Reebok 2012 Annual Report Download - page 220

adidas Group
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2012 Annual Report
Consolidated Financial Statements
198
2012
Notes
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04.8
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Currency translation
Transactions in foreign currencies are initially recorded in the respective
functional currency by applying the spot exchange rate valid at the
transaction date to the foreign currency amount.
In the individual financial statements of subsidiaries, monetary
items denominated in non-functional currencies of the subsidiaries are
generally translated into the functional currency at closing exchange
rates at the balance sheet date. The resulting currency gains and losses
are recorded directly in the income statement.
Assets and liabilities of the Group’s non-euro functional currency
subsidiaries are translated into the presentation currency, the euro,
which is also the functional currency of adidas AG, at closing exchange
rates at the balance sheet date. For practical reasons, revenues
and expenses are translated at average rates for the period which
approximate the exchange rates on the transaction dates. All cumulative
differences from the translation of equity of foreign subsidiaries resulting
from changes in exchange rates are included in a separate item within
shareholders’ equity without affecting the income statement.
A summary of exchange rates to the euro for major currencies in
which the Group operates is as follows:
Exchange rates (€ 1 equals)
Average rates for the year
ending Dec. 31,
Spot rates
at Dec. 31,
2012 2011 2012 2011
USD 1.2862 1.3922 1.3194 1.2939
GBP 0.8115 0.8678 0.8161 0.8353
JPY 102.6451 111.0420 113.6100 100.2000
CNY 8.1137 9.0000 8.2931 8.1527
RUB 39.9512 40.8709 40.0737 41.4303
Derivative financial instruments
The Group uses derivative financial instruments, such as currency
options, forward contracts as well as interest rate swaps and cross-
currency interest rate swaps, to hedge its exposure to foreign exchange
and interest rate risks. In accordance with its Treasury Policy, the Group
does not enter into transactions with derivative financial instruments for
trading purposes.
Derivative financial instruments are initially recognised in the
statement of financial position at fair value, and subsequently also
measured at their fair value. The method of recognising the resulting
gains or losses is dependent on the nature of the hedge. On the date a
derivative contract is entered into, the Group designates derivatives as
either a hedge of a forecasted transaction (cash flow hedge), a hedge
of the fair value of a recognised asset or liability (fair value hedge) or a
hedge of a net investment in a foreign entity.
Changes in the fair value of derivatives that are designated and
qualify as cash flow hedges, and that are effective, as defined in IAS 39
“Financial instruments: recognition and measurement”, are recognised
in equity. When the effectiveness is not 100%, the ineffective portion
of the change in the fair value is recognised in the income statement.
Accumulated 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 derivatives and the offsetting gains or losses on
the hedged items are recognised immediately in the income statement.
Certain derivative transactions, while providing effective economic
hedges under the Group’s risk management policies, may not qualify
for hedge accounting under the specific rules of IAS 39. Changes in the
fair value of any derivative instruments that do not meet these rules are
recognised immediately in the income statement.
Hedges of net investments in foreign entities are accounted for in a
similar way to cash flow 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 recognised in equity.
The Group documents the relationship between hedging instruments
and hedge objects 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 specific firm commitments and 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 influenced 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.
Cash and cash equivalents
Cash and cash equivalents represent cash at banks, cash on hand and
short-term deposits with maturities of three months or less from the
date of acquisition.
Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
Receivables and other financial assets
Receivables and other financial assets are recognised at fair value,
which corresponds to the nominal value for current receivables and
other financial assets. For non-current receivables and other financial
assets, the fair value is estimated as the present value of future cash
flows discounted at the market rate of interest at the balance sheet date.
Subsequently, these are measured at amortised cost using the “effective
interest method”. Required allowances, if necessary, are determined on
the basis of individual risk assessments, and on the ageing structure of
receivables past due.