Reebok 2007 Annual Report Download - page 163

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ANNUAL REPORT 2007 --- adidas Group
Changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges, and
that are 100% effective, as defi ned in IAS 39, are recognized in equity. When the effectiveness is
not 100%, the ineffective portion of the fair value is recognized in net income. Cumulated gains
and losses in equity are transferred to the income statement in the same periods during which
the hedged forecasted transaction affects the income statement.
For derivative instruments designated as fair value hedges, the gains or losses on the deriv-
atives and the offsetting gains or losses on the hedged items are recognized immediately in net
income.
Certain derivative transactions, while providing effective economic hedges under the Group’s
risk management policies, may not qualify for hedge accounting under the specifi c rules of IAS
39. Changes in the fair value of any derivative instruments that do not qualify for hedge account-
ing under IAS 39 are recognized immediately in the income statement.
Hedges of net investments in foreign entities are accounted for in a similar way to cash fl ow
hedges. If, for example, the hedging instrument is a derivative (e.g. a forward contract) or, for
example, a foreign currency borrowing, effective currency gains and losses in the derivative and
all gains and losses arising on the translation of the borrowing, respectively, are recognized in
equity.
The Group documents the relationship between hedging instruments and hedged items at
transaction inception, as well as the risk management objectives and strategies for undertaking
various hedge transactions. This process includes linking all derivatives designated as hedges
to specifi c forecasted transactions. The Group also documents its assessment of whether the
derivatives that are used in hedging transactions are highly effective by using different methods
of effectiveness testing, such as the “dollar offset method” or the “hypothetical derivative
method”.
The fair values of forward contracts and currency options are determined on the basis of
market conditions on the reporting dates. The fair value of a currency option is determined using
generally accepted models to calculate option prices. The fair market value of an option is
infl uenced not only by the remaining term of the option but also by additional factors, such as
the actual foreign exchange rate and the volatility of the underlying foreign currency base. The
fair values of interest rate options on the reporting date are assessed by generally accepted
models, such as the “Markov functional model”.
CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash and short-term bank
deposits with maturities of three months or less from the date of acquisition.
RECEIVABLES AND OTHER ASSETS Receivables and other assets are recognized at fair value,
which is estimated as the present value of future cash fl ows discounted at the market rate of
interest at the balance sheet date. If necessary, required allowances are determined on the basis
of individual risk assessment and past experience of losses.
INVENTORIES Merchandise and fi nished goods are valued at the lower of cost or net realizable
value, which is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale. Costs are determined
using a standard valuation method: the “average cost method”. Costs of fi nished goods include
cost of raw materials, direct labor and the components of the manufacturing overheads which
can reasonably be attributed. The net realizable value allowances are computed consistently
throughout the Group based on the age and expected future sales of the items on hand.
ASSETS / LIABILITIES CLASSIFIED AS HELD-FOR-SALE Assets and liabilities (primarily non-
current) that are expected to be recovered principally through sale rather than through conti-
nuing use are classifi ed as held-for-sale. These are measured at the lower of their carrying
amount and fair value less cost to sell.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost (which
comprises any costs directly attributable to bringing the asset to the condition necessary for it to
be capable of operating in the manner intended by Management) less accumulated depreciation
(except for land and construction in progress) and accumulated impairment losses. Depreciation
is computed utilizing the “straight-line method”, except where the “declining-balance method”
is more appropriate in light of the actual utilization pattern. Useful lives are as follows:
USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT
Years
Buildings / Leasehold improvements
Technical equipment and machinery as well as other equipment and furniture and fi ttings
5 – 50
2 – 10
Expenditures for maintenance and repairs are expensed as incurred. Renewals and improve-
ments are capitalized and depreciated separately, if the recognition criteria are met.
IMPAIRMENT In the event that facts and circumstances indicate that the cost of non-current
assets (fi nancial and non-fi nancial assets) should be impaired, an evaluation of recoverability is
performed. An impairment loss is recognized in the income statement if the carrying amount
exceeds the recoverable amount. If there is an impairment loss for a cash-generating unit, fi rst
the carrying amount of any goodwill allocated to the cash-generating unit is reduced, and sub-
sequently the other assets of the unit are reduced pro rata on the basis of the carrying amount
of each asset in the unit.
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