ADIDAS GROUP Annual Report 2006 Notes

12.2 ADIDAS GROUP Annual Report 2006 Notes

5. Acquisition/Disposal of Subsidiaries

The adidas Group assumed full ownership of its subsidiary in India, adidas India Marketing Private Ltd., New Delhi (India), by purchasing the remaining 8.6% of shares effective January 17, 2006, for an amount of €2 million.

Chapter 35 / Business Combinations (IFRS 3)

Effective January 31, 2006, the adidas Group assumed control of Reebok International Ltd. (USA), with all its direct and indirect shareholders. The purchase price for 100% of the shares of Reebok International Ltd. (USA) was $3.6 billion (€3.00 billion), fully paid in cash.

The acquisition had the following effect on the Group’s assets and liabilities:

Reebok’s Net Assets at the Acquisition Date € in millions

Recognised

Preacquisition

Fair value

value on

carrying amounts

adjustments

acquisition

Cash and cash equivalents

539 -- 539 Accounts receivable

Other current assets

Property, plant, and equipment, net

Trademarks and other intangible assets, net

Long-term financial assets

Deferred tax assets

Other noncurrent assets

16 --

Borrowings (506) -- (506) Accounts payable

Income taxes

Accrued liabilities and provisions

Other current liabilities

Pensions and similar obligations

Deferred tax liabilities

Other noncurrent liabilities

Minority interests

Net assets

Goodwill arising on acquisition

Purchase price settled in cash

Cash and cash equivalents acquired

Cash outflow on acquisition 2,432

Following valuation methods for the acquired assets have been applied. • Inventories: The pro rata basis valuation is applied for estimating the fair value of acquired

inventories. The realized margins were added to the book values of the acquired inventories. Subsequently, cost to complete for selling, advertising, and general administration and a reasonable pro rata allowance were deducted.

• Property, plant, and equipment: The comparison method was used for acquired land by considering the prices paid for comparable properties. The direct capitalization method was applied for the valuation of all acquired buildings. The annual rents which can be realized will be adjusted by deducting risk factors and applicable operating costs and are finally discounted. The acquired machinery and equipment is valued with the depreciated replacement cost method. The replacement costs are determined by applying an index to the asset’s historical cost. The replacement costs are then adjusted for the loss in value caused by depreciation.

• Trademarks and other intangible assets: The relief-from-royalty method is applied for trademarks and technologies. The fair value is determined by discounting the royalty savings after tax and adding a tax amortization benefit, resulting from the amortization of the acquired asset. For the valuation of licensing agreements, customer relationships, and order backlogs, the multiperiod-excess-earnings method was used. The respective future excess cash flows are identified and adjusted in order to eliminate all elements not associated with these assets. Future cash flows are measured on the basis of the expected sales by deducting variable and sales-related imputed costs for the use of contributory assets. Subsequently, the outcome is discounted using an appropriate discount rate and adding a tax amortization benefit.

• Long-term financial assets: The discounted cash flow method was used for the valuation of a participation. Future free cash flows were discounted back to the valuation a date using an appropriate discount rate.

The excess of the acquisition cost paid over the net of the amounts of the fair values assigned to all assets acquired and liabilities assumed, taking into consideration the respective deferred taxes, is referred to as goodwill. Any acquired asset that does not meet the identification and recognition criteria for an asset is included in the amount recognized as goodwill.

414 Wiley IFRS: Practical Implementation Guide and Workbook

Based on the expected cost of sales and operating expenses synergy potential, the goodwill arising on this acquisition was allocated to the cash-generating units adidas and Reebok in an amount of €699 million and €466 million, respectively, and is converted in functional currencies as appropriate. If this acquisition had occurred on January 1, 2006, total group net sales would have been €10.2 billion and net income would have been €448 million for the year ending December 31, 2006.

The acquired Reebok subsidiaries contributed €92 million to the group’s operating profit for the period from February to December 2006. The contribution to the net income cannot be disclosed due to the advanced integration of the financing and tax activities. Effective September 1, 2006, the adidas group assumed full ownership of its brand adidas subsidiary in Korea, adidas Korea Ltd., Seoul (Korea), by purchasing the remaining 49% of shares for an amount of €30 million. The additional net income for the group for the period from September to December 2006 was €1 million.

Effective September 1, 2006, the adidas group sold its 92% of shares in P.T. Trigaris Sportindo (adidas Indonesia) in connection with a restructuring of the Indonesian business.

12. Goodwill

Goodwill primarily relates to the Group’s acquisitions of the Reebok business as well as of subsidiaries in the United States, Australia/New Zealand, Netherlands/Belgium, and Italy.

Goodwill € in millions

Dec. 31, 2006

Dec. 31, 2005

Goodwill, gross

Less: impairment

Goodwill, net

The increase in goodwill relates to the acquisition of the Reebok business. The main part of this goodwill is denominated in US dollars. The currency translation effect was negative €88 million.

From January 1, 2005, goodwill is tested annually for impairment. There was no impairment expense for the years ending December 31, 2006, and 2005. The Group determines whether goodwill impairment is necessary at least on an annual basis. This requires an estimation of the fair value less costs to sell of the cash-generating units to which the goodwill is allocated. Estimating the fair value less costs to sell requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

Future changes in expected cash flows and discount rates may lead to impairments of the accounted goodwill in the future. For details see Statement of Movements of Tangible and Intangible Assets and Financial Assets [Attachment 1 to these Notes].