Adidas 2002 Annual Report Download - page 126

124 FINANCIAL ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS (IFRS) /// NOTES
3 /// FRAMEWORK FOR ACCOUNTING POLICIES IN ACCORDANCE WITH IFRS AND EXPLANATION
OF MAJOR DIFFERENCES COMPARED WITH GERMAN ACCOUNTING POLICIES
The major differences between the accounting policies and consolidation methods according to
IFRS and German law as set out in § 292a section 2 No. 4b) of the German Commercial Code (HGB)
are outlined below.
a) Framework for Accounting Policies in Accordance with IFRS
The accounting policies of entities in accordance with IFRS are based on the objective of providing
investors with decision-relevant information.
Based on the assumption that decision-relevant information should be provided to investors, it
follows that accounting policies should be aimed at showing an entity’s operating results, rather
than determining the amount of distributable profits whilst bearing in mind the need for protection
of creditors.
As a rule, accounting policies in accordance with IFRS have a lower level of prudence than
German accounting policies, which leads to the following major differences:
>Minimization of possibilities for establishing and releasing hidden reserves;
>The consistency requirement (recognition, valuation, classification, consolidation) is to be strictly
followed; changes in accounting policies are only permitted if it can be proven that the change
leads to an improvement in the fair presentation of the financial statements;
>Economic substance has precedence over legal form. The principle of substance over form has a
stronger influence in accounting policies in accordance with IFRS than in German GAAP.
b) Description of Major Differences in Accounting Policies Compared with German Accounting
Policies
The major differences in accounting policies in accordance with IFRS compared with German
accounting policies in the consolidated financial statements of the Group are as follows:
Unrealized Profits Included in the Income Statement
Although the realization principle is a specific part of IFRS, in contrast to German accounting
policies “unrealized” profits must be included in the income statement in certain cases. The follow-
ing balance sheet items are translated at foreign exchange rates ruling at the end of the year even
if this leads to an “unrealized” profit compared with using the exchange rate at the booking date:
>Foreign currency receivables and liabilities;
>Derivative financial instruments to the extent they do not represent a hedge;
>Available-for-sale securities.
Deferred Taxes
Deferred tax assets must be included to their full extent. This also applies to tax loss carryforwards
which can be offset against future profits for tax purposes and which are thus to be reflected as
deferred tax assets. Deferred tax assets are to be reviewed for their realization regularly and are to
be written down if appropriate.
Pension Provisions
Pension provisions are to be calculated actuarially using the projected unit credit method. Use
of the German tax-based entry-age-normal method (§ 6a German Income Tax Act – EStG) is not
permitted.
Expected wage and salary increases until pensionable age are to be considered when calculat-
ing the pension liability to beneficiaries under the scheme. Capital market interest rates are to
be used to discount the amounts, which can partly offset this increase, as the rate can be higher
than the 6% used for tax purposes in Germany (§ 6a EStG). Pension provisions are to be calculated
for beneficiaries as soon as they become scheme members. Appropriate fluctuation rates should
be used when considering the provisions needed for this group of beneficiaries.
Other Provisions and Accruals
Provisions and accruals may only be set up to cover obligations to third parties. Internal accruals
are not permitted.
Accounting for Leases
In contrast to the use of German tax-based leasing provisions, IFRS requirements more often
lead to leased items being recognized in the balance sheet of the lessee rather than of the lessor.
IFRS requires the contractual party which is the economic owner and which thus has the major
share of risks and opportunities arising from use of the item being leased to recognize the lease in
its balance sheet.
Minority Interests
Minority interests may not be included as part of Group shareholders’ equity in the consolidated
balance sheet. They must be shown as a separate item between third-party capital and shareholders’
equity.