Adidas 2002 Annual Report Download - page 136

Above instruments had a negative fair value of € 3 million and a positive fair value of € 1 million
as at December 31, 2002 and 2001 respectively.
Some of the instruments qualify as cash flow hedges pursuant to IAS 39. The related negative
change in fair value of € 4 million was debited in equity and will be expensed according to interest
rate developments in parallel to the underlying hedged item. The negative change in the fair
value of the remaining instruments of € 2 million was recorded directly in the income statement, as
incurred.
Credit Risk
The Group’s treasury arranges currency and interest rate hedges, and invests cash, with major
banks of a high credit standing throughout the world, all being rated “A-” or higher in terms of
Standard & Poor’s long-term ratings.
NOTES TO THE CONSOLIDATED INCOME STATEMENT
22 /// OPERATING EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AS WELL AS
DEPRECIATION AND AMORTIZATION (EXCL. GOODWILL))
Operating expenses include expenses for sales, marketing and research and development, as well
as for logistics and central finance and administration. In addition, they include depreciation on
tangible and amortization on intangible assets, with the exception of goodwill amortization and
other depreciation and amortization which is included in the cost of sales.
A significant part of the operating expenses comprises the Marketing Working Budget. The
Marketing Working Budget consists of promotion and communication spending such as promotion
contracts, advertising, retail support, events and other communication activities, however it does
not include marketing overhead expenses. For the year 2002, Marketing Working Budget accounted
for approximately 35% (2001: 35%) of the total operating expenses.
Total depreciation and amortization expense for tangible and intangible assets (except for
goodwill) was € 114 million and € 108 million for the years ending December 31, 2002 and 2001
respectively. Thereof € 17 million and € 18 million were recorded within the cost of sales as they
are directly attributable to the production costs of goods sold.
The decrease in fair values is the result of the US dollar vs. euro development from 0.88
(December 31, 2001) to 1.05 (December 31, 2002) which in turn has a beneficial impact on future
product costs. Out of the negative fair value of € 10.0 million of forward contracts, € 14.0 million
relate to hedging instruments falling under hedge accounting as per definition of IAS 39, split into a
negative fair value of € 15.7 million from cash flow hedges and a positive fair value of € 1.7 million
from net investment hedges. The total fair value of outstanding currency options relates to cash
flow hedges.
The fair value adjustments of outstanding cash flow hedges for forecasted sales will be re-
ported in the income statement when the forecasted sales transaction is recorded, the wide majority
being forecasted for 2003. A minority of cash flow hedges refers to an embedded derivative within a
specific contract and will be transferred from equity to the income statement at specified payment
dates up to 2008 as per the contract. The embedded derivative is not separated from the host
contract, as the economic characteristics and risk of the embedded derivative are closely related to
the host contract. Other significant embedded derivatives do not exist at the balance sheet date.
In addition, adidas-Salomon hedges part of its net investment in Salomon & Taylor Made Co.,
Ltd., Tokyo (Japan) with forward contracts. A related gain of € 1.4 million in 2002 is recognized in
equity.
Management of Interest Rate Risk
It has been the policy of the Group to concentrate its financing on short-term borrowings, but to
protect against liquidity risks with longer-term financing agreements, and to protect against the
risk of rising interest rates with interest rate caps. In view of the continuing decline of the borrow-
ings, no additional caps were arranged in 2002.
As part of a low-cost resetting strategy of euro caps with expiration dates in the years 2006 and
2007 to lower protected interest rates, the Group sold floors in the notional amount of € 0.4 billion
with an average strike rate of 3.6% in 2001. To prevent possible opportunity losses from these floors
in an environment of generally declining interest rates, the floors were widely neutralized with
offsetting transactions at an average rate of 3.2% in the course of 2002.
The interest rate hedges which were outstanding at the end of 2002 and 2001 respectively
expire as detailed below:
134 FINANCIAL ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS (IFRS)
EXPIRATION DATES OF INTEREST RATE HEDGES € in millions
Dec. 31 Dec. 31
2002 2001
Within 1 year 244 230
Between 1 and 3 years 426 459
Between 3 and 5 years 569 756
After 5 years 050
Total 1,239 1,495
Notes to the Consolidated Income Statement