Reebok 2006 Annual Report Download - page 157

Notes ›153
The carrying amounts of already existing as well as newly acquired goodwill are allocated to
the cash-generating units as follows:
In 2006, the adidas Group determined that there was no impairment of goodwill necessary.
The recoverable amount of a cash-generating unit is determined on the basis of fair value
less costs to sell, which are calculated with 1% of the fair value. These calculations use cash
flow projections based on the financial planning covering a five-year period in total. Cash flows
beyond the five-year 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 each
cash-generating unit operates.
The discount rates are based on a weighted average cost of capital calculation consid-
ering the debt/equity structure and financing costs of the major competitors of each cash-
generating unit. The discount rates used are after-tax rates and reflect specific equity and
country risk of the relevant cash-generating unit. The applied discount rates for the specific
cash-generating unit are between 7.2% and 8.0%.
Research and Development
Research costs are expensed as incurred. Development costs are also expensed as incurred if
the recognition criteria are not met.
The Group spent € 98 million and € 63 million on product research and development for
the years ending December 31, 2006 and 2005, respectively.
Financial Assets
All purchases and sales of investments are recognized on the trade date. Costs of purchases
include transaction costs. If the fair value of available-for-sale investments can be measured
reliably, they are subsequently carried at fair value. Realized and unrealized gains and losses
arising from changes in the fair value of these investments are included in the income state-
ment of the period in which they arise except for available-for-sale financial assets where
unrealized gains and losses are recognized in equity unless they are impaired.
Borrowings and Other Liabilities
Borrowings and other liabilities are recognized at fair value using the effective interest method,
net of transaction costs incurred. In subsequent periods, long-term borrowings are stated at
amortized cost using the effective interest method. Any difference between proceeds (net of
transaction costs) and the redemption value is recognized in the income statement over the
terms of the borrowings.
The fair value of the liability component of the convertible bond is determined using a
market interest rate for a comparable straight bond; this amount is presented under long-
term borrowings on an amortized cost basis until conversion or maturity of the bond. The
remaining portion is included in shareholders’ equity where the value of the equity component
is not changed in subsequent periods.
Provisions
Provisions are recognized where a present – legal or constructive – obligation has been
incurred which is likely to lead to an outflow of resources whereas the timing or amount is
uncertain. Non-current provisions are discounted if the effect of discounting is material.
Pensions and Similar Obligations
Provisions for pensions and similar obligations comprise the provision obligation of the Group
under defined benefit and contribution plans. The obligations under defined benefit plans are
calculated separately for each plan by estimating the amount of benefit that employees have
earned in return for their service in the current and prior periods. That benefit is discounted
to determine its present value, and all unrecognized past service costs and the fair value of
any plan assets are deducted. The discount rate is the yield at the balance sheet date on high-
quality corporate bonds. The calculations are performed by qualified actuaries using the pro-
jected unit credit method in accordance with IAS 19. Obligations for contributions to defined
contribution plans are recognized as an expense in the income statement when they are due.
Allocation of Goodwill € in millions
TaylorMade- Total
adidas Reebok adidas Golf goodwill
December 31, 2005 150 — 286 436
Additions – Reebok acquisition 699 466 — 1,165
Additions – other 3 — — 3
Currency effects (57) (29) (2) (88)
December 31, 2006 795 437 284 1,516