13 » Goodwill

Goodwill primarily relates to the acquisitions of the Reebok and Runtastic businesses as well as acquisitions of subsidiaries, primarily in the USA, Australia, New Zealand, the Netherlands, Denmark and Italy.

The majority of goodwill, which primarily relates to the acquisition of the Reebok business in 2006, is denominated in US dollars. A currency translation effect of negative € 49 million and positive € 12 million were recorded for the years ending December 31, 2020 and 2019, respectively.

adidas determines whether goodwill impairment is necessary on at least an annual basis. The impairment test for goodwill is performed based on groups of cash-generating units which represent the lowest level within the company at which goodwill is monitored for internal management purposes. This requires an estimation of the recoverable amount of the groups of cash-generating units to which the goodwill is allocated. The recoverable amount of a group of cash-generating units is determined based on its value in use. Estimating the value in use requires adidas to make an estimate of the expected future cash flows from the groups of cash-generating units and also to choose a suitable discount rate to calculate the present value of those cash flows.

This calculation uses cash-flow projections based on the financial planning in line with our new strategy ‘Own the Game’covering a five-year period in total. The planning is based on long-term expectations of the company and reflects in total for the groups of cash-generating units an average annual mid-single-to low-double-digit sales increase with varying forecast growth prospects for the different groups of cash-generating units. Furthermore, adidas expects the operating margin to expand, primarily driven by an improvement in the gross margin, as well as lower operating expenses as a percentage of sales. The planning for capital expenditure and working capital is primarily based on past experience. The planning for future tax payments is based on current statutory corporate tax rates of the individual groups of cash-generating units. Cash flows beyond this five-year period are extrapolated using steady growth rates of 1.7% (2019: 1.7%). According to the company’s expectations, these growth rates do not exceed the long-term average growth rate of the business sector in which the respective group of cash-generating units operates.

Discount rates are based on a weighted average cost of capital calculation considering a five-year average market-weighted debt/equity structure and financing costs referencing major competitors for the respective group of cash-generating units. The discount rates used are after-tax rates and reflect the specific equity and country risk of the respective group of cash-generating units.

The groups of cash-generating units are defined as the regional markets which are responsible for the joint distribution of the adidas and Reebok brands as well as the other operating segments adidas Golf and Runtastic. The regional markets are Europe, adidas North America, Reebok North America, Asia-Pacific, Russia/CIS, Latin America, and Emerging Markets. The number of groups of cash-generating units amounted to a total of nine at the end of 2020 and 2019, respectively.

In light of the coronavirus pandemic, there were indications of possible impairment on goodwill during the year ending December 31, 2020. In response to this ‘triggering event’, and taking into account the potential future impact of the coronavirus pandemic, impairment tests were carried out at the level of the cash-generating units on March 31, June 30, September 30, and December 31, 2020. These tests were based on updated financial planning and estimates. Given the unforeseeable future consequences of the coronavirus pandemic, these estimates and judgments are subject to an increased level of uncertainty. The goodwill impairment tests revealed no need for goodwill impairment for the years ending December 31, 2020 and 2019.

The carrying amounts of acquired goodwill allocated to the respective groups of cash-generating units and the respective discount rates applied to the cash flow projections are as follows:

A change in the discount rate by up to approximately 5.2 percentage points or a reduction of planned free cash inflows by up to approximately 50% would not result in any impairment requirement.

Future changes in expected cash flows and discount rates may lead to impairments of the reported goodwill in the future.

The reconciliation of goodwill is as follows: