Reebok 2012 Annual Report Download - page 230

adidas Group
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2012 Annual Report
Consolidated Financial Statements
208
2012
Notes
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04.8
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Moreover, as a result of these adjustments relating to the financial year
2011, the consolidated statement of changes in equity, the consolidated
statement of comprehensive income and the comparative amounts for
2011 in the Notes to the consolidated financial statements also had to
be restated accordingly. In addition, a correction of the consolidated
statement of changes in equity at the time of the opening balance as at
January 1, 2011 was necessary.
In particular, the following errors had to be adjusted:
a) Manipulation of sales and accounts receivable
Through different practices, Reebok India overstated net sales and
accounts receivable, whereas inventories were understated as at
December 31, 2011 and in previous financial years.
This was achieved through the following practices:
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Issuing invoices to customers, even though inventories were not
delivered at the time of invoicing, but stored in secret warehouses of
Reebok India or in warehouses of a shipping company.
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Entering into sales agreements with distributors which did not
transfer risk and rewards.
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Not recording sales returns received from customers at the time of
return and storing the returned inventory in secret warehouses.
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Issuing unjustified invoices, for example, for subsequent price
increases, or not recording valid credit notes to customers.
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The incorrect or omitted recording of contractual obligations towards
customers.
As a result of these practices, the allowances for inventories and the
provision for sales returns were also determined incorrectly.
The impact on the opening consolidated statement of financial
position as at January 1, 2011 and the consolidated statement of financial
position as at December 31, 2011 is as follows:
Impact on the consolidated financial statements (€ in millions)
Jan. 1, 2011 Dec. 31, 2011
Accounts receivable (94) (132)
Inventories 16 20
Other current financial liabilities – 6
Other current provisions 14 10
Other current liabilities – (1)
Total equity (92) (127)
Net sales – (37)
Cost of sales – (6)
Other operating expenses – 20
b) Fictitious cash collections
Reebok India recorded fictitious cash collections of outstanding
accounts receivable. This scheme involved agreements with business
partners, whereby Reebok India transferred money to business partners
in January 2011 while at the same time receiving cheques back-dated to
December 2010 from those same partners.
In addition, in 2011, Reebok India initiated a programme to roll
out further franchise stores, whereby the investees had to make a
prepayment which was recorded as collection of various outstanding
customer accounts instead of recording a financial liability against the
investor.
The required corrections led to a reduction of cash and cash equivalents
of € 5 million and an increase in accounts receivable of € 27 million
as well as an increase in short-term borrowings of € 11 million and in
other current and non-current financial liabilities of € 11 million in the
opening consolidated balance sheet as at January 1, 2011.
For the year ending December 31, 2011, the correction led to an
increase in accounts receivable as well as other current and non-current
financial liabilities of € 6 million.
c) Unrecorded liabilities and provisions
A significant number of vendor invoices and provisions relating to
commitments given to business partners were not recorded. Amongst
others, this included committed subsequent sales discounts as well as
termination penalties in connection with store closures.
Furthermore, in the statement of financial position, Reebok India has
not recognised onerous contracts relating to contracts with franchisees
which will incur losses over the remaining contractual term due to
minimum guarantee agreements in favour of the franchisees.
The impact on the consolidated financial statements as at
December 31, 2011 is as follows:
Impact on the consolidated financial statements (€ in millions)
Jan. 1, 2011 Dec. 31, 2011
Other current provisions 1 30
Current accrued liabilities – 1
Other current liabilities – 3
Other non-current provisions 32 –
Total equity (33) (34)
Net sales – (6)
Other operating expenses – 1
d) Goodwill
Deducting the overstated sales and income in the business plans
established in the previous years would have resulted in full impairment
of the goodwill allocated to the cash-generating unit Wholesale India.
Therefore, the goodwill of € 27 million is impaired in the opening
consolidated balance sheet as at January 1, 2011.
e) Deferred tax assets
Deferred tax assets of € 7 million and € 9 million for the years ending
December 31, 2010 and 2011, respectively, were recognised by Reebok
India. Deducting the overstated sales and income in the business plans
established in the previous years would have resulted in a business plan
which does not support the probability of the utilisation of these deferred
tax assets.
The required corrections led to a decrease of deferred tax assets
in the opening consolidated balance sheet as at January 1, 2011 of
€ 7 million. For the year ending December 31, 2011, the deferred tax
asset was reduced by € 9 million and tax expense for the year ending
December 31, 2011 was increased by € 4 million as the recognition
criteria for deferred tax assets were not fulfilled anymore.