Adidas 2001 Annual Report Download - page 73

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68 Consolidated Accounts
Effective January 1, 1999 the European Monetary Union commenced
and the exchange rates between the participating currencies and the
euro were irrevocably fixed. Starting January 1, 2002 in all European
Monetary Union countries the euro officially replaced the local currency.
In the individual financial statements of Group companies, monetary
items denominated in a foreign currency are generally measured at
closing exchange rates at the balance sheet date. The resulting currency
gains and losses are recorded directly in income.
Derivative Financial Instruments
The Company uses derivative financial instruments, interest and currency
options, as well as forward contracts, to hedge its exposure to foreign
exchange and interest rate risks. In accordance with its treasury policy,
the Company does not hold any derivative financial instruments for
trading purposes.
Derivative financial instruments are initially recognized in the balance
sheet at cost and subsequently measured at their fair value. The method
of recognizing the resulting gain or loss is dependent on the nature of
the item being hedged. On the date a derivative contract is entered into,
the Company designates certain derivatives as either a hedge of the fair
value of a recognized asset or liability (fair value hedge) or a hedge of a
forecasted transaction (cash flow 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 100% effective, are recognized in equity.
If there is no 100% effectiveness, the deviating amounts are recognized
in net income. Amounts deferred in equity are transferred to the income
statement in the same periods during which the hedged forecasted trans-
action affects the income statement. For derivative instruments designated
as a fair value hedge, the gain or loss on the derivative and the offsetting
gain or loss on the hedged item are recognized immediately in net income.
Certain derivative transactions, while providing effective economic
hedges under the Company’s risk management policies, do not qualify
for hedge accounting under the specific rules of IAS 39. Changes in the
fair values of any derivative instruments that do not qualify for hedge
accounting under IAS 39 are recognized immediately in the income
statement.
Hedges of net investments in foreign entities are accounted for similarly
to cash flow hedges. If the hedging instrument is a derivative (e.g. a
forward contract) or for example a foreign currency borrowing, any gains
and losses in the derivative and all gains and losses arising on the trans-
lation of the borrowing are recognized in equity.
The Company documents at the inception of the transaction the relation-
ship between hedging instruments and hedged items, as well as the risk
management objective and strategy for undertaking various hedge trans-
actions. This process includes linking all derivatives designated as hedges
to specific forecasted transactions. The Company also documents its assess-
ment, both at the hedge inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items.