Adidas 2005 Annual Report Download - page 137

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Consolidated Financial Statements (IFRS)
All subsidiaries have been included in the consolidated fi nancial statements in 2005. In 2004,
three subsidiaries were not included, since they had little or no active business and were in-
signifi cant to the Group’s fi nancial position, results of operations and cash fl ows. The shares in
these companies were accounted at cost.
The fi rst-time consolidation of the newly founded companies did not have any material impact
in 2005.
A schedule of the shareholdings of adidas-Salomon AG is shown in Attachment I to these
notes. A collective listing of these shareholdings in accordance with § 313 section 4 of the Ger-
man Commercial Code will be fi led with the Commercial Register at the Local Court in Fürth
(Bavaria).
Within the scope of the fi rst-time consolidation, all acquired assets and liabilities are entered
in the balance sheet at fair value. A debit difference between the book value and the pro-
portionate fair value of the assets and liabilities is shown as goodwill. A credit difference is
recorded in the income statement.
All signifi cant intercompany transactions and balances, and any unrealized gains and losses
arising from intercompany transactions are eliminated in preparing the consolidated fi nancial
statements.
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 a rate that approximates the exchange rates at the dates of the transactions, in
general the average exchange rates for the year. All cumulative differences from the transla-
tion 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 fi nancial 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:
Derivative Financial Instruments
The Group uses derivative fi nancial instruments, such as interest and currency options, for-
ward 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 hold any derivative fi nancial instruments for trading purposes.
Derivative fi nancial 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 a forecasted transaction
(cash fl ow hedge), a hedge of the fair value of a recognized 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 fl ow hedges,
and that are 100% effective, as defi ned in IAS 39, are recognized in equity. Insofar as the effec-
tiveness is not 100%, the changes in fair value are recognized in net income. Cumulated 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 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 specifi c 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 fl ow hedges.
If 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 recognized in equity.
The Group documents the relationship between hedging instruments and hedged items at the
inception of the transaction, 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 specifi c forecasted transactions. The Group also documents its assessment whether
the derivatives that are used in hedging transactions are highly effective in offsetting changes
in cash fl ows 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 us-
ing generally accepted models to calculate option prices. The fair market value of an option is
infl uenced 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 generally
accepted models, such as the “Markov functional model”.
Notes
Exchange Rates € 1 equals
Average rate for the year Spot rate
ending December 31 at Dec. 31
2005 2004 2005 2004
USD 1.2453 1.2434 1.1797 1.3621
GBP 0.6839 0.6785 0.6853 0.7051
JPY 136.91 134.41 138.90 139.65