Reebok 2012 Annual Report Download - page 197

adidas Group
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2012 Annual Report
Group Management Report – Financial Review
175
2012
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03.5
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Risk and Opportunity Report
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Financial risks
As our brands remain a key factor for our Group’s success, we assess the
potential impact related to counterfeiting and imitation as significant but,
as a result of our relentless and intensive efforts against counterfeiting,
we rate the likelihood of being impacted to such a degree as unlikely.
Product quality risks
The adidas Group faces a risk of selling defective products, which
may result in injury to consumers and/or brand and product image
impairment. We mitigate this risk by employing dedicated teams that
monitor the quality of our products on all levels of the supply chain
through rigorous testing prior to production, close cooperation with
suppliers throughout the manufacturing process, random testing after
retail delivery, open communication about defective products and quick
settlement of product liability claims when necessary. In 2012, we did not
recall any products.
The potential impact of product liability cases or having to conduct
wide-scale product recalls could be significant but, given our internal
standards and control activities regarding product quality, we regard the
likelihood as possible.
Fraud and corruption risks
We face the risk that our employees breach rules and standards that
guide appropriate and responsible business behaviour. This includes
the risks of fraud and corruption. In order to successfully manage
these risks, the Group Policy Manual was launched at the end of 2006
to provide a framework for basic work procedures and processes. It
also includes our Code of Conduct
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SEE CORPORATE GOVERNANCE REPORT
INCLUDING THE DECLARATION ON CORPORATE GOVERNANCE, P. 51 which stipulates
that every employee shall act ethically in compliance with the laws and
regulations of the legal systems where they conduct Group business.
All of our employees have to participate in a special Code of Conduct
training as part of our Global Compliance Programme.
In addition, we utilise controls such as segregation of duties in IT
systems to prevent fraudulent activities. Moreover, we have created a
network of Compliance Officers across the Group who guide and advise
our operating managers regarding fraud and corruption topics, and we
are further strengthening our internal control activities by highlighting
key controls in our business processes to prevent and detect fraudulent
or corruptive behaviour. Various additional mechanisms are in place to
monitor compliance. Whenever reasonable, we actively investigate and,
in case of unlawful conduct, we work with state authorities to ensure
rigorous enforcement of criminal law.
We believe the potential impact on the Group’s performance caused by
fraud or corruption could be significant. Despite the substantial growth
of our global workforce in recent years, we regard the likelihood of being
impacted by fraud and corruption risks to such an extent as unlikely,
due to our preventative measures and controls. However, we believe the
likelihood of occurrence of smaller fraud or corruption cases is higher.
Financial risks
Credit risks
A credit risk arises if a customer or other counterparty to a financial
instrument fails to meet its contractual obligations. The adidas Group
is exposed to credit risks from its operating activities and from certain
financing activities. Credit risks arise principally from accounts
receivable and, to a lesser extent, from other third-party contractual
financial obligations such as other financial assets, short-term bank
deposits and derivative financial instruments
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SEE NOTE 29, P. 224.
Without taking into account any collateral, the carrying amount of
financial assets and accounts receivable represents the maximum
exposure to credit risk.
At the end of 2012, there was no relevant concentration of credit risk
by type of customer or geography. Our credit risk exposure is mainly
influenced by individual customer characteristics. Under the Group’s
credit policy, new customers are analysed for creditworthiness before
standard payment and delivery terms and conditions are offered.
Tolerance limits for accounts receivable are also established for each
customer. Both creditworthiness and accounts receivable limits are
monitored on an ongoing basis. Customers that fail to meet the Group’s
minimum creditworthiness are, in general, allowed to purchase products
only on a prepayment basis.
Other activities to mitigate credit risks include retention of title clauses
as well as, on a selective basis, credit insurances, accounts receivable
sales without recourse and bank guarantees.
Objective evidence that financial assets are impaired includes, for
instance, significant financial difficulty of the issuer or debtor, indications
of the potential bankruptcy of the borrower and the disappearance of an
active market for a financial asset because of financial difficulties. The
Group utilises allowance accounts for impairments that represent our
estimate of incurred credit losses with respect to accounts receivable.
Allowance accounts are used as long as the Group is satisfied that
recovery of the amount due is possible. Once this is no longer the case,
the amounts are considered irrecoverable and are directly written off
against the financial asset. The allowance consists of two components:
(1) an allowance established for all receivables dependent on the ageing
structure of receivables past due date and
(2) a specific allowance that relates to individually assessed risk for
each specific customer – irrespective of ageing.
At the end of 2012, no Group customer accounted for more than 10% of
accounts receivable. Based on our allowance accounts, we believe that
the potential financial impact of our credit risks from customers could
be major but we rate the likelihood of materialising only as possible.
The adidas Group Treasury department arranges currency and interest
rate hedges, and invests cash, with major banks of a high credit standing
throughout the world. adidas Group companies are authorised to