Adidas 2000 Annual Report Download - page 37

adidas-Salomon ANNUAL REPORT 2000
33
Management Discussion & Analysis
Currency Risk Managed Successfully
The Group’s hedging policy is determined by its Treasury Com-
mittee, which consists of members of the Executive Board of
adidas-Salomon AG, whereas management of the brands and
regions is involved in day-to-day hedging decisions. Currency
developments for the Group in 2000 were largely negative.
The US dollar-euro relationship is the most important single
currency relationship for the Group due to the high share of
product purchases in the Far East, which are denominated in
US dollars. In 2000, the Group had to buy more than $1.4 billion
versus other currencies. European currencies accounted for
75% of this amount. The euro alone accounted for 44% of the
US dollar purchases. The euro was under downward pressure
for most of the year, falling at one point to a rate below c0.83
to the US dollar. The average US dollar-euro exchange rate was
0.92 in 2000, compared to 1.07 in 1999. adidas-Salomon’s
actual conversion rate before option premium incurred was
0.98 in 2000 versus 1.14 in 1999. Though the Group’s actual
US dollar-euro conversion rate was well ahead of the average
market rate in both years, the 0.98 rate for 2000 meant that, on
average, the Group spent 19% more euro for every US dollar
which was purchased in 2000 versus 1999. Strong product
and marketing management was able to compensate for this
effect, as evidenced by the stability in the gross margin.
Preparing for IAS 39
Starting in January 2001, adidas-Salomon’s accounting and
reporting for financial instruments is obliged to comply with the
new International Accounting Standard 39 (IAS 39) “Financial
Instruments: Recognition and Measurement”. IAS 39 requires
the presentation of all financial instruments at their fair value in
the balance sheet. At the same time, rules for hedge account-
ing have been tightened. Under previous accounting and
disclosure rules, the gains and losses resulting from hedging
positions to protect anticipated future transactions could be
deferred until the due date of the hedged transactions.
Under IAS 39, hedge accounting for financial instruments which
cover anticipated future commercial transactions is still allowed
for hedging with forward contracts when certain conditions
(“hedge effectiveness test”) are met. IAS 39 permits limited
hedge accounting when currency options are “in-the-money”.
No hedge accounting is allowed when options are “out-of-the-
money”. To limit option premium payments, adidas-Salomon
has only engaged in currency options which, at the time of their
purchase, were “out-of-the-money”.
Changeover to Euro on Track
Preparations among Group companies for changing financial
and accounting systems to the euro currency are running
according to plan. Most organizations will convert systems
during the first half of 2001. All figures in this annual report
are stated in euros for the first time, being converted at
official rates.
Also on schedule, in accordance with initial planning and
based on customer requests, pricing will be changed to the
euro currency starting with deliveries for the Spring/Summer
2002 season.
Relative Composition of Net Borrowings
(in %)
12/00
12/99
0 20406080100
Bank Borrowings
Commercial Paper
Private Placements
Average euro/US dollar Rate
(US dollar per euro, monthly averages)
1.20
1.10
1.00
0.90
0.80
Jan 1999 Jun 1999 Dec 1999 Jun 2000 Dec 2000