Pro forma adjustment for:

Assumed exchange of Convertible Notes to ordinary shares 14,478,080

Pro forma weighted-average ordinary shares outstanding 166,146,849

Pro forma basic and diluted net loss per share attributable to owners of the parent (4.28)

12. Property and equipment

Property and

equipment Leasehold

improvements Total (in € millions) Cost At January 1, 2016 96 41 137 Additions 28 10 38 Disposals (10) (1) (11) Exchange differences (3) 1 (2)

At December 31, 2016 111 51 162

Additions 10 29 39 Disposals (11) (2) (13) Exchange differences (5) (5) (10)

At December 31, 2017 105 73 178

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Notes to the 2017 consolidated financial statements

Property and

equipment Leasehold

improvements Total (in € millions) Accumulated depreciation At January 1, 2016 (47) (9) (56) Depreciation charge (26) (6) (32) Disposals 10 1 11 Exchange differences 1 (1) —

At December 31, 2016 (62) (15) (77)

Depreciation charge (37) (9) (46) Disposals 11 2 13 Exchange differences 4 1 5

At December 31, 2017 (84) (21) (105)

Cost, net accumulated depreciation At December 31, 2016 49 36 85

At December 31, 2017 21 52 73

In 2017, the Group shortened the useful life of certain equipment due to a planned transition to the cloud and recorded accelerated depreciation of €11 million. The Group had no such charges in 2016 and 2015.

The Group leases various equipment under non-cancellable finance lease agreements over a lease term of 3 years. Property and equipment includes the following amounts where the Group is a lessee under a finance lease:

2016 2017 (in € millions) Finance leases 15 15 Accumulated depreciation (10) (14)

5 1

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Notes to the 2017 consolidated financial statements 13. Intangible assets including goodwill

Internal development

costs and patents

Acquired intangible assets Total Goodwill Total

(in € millions) Cost At January 1, 2016 5 12 17 65 82 Additions 3 — 3 — 3 Acquisitions, business combination (Note 5) — 1 1 7 8 Write off of fully amortized intangibles — (1) (1) — (1) Exchange differences — — — 1 1

At December 31, 2016 8 12 20 73 93

Additions 12 — 12 — 12 Acquisition, business combination (Note 5) — 17 17 71 88 Write off of fully amortized intangibles (2) (11) (13) — (13) Exchange differences — (1) (1) (9) (10)

At December 31, 2017 18 17 35 135 170

Accumulated amortization At January 1, 2016 (1) (8) (9) — (9) Amortization charge (2) (4) (6) — (6) Write off of fully amortized intangibles — 1 1 — 1 Exchange differences — 1 1 — 1

At December 31, 2016 (3) (10) (13) — (13)

Amortization charge (5) (3) (8) — (8) Write off of fully amortized intangibles 2 11 13 — 13 Exchange differences — — — — —

At December 31, 2017 (6) (2) (8) — (8)

Cost, net accumulated amortization At December 31, 2016 5 2 7 73 80

At December 31, 2017 12 15 27 135 162

Amortization of €4 million, €5 million and €8 million in 2015, 2016, and 2017, respectively, is included in research and development in the consolidated statement of operations. Research and development costs that are not eligible for capitalization have been expensed in the period incurred.

Goodwill is tested for impairment on an annual basis or when there are indications the carrying amount may be impaired. In 2015, the Group had only one operating segment. In 2016, given the Group’s focus on the differentiation between Premium and Ad-Supported as distinct businesses, as well as the evolution of these services as distinct products and experiences that appeal to different customers, the combined revenue organization was separated into two businesses. For the purpose of 2016 and 2017 impairment testing, goodwill is allocated to the Group’s two operating segments, Premium and Ad- Supported, based on the units that are expected to benefit from the business combination. The Group monitors goodwill at the operating segment level

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Notes to the 2017 consolidated financial statements for internal purposes, consistent with the way it assesses performance and allocates resources. The carrying amount of goodwill allocated to each of the operating segments is as follows:

Premium Ad-

Supported Premium Ad-

Supported 2016 2016 2017 2017 (in € millions) Goodwill 64 9 119 16

Valuation methodology

The Group performed its annual impairment test in the fourth quarter of 2016. The recoverable amount of the Premium and Ad-Supported operating segments is determined by the Probability Weighted Expected Return Method (“PWERM”). The PWERM represents fair value less costs of disposal (“FVLCD”), which is classified as Level 3 under the fair value hierarchy. FVLCD is calculated using the projected revenue of the business and applying a multiple based on historical revenue multiples of comparable publicly traded companies. The PWERM method quantifies the underlying enterprise value by probability weighting the indicated equity values of potential discrete future outcomes (or “scenarios”). The weighting and key assumptions used to estimate the fair value using the PWERM were the same for both operating segments. As a result of the analysis, the FVLCD for the Premium and Ad-Supported operating segments was determined to be in excess of their carrying amounts. No impairment was recorded in 2015 and 2016.

Key assumptions used in the FVLCD calculations at the impairment testing date

The valuation models weighted the different scenarios as follows:

2016 Market Approach – High Case Public Company 20% Market Approach – Low Case Public Company 40% Market Approach – High Case Transaction 4% Market Approach – Low Case Transaction 6% Private Case – Income and Market Approaches 3%

The key assumptions used to estimate the fair value of the operating segments using the PWERM are as follows:

2016 Revenue multiple used to estimate enterprise value 2.0 – 3.5 Discount rate (%) 19.0

The calculation of the FVLCD is most sensitive to the revenue multiple and discount rate assumptions. Revenue multiples were selected based on the relative growth prospects, margin, and risks of comparable companies, versus the Group, as well as an assumption of market conditions at exit. The indicated value in the public company and transaction cases were discounted back to the valuation date using a rate consistent with the Group’s weighted-average cost of capital (“WACC”). There are no reasonably possible changes in the key assumptions that would result in the operating segments’ carrying amounts exceeding their recoverable amounts.

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Notes to the 2017 consolidated financial statements The Group performed its annual impairment test in the fourth quarter of 2017, and concluded that goodwill was not impaired as the fair value of the operating segments significantly exceeded their carrying amounts.

14. Restricted cash and other non-current assets

2016 2017 (in € millions) Restricted cash

Lease deposits 20 41 Other 1 1

Other non-current assets 2 12

23 54

15. Trade and other receivables

2016 2017 (in € millions) Trade receivables 249 295 Less: provision for impairment of trade receivables (26) (23)

Trade receivables – net 223 272 Other 77 88

300 360

Trade receivables are non-interest bearing and generally have 30-day payment terms. Due to their comparatively short maturities, the carrying value of trade and other receivables approximate their fair value. The Group establishes an accrual against advances made to rights holders not expected to be recovered.

The aging of the Group’s trade receivables that are not impaired is as follows:

2016 2017 (in € millions) Current 127 153 Overdue 1 – 30 days 45 69 Overdue 31 – 60 days 21 13 Overdue 60 – 90 days 13 11 Overdue more than 90 days 17 26

223 272

With respect to trade receivables that are neither impaired nor past due, there are no indications at the reporting date that the debtors will not meet their payment obligations. The trade receivables past due relate to a number of customers for whom there is no recent history of default or other indicators of impairment.

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Notes to the 2017 consolidated financial statements The movements in the Group’s provision for bad debts are as follows:

2016 2017 (in € millions) At January 1 6 18 Provision for receivables impairment 19 12 Receivables written off (3) (3) Reversal of unutilized provisions (4) (12)

At December 31 18 15

The Group maintains a provision for impairment of a portion of trade receivables when collection becomes doubtful. The Group estimates anticipated losses from doubtful accounts based upon the expected collectability of all accounts receivables, which takes into account the number of days past due, collection history, identification of specific customer exposure, and current economic trends. An impairment loss on trade receivables is calculated as the difference between the carrying amount and the present value of the estimated future cash flow. Impairment losses are charged to general and administrative expense in the consolidated statement of operations. Receivables for which an impairment provision was recognized are written off against the provision when it is deemed uncollectible.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. The Group does not hold any collateral as security.

16. Issued share capital and other reserves

As at December 31, 2016 and 2017, the authorized and subscribed share capital was comprised of 403,001,760 shares at a par value €0.000625 each.

The Group has incentive stock option plans under which options to subscribe to the Company’s share capital have been granted to executives and certain employees. Options exercised under these plans have been settled via the issuance of new shares.

On November 13, 2012, the Group entered into an equity financing agreement with new and existing shareholders for the issuance of 4,204,120 ordinary shares for total gross proceeds of €79 million and incurred transaction costs of €3 million in addition to the shares received, the new investors also received contingent options that provided downside protection (meaning that the new investors are eligible to receive additional shares at certain valuations in the event of certain triggering events such as a trade sale, public listing, or liquidation). The contingent options were determined to be embedded derivatives which required separation from the equity issuance. The contingent options recognized as a derivative liability upon issuance were valued at €39 million at December 31, 2012. Refer to Note 22.

On November 20, 2013, the Group entered into an equity financing agreement with new investors for the issuance of 8,233,160 shares. On December 19, 2013, the first closing occurred and the Group issued 5,584,160 shares for total gross proceeds of €123 million and incurred transaction costs of €2 million. The second closing occurred on January 17, 2014, whereby 2,649,000 ordinary shares were issued for total gross proceeds of €58 million. In addition to the shares received in December 2013, the new investors also received contingent options that provided downside protection (meaning that the new investors are eligible to receive additional shares at certain valuations in the event of certain triggering events such as a trade sale, public listing, or liquidation). The contingent options were determined to be embedded derivatives, which required separation from the equity issuance. The contingent options recognized as a derivative liability upon issuance were valued at €31 million at December 31, 2013. Refer to Note 22.

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Notes to the 2017 consolidated financial statements On April 17, June 9, and July 15, 2015, the Group entered into an equity financing agreement with new and existing shareholders for the issuance of 9,484,880 ordinary shares for total gross proceeds of €479 million and incurred transaction costs of €5 million. In addition to the shares received, the new investors also received contingent options that provided downside protection (meaning that the new investors are eligible to receive additional shares at certain valuations in the event of certain triggering events such as a trade sale, public listing, or liquidation). The contingent options were determined to be embedded derivatives, which required separation from the equity issuance. The contingent options are recognized as a derivative liability and were valued at €87 million upon issuance. For further details, please see Note 22.

On October 17, 2016, the Group issued, for €27 million in cash, warrants to acquire 5,120,000 ordinary shares to certain members of key management. The exercise price of each warrant is US$50.61, which was equal to 1.2 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through October 17, 2019. For further details, please see Note 22.

On July 13, 2017, the Group issued, for €9 million in cash, a warrant to acquire 1,600,000 ordinary shares to a holder that is an employee and a member of management of the Group. The exercise price of each warrant is US$89.73, which was equal to 1.3 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through July 2020. For further details, please see Note 22.

On December 15, 2017, the Group issued 8,552,440 ordinary shares in exchange for a non-controlling equity interest in Tencent Music Entertainment Group (“TME”) valued at €910 million. For further details, please see Note 22. The ordinary shares issued are subject to certain transfer restrictions for a period of up to three years from December 15, 2017, subject to limited exceptions, including transfers with the Group’s prior consent; transfers to certain permitted transferees; transfers pursuant to a tender offer or exchange offer recommended by the Group’s board of directors for a majority of the Group’s issued and outstanding securities; transfers pursuant to mergers, consolidations, or other business combination transactions approved by the Group’s board of directors; transfers to the Group or any of its subsidiaries; or transfers that are necessary to avoid regulation as an “investment company” under the U.S. Investment Company Act of 1940, as amended.

On December 15 and 29, 2017, the Group entered into exchange agreements with holders of a portion of its Convertible Notes, pursuant to which the Group exchanged an aggregate of US$411 million in principal of Convertible Notes, plus accrued interest of US$37 million, for an aggregate of 6,554,960 ordinary shares. For further details, please see Note 22.

No dividends were paid during the year or are proposed. All shares have equal rights to vote at general meetings.

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Notes to the 2017 consolidated financial statements Other reserves

2015 2016 2017 (in € millions) Currency translation At January 1 8 8 (4) Currency translation — (12) (3)

At December 31 8 (4) (7)

Available for sale financial assets At January 1 — — (4) Losses on fair value — (4) (13) Losses reclassified to consolidated statement of operations — — 1

At December 31 — (4) (16)

Share-based payments At January 1 47 77 130 Share-based payments (Note 17) 29 53 67 Income tax impact associated with share-based payments (Note 10) 1 — 3

At December 31 77 130 200

At December 31 85 122 177

Currency translation reserve comprises foreign exchange differences arising from the translation of the financial statements of foreign operations into the reporting currency.

Available for sale financial assets reserve recognizes the unrealized fair value gains and losses on current asset investments held as available for sale.

Share-based payments reserve recognizes the grant date fair value of equity-settled awards provided to employees as part of their remuneration. For further details, please see Note 17.

17. Share-based payments

Employee Share Option Plans

Under the Employee Share Option Plans (“ESOP”), share options of the Company are granted to executives and certain employees of the Group. For options granted prior to January 1, 2016, the exercise price is equal to the fair value of the shares on grant date for employees in the United States and for U.S. citizens and fair value less 30% for the rest of the world. The value of the discount is included in the grant date fair value of the award. For options granted thereafter, the exercise price of the options is equal to the fair value of the shares on grant date for all employees. Generally, the first vesting period (13.5% – 25% of the initial grant) is up to one year from the grant date and subsequently vests at a rate of 6.25% each quarter until fully vested. The exercise price for options is payable in the EUR value of a fixed USD amount; therefore, the Group considers these awards to be USD-denominated. The options are generally granted with a term of 5 years.

In connection with the Group’s acquisition of Echo Nest in March of 2014, the Group assumed Echo Nest’s equity incentive plan and issued replacement awards, the Group issued 458,160 stock options at a weighted-average exercise price of US$7.05 to replace previously held Echo Nest equity awards.

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Notes to the 2017 consolidated financial statements Restricted Stock Awards

In connection with the Group’s acquisition of Echo Nest in March of 2014, the Group issued 158,720 restricted stock awards (RSAs) to certain Echo Nest employees. Vesting of the RSAs is contingent on continued employment of these employees. The awards are accounted for as equity-settled share- based payment transactions. The RSAs vested annually over a two-year period from the acquisition date.

In connection with an acquisition during 2017, the Group issued 61,880 RSAs to certain employees of the aquiree. Vesting of the RSAs is contingent on continued employment of these employees. The awards are accounted for as equity-settled share-based payment transactions. The RSAs vest over a two- and three-year period from the acquisition date.

During 2015, 2016, and 2017, the Group recorded share-based compensation expense related to RSAs of €1 million, €0 million, and €0 million, respectively. The valuation of the RSAs was consistent with the fair value of the ordinary shares further described in Note 22.

Restricted Stock Unit Program

During 2014, the Company implemented Restricted Stock Unit (RSUs) program accounted for as equity-settled share-based payment transaction. RSUs are measured based on the fair market value of the underlying stock on the date of grant. The RSUs granted to participants under the Program generally vest over three to five years. The vesting of certain RSUs could accelerate in the event of an IPO or other change in control event.

In June 2017, the shareholders approved the Director Restricted Stock Unit plan for the Company to issue awards specifically to members of its Board of Directors. During 2017, a total of 35,520 RSUs have been awarded under this plan.

During 2015, 2016 and 2017, the Group recorded share-based compensation expense related to restricted stock units of €8 million, €5 million, and €6 million, respectively. The valuation of the RSUs was consistent with the fair value of the ordinary shares further described in Note 22.

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Notes to the 2017 consolidated financial statements Activity in the RSUs and RSAs outstanding and related information is as follows:

RSU RSA

Number of

RSUs

Weighted average

grant date fair value

Number of RSAs

Weighted average

grant date fair value

US$ US$ Outstanding at January 1, 2015 849,520 30.38 158,720 23.90 Granted 118,440 43.15 — — Forfeited (228,920) 30.38 — — Vested (111,560) 30.38 (79,360) 23.90

Outstanding at December 31, 2015 627,480 32.78 79,360 23.90

Granted 176,080 41.85 — — Forfeited (140,000) 30.38 — — Released (162,080) 32.53 (79,360) 23.90

Outstanding at December 31, 2016 501,480 36.73 — —

Granted 80,920 59.63 61,880 90.65 Forfeited (85,903) 37.43 — — Released (300,560) 38.95 — —

Outstanding at December 31, 2017 195,937 42.46 61,880 90.65

Activity in the share options outstanding and related information is as follows:

ESOP Non-employee options

Number of

options

Weighted average

exercise price Number of

options

Weighted average

exercise price US$ € Outstanding at January 1, 2015 6,972,760 12.75 4,069,600 2.43 Granted 3,347,640 40.38 — — Forfeited (316,880) 20.03 (4,069,600) (2.43) Exercised (711,400) 9.43 — — Expired (100,000) 15.23 — —

Outstanding at December 31, 2015 9,192,120 22.80 — —

Granted 6,020,360 41.90 — — Forfeited (512,560) 36.03 — — Exercised (3,661,480) 10.15 — — Expired (61,960) 20.93 — —

Outstanding at December 31, 2016 10,976,480 36.88 — —

Granted 5,819,520 64.11 — — Forfeited (659,000) 46.34 — — Exercised (1,422,520) 22.23 — — Expired (67,760) 28.49 — —

Outstanding at December 31, 2017 14,646,720 48.73 — —

Exercisable at December 31, 2015 4,927,200 13.18 — — Exercisable at December 31, 2016 3,765,000 29.98 — — Exercisable at December 31, 2017 5,822,400 39.62 — —

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Notes to the 2017 consolidated financial statements The weighted-average contractual life for the share options outstanding at December 31, 2015, 2016, and 2017 is 2.5 years, 3.4 years, and 3.3 years, respectively. The weighted-average share price at exercise for options exercised during 2015, 2016, and 2017 was US$43.60, US$42.05, and US$57.53, respectively. The weighted-average fair value of options granted during the year ended December 31, 2015, 2016, and 2017 was US$15.58 per option, US$13.10 per option, and US$18.05 per option, respectively.

The share options outstanding are comprised of the following: 2015 2016 2017

Number of

options

Weighted average

remaining contractual life (years)

Number of options

Weighted average

remaining contractual life (years)

Number of options

Weighted average

remaining contractual life (years)

Range of exercise prices (US$) Below 40.00 6,610,400 1.9 2,731,080 2.0 1,545,440 1.4 40.00 – 42.50 1,268,160 4.3 6,320,120 4.0 5,734,920 2.7 Above 42.50 1,313,560 4.3 1,925,280 3.6 7,366,360 3.8

9,192,120 2.5 10,976,480 3.4 14,646,720 3.3

In determining the fair value of the employee share-based awards, the Group uses the Black-Scholes option-pricing model. The Company does not anticipate paying any cash dividends in the near future and therefore uses an expected dividend yield of zero in the option valuation model. The expected volatility is based on the historical volatility of public companies that are comparable to the Group over the expected term of the award. The risk-free rate is based on U.S. Treasury zero-coupon rates as the exercise price is based on a fixed USD amount. The expected life of the share options is based on historical data and current expectations.

The following table lists the inputs to the Black-Scholes option-pricing models used for employee share-based payments for the years ended December 31, 2015, 2016, and 2017:

2015 2016 2017 Expected volatility (%) 39.4 – 55.9 37.9 – 45.8 32.0 – 43.5 Risk-free interest rate (%) 0.9 – 1.6 0.8 – 1.8 1.4 – 2.0 Expected life of share options (years) 2.8 – 5.2 2.5 – 5.0 2.4 – 4.4 Weighted-average share price (US$) 36.20 – 46.50 41.20 – 44.40 50.70 – 90.65

Valuation assumptions are determined at each grant date and, as a result, are likely to change for share-based awards granted in future periods. Changes to the input assumptions could materially affect the estimated fair value of share-based payment awards.

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Notes to the 2017 consolidated financial statements The sensitivity analysis below shows the impact of increasing and decreasing expected volatility by 10% as well as the impact of increasing and decreasing the expected life by one year. This analysis was performed on stock options granted in 2017. The following table shows the impact of these changes on stock option expense for the options granted in 2017:

2017 (in € millions) Actual stock option expense 31 Stock option expense increase (decrease) under the following assumption

changes Volatility decreased by 10% (8) Volatility increase by 10% 7 Expected life decrease by 1 year (5) Expected life increase by 1 year 4

The expense recognized in the consolidated statement of operations for employee share-based payments is as follows:

2015 2016 2017 (in € millions) Cost of revenue 1 1 2 Research and development 11 16 21 Sales and marketing 6 10 15 General and administrative 10 26 27

28 53 65

18. Convertible notes and borrowings

Convertible Notes

On April 1, 2016, the Group issued US$1,000 million principal amount of Convertible Notes due in 2021. The notes were issued at par and bear interest of 5.0% payment-in-kind interest increasing by 100 basis points every six months after two years. Upon a specified conversion event occurring, the Convertible Notes will convert into ordinary shares at a conversion rate reflecting a conversion price equal to the lesser of a price cap per share or a discount of 20.0% to the per share price of the Company’s ordinary shares. If a specified conversion event has not occurred within twelve months, the discount will increase by 250 basis points and then again, every six months thereafter until a specified conversion event has occurred. A direct listing is not considered a specified conversion event. The terms also include change of control clauses where the notes holders have the option to convert into ordinary shares. At maturity, if the notes have not yet been converted or repaid, note holders will receive cash in an amount equal to the original principal amount plus 10% annualized return.

The Group accounts for the Convertible Notes in accordance with IAS 39, Financial Instruments: Recognition and Measurement, ‘fair value option’. Under this approach, the Convertible Notes are accounted for in its entirety at fair value through profit or loss (initial recognition). The transaction costs of approximately US$20 million were effectively immediately expensed in finance costs.

The Convertible Note agreements include certain affirmative covenants, including the delivery of audited consolidated financial statements to the holders.

On December 15, 2017, holders of a portion of the Group’s Convertible Notes exchanged US$301 million in principal of Convertible Notes, plus accrued interest of US$27 million, for 4,800,000 ordinary shares. The

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Notes to the 2017 consolidated financial statements Convertible Notes were recorded at fair value on the date of exchange, which was reclassified to equity upon issuance of the ordinary shares. The fair value at exchange was based on secondary market transactions of US$600 million between note holders and a third party.

On December 27, 2017, the Group entered into an exchange agreement with holders of a portion of its Convertible Notes, pursuant to which the Group exchanged an aggregate of US$110 million in principal of Convertible Notes, plus accrued interest of US$10 million, for an aggregate of 1,754,960 ordinary shares as of December 29, 2017. The Convertible Notes were recorded at fair value on the date of exchange, which was reclassified to equity upon issuance of the ordinary shares. The fair value at exchange of US$211 million was based on the ordinary share fair value as at December 31, 2017. See Note 22.

In January 2018, the Group entered into an exchange agreement with holders of the remaining balance of its Convertible Notes, pursuant to which the Group exchanged the remaining of $628 million of Convertible Notes, plus accrued interest, for 9,431,960 ordinary shares. Pursuant to this exchange agreement, subject to certain conditions, if the Company fails to list its ordinary shares on or prior to July 2, 2018, the Group has agreed to offer to each noteholder the option to unwind the transaction such that the Group purchases back the shares that were issued to such noteholder pursuant to the exchange and will issue such noteholder a new note that is materially identical to its note prior to the exchange. The option to unwind the exchange if a listing does not occur by July 2, 2018 meets the definition of a contingent settlement event, and results in the issued equity shares (“Converted Notes”) being classified as a financial liability in the statement of financial position until the option to unwind expires due to a direct listing or the passage of time. The Group accounts for the Converted Notes in accordance with IAS 39, Financial Instruments: Recognition and Measurement, ‘fair value option’. Under this approach, the Converted Notes are accounted for in its entirety at fair value through profit or loss. We will continue to fair value the issued shares and recognize changes in fair value within finance costs in the consolidated statement of operations until the option to unwind expires due to a direct listing or the passage of time.

Finance lease liabilities

Total borrowings include finance lease liabilities. Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default.

2016 2017 (in € millions) Gross finance lease liabilities – minimum lease payments: Not later than one year 5 1 Later than one year but not more than 5 years 1 —

6 1 Future finance charges on finance lease liabilities — —

Present value of finance lease liabilities 6 1

The present value of finance lease liabilities is as follows:

2016 2017 (in € millions) No later than 1 year 5 1 Later than 1 year and no later than 5 years 1 —

6 1

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Notes to the 2017 consolidated financial statements Undrawn borrowing facilities

On December 23, 2013, the Group signed a Revolving Credit Facility with a group of lenders. The facility provided for maximum borrowings, of US$200 million. The total facility was available for issuance under a revolving loan and US$20 million was available for a swingline loan. The interest rates per annum under the facility were based on floating rates of interest measured by reference to an adjusted Prime rate, Federal Funds rate, London inter-bank offered rate (LIBOR), or Euro inter-bank offered rate (EURIBOR). The Group incurred loan origination fees of approximately US$2 million, which were deferred and amortized to finance costs over the term of the facility.

The Revolving Credit Facility was terminated on April 7, 2016. The Group had no borrowings under the senior revolving credit facility at the time of its termination. No early termination penalties were incurred by the Group as a result of the termination.

The Group incurred financing costs and commitment fees, of €1 million in 2016, inclusive of loan origination amortization and unused commitment fees. Upon termination of the facility, the Group wrote off the remaining unamortized loan origination costs.

19. Trade and other payables

2016 2017 (in € millions) Trade payables 139 242 Value added tax and sales taxes payable 50 91 Other current liabilities 12 8

201 341

Trade payables generally have a 30-day term and are recognized and carried at their invoiced value, inclusive of any value added tax that may be applicable.

20. Accrued expenses and other liabilities

2016 2017 (in € millions) Non-current Deferred rent 9 55 Borrowings (Note 18) 1 — Other accrued liabilities — 1

10 56

Current Accrued fees to rights holders 562 639 Accrued salaries, vacation, and related taxes 20 34 Accrued social costs for options and RSUs 11 87 Borrowings (Note 18) 5 1 Other accrued expenses 75 120

673 881

683 937

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Notes to the 2017 consolidated financial statements 21. Provisions

The changes in the Group’s provisions were as follows:

Legal

contingencies Onerous

contracts Other Total (in € millions) Carrying amount at January 1, 2016 8 6 9 23 Charged/(credited) to the consolidated statement of operations:

Additional provisions 46 5 2 53 Reversal of unutilized amounts — — — — Utilized (5) (6) (4) (15)

Carrying amount at December 31, 2016 49 5 7 61

Charged/(credited) to the consolidated statement of operations: Additional provisions 60 5 2 67 Reversal of unutilized amounts — — (1) (1) Exchange differences (11) — — (11) Utilized (45) (4) (2) (51)

Carrying amount at December 31, 2017 53 6 6 65

As at December 31, 2016: Current portion 49 4 4 57

Non-current portion — 1 3 4

As at December 31, 2017: Current portion 53 4 2 59

Non-current portion — 2 4 6

Provision for legal contingencies

Various legal actions, proceedings, and claims are pending or may be instituted or asserted against the Group. The results of such legal proceedings are difficult to predict and the extent of the Group’s financial exposure is difficult to estimate. The Group records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Between December 2015 and January 2016, two putative class action lawsuits were filed against Spotify USA Inc. in the U.S. District Court for the Central District of California, alleging that the Group unlawfully reproduced and distributed musical compositions without obtaining licenses. These cases were subsequently consolidated in May 2016 and transferred to the U.S. District Court for the Southern District of New York in October 2016, as Ferrick et al. v. Spotify USA Inc., No. 1:16-cv-8412-AJN (S.D.N.Y). In May 2017, the parties reached a signed class action settlement agreement which the court has preliminarily approved, pursuant to which the Group will be responsible for (i) a $43 million cash payment to a fund for the class, (ii) all settlement administration and notice costs, expected to be between $1 million to $2 million, (iii) a direct payment of class counsel’s attorneys’ fees of up to $5 million dollars, (iv) future royalties for any tracks identified by claimants, as well as other class members who provide proof of ownership following the settlement, and (v) reserving future royalties for unmatched tracks. The final approval hearing was held on December 1, 2017 and the court has not yet issued a ruling.

Even if the settlement is finally approved, the Group may still be subject to claims of copyright infringement by rights holders who have purported to opt out of the settlement or who may not otherwise be covered by its terms.

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Notes to the 2017 consolidated financial statements Provision for onerous contracts

At December 31, 2016, onerous contracts principally represent a specific partner contract where the unavoidable cost of meeting the obligations exceeds the expected revenue. The costs associated with the provisions are recognized as cost of revenue.

At December 31, 2017, onerous contracts principally represent vacant leasehold property for which the Group has substantially ceased to use and the Group estimates a sub-tenant would be at a significantly reduced rental. In this case, the unavoidable costs of meeting the obligations under the lease exceed the economic benefits expected to be received. As such, the Group has recorded a provision for the estimated cash flows related to the property within operating expenses. The Group expects the provision to be consumed over the remaining lease term, being nine years.

Other

The Group has obligations under lease agreements to return the leased assets to their original condition. An obligation to return the leased asset to their original condition upon expiration of the lease is accounted for as asset retirement obligations. The obligations are expected to be settled at the end of the lease terms.

Indirect tax provisions relate primarily to potential non-income tax obligations in various jurisdictions. The Group recognizes provisions for claims or indirect taxes when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These provisions are recognized as general and administrative expenses.

22. Financial risk management and financial instruments

Financial risk management

The Group’s operations are exposed to financing and financial risks, which are managed under the control and supervision of the Board of Directors of the Company. To manage these risks efficiently, the Group has established guidelines in the form of a treasury policy that serves as a framework for the daily financial operations. The treasury policy stipulates the rules and limitations for the management of financial risks.

Financial risk management is centralized within Treasury who are responsible for the management of financing and financial risks. Treasury manages and executes the financial management activities, including monitoring the exposure of financial risks, cash management, and maintaining a liquidity reserve, and it provides certain financial services to the Group’s entities. Treasury operates within the limits and policies authorized by the Board of Directors.

Capital management

The Group’s objectives when managing capital (cash and cash equivalents, short term investments, equity, and Convertible Notes) is to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group’s capital structure and dividend policy is decided by the Board of Directors. Treasury continuously reviews the Group’s capital structure considering, amongst other things, market conditions, financial flexibility, business risk, and growth rate.

The Group is not subject to any externally imposed capital requirements.

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Notes to the 2017 consolidated financial statements Credit risk management

Financial assets carry an element of risk that counterparties may be unable to fulfill their obligations. This exposure arises from the investments in liquid funds of banks and other counterparties. The Group mitigates this risk by adopting a risk adverse approach in relation to the investment of surplus cash. The main objectives for investments are first, to preserve principal and secondarily, to maximize return given the rules and limitations of the treasury policy. Surplus cash is invested in counterparties and instruments considered to carry low credit risk. Investments are subject to credit rating thresholds and at the time of investment, no more than 10% of surplus cash can be invested in any one issuer (excluding certain government bonds and investments in cash management banks). The weighted-average maturity of the portfolio shall not be greater than 2 years, and the final maturity of any investment is not to exceed 5 years. The Group shall maintain the ability to liquidate the majority of all short term investments within 90 days. At December 31, 2016 and 2017, the financial credit risk was equal to the consolidated statement of financial position value of cash and cash equivalents and short term investments of €1,585 million and €1,509 million, respectively. No credit losses were incurred during 2016 or 2017 on investments.

The credit risk with respect to the Group’s trade receivables is diversified geographically and among a large number of customers, private individuals as well as companies in various industries, both public and private. The majority of the Group’s revenue is paid in advance significantly lowering the credit risk incurred for these specific counterparties. Solvency information is generally required for credit sales within the Ad sales and Partner subscription business to minimize the risk of bad debt losses and is based on information provided by credit and business information from external sources.

Liquidity risk management

Liquidity risk is the Group’s risk of not being able to meet the short term payment obligations due to insufficient funds. The Group has internal control processes and contingency plans for managing liquidity risk. A centralized cash pooling process enables the Group to manage liquidity surpluses and deficits according to the actual needs at the group and subsidiary level. The liquidity management takes into account the maturities of financial assets and financial liabilities and estimates of cash flows from operations.

The Group’s policy is to have a strong liquidity position in terms of available cash and cash equivalents, and short term investments.

2016 2017 (in € millions) Liquidity Short term investments 830 1,032 Short term deposits 373 122 Cash at bank and on hand 382 355

Total surplus liquidity 1,585 1,509

Liquidity position 1,585 1,509

Currency risk management

Transaction exposure relates to business transactions denominated in foreign currency required by operations (purchasing and selling) and/or financing (interest and amortization). The Group’s general policy is to hedge transaction exposure on a case-by-case basis. During 2016, the Group had not entered into any hedging transactions. In 2017, the Group began entering into multiple foreign exchange forward contracts. The Group

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Notes to the 2017 consolidated financial statements strives, as far as possible, to mitigate its currency exposure in the USD denominated Convertible Notes by matching the balance with USD denominated cash and cash equivalents and short term investments creating a natural hedge. Translation exposure relates to net investments in foreign operations. The Group does not conduct translation risk hedging.

(i) Transaction exposure sensitivity

In most cases, the Group’s customers are billed in their respective local currency. Major payments, such as salaries, consultancy fees, and rental fees are settled in local currencies. Royalty payments are primarily in EUR and USD. Hence, the operational need to net purchase foreign currency is primarily due to a deficit from such settlements.

The table below shows the immediate impact on net loss before tax of a 10% strengthening in the closing exchange rate of significant currencies to which the Group had exposure, at December 31, 2016 and 2017. The sensitivity associated with a 10% weakening of a particular currency would be equal and opposite. This assumes that each currency moves in isolation.

2016 SEK AUD EUR GBP USD (in € millions) (Increase)/decrease in loss before tax (20) 6 (36) (22) (31)

2017 SEK AUD EUR GBP USD (in € millions) (Increase)/decrease in loss before tax 1 5 2 (2) 9

For the notional amount of the Group’s foreign exchange forward contracts not designated for hedging, the immediate impact on net loss before tax of a 10% strengthening in the closing exchange rate of the USD would be a negative impact of €26 million as of December 31, 2017.

(ii) Translation exposure sensitivity

The positive impact on the Group’s equity would be approximately €40 million and €27 million if the EUR weakened by 10% against all translation exposure currencies, based on the exposure at December 31, 2016 and 2017, respectively.

Interest rate risk management

Interest rate risk is the risk that changes in interest rates will have a negative impact on the Group’s earnings and cash flow. The fair value of the Group’s Convertible Notes is dependent on market interest rates, which may negatively impact earnings. The Convertible Notes are remeasured at each reporting date using valuation models using input data, which includes market interest rates. Changes in the fair value of the Convertible Notes are recognized in finance income or cost in the consolidated statement of operations. An increase in market interest rates will decrease the value of the Convertible Notes. The Group has not entered into any hedging arrangement to mitigate these fluctuations.

The Group’s exposure to interest rate risk also is related to its interest-bearing assets, primarily its available for sale debt securities. Fluctuations in interest rates impact the yield of the investment. The sensitivity analysis considered the historical volatility of short term interest rates and determined that it was reasonably possible that a change of 100 basis points could be experienced in the near term. A hypothetical 100 basis points increase in interest rates would have impacted interest income by €6 million and €8 million for the years ended December 31, 2016 and 2017, respectively.

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Notes to the 2017 consolidated financial statements Financing risk management

The Group finances its operations through external borrowings, equity, and cash flow from operations. The funding strategy has been to diversify funding sources. Currently the external debt consists of the Convertible Notes and finance leases.

Share price risk management

Share price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in the fair value of the Company’s ordinary share price. The Group’s exposure to this risk relates primarily to the Convertible Notes and contingent options arising from financing activities and the outstanding warrants. At December 31, 2017, the Convertible Notes are valued at the assumed exchange to ordinary shares based on the fair value of the Company’s ordinary share price. An increase of share price will increase the value of the Convertible Notes.

The contingent options and warrants are remeasured at each reporting date using valuation models using input data based on the Company’s share price. Changes in the fair value of these instruments are recognized in finance income or cost. An increase of share price will decrease the value of the contingent options and an increase in the value of the warrants. The Group has not entered into any hedging arrangement to mitigate these fluctuations.

Management of insurable risks

Insurance coverage is governed by corporate guidelines and includes a common package of different property and liability insurance programs. The business is responsible for assessing the risks to decide the extent of actual coverage. Treasury manages the common Group insurance programs.

Financial instruments

Foreign exchange forward contracts

Beginning in 2017, the Group began entering into multiple foreign exchange forward contracts with financial institutions to reduce the risk that cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Group does not enter into foreign exchange forward contracts for trading or speculative purposes. The Group’s hedging policy is designed to mitigate the impact of foreign currency exchange rate movements on operating results. The Group principally executes its foreign exchange forward contracts in the retail market in an over-the-counter environment with a high level of price transparency. The market participants and the Group’s counterparties are primarily large money center banks and regional banks.

Cash flow hedges

The Group designated certain foreign exchange forward contracts as cash flow hedges when all the requirements of IAS 39 Financial Instruments were met. The foreign exchange contracts protect the Group against the variability of forecasted foreign currency cash flows resulting from revenues, cost of revenues, and net asset or liability positions designated in currencies other than the Euro. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The maximum original duration of any contract allowable under the hedging policy is thirteen months. The Group’s outstanding foreign exchange forward contracts designated as cash flow hedges have maturities of less than one year. The Group’s primary currency pairs used for cash flow hedges are Euro / U.S. dollar, Euro / Australian dollar, Euro / British pound, and Euro / Swedish krona. The notional principal of the foreign exchange contracts was approximately €791 million as of December 31, 2017. The following table

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Notes to the 2017 consolidated financial statements summarizes the notional principal of the foreign currency exchange contracts by hedged line item in the condensed statement of operations as of December 31, 2017: Notional amount in foreign currency

Australian dollar

(AUD) British pound

(GBP) Swedish krona

(SEK) U.S. dollar

(USD) (in millions) Hedged line item in consolidated statement of operations Revenue 130 219 1,159 16 Cost of revenue 102 156 779 11

Total 232 375 1,938 27

The Group recognizes the foreign exchange contracts from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value. The Group reflects the gain or loss on the effective portion of a cash flow hedge as a component of other reserves and subsequently reclassifies cumulative gains and losses to revenues or cost of revenues, depending on the risk hedged, when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in other reserves would be immediately reclassified to finance costs. The Group evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in finance costs in the consolidated statement of operations. Interest charges or “forward points” on the foreign exchange contracts are excluded from the assessment of hedge effectiveness and are recorded in finance costs in the consolidated statement of operations.

For the year ended December 31, 2017, no material amount of gains or losses were recognized in other comprehensive loss or the statement of operations.

The asset and liability positions of the foreign exchange forward contracts are included in other current assets and derivative liabilities on the consolidated statement of financial position, respectively.

Non designated hedges

Foreign exchange forward contracts that do not meet the requirements in IAS 39 Financial Instruments to be designated as a cash flow hedges are measured at fair value. The currency pair for the foreign exchange forward contracts not designated for hedging are Euro/U.S. dollar. The notional amounts of these instruments were approximately USD $310 million and €25 million as of December 31, 2017. For the year ended December 31, 2017, the gain associated with the changes in fair value of these instruments, of €2 million, was recognized in finance income or costs.

The asset positions of the foreign exchange forward contracts not designated for hedging are included in other current assets on the consolidated statement of financial position.

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Notes to the 2017 consolidated financial statements Fair values

Set out below is a comparison of the carrying amounts and fair values of financial assets and liabilities. The carrying amounts of certain financial instruments, including cash and cash equivalents, trade and other receivables, restricted cash, trade and other payables, and accrued expenses approximate fair value due to their relatively short maturities.

2016 2017

Carrying

value Fair

value Carrying

value Fair

value (in € millions) Financial assets Cash and cash equivalents 755 755 477 477 Trade and other receivables (Note 15) 300 300 360 360 Short term investments:

Government securities 262 262 244 244 Agency securities 55 55 7 7 Corporate notes 323 323 330 330 Collateralized reverse purchase agreements 190 190 451 451

Derivatives (not designated for hedging) Foreign exchange forwards — — 2 2

Derivatives (designated for hedging) Foreign exchange forwards — — 6 6

Long term investment — — 910 910 Restricted cash (Note 14) 21 21 42 42

1,906 1,906 2,829 2,829

Financial liabilities Fair value through profit or loss:

Convertible Notes (Note 18) 1,106 1,106 944 944 Derivatives (not designated for hedging):

Contingent options (Note 16) 100 100 3 3 Warrants (Note 16) 34 34 346 346

Derivatives (designated for hedging) Foreign exchange forwards — — 5 5

Trade and other payables (Note 19) 201 201 341 341 Accrued expenses and other liabilities (Note 20) 674 674 881 881

2,115 2,115 2,520 2,520

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined in Note 2.

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Notes to the 2017 consolidated financial statements As at December 31, 2016, the Group held the following classes of financial instruments measured at fair value:

Financial assets and liabilities by fair value hierarchy level Level 1 Level 2 Level 3 2016 (in € millions) Financial assets at fair value Available for sale financial assets

Short term investments: Government securities 248 14 — 262 Agency securities — 55 — 55 Corporate notes — 323 — 323 Collateralized reverse purchase agreements — 190 — 190

Total financial assets at fair value by level 248 582 — 830

Financial liabilities at fair value Fair value through profit or loss:

Convertible Notes — — 1,106 1,106 Derivatives (not designated for hedging):

Contingent options — — 100 100 Warrants — — 34 34

Total financial liabilities at fair value by level — — 1,240 1,240

As at December 31, 2017, the Group held the following classes of financial instruments measured at fair value:

Financial assets and liabilities by fair value hierarchy level Level 1 Level 2 Level 3 2017 (in € millions) Financial assets at fair value Available for sale financial assets

Short term investments: Government securities 206 38 — 244 Agency securities — 7 — 7 Corporate notes — 330 — 330 Collateralized reverse purchase agreements — 451 — 451

Derivatives (not designated for hedging): Foreign exchange forwards — 2 — 2

Derivatives (designated for hedging): Foreign exchange forwards — 6 — 6

Long term investment — — 910 910

Total financial assets at fair value by level 206 834 910 1,950

Financial liabilities at fair value Fair value through profit or loss:

Convertible Notes — — 944 944 Derivatives (not designated for hedging):

Contingent options — — 3 3 Warrants — — 346 346

Derivatives (designated for hedging): Foreign exchange forwards — 5 — 5

Total financial liabilities at fair value by level — 5 1,293 1,298

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Notes to the 2017 consolidated financial statements The Group’s policy is to recognize transfers into and transfers out of fair value hierarchy levels at the end of the reporting period.

During the years ended December 31, 2016 and 2017 there were no transfers between levels in the fair value hierarchy.

Recurring fair value measurements

The following sections describe the valuation methodologies the Group uses to measure the Level 3 financial instruments at fair value on a recurring basis.

Long term investment

Long term investment consists of a non-controlling equity interest of approximately 9% in Tencent Music Entertainment Group (“TME”), a private company that provides digital music services to users including streaming, online live broadcasts, and karaoke services. In connection with the investment the Group agreed not to transfer its shares of TME for a period of three years from December 15, 2017, subject to limited exceptions, including transfers with TME’s prior consent; transfers to certain permitted transferees; transfers pursuant to a tender offer or exchange offer recommended by TME’s board of directors for a majority of TME’s issued and outstanding securities; transfers pursuant to mergers, consolidations, or other business combination transactions approved by TME’s board of directors; transfers to TME or any of its subsidiaries; or transfers that are necessary to avoid regulation as an “investment company” under the U.S. Investment Company Act of 1940, as amended. The investment is classified as an available-for-sale financial asset and carried at fair value through other comprehensive income. The fair value of unquoted ordinary shares has been estimated using unquoted market transactions with close proximity of December 31, 2017, net of transaction costs of €11M which is reflected as a reduction of other reserves within equity.

The fair value of the long term investment will vary over time and is subject to a variety of risks including: company performance, macro-economic, regulatory, industry, and systemic risks of the equity markets overall.

The table below presents the changes in the long term investment as at December 31:

(in € millions) At January 1, 2017 — Equity issued in exchange for long term investment 910 Changes in fair value recorded in other comprehensive loss —

At December 31, 2017 910

The impact on the fair value of the investment in TME using reasonably possible alternative assumptions with an increase or a decrease of TME’s share price of 10% results in a range of €819 million to €1,001 million at December 31, 2017.

Fair value of ordinary shares

The valuation of certain items in the consolidated financial statements is consistent with the Group’s use of the Probability Weighted Expected Return Method (“PWERM”) to value its own shares.

The fair value of the ordinary shares is determined using recent secondary market transactions in our ordinary shares and the PWERM, which is one of the recommended valuation methods to measure fair value in privately

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Notes to the 2017 consolidated financial statements held companies with complex equity structures in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held- Company Equity Securities Issued as Compensation. Under this method, discrete future outcomes, including as a public company, non-public company scenarios, and a merger or sale, are weighted based on estimates of the probability of each scenario. In the Group’s application of this method, five different future scenarios are identified (high and low case public company, high and low case transaction, and private company). For each scenario, an equity value is calculated based on revenue multiples, derived from listed peer companies, which are applied on different (scenario-dependent) forecasted revenues. For the private company scenario, a discounted cash flow method also is considered in determining the equity value. Ordinary share values are weighted by the probability of each scenario in the valuation model. In addition, an appropriate discount adjustment is incorporated to recognize the lack of marketability due to being a closely held entity. Finally, the impact on the share value of recent financing and secondary trading are considered.

The following weightings were applied to each valuation method:

2016 2017 PWERM

80 – 100%

50 – 80%

Secondary market transactions

0 – 20%

20 – 50%

The PWERM valuations weighted the different scenarios as follows:

2016 2017 Market Approach – High Case Public Company

20 – 25%

25 – 40%

Market Approach – Low Case Public Company

35 – 40% 35%

Market Approach – High Case Transaction 4%

4 – 6%

Market Approach – Low Case Transaction 6%

4 – 6%

Private Case – Income and Market Approaches 30%

5 – 30%

The key assumptions used to estimate the fair value of the ordinary shares and contingent options using the PWERM are as follows:

2016 2017 Revenue multiple used to estimate enterprise value 2.0 – 3.5 2.2 – 4.6 Discount rate (%) 14.0 – 19.5 13.0 – 19.5 Volatility (%) 35.0 – 47.5 30.0 – 37.5

Contingent options

The Group’s derivatives include contingent options that provide investors associated with the equity financings with downside protection.

The contingent options are measured on a recurring basis in the consolidated statement of financial position and are Level 3 financial instruments recognized at fair value through the consolidated statement of operations. The contingent options are valued using the models that include the value of the Company’s ordinary shares, including the assumptions for probability scenarios and PWERM as determined above. The key assumptions used to estimate the fair value of the options using the PWERM are consistent with those noted above.

Under each scenario, the Group computed the difference between a) the value of the new shares, valued with the embedded contingent options and b) the ordinary shares, valued without the embedded contingent options (“Ordinary Shares”) to derive an indication of the value of the contingent options for each scenario. The

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Notes to the 2017 consolidated financial statements differential between new shares and the Ordinary Shares were discounted, where appropriate, to present value to arrive at an indication of the value of the contingent options for each scenario at the valuation date. Finally, the indicated values under each scenario were weighted based on the weightings noted above to determine the indicated value of the contingent options.

The impact on the fair value of the contingent options of using reasonably possible alternative assumptions with an increase or a decrease of share price of 10% results in a range of €2 million to €4 million (2016: €80 million to €122 million) at December 31, 2017.

The table below presents the changes in the contingent options liability as at December 31:

2015 2016 2017 (in € millions) At January 1 7 82 100 Equity financing transactions – contingent options 87 — — (Gain)/loss recognized in profit or loss (12) 18 (97)

At December 31 82 100 3

The contingent options liability is included in derivative liabilities on the consolidated statement of financial position. The change in estimated fair value is recognized within finance income or costs in the consolidated statement of operations.

Warrants

On October 17, 2016, the Company sold, for €27 million, warrants to acquire 5,120,000 ordinary shares to certain holders that are employees and management of the Group. The exercise price of each warrant is US$50.61, which was equal to 1.2 times the fair market value of ordinary shares on the date of issuance. The warrants are exercisable at any time through October 17, 2019.

On July 13, 2017, the Company sold, for €9 million, a warrant to acquire 1,600,000 ordinary shares to certain holders that are employees and management of the Group. The exercise price of each warrant is US$89.73, which was equal to 1.3 times the fair market value of ordinary shares on date of issuance. The warrants are exercisable at any time through July 2020. The warrants are measured on a recurring basis in the consolidated statement of financial position and are Level 3 financial instruments recognized at fair value through the consolidated statement of operations. The warrants are valued using a Black-Scholes option-pricing model, which includes inputs determined from models that include the value of the Company’s ordinary shares, as determined above and additional assumptions used to estimate the fair value of the warrants in the option pricing model as follows:

2016 2017 Expected term (years) 1.85 – 2.09 0.9 – 1.6 Risk free rate (%) 0.77 – 1.14 1.17 – 1.76 Volatility (%) 35.0 – 37.5 30.0 – 37.5 Share price (US$) 42.18 – 44.40 50.70 – 120.50

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Notes to the 2017 consolidated financial statements The table below presents the changes in the warrants liability as at December 31:

(in € millions) At January 1, 2016 — Issuance of warrants for cash 27 Loss recognized in profit or loss 7

At December 31, 2016 34

Issuance of warrant for cash 9 Non cash changes in profit or loss

Changes in fair value 313 Effect of changes in foreign exchange rates (10)

At December 31, 2017 346

The warrants liability is included in derivative liabilities on the consolidated statement of financial position. The change in estimated fair value is recognized within finance costs in the consolidated statement of operations.

The sensitivity analysis below calculates the impact of increasing and decreasing expected volatility by 10% as well as the impact of increasing or decreasing the expected term by half a year. The following table shows the impact of these changes on finance costs.

2016 2017 (in € millions) Actual change in fair value recognized within finance costs 7 303 Warrants fair value adjustments increase (decrease) under the following assumption

changes Volatility decreased by 10% (4) — Volatility increase by 10% 4 — Expected term decrease by 0.5 year (7) (4) Expected term increase by 0.5 year 6 3

The impact on the fair value of the warrants of using reasonably possible alternative assumptions with an increase or a decrease of share price of 10% results in a range of €21 million to €43 million at December 31, 2016 and €333 million to €361 million at December 31, 2017. Expected volatility did not significantly impact the value of the warrants at December 31, 2017.

Convertible Notes

The Convertible Notes are measured on a recurring basis in the consolidated statement of financial position and are Level 3 financial instruments recognized at fair value through the consolidated statement of operations. At December 31, 2016, the fair value of the debt was determined based on consideration and weighting of two future scenarios, a Near Term Exit (where the debt is convertible into ordinary shares in the case of a qualifying event), and a Private Company Case. All components of the debt under the Near Term Exit and Private Company Case, with the exception of the share cap, which assumes a risk-free discount rate, were discounted at the implied rate on the date of issuance plus the chosen benchmark rate. The calculation under the Private Company Case, assumes the debt is repaid at maturity.

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Notes to the 2017 consolidated financial statements A binomial option pricing model was used to assess the value of the Price Cap Derivative. The key assumptions, including the weighting of the different scenarios and those used in valuing the Price Cap Derivative, were as follows:

2016 Case – Near Term Exit 70% Case – Private Company Case 30%

2016 Risk-free rate (%) 0.6 – 0.7 Discount rate (%) 14.4 – 17.0 Benchmark interest rate (%) 9.4 – 12.0 Volatility (%) 35.0 – 42.5

At December 31, 2017, the Convertible Notes are valued at the assumed exchange to ordinary shares based on the fair value of the Company’s ordinary share price. The key assumptions to the fair value of ordinary shares has been discussed above.

The table below presents the changes in the Convertible Notes as at December 31:

(in € millions) At January 1, 2016 — Loan financing transaction – Convertible Notes 861 Loss recognized in profit or loss 245

At December 31, 2016 1,106 Non cash changes recognized in profit or loss

Changes in fair value 666 Effect of changes in foreign exchange rates (142) Issuance of shares upon exchange of Convertible Notes (686)

At December 31, 2017 944

The change in estimated fair value is recognized within finance costs in the consolidated statement of operations.

The sensitivity analysis below calculates the impact of increasing or decreasing the expected underlying interest rate by 100 basis points at December 2016. The following table shows the impact of this change on finance costs.

2016 (in € millions) Actual change in fair value recognized within finance costs 245 Convertible Notes fair value adjustments increase (decrease) under the

following assumption changes Discount rate decreased by 100 basis points 16 Discount rate increased by 100 basis points (15)

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Notes to the 2017 consolidated financial statements The impact on the fair value of the Convertible Notes of using reasonably possible alternative assumptions with an increase or decrease in share price of 10% results in a range of €1,115 million to €1,101 million at December 31, 2016 and €1,038 million to €849 million at December 31, 2017.

23. Commitments and contingencies

Obligations under leases

The Group leases certain properties under non-cancellable operating lease agreements. The lease terms are between one and seventeen years, and the majority of the lease agreements are renewable at the end of the lease period.

The future minimum lease payments under non-cancellable operating leases as at December 31 are as follows:

2016 2017 (in € millions) Not later than one year 25 47 Later than one year but not more than 5 years 97 244 More than 5 years 90 478

212 769

Total lease expenses were €14 million, €19 million, and €52 million for the years ended December 31, 2015, 2016, and 2017, respectively.

The Group also has finance leases for various items of equipment. The obligations under finance leases are secured by the lessor’s title to the leased assets. Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments, are disclosed in Note 18.

Commitments

The Group is subject to the following minimum royalty payments associated with its license agreements as at December 31.

2016 2017 (in € millions) Not later than one year 26 1,060 Later than one year but not more than 5 years 14 635

40 1,695

Contingencies

Various legal actions, proceedings, and claims are pending or may be instituted or asserted against the Group. These may include but are not limited to matters arising out of alleged infringement of intellectual property; alleged violations of consumer regulations; employment-related matters; and disputes arising out of supplier and other contractual relationships. As a general matter, the music and other content made available on the Group’s service are licensed to the Group by various third parties. Many of these licenses allow rights holders to audit the Group’s royalty payments, and any such audit could result in disputes over whether the Group has paid the proper royalties. If such a dispute were to occur, the Group could be required to pay additional royalties, and the amounts involved could be material. The Group expenses legal fees as incurred. The Group records a provision

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Notes to the 2017 consolidated financial statements for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Group’s operations or its financial position, liquidity, or results of operations.

Since July 2017, six lawsuits alleging unlawful reproduction and distribution of musical compositions have been filed against the Group in (i) the U.S. District Court for the Middle District of Tennessee (Bluewater Music Services Corporation v. Spotify USA Inc., No. 3:17-cv-01051; Gaudio et al. v. Spotify USA Inc., No. 3:17-cv-01052; Robertson et al. v. Spotify USA Inc., No. 3:17-cv-01616; and A4V Digital, Inc. et al. v. Spotify USA Inc., 3:17-cv-01256), (ii) in the U.S. District Court for the Southern District of Florida (Watson Music Group, LLC v. Spotify USA Inc., No. 0:17-cv-62374), and (iii) the U.S. District Court for the Central District of California (Wixen Music Publishing Inc. v. Spotify USA, Inc., 2:17-cv-09288) (alleging that Spotify has infringed the copyrights in over 10,000 musical compositions). The complaints seek an award of damages, including the maximum statutory damages allowed under U.S. copyright law of $150,000 per work infringed. The Group intends to vigorously defend the claims.

24. Related party transactions

Key management compensation

Key management includes members of the Company’s executive committee and the board of directors. The compensation paid or payable to key management for Board and employee services includes their participation in share-based compensation arrangements. The disclosure amounts are based on the expense recognized in the consolidated statement of operations in the respective year.

2015 2016 2017 (in € millions) Key management compensation Short term employee benefits 15 4 4 Share-based payments 10 18 17 Post-employment benefits — 1 — Termination benefits — 1 1

25 24 22

As noted in Note 16, the Company issued warrants to acquire ordinary shares to certain members of key management of the Group.

On April 1, 2016, the Group issued and sold the Convertible Notes to, among others, Rivers Cross Trust, an entity wholly owned by Mr. McCarthy, the Group’s Chief Financial Officer. The original principal amount purchased by Rivers Cross Trust was approximately US$0.2 million. In January 2018, the Convertible Notes, plus accrued interest, were exchanged for ordinary shares. Refer to Note 26.

The Group recognized partner revenues from its associate in Soundtrack Your Brand Sweden AB of €1 million, €2 million, and €3 million during years ended December 31, 2015, 2016 and 2017, respectively.

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Notes to the 2017 consolidated financial statements 25. Group information

The Company’s principal subsidiaries as at December 31, 2017 are as follows:

Name Principal activities

Proportion of voting rights and shares

held (directly or indirectly)

Country of incorporation

Spotify AB Main operating company 100% Sweden Spotify USA Inc. USA operating company 100% USA Spotify Ltd

Sales, marketing, contract research and development, and customer support

100%

UK

Spotify Norway AS Sales and marketing 100% Norway Spotify Spain S.L. Sales and marketing 100% Spain Spotify GmbH Sales and marketing 100% Germany Spotify France SAS Sales and marketing 100% France Spotify Sweden AB Sales and marketing 100% Sweden Spotify Netherlands B.V. Sales and marketing 100% Netherlands Spotify Canada Inc. Sales and marketing 100% Canada Spotify Australia Pty Ltd Sales and marketing 100% Australia Spotify Brasil Serviços De Música LTDA Sales and marketing 100% Brazil Spotify Japan K.K Sales and marketing 100% Japan Spotify Singapore Pte Ltd. Marketing 100% Singapore

There are no restrictions on the net assets of the Group companies.

Information about associates and joint ventures

The Group holds an equity interest in Soundtrack Your Brand Sweden AB of 17.5%, this interest was diluted in February 2017 from 26.5% resulting from a financing round in which the Group did not participate. The total assets and net assets of Soundtrack Your Brand Sweden AB are not material to the Group.

The Group co-founded a joint arrangement, Symposium Stockholm AB (Symposium), in 2015. In December 2016, the Group divested its interest in Symposium to its joint arrangement partner. This did not have a material impact on the Group’s consolidated financial statements.

26. Events after the reporting period

In January 2018, the Group entered into an exchange agreement with holders of the remaining balance of its Convertible Notes, pursuant to which the Group exchanged the remaining US$628 million of Convertible Notes, plus accrued interest of US$16 million, for an aggregate of 9,431,960 ordinary shares. Pursuant to this exchange agreement, subject to certain conditions, if the Company fails to list its ordinary shares on or prior to July 2, 2018, the Group has agreed to offer to each noteholder the option to unwind the transaction such that the Group purchases back the shares that were issued to such noteholder pursuant to the exchange and will issue such noteholder a new note that is materially identical to its note prior to the exchange.

On February 28, 2018, the Board of Directors of the Company approved a 40-to-one share split of the Company’s ordinary shares which will become effective upon approval by the Company’s shareholders. All share and per share information included in the accompanying financial statements has been adjusted to reflect this share split.

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Notes to the 2017 consolidated financial statements On February 16, 2018, the Company issued ten beneficiary certificates per ordinary share held of record to entities beneficially owned by the Group’s founders, Daniel Ek and Martin Lorentzon, for a total of 379,201,200 beneficiary certificates. The Company’s shareholders have authorized the issuance of up to 1,400,000,000 beneficiary certificates to shareholders of the Company without reserving to the Company’s existing shareholders a preemptive right to subscribe for the beneficiary certificates issued in the future. Our beneficiary certificates may be issued at a ratio of between one and 20 beneficiary certificates per ordinary share as determined by the Company’s board of directors at the time of issuance. Each beneficiary certificate entitles its holder to one vote. The beneficiary certificates carry no economic rights and are issued to provide the holders of such beneficiary certificates with additional voting rights. The beneficiary certificates, subject to certain exceptions, are non-transferable and shall be automatically canceled for no consideration in the case of sale or transfer of the ordinary share to which they are linked.

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