Reebok 2006 Annual Report Download - page 156

Consolidated Financial Statements ›
152 ANNUAL REPORT 2006 › adidas Group ›
Irrespective of whether there is an indication of impairment, intangible assets with an
indefinite useful life and goodwill acquired in business combinations are tested annually for
impairment.
An impairment loss recognized for goodwill is not reversed. In respect of other assets,
an impairment loss recognized in prior periods is reversed if there has been a change in the
estimates used to determine the recoverable amount. An impairment loss is reversed only to
the extent that the asset’s carrying amount does not exceed the carrying amount that would
have been determined (net of depreciation or amortization) if no impairment loss had been
recognized.
Finance Leases
If under a lease agreement substantially all risks and rewards associated with an asset are
transferred to the Group, the asset less accumulated depreciation and the corresponding
liability are recognized at the fair value of the asset or the lower net present value of the mini-
mum lease payments. Minimum lease payments are apportioned between the finance charge
and the reduction of the outstanding liability. The finance expense is allocated to each period
during the lease term so as to produce a constant periodic rate of interest on the remaining
balance of the liability.
Identifiable Intangible Assets
Acquired intangible assets are valued at cost less accumulated amortization and impairment
losses. Amortization is calculated on a straight-line basis with the following useful lives:
In 2006, the adidas Group determined that there was no impairment necessary for any of its
trademarks with indefinite useful lives.
The recoverable amount is determined on the basis of fair value less costs to sell, which
are calculated with 1% of the fair value. The fair value is determined in discounting the royalty
savings after tax and adding a tax amortization benefit, resulting from the amortization of
the acquired asset (relief-from-royalty method). These calculations use projections of royalty
savings based on the financial planning covering a maximum period of five years in total. Roy-
alty savings beyond this period are extrapolated using steady growth rates of around 2%. The
growth rates do not exceed the long-term average growth rate of the business in which the
trademarks are allocated.
The discount rate is based on a weighted average cost of capital calculation consider-
ing the debt/equity structure and financing costs of the major competitors. The discount rate
used is after-tax rates and reflects specific equity and country risk. The applied discount rate
is 7.5%.
Expenditures for internally generated intangible assets are expensed as incurred if they
do not qualify for recognition.
Goodwill
Goodwill is the excess of the purchase cost over the fair value of acquired identifiable assets
and liabilities. Goodwill arising from the acquisition of a foreign entity and any fair value ad-
justments to the carrying amounts of assets and liabilities of that foreign entity are treated
as assets of the reporting entity and are translated at exchange rates prevailing at the date of
the initial consolidation. Goodwill is carried in the functional currency of the acquired foreign
entity.
Acquired goodwill is valued at cost less accumulated impairment losses. From January 1,
2005, scheduled amortization of goodwill ceased. Goodwill is tested annually for impairment,
and additionally when there are indications of potential impairment.
Goodwill has been allocated for impairment testing purposes to three cash-generating
units. The Group’s cash-generating units are identified according to brand of operations (in the
prior year according to brands and regions) in line with the internal management approach.
The adidas Group has thus defined the three segments adidas, Reebok and TaylorMade-adidas
Golf as the relevant cash-generating units.
Useful Lives of Identifiable Intangible Assets
Years
Trademarks indefinite
Patents, trademarks and concessions 5 – 15
Software 3 – 5