Reebok 2012 Annual Report Download - page 222

adidas Group
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2012 Annual Report
Consolidated Financial Statements
200
2012
Notes
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04.8
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Intangible assets (except goodwill)
Intangible assets are valued at amortised cost less accumulated
amortisation (except for assets with indefinite useful lives) and
impairment losses. Amortisation is calculated on a straight-line basis
taking into account any potential residual value.
Expenditures during the development phase of internally generated
intangible assets are capitalised as incurred if they qualify for recognition
under IAS 38 “Intangible Assets”.
Estimated useful lives are as follows:
Estimated useful lives of intangible assets
Years
Trademarks indefinite
Software 3 – 5
Patents, trademarks and concessions 5 – 15
The adidas Group determined that there was no impairment necessary
for any of its trademarks with indefinite useful lives in the years ending
December 31, 2012 and 2011. In addition, an increase in the discount
rate of up to 1.5% or a reduction of cash inflows of up to 20% would not
result in any impairment requirement.
The recoverable amount is determined on the basis of fair value less
costs to sell (costs to sell are calculated with 1% of the fair value). The
fair value is determined in discounting notional royalty savings after tax
and adding a tax amortisation benefit, resulting from the amortisation
of the acquired asset (“relief-from-royalty method”). These calculations
use projections of net sales related royalty savings, based on financial
planning which covers a period of five years in total. The level of the
applied royalty rate for the determination of the royalty savings is based
on contractual agreements between the adidas Group and external
licensees as well as publicly available royalty rate agreements for similar
assets. Notional royalty savings beyond this period are extrapolated
using steady growth rates of 1.7% (2011: 1.7%). The growth rates do not
exceed the long-term average growth rate of the business to which the
trademarks are allocated.
The discount rate is based on a weighted average cost of capital
calculation derived using a five-year average market-weighted debt/
equity structure and financing costs referencing the Group’s major
competitors. The discount rate used is an after-tax rate and reflects the
specific equity and country risk. The applied discount rate depends on
the respective intangible asset being valued and ranges between 6.5%
and 8.4% (2011: between 6.5% and 8.1%).
Goodwill
Goodwill is an asset representing the future economic benefits arising
from assets acquired in a business combination that are not individually
identified and separately recognised. This results when the purchase
cost exceeds the fair value of acquired identifiable assets, liabilities and
contingent liabilities. Goodwill arising from the acquisition of a foreign
entity and any fair value adjustments to the carrying amounts of assets,
liabilities and contingent liabilities of that foreign entity are treated as
assets, liabilities and contingent liabilities of the respective reporting
entity, and are translated at exchange rates prevailing at the date of the
initial consolidation. Goodwill is carried in the functional currency of the
acquired foreign entity.
Acquired goodwill is valued at cost and is tested for impairment on
an annual basis and additionally when there are indications of potential
impairment.
The cash-generating units are defined as the geographic regions
(split into wholesale and retail) which are responsible for the joint
distribution of adidas and Reebok as well as the other operating
segments TaylorMade-adidas Golf, Rockport and Reebok-CCM Hockey.
Compared to 2011, Brazil is now managed separately from the rest
of Latin America. As a result, the number of cash-generating units
increased overall to a total of 32 (2011: 30).
The cash-generating units (or groups of units) represent the lowest
level within the Group at which goodwill is monitored for internal
management purposes. The impairment test for goodwill has been
performed based on cash-generating units (or groups of units).
The recoverable amount of a cash-generating unit is determined
on the basis of value in use. This calculation uses cash flow projections
based on the financial planning covering a five-year period in total.
The planning is based on the adidas Group’s strategic business plan
“Route 2015”
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SEE GROUP STRATEGY, P. 68 until 2015 and was prolonged
by two further years based on historical and expected growth prospects
and margin developments until 2015. It reflects an expected mid- to
high-single-digit sales increase for the majority of the cash-generating
units (or groups of units). For a few emerging markets, we expect, on
average, a low-double-digit sales growth rate. Furthermore, we expect
the operating margin to improve, primarily driven by an improvement in
the gross margin as well as lower operating expenses as a percentage
of sales. The planning for capital expenditure and working capital
is primarily based on past experience. The planning for future tax
payments is based on current statutory corporate tax rates of the
single cash-generating units (or groups of units). Cash flows beyond
this five-year period are extrapolated using steady growth rates of 1.7%
(2011: 1.7%). According to our expectations, these growth rates do not
exceed the long-term average growth rate of the business in which each
cash-generating unit operates.