Adidas 2003 Annual Report Download - page 133

Currency Translation
Assets and liabilities of the Group’s non-euro functional currency subsidiaries are translated into
euro at closing exchange rates at the balance sheet date. Revenues and expenses are translated
at the average exchange rates for the year. 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 income.
In the individual financial statements of Group companies, monetary items denominated in a
non-euro currency are generally measured at closing exchange rates at the balance sheet date.
The resulting currency gains and losses are recorded directly in income.
A summary of exchange rates to euro for major currencies in which the Group operates is as
follows:
EXCHANGE RATES € 1 equals
Average rate for the year Spot rate
ending December 31 at Dec. 31
2003 2002 2003 2002
USD 1.1313 0.9448 1.2630 1.0487
GBP 0.6920 0.6286 0.7048 0.6505
JPY 130.98 118.11 135.05 124.39
Derivative Financial Instruments
The Group 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 Group does not hold any derivative financial instruments for trading purposes.
Derivative financial instruments are initially recognized in the balance sheet at cost and sub-
sequently 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 Group designates certain derivatives as either a hedge of the fair value of a recognized asset or
liability (fair value hedge), 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 the effectiveness is not 100%, 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 transaction 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 Group’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 currency gains and losses in the derivative as well as all gains and losses arising on
the translation of the borrowing are recognized in equity.
The Group documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as the risk management objective and strategy for under-
taking various hedge transactions. This process includes linking all derivatives designated as
hedges to specific forecasted transactions. The Group also documents its assessment, both at the
hedge inception and on an ongoing basis, whether the derivatives that are used in hedging trans-
actions are highly effective in offsetting changes in cash flows of hedged items.
The fair values of forward contracts and currency options are determined on the basis of the
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 influ-
enced not only by the remaining term of the option but also by further determining factors, such as
the actual foreign exchange rate and the volatility of the underlying foreign currency base. The fair
values of interest rate options on the reporting date are assessed by the financial institutions
through which these options were arranged.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term bank deposits with maturities of three
months and less.
Receivables
Receivables are stated at nominal amounts less allowances for doubtful accounts. These
allowances are determined on the basis of individual risk assessment and past experience of
losses.
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