Adidas 2002 Annual Report Download - page 123

Changes in the fair value of derivatives that are designated and qualify as cash flow hedges,
and that are 100% effective, are recognized in equity. If there is no 100% effectiveness, the deviating
amounts are recognized in net income. Amounts deferred in equity are transferred to the income
statement in the same periods during which the hedged forecasted transaction affects the income
statement. For derivative instruments designated as a fair value hedge, the gain or loss on the
derivative and the offsetting gain or loss on the hedged item are recognized immediately in net
income.
Certain derivative transactions, while providing effective economic hedges under the Group’s
risk management policies, do not qualify for hedge accounting under the specific rules of IAS 39.
Changes in the fair values of any derivative instruments that do not qualify for hedge accounting
under IAS 39 are recognized immediately in the income statement.
Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges.
If the hedging instrument is a derivative (e.g. a forward contract) or for example a foreign currency
borrowing, any currency gains and losses in the derivative and all gains and losses arising on the
translation of the borrowing are recognized in equity.
The Group documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as the risk management objective and strategy for under-
taking various hedge transactions. This process includes linking all derivatives designated as
hedges to specific forecasted transactions. The Group also documents its assessment, both at the
hedge inception and on an ongoing basis, whether the derivatives that are used in hedging trans-
actions are highly effective in offsetting changes in cash flows of hedged items.
The fair values of forward contracts and currency options are determined on the basis of the
market conditions on the reporting dates. The fair values of interest rate options on the reporting
date are assessed by the financial institutions through which these options had been arranged.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments with maturi-
ties of three months and less.
Receivables
Receivables are stated at nominal amounts less allowances for doubtful accounts. These
allowances are determined on the basis of individual risk assessment and past experience of
losses.
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Currency Translation
Assets and liabilities of the Group’s non-euro functional currency subsidiaries are translated into
euro at closing exchange rates at the balance sheet date. Revenues and expenses are translated at
the average exchange rates for the year. All cumulative differences from the translation of equity
of foreign subsidiaries resulting from changes in exchange rates are included in a separate caption
within shareholders’ equity without affecting income.
In the individual financial statements of Group companies, monetary items denominated in a
foreign currency are generally measured at closing exchange rates at the balance sheet date. The
resulting currency gains and losses are recorded directly in income.
A summary of exchange rates to euro for major currencies in which the Group operates is as
follows:
Effective January 1, 1999 the European Monetary Union commenced and the exchange rates
between the participating currencies and the euro were irrevocably fixed. On January 1, 2002 the
euro officially replaced the local currency in all European Monetary Union countries.
Derivative Financial Instruments
The Group uses derivative financial instruments, interest and currency options, as well as forward
contracts, to hedge its exposure to foreign exchange and interest rate risks. In accordance with its
treasury policy, the Group does not hold any derivative financial instruments for trading purposes.
Derivative financial instruments are initially recognized in the balance sheet at cost and sub-
sequently measured at their fair value. The method of recognizing the resulting gain or loss is
dependent on the nature of the item being hedged. On the date a derivative contract is entered into,
the Group designates certain derivatives as either a hedge of the fair value of a recognized asset
or liability (fair value hedge), a hedge of a forecasted transaction (cash flow hedge) or a hedge of a
net investment in a foreign entity.
EXCHANGE RATES € 1 equals
Average rate for the year Spot rate
ending December 31 Dec. 31
2002 2001 2002 2001
USD 0.9448 0.8965 1.0487 0.8813
GBP 0.6286 0.6222 0.6505 0.6085
JPY 118.11 108.84 124.39 115.33
ARS 2.9777 0.8954 3.5260 1.4542