Reebok 2007 Annual Report Download - page 168

164
ANNUAL REPORT 2007 --- adidas Group CONSOLIDATED FINANCIAL STATEMENTS - Notes - Notes to the Consolidated Balance Sheet
The acquisition had the following effect on the Group’s assets and liabilities:
REEBOK’S NET ASSETS AT THE ACQUISITION DATE
€
in milli
o
n
s
Pre-aquisition Recognized
carrying Fair value values on
amounts adjustments acquisition
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property, plant and equipment, net
Trademarks and other intangible assets, net
Long-term fi nancial assets
Deferred tax assets
Other non-current assets
Borrowings
Accounts payable
Income taxes
Accrued liabilities and provisions
Other current liabilities
Pensions and similar obligations
Deferred tax liabilities
Other non-current liabilities
Minority interests
Ne
t
asse
t
s
Goodwill arising on acquisition
P
urchase pr
i
ce settled
i
n cas
h
Cash and cash equivalents acquired
C
ash outfl ow on acquisitio
n
539 — 539
453 — 453
447 55 502
103 (3) 100
293 (33) 260
68 1,674 1,742
— 4 4
198 44 242
16 — 16
(506) — (506)
(109) — (109)
(59) — (59)
(329) (30) (359)
(418) — (418)
(7) — (7)
(11) (578) (589)
(2) — (2)
(3) — (3)
1,133 1,806
673
1,165
2,971
539
2,432
Pre-acquisition carrying amounts were based on applicable IFRS standards.
The following valuation methods for the acquired assets were applied:
-- Inventories: The pro rata basis valuation was applied for estimating the fair value of acquired
inventories. Realized margins were added to the book values of acquired inventories. Subse-
quently, the costs for completion for selling, advertising and general administration as well as a
reasonable profi t allowance were deducted.
-- Property, plant and equipment: The “comparison method” was used for acquired land by
considering the prices paid for comparable properties. The “direct capitalization method” was
applied for the valuation of all acquired buildings. Annual rents which could be realized in the
future were discounted following adjustments for risk factors and deduction of applicable
operating costs. The acquired machinery and equipment was valued utilizing the depreciated
replacement cost method. The replacement costs were determined by applying an index to the
asset’s historical cost. The replacement costs were then adjusted for the loss in value caused
by depreciation.
-- Trademarks and other intangible assets: The “relief-from-royalty method” was applied for
trademarks and technologies. The fair value was determined by discounting the royalty savings
after tax and adding a tax amortization benefi t, resulting from the amortization of the acquired
asset. For the valuation of licensing agreements, customer relationships and order backlogs, the
“multi-period-excess-earnings method” was used. The respective future excess cash fl ows were
identifi ed and adjusted in order to eliminate all elements not associated with these assets.
Future cash fl ows were measured on the basis of the expected sales by deducting variable and
sales-related imputed costs for the use of contributory assets. Subsequently, the outcome was
discounted using the appropriate discount rate and adding a tax amortization benefi t.
-- Long-term fi nancial assets: The “discounted cash fl ow method” was used for the valuation of a
participation. Future free cash fl ows were discounted back to the valuation date using an
appropriate discount rate.
The excess of the acquisition cost paid versus the net of the amounts of the fair values assigned
to all assets acquired and liabilities assumed, taking into consideration the respective deferred
taxes, was recognized as goodwill. Any acquired asset that did not meet the identifi cation and
recognition criteria for an asset was included in the amount recognized as goodwill.
Based on the expected cost of sales and operating expenses synergy potential, the goodwill
arising on this acquisition was allocated to the cash-generating units adidas and Reebok in an
amount of € 699 million and € 466 million, respectively, and was converted in functional curren-
cies as appropriate.
If this acquisition had occurred on January 1, 2006, total Group net sales would have been
€ 10.2 billion and net income would have been € 448 million for the year ending December 31,
2006.
The acquired Reebok subsidiaries contributed € 92 million to the Group’s operating profi t for
the period from February to December 2006. Contribution to net income cannot be disclosed due
to the advanced integration of fi nancing and tax activities.