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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

For the month of March 2013

Commission File Number 1-13758

PORTUGAL TELECOM, SGPS, S.A.

(Exact name of registrant as specified in its charter)

Av. Fontes Pereira de Melo, 40
1069 - 300 Lisboa, Portugal

(Address of principal executive office)

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

Form 20-F x   Form 40-F o

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

Yes o   No x

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Annual Report

2012

Portugal Telecom, SGPS, S.A.

Public Company - Avenida Fontes Pereira de Melo, 40 ·1069-300 Lisboa - Share capital: Euro 26,895,375

Registered in the Conservatory of the Commercial Registry of Lisbon and Collective Person under no. 503 215 058

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Annual Report

2012

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Management Report

Introduction

Portugal Telecom, SGPS, S.A. (“Portugal Telecom” or “Company”) and its subsidiaries, jointly controlled entities and associated companies, which represent its corporate Group (“Portugal Telecom Group” or “Group”), operate primarily in the telecommunications sector, in Portugal, Brazil and several other countries in Africa and Asia. The Group operates in Brazil mainly through Oi and Contax, following the investments acquired in these entities in March 2011. The consolidated annual report of the Company provides a detailed explanation of its consolidated activity and the evolution of its businesses for the year ended 31 December 2012 and, as such, we propose to the shareholders the analysis of that report in conjunction with this report.

Business overview

Apart from management of investments, the Company did not conduct directly any other business activity.

Legal Information

·                  There are no outstanding amounts overdue to the Portuguese State and the Portuguese Social Security System.

·                  The Company did not enter into any material businesses or transactions with the members of its Board of Directors and the Audit Committee, except for those mentioned in Note 48 of the 2012 Consolidated Annual Report.

2012 events and recent developments

The events of the year ended 31 December 2012 and recent developments are described in the 2012 Consolidated Annual Report of Portugal Telecom.

Proposal for application of profits and distribution of reserves

Considering that:

A)               Net profit for the year ended 31 December 2012 amounted to Euro 230,495,402.78;

B)               Retained earnings amounted to Euro 2,553,426,828.85 as at 31 December 2012, of which Euro 1,128,660,097.39 constitute distributable reserves to shareholders under applicable commercial law;

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C)              On 27 June 2012, the Board of Directors of Portugal Telecom approved a new shareholder remuneration policy for fiscal years 2012 to 2014 that includes the payment of an annual cash dividend of Euro 0.325 per share.

The Board of Directors proposes that:

1.                  Considering the net income for the year amounting to Euro 230,495,402.78, increased by Euro 60,871,159.72 included in the caption of retained earnings, we propose that a total of Euro 291,366,562.50 be paid to shareholders, corresponding to Euro 0.325 per share, in respect of the total number of issued shares;

2.                  Taking into account the proposal included in the agenda of the Shareholder’s Meeting regarding to the acquisition and disposal of own shares, it will not be possible to accurately determine the number of own shares that will be in treasury on the date of the abovementioned payment without limiting the Company’s intervention ability, we propose that, in the distribution of the overall sum of Euro 291,366,562.50, as provided for in the foregoing paragraph, calculated on the basis of an unit amount per issued share (in this case, Euro 0.325 per share), the following be observed:

a)        Each issued share shall be paid the unit amount of Euro 0.325;

b)        The amount corresponding to the shares that, on the payment day of the abovementioned amount, belong to the Company itself (calculated on the said unit amount of Euro 0.325 per issued share) shall not be paid and shall be transferred to retained earnings;

3.                  Considering the right to the abovementioned payment pertaining to the shares resulting from the exercise of the right to conversion of convertible bonds issued:

a)         Each share entitled to dividend resulting from the conversion of convertible bonds shall be paid the said unit amount of Euro 0.325;

b)         The payment to each share resulting from the conversion of convertible bonds shall be made by using retained earnings.

Lisbon,14 March 2013

Henrique Granadeiro, Chairman of the Board of Directors

Zeinal Bava, Chief Executive Officer

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Alfredo José Silva de Oliveira Baptista, Executive Director

Amílcar Carlos Ferreira de Morais Pires, Non-Executive Director

Carlos Alves Duarte, Executive Director

Fernando Magalhães Portella, Non-Executive Director

Francisco Teixeira Pereira Soares, Non-Executive Director

Gerald Stephen McGowan, Non-Executive Director

João Manuel de Mello Franco, Non-Executive Director

João Nuno de Oliveira Jorge Palma, Non-Executive Director

Joaquim Aníbal Brito Freixial de Goes, Non-Executive Director

José Guilherme Xavier de Basto, Non-Executive Director

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José Pedro Cabral dos Santos, Non-Executive Director

Luís Pacheco de Melo, Executive Director

Manuel Rosa da Silva, Executive Director

Maria Helena Nazaré, Non-Executive Director

Mário João de Matos Gomes, Non-Executive Director

Milton Almicar Silva Vargas, Non-Executive Director

Nuno Rocha dos Santos de Almeida e Vasconcellos, Non-Executive Director

Otávio Marques de Azevedo, Non-Executive Director

Paulo José Lopes Varela, Non-Executive Director

Pedro Humberto Monteiro Durão Leitão, Executive Director

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Rafael Luís Mora Funes, Non-Executive Director

Shakhaf Wine, Executive Director

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Standalone financial statements

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INDEX

Balance sheet

Income statement

Statement of changes in shareholders’ equity

Statement of cash flows

Notes to the standalone financial statements

1.                                          Introduction

2.                                          Basis of presentation

3.                                          Main accounting policies, judgments and estimates

4.                                          Cash flows

5.                                          Errors, changes in accounting policies and estimates

6.                                          Tangible fixed assets

7.                                          Financial investments - equity method of accounting

8.                                          Related parties

9.                                          Other financial assets and financial liabilities

10.                                   Income taxes

11.                                   State and other public entities

12.                                   Other accounts receivable and accounts payable

13.                                   Deferrals

14.                                   Shareholders’ equity

15.                                   Provisions and contingent liabilities

16.                                   Loans obtained

17.                                   Suppliers

18.                                   Accrued expenses

19.                                   Equity in earnings/(losses) of affiliated companies

20.                                   Supplies and external services

21.                                   Wages and salaries

22.                                   Increases/(reductions) in fair value

23.                                   Other income and gains

24.                                   Other expenses and losses

25.                                   Interest and related income/(expense)

26.                                   Earnings per share

27.                                   Guarantees

28.                                   Events occurred after the balance sheet date

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PORTUGAL TELECOM, SGPS, S.A.

BALANCE SHEET

31 DECEMBER 2012 AND 2011

Euro

The accompanying notes form an integral part of these financial statements.

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PORTUGAL TELECOM, SGPS, S.A.

INCOME STATEMENT

FOR THE YEARS ENDED 31 DECEMBER 2012 AND 2011

Euro

The accompanying notes form an integral part of these financial statements.

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PORTUGAL TELECOM, SGPS, S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2012

Euro

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PORTUGAL TELECOM, SGPS, S.A.

STATEMENT OF CASH FLOW

FOR THE YEARS ENDED 31 DE1 MBER 2012 AND 2011

Euro

The accompanying notes form an integral part of these financial statements.

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PORTUGAL TELECOM, SGPS, S.A.

Notes to the Standalone Financial Statements

as at 31 December 2012

(Amounts in Euro)

1.             Introduction

Portugal Telecom, SGPS, S.A. (“Portugal Telecom” or “Company”) and its subsidiaries, jointly controlled entities and associated companies (Note 8), which represent its corporate Group (“Portugal Telecom Group” or “Group”), operate primarily in the telecommunications sector, in Portugal, Brazil and several other countries in Africa and Asia. The corporate purpose of the Company is the management of investments.

As a result of the five privatization processes between 1 June 1995 and 4 December 2000, Portugal Telecom’s share capital is held mainly by private shareholders. The shares of Portugal Telecom are listed on the Euronext Stock Exchange and on the NYSE - New York Stock Exchange.

On 26 July 2011, Portugal Telecom’s General Meeting of Shareholders approved an amendment to the Company’s Bylaws, eliminating the special rights granted to the 500 Class A shares (the so-called “golden share”).

On 27 January 2011, Portugal telecom concluded the disposal to a third party of the 28.78% stake previously held by the Group in the company Universo Online (“UOL”) (Note 4.d), including the 21.95% and 6.83% stakes held respectively by Portugal Telecom and by another Group company as at 31 December 2010. This transaction was concluded for a total cash consideration of 356 million Brazilian Reais, equivalent to 10.3 Brazilian Reais per share.

On 28 March 2011, Portugal Telecom concluded the acquisition process of the investments in Telemar Norte Leste, S.A. (“Telemar”) and Contax, S.A. (“Contax”) for a total cash consideration of 8,437 million Brazilian Reais and entered into several agreements with the controlling shareholders of these companies. As a result of this operation, Portugal Telecom acquired an economic interest of 25.3% in Telemar (the parent company of the Oi Group at that date) and 14.1% in Contax. Under the terms of the agreements entered into with the controlling shareholders, Portugal Telecom shares the power to govern the strategic financial and operating policies of these companies, which for this reason are classified as jointly controlled entities. Consequently, the entities acquired are proportionally consolidated in the consolidated financial statements of Portugal Telecom, while in these standalone financial statements they are recognized by the equity method of accounting. Oi Group is the leading provider of telecommunications services in the Brazilian market and the largest fixed telecommunications

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operator in South America in terms of active clients. Contax is one of the leading corporate services company and the leader in contact centre services in Brazil.

The transaction mentioned above was completed following the Memorandum of Understanding entered into, on 28 July 2010, by Portugal Telecom with Andrade Gutierrez Participações, S.A. (“AG”) and LF Tel, S.A. (“LF”), two of the main shareholders of Telemar Participações (the controlling shareholder of the Oi Group), which sets the principles for the development of a strategic partnership between Portugal Telecom and Oi Group. Under this strategic partnership,  it was envisaged that, amongst other purposes, Oi would acquire up to 10% of the outstanding shares of Portugal Telecom. As at 31 December 2011, Oi held 64,557,566 shares of Portugal Telecom, representing 7.2% of share capital. During the year ended 31 December 2012, Oi acquired 25,093,639 shares and as such holds 89,651,205 shares of Portugal Telecom, representing 10.0% of share capital. Portugal Telecom’s share held indirectly in this investment was classified as treasury shares in its Balance Sheet and amounted to Euro 159 million as at 31 December 2012 (Note 14.2).

On 27 February 2012, the general meetings of Tele Norte Leste Participações S.A. (“TNL”), Telemar, Coari Participações (“Coari”) and Brasil Telecom S.A. (“Brasil Telecom”) approved a corporate reorganization of the Oi Group (the “Corporate Reorganization”), following which the previous corporate structure composed by TNL, Telemar, Coari and Brasil Telecom was integrated in Brasil Telecom, which was renamed Oi S.A. and remained the only listed company of the group in Brazilian and US capital markets. This Corporate Reorganization consisted of:

·             The share exchange of newly issued shares of Coari for currently outstanding shares issued by Telemar, resulting in Telemar becoming a wholly-owned subsidiary of Coari;

·            The merger of Coari into Brasil Telecom, with Coari ceasing to exist and Telemar becoming a wholly-owned subsidiary of Brasil Telecom;

·             The merger of TNL into Brasil Telecom, with TNL ceasing to exist; and

·             The distribution of redeemable shares of Brasil Telecom exclusively to holders of Brasil Telecom prior to the merger, with cash redemption of such shares to be made immediately after their issuance for an amount of 1,502 million Brazilian Reais, which was reflected in the computation of the exchange ratios considered in the mergers mentioned above. Taking into consideration the commitment underlying these operations, Brasil Telecom recognized in 2011 this amount payable to its shareholders, including 740 million Brazilian Reais payable to its former controlling shareholder Coari Participações (49.3%), which was fully owned by Telemar, and 762 million Brazilian Reais payable to the former non-controlling interests.

As a result of the approval of this Corporate Reorganization, the new economic interest held by Portugal Telecom in the Oi Group, which currently includes 100% of Telemar and Brasil Telecom while before the reorganization included 100% of Telemar and 49.3% of Brasil Telecom, decreased from the 25.3% direct and indirect interest previously held in Telemar to a 23.3% direct and indirect interest in Oi, S.A.. In connection with this Corporate Reorganization,

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Portugal Telecom recorded directly in shareholders’ equity a gain amounting to Euro 61,296,212, which reflects (1) a gain of Euro 252 million corresponding to the reduction of the carrying value of non-controlling interests, primarily explained by a higher difference between the fair value and the carrying value of Telemar, as compared to that same difference applicable to Brasil Telecom, and (2) a loss of Euro 191 million corresponding to the share of Portugal Telecom in the amount paid by Oi regarding the exercise of withdrawal rights (2 billion Brazilian Reais) by shareholders that requested it. The gain of Euro 61,296,212 mentioned above includes an amount of Euro 12,060,380 recognized under the caption “Treasury shares” (Note 14.2) and an amount of Euro 49,235,832 recognized under the caption “Adjustments to financial assets” (Note 14.5) in connection with the equity method of accounting applied to PT Portugal, the Company’s subsidiary that indirectly holds the investment in the Oi Group.

These financial statements, which relate to the Company on a standalone basis, were prepared in accordance with accounting principles generally accepted in Portugal (Note 2) and, as such, the financial investments were accounted for under the equity method, as explained in Note 3.4. The Company prepared and presented separately its consolidated financial statements, which include the financial statements of the companies controlled or jointly controlled by Portugal Telecom. In these standalone financial statements, the shareholders’ equity as at 31 December 2012 and 2011 and the net income for the years then ended include the effect of the consolidation of the shareholders’ equity and net income of Portugal Telecom’s affiliated companies, based on their respective financial statements, but do not include the effect of the full or proportional consolidation of their assets, liabilities, costs and revenues.

The financial statements for the year ended 31 December 2012 were approved by the Board of Directors and authorized for issue on 14 March 2013 and are still subject to approval by the General Meeting of Shareholders under the commercial legislation in Portugal.

2.             Basis of presentation

These financial statements were prepared based on Decree-law nº. 158/2009, dated 13 July, and in accordance with the Conceptual Structure, Accounting and Financial Reporting Standards (“NCRF”) and Interpretative Standards, as approved by Notices nº 15652/2009, 15655/2009 and 15653/2009 of the General-Secretary of the Ministry of Finance, dated 27 August, which make up the New Portuguese accounting system, named “Sistema de Normalização Contabilística” (“SNC”).

The Company adopted NCRF for the first time in 2010 and applied for this purpose the “NCRF 3 Adoption For The First Time of NCRF” (“NCRF 3”), with the transition date being 1 January 2009 for the purposes of the presentation of these financial statements. As permitted by Decree-Law nº. 158/2009, the Company also applies the International Financial Reporting Standards (“IAS/IFRS”) and related interpretations (“SIC/IFRIC”) issued by the International

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Accounting Standards Board (“IASB”), in order to fill in the gaps or omissions in SNC regarding specific situations of certain transactions.

The consolidated financial statements of Portugal Telecom are prepared, since 1 January 2005, in accordance with IFRS as adopted by the European Union, which are applicable to the listed companies in the European Union. Therefore, the shareholders’ equity as at 31 December 2012 and 2011 and the net income for the years then ended that are included in the consolidated financial statements of Portugal Telecom differ from the amounts presented in these standalone financial statements. The reconciliation of shareholders’ equity as at 31 December 2012 and net income for the year then ended, attributable to the Company’s shareholders, between standalone (under NCRF) and consolidated financial statements (under IFRS), is as follows:

3.             Main accounting policies, judgments and estimates

These standalone financial statements were prepared on a going concern basis of accounting. The main accounting policies used in the preparation of these standalone financial statements are described below and were applied consistently.

3.1.                            Tangible fixed assets

Tangible fixed assets are stated at acquisition cost, which includes the amount paid to acquire the asset and any expenses directly attributable to bringing the asset to the location and condition necessary for their operation.

Tangible fixed assets are depreciated on a straight-line basis from the month they are available for use. The depreciation rates reflect the useful life of each class of assets, as follows:

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The gains and losses resulting from any write-off or disposal are determined by the difference between the amount received and the carrying value of the asset, and are recognized in the income statement when the write-off or disposal occurs.

3.2.                            Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. The remaining lease contracts are considered operating leases. The classification of leases depends on the substance of the transaction and not on the form of the contract.

Assets acquired under finance leases and the corresponding liabilities are accounted for at the beginning of the contract as the lower amount between the fair value of the assets and the present value of minimum lease payments. Rents include the reimbursement of the liability and interest expense, with interest being recognized in the income statement based on a periodic interest rate over the remaining liability.

Under operating leases, rents are recognized on a straight-line basis during the period of the lease.

3.3.                            Business combinations and goodwill

Acquisitions of subsidiaries are accounted for based on the purchase method. On the acquisition date, the purchase price includes the following components: (a) the fair value of assets acquired; (b) the fair value of liabilities incurred; (c) the fair value of equity instruments issued by the Company in exchange for the control of the subsidiary; and (d) expenses directly attributable to the acquisition. When applicable, the purchase price includes the effect of contingent payments agreed upon under the terms of the transaction, with subsequent changes in those payments being recorded as an adjustment to goodwill.

Any excess of the acquisition cost over the fair value of net assets acquired and contingent liabilities of the acquired company, at the date of acquisition, is recorded as goodwill, in accordance with “NCRF 14 Business Combinations” (“NCRF 14”). If the acquisition cost is lower than the fair value of identifiable net assets, the difference is recorded as a gain in net income. As provided for in NCRF 3, the Company applies NCRF 14 only to acquisitions occurred after 1 January 2009.

Goodwill is not amortized, but tested for impairment losses on an annual basis or whenever there is evidence of a potential loss of value. For impairment test purposes, goodwill is allocated to cash generating units. Any impairment loss is recognised in the income statement of the period, and cannot be reversed in a subsequent period.

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3.4.                            Financial investments

Subsidiaries are those entities over which the Company has the power to govern the financial and operating policies of the entity, generally represented by the majority of the voting rights. Associated companies are entities over which the Company has a significant influence but not control, generally represented by stakes between 20% and 50% of voting rights.

Financial investments in subsidiaries and associated companies are recorded under the equity method of accounting. Under this method, financial investments are initially recorded at acquisition cost and subsequently adjusted for the changes, after the acquisition date, in the Company’s share in the net assets of those entities. Portugal Telecom’s earnings include its share in the earnings of its subsidiaries and associated companies.

Financial investments in foreign entities are translated to Euros using the exchange rates prevailing at the balance sheet date, while the Company’s share in the earnings of those entities is computed based on the average exchange rates for the reported period. The effect of translation differences is recognised in shareholders’ equity under the caption “Adjustments to financial assets”, and is transferred to net income upon the disposal of a foreign entity or the realization of the investment through another way. The exchange rates used in the translation of the main foreign entities (held directly or indirectly by Portugal Telecom) are as follows:

Financial investments are evaluated whenever there is evidence they may be impaired and the related impairment losses are recorded in the income statement.

Gains obtained in transactions with subsidiaries and associated companies are eliminated proportionally to the Company’s share in those entities, against a reduction in the financial investment.

Capital gains resulting from the disposal of subsidiaries and associated companies within the Group are deferred or reversed until the date these investments are disposed of to a third party. Whenever these gains are deferred, their recognition in earnings is made under the caption “Equity in earnings/(losses) of affiliated companies”, on the same proportion that goodwill or assets and liabilities identified in the allocation of the purchase price recorded by the acquirer is recognized in earnings.

Additional capital contributions and loans granted to subsidiaries and associated companies are recorded at nominal value, reduced by adjustments for estimated losses, if applicable.

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3.5.                            Accruals

The Company records its revenue and expenses as they are generated or incurred, regardless of when they are received or paid, respectively.

3.6.                            Income taxes

Income tax expense corresponds to the sum of current and deferred taxes. Deferred taxes are recognized in earnings except when they relate to items recorded directly in shareholders’ equity, in which case they are also recorded in shareholders’ equity.

Portugal Telecom adopted the Special Taxation Regime for Groups of Companies (“RETGS”), as defined in Section 69 of the Corporate Income Tax Code (“IRC”), which applies to all companies in which it holds, directly or indirectly, at least 90% of the share capital and that, simultaneously, are located in Portugal and are subject to corporate income tax. Any gain generated by the Group as a result of the adoption of this regime, resulting from tax losses of the companies included in the tax consolidation, is recorded in earnings under the caption “Equity in earnings/(losses) of affiliated companies” (Note 19). The companies which are not under this regime are subject to corporate income tax on a standalone basis, based on the respective taxable profits and tax rates.

The current income tax is computed based on the estimated taxable income for corporate income tax purposes, based on the statutory tax rate in Portugal, which is increased through a municipal tax and/or through an additional state surcharge depending on the collectible profit of the year (Note 10).

The income tax expense recorded in the financial statements was determined in accordance with “NCRF 25 Income Taxes”. In determining income tax expense for the year, besides the current tax based on profit before-tax adjusted in accordance with the tax legislation, it is also considered the effects of temporary differences between income before tax and taxable income originated in the year or in preceding years.

Deferred taxes correspond to the temporary differences between assets and liabilities for accounting purposes and the related amounts for taxable purposes. Deferred tax assets and liabilities are computed and evaluated annually, using the tax rates which are expected to be in force at the date of reversal of these temporary differences.

Deferred tax assets are recorded only when there is a reasonable expectation of sufficient future tax profits which allow for their use. As at the balance sheet date the Company conducts a reassessment of the temporary differences originating deferred tax assets, in order to record deferred tax assets not recognized previously and/or to reduce the amount of deferred tax assets that are recognized, based on the current estimate of its recoverable amount.

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3.7.                            Accounts receivable

Accounts receivable are initially recognized at fair value, and subsequently measured at amortized cost, based on the effective interest rate method, deducted from impairment losses.

Impairment losses for doubtful accounts receivable are computed based on the evaluation of the estimated risks resulting from the non-collection of receivables. Impairment losses are recorded in the income statement.

3.8.                            Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered primarily through a sale transaction rather than through continuing use. This condition is regarded as met only when the subject transaction is highly probable and the asset or group of assets is available for immediate sale in its present condition. The sale should be completed within one year as from the date the asset was classified as held for sale.

Non-current assets classified as held for sale are measured at the lower of the assets’ previous carrying amount or the fair value less costs to sell.

3.9.                            Provisions and contingent liabilities

The Company recognizes provisions when there is a present obligation 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. Where any of the above mentioned criteria is not accomplished, the Company discloses the event as a contingent liability, unless the cash outflow is remote.

Provisions are recognized for an amount corresponding to the present value of the best estimate, at the reporting date, of the resources needed to settle the obligation. That estimate is determined considering the risks and uncertainties associated with the obligation. Provisions are reviewed at the end of each year and adjusted for in order to reflect the best estimate as of that date.

3.10.                     Loans obtained

Loans obtained are initially recognized at fair value, net of transaction costs incurred, and subsequently presented at amortized cost, based on the effective interest method.

Exchangeable bonds issued by Portugal Telecom are recognized as compound instruments, comprising the following two components: (i) the present value of the debt, estimated through the prevailing market interest rate for similar non-convertible debt, which is recorded as a

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financial liability; and (ii) the fair value of the embedded option for the holder to convert the bond into equity, which is recorded directly in shareholders’ equity. As of the balance sheet date, the debt component is recognized at amortized cost and the shareholders’ equity component is recognized at the initial value.

3.11.                     Treasury shares

Equity swap contracts on own shares that include an option exercisable by Portugal Telecom for physical settlement are recognised as a financial liability and a corresponding reduction of shareholders’ equity, and are accounted for as an acquisition of treasury shares on the inception date of the contract.

Shares of Portugal Telecom acquired by its subsidiaries are recognized in the Balance Sheet as treasury shares at the acquisition cost, based on the Portugal Telecom’s effective interest in those entities.

3.12.                     Balance sheet classification

Realizable assets and liabilities due over a period greater than one year from the balance sheet date are classified under non-current assets and non-current liabilities, respectively, at present value.

3.13.                     Foreign currency transactions and balances

Transactions denominated in foreign currencies (different from the Company´s domestic currency) are translated to Euros at the exchange rates prevailing at the time the transactions are made. Assets and liabilities in foreign currency for which there is no agreement for fixing an exchange rate are translated to Euros using the exchange rates prevailing at the balance sheet date. Favourable or unfavourable exchange rate differences arising from the differences between exchange rates in force at the date of the respective transactions and those applying on the date of collection or payment or at the balance sheet date are recorded as gains and losses in the income statement.

Assets and liabilities as at 31 December 2012 and 2011 were translated into Euros using the following exchange rates to the Euro reported by the Portuguese Central Bank:

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3.14.                     Financial assets and liabilities

Financial assets and liabilities are recognized in the balance sheet when the Company becomes part of the corresponding contractual terms, and are classified in the following categories: (a) at cost or amortized cost; and (b) at fair value, with the respective changes being recorded in the income statement.

(a)                       Financial assets and liabilities at cost or amortized cost

Assets and liabilities are classified at cost or amortized cost if they: (a) have a defined maturity;

(b) have a fixed or determined income; and (c) don’t represent or include a derivative financial instrument.

Assets and liabilities classified in this category are measured at amortized cost reduced by accumulated impairment losses (for financial assets) and correspond primarily to the following asset and liability captions included in the Company’s balance sheet:

·      Loans included under the caption “Financial investments - equity method of accounting”

·      Loans obtained

·      Balances with Group companies

·      Suppliers

·      Accrued expenses

·      Advances to suppliers

·      State and other public entities

·      Other accounts receivable and payable

·      Other financial assets and liabilities

·      Cash and bank deposits

Amortized cost is determined through the effective interest method. The effective interest rate is the one that discounts the estimated future payments and receipts, during the term of the financial instrument, to the carrying value of the financial asset or liability.

(b)                       Financial assets and liabilities at fair value

All the remaining financial assets and liabilities not included in the category “cost or amortized cost” are recognized at fair value. These financial assets and liabilities correspond primarily to interest and exchange rate derivative financial instruments.

The changes in the fair value of these derivatives are recognized through shareholders’ equity or profit and loss, depending on whether those derivatives meet or not the criteria for hedge accounting, respectively. These changes in fair value are recorded under the caption “Increases/(reductions) in fair value” (Note 22).

(c)                        Impairments on financial assets

Financial assets included under the caption “cost or amortized cost” are subject to impairment tests by the end of each year. Such assets are impaired when there is clear evidence that, as a

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result of one or more events occurred after its initial recognition, their future estimated cash flows will be affected.

For assets measured at amortized cost, the impairment loss corresponds to the difference between the carrying amount of the asset and the present value of the revised future estimated cash flows discounted using the initial effective interest rate. For financial assets measured at cost, the impairment loss corresponds to the difference between the carrying amount of the asset and the best estimated of the asset’s fair value.

Subsequently, if there is a reduction in the impairment loss as a result of an event occurred after the initial recognition of the loss, the impairment should be reversed through earnings. The reversal is recognized up to the limit of the amount that would be recorded (at amortized cost) if the loss had not been initially recognized.

(d)                       Derecognition of financial assets and liabilities

The Company derecognizes financial assets when its contractual rights to obtain the asset’s cash flows expire, or when it transfers to another entity all the significant risks and rewards associated with the ownership of those assets. The Company derecognizes financial liabilities only when the corresponding obligation is settled, cancelled or expires.

3.15.                     Main accounting estimates and judgements

To prepare the standalone financial statements under NCRF, the Company’s management uses estimates and assumptions that have an effect in the application of accounting policies and in the amounts reported. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances on which the estimate was based, or as a result of new information or more experience. The main accounting estimates reflected in the financial statements relate to the impairment tests of financial investments and the evaluation of the fair value of financial instruments.

The Company tests annually its financial investments for impairment, whenever they present evidence of impairment, including severe decline in the operations activity of the affiliated company. Under this analysis, the recoverable amounts of the financial investments are determined based on value-in-use calculations. The use of this method requires the estimate of future cash flows expected to arise from the continuing operation for each of the subsidiaries, the choice of a growth rate to extrapolate cash flow projections and the estimate of a suitable discount rate for each cash generating unit.

Estimates used are based on the best information available during the preparation of financial statements, although future events, neither controlled nor foreseeable by the Company, could occur and have an impact on those estimates. In accordance with “NCRF 4 Accounting Policies,

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Changes in Estimates and Errors” (“NCRF 4”), changes to these estimates that occur after the date of the financial statements are recognized in net income, using a prospective methodology.

3.16.                     Events occurred after the balance sheet date

Events occurred after the balance sheet date that provide additional information about conditions existing at the balance sheet date are reflected in the financial statements. Events occurred after the balance sheet date that provide information about conditions that occur after the balance sheet date are not reflected in the financial statements, but are disclosed in the notes to the financial statements, if material.

4.             Cash flows

The caption “Cash and cash equivalents” of the statement of cash flows includes cash on hand and bank deposits readily convertible to a known amount of cash.

The Company is exposed to a liquidity risk if its sources of funding, including cash balances, operating cash inflows, divestments, credit lines and cash flows obtained from financing operations, do not match its financing needs, such as operating and financing outflows, investments, shareholder remuneration and debt repayments. Based on the cash flows generated by investing activities, mainly from dividends and interest received from affiliated companies, and on the available cash and cash equivalents plus undrawn committed standby facilities and underwritten commercial paper agreements, as detailed below, the Company believes that it will be able to meet its obligations.

Considering the centralized cash management system implemented by the Company in 2006 for its operations in Portugal, under which the companies that are included in this system can finance its cash requirements through Portugal Telecom, the Company manages the liquidity risk of its Group operations in Portugal. In order to reduce this risk, Portugal Telecom seeks to maintain a liquidity position and an average maturity of debt that allows the repayment of short-term loans obtained and, simultaneously, the payment of all contractual obligations, as mentioned above. As at 31 December 2012, the amount of available cash from Group operations in Portugal, plus the undrawn amount of underwritten commercial paper lines (cash immediately available upon a 2 or 3-days notice) and committed standby facilities amounted to Euro 2,945 million, while average maturity of net debt was 4.1 years.

The capital structure of Portugal Telecom is managed in order to ensure that its businesses will be able to continue as a going concern and to maximize the return to shareholders. The capital structure of the Group includes loans obtained, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, treasury shares, reserves and accumulated earnings. Portugal Telecom reviews periodically its capital structure

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considering the risks associated with each of the above mentioned classes of its capital structure.

The cash flow statement was prepared in accordance with “NCRF 2 Statement of Cash Flows”, with the following aspects being worth mentioning.

(a)                       Cash receipts (payments) relating to income taxes

In years ended 31 December 2012 and 2011, this caption has the following composition:

Euro

(a)    This caption includes (1) cash receipts from affiliated companies related to payments on account of income tax to be settled in the following year, amounting to Euro 90,056,806 in 2012 and Euro 127,749,302 in 2011 (Note 8), (2) the settlement of the fourth and last installment regarding the previous year income tax, which amounted to a payment of Euro 34,428,543 in 2012 and a cash receipt of Euro 23,577,960 in 2011, and (3) cash receipts of Euro 5,414,818 in 2012 and Euro 2,369,142 in 2011 related to additional tax assessments from previous years made by affiliated companies.

(b)    In 2011, Portugal Telecom settled only the first payment on account in the amount of Euro 6.8 million, as a result of the expected tax loss to be generated in fiscal 2011, and settled the three Additional Payments on Account in the amount of Euro 3.4 million each, totaling Euro 10.4 million. In 2012, Portugal Telecom only made the Additional Payments on Account of Euro 5.6 million each, totaling Euro 16.9 million, and did not made any payment on account due to the tax loss generated in 2011.

(c)     This caption corresponds to refunds obtained as a result of payments on account made in the previous year in excess of the tax payable calculated under the tax consolidation regime of Portugal Telecom.

(d)    This caption includes primarily (1) withholding taxes on capital income, related mainly to interest on short-term financial applications, amounting to Euro 1.9 million in 2012 and Euro 8.9 million in 2011, (2) withholding tax on income from equity swaps on own shares, amounting to Euro 2.0 million in 2012 and Euro 4.0 million in 2011, (3) additional tax assessments regarding prior years, amounting to Euro 1.8 million in 2012 and Euro 2.4 million in 2011, and (4) a cash receipt of Euro 7.3 million in 2012 resulting from a revised tax assessment filed by the Company regarding the year 2010 which adjusted the tax benefits of RFAI and SIFIDE.

(b)                       Other cash receipts (payments), net

In the year ended 31 December 2012, other cash receipts amounted to Euro 7,393,639, compared to other payments of Euro 9,876,815 in 2011. This change is primarily explained by a cash receipt of Euro 10.2 million in 2012 (Note 12), corresponding to services rendered to Vivo between April and August 2008 under the management fee contract entered into with this entity in previous years, and by lower contributions made to Páginas Amarelas under the respective shareholders agreement, which amounted to Euro 4.5 million in 2012 (Notes 18 and 24) and Euro 8.5 million in 2011, related to the contributions of the years 2011 and 2010, respectively.

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(c)                        Payments (cash receipts) resulting from short-term financial applications

In the year ended 31 December 2011, the Company entered into short-term financial applications amounting to Euro 60,000,000, which were settled on expiration date as at 16 April 2012, and had a coupon of 6.5%, which were settled at maturity.

(d)                       Cash receipts resulting from financial investments

In the years ended 31 December 2012 and 2011, this caption has the following composition:

Euro