Reebok 2006 Annual Report Download - page 154

Consolidated Financial Statements ›
150 ANNUAL REPORT 2006 › adidas Group ›
2 » Summary of Significant Accounting Policies
The consolidated financial statements are prepared in accordance with the consolidation,
accounting and valuation principles described below.
Principles of Consolidation
The consolidated financial statements include the accounts of adidas AG and its direct and
indirect subsidiaries, which are prepared in accordance with uniform accounting principles.
A company is considered as a subsidiary if adidas AG directly or indirectly governs the
financial and operating policies of the respective enterprise.
The number of consolidated companies evolved as follows for the years ending Decem-
ber 31, 2006 and 2005, respectively.
A schedule of the shareholdings of adidas AG is shown in Attachment II to these Notes.
Furthermore, a schedule of these shareholdings will be filed with the Commercial Register at
the Local Court in Fürth (Bavaria).
The first-time consolidation of the purchased companies had a material impact in 2006
(see Note 5).
Within the scope of the first-time consolidation, all acquired assets and liabilities are
recognized in the balance sheet at fair value. A debit difference between the book value and
the proportionate fair value of the assets and liabilities is shown as goodwill. A credit differ-
ence is recorded in the income statement. No fair value adjustments are recognized at the first
consolidation of acquired minority interest of companies accounted with the purchase method.
A debit difference between the cost of the additional investment and the carrying amount of
the net assets at the acquisition date is shown as goodwill. A credit difference is recorded in
the income statement.
All intercompany transactions and balances, as well as any unrealized gains and losses
arising from intercompany transactions are eliminated in preparing the consolidated financial
statements.
Currency Translation
Transactions of assets and liabilities in foreign currencies are translated into the functional
currency euro at spot rates on the transaction date.
Assets and liabilities of the Group’s non-euro functional currency subsidiaries are trans-
lated into euro at closing exchange rates at the balance sheet date. Revenues and expenses
are translated at the exchange rates on the transaction dates. All cumulative differences from
the translation of equity of foreign subsidiaries resulting from changes in exchange rates are
included in a separate item within shareholders’ equity without affecting income.
In the individual financial statements of Group companies, monetary items denominated
in non-euro currencies 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:
Derivative Financial Instruments
The Group uses derivative financial instruments, such as interest and currency options, for-
ward contracts, as well as interest rate swaps and cross-currency interest rate swaps 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 fair value,
and subsequently measured also 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 con-
tract is entered into, the Group designates certain derivatives as either a hedge of a forecasted
transaction (cash flow hedge), a hedge of the fair value of a recognized asset or liability (fair
value hedge) or a hedge of a net investment in a foreign entity.
Number of Consolidated Companies
2006 2005
January 1 94 107
Newly founded/consolidated companies 2 5
Divestments/exclusion from consolidation (4) (18)
Merged companies (1) —
Purchased companies 77 —
December 31 168 94
Exchange Rates € 1 equals
Average rate for the year Spot rate
ending Dec. 31 at Dec. 31
2006 2005 2006 2005
USD 1.2562 1.2453 1.3170 1.1797
GBP 0.6820 0.6839 0.6715 0.6853
JPY 146.08 136.91 156.93 138.90