14 » Trademarks and other Intangible Assets

Trademarks and other intangible assets consist of the following:

At December 31, 2020, trademarks, mainly related to the acquisition of Reebok International Ltd. (USA) in 2006 and Runtastic GmbH in 2015, have indefinite useful lives. This is due to the expectation of permanent use of the acquired trademarks Reebok and Runtastic.

adidas tests at least on an annual basis whether trademarks with indefinite useful lives are impaired based on the value-in-use concept on the basis of the relevant cash-generating units. In light of the coronavirus pandemic, facts and circumstances indicated that trademarks might be impaired. Due to this ‘triggering event’, impairment tests at the respective level of cash-generating units were carried on March 31, June 30, September 30, and December 31, 2020, taking into consideration the expected consequences of the coronavirus pandemic. These 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. In order to reflect the increased uncertainty in assessing the expected consequences of the coronavirus pandemic, planned free cash inflows were subject to additional stress scenarios. In 2020, total impairment losses of € 41 million were recognized for the Reebok trademark within the impairment test of June 30, 2020, and therefore the carrying amount amounts to € 733 million at December 31, 2020.

The impairment test for the Reebok trademark is performed based on Reebok cash-generating units in the individual markets. There has been no change in the methodology compared to 2019. This requires an estimate of the recoverable amount of the Reebok groups of cash-generating units to which the Reebok brand as a corporate asset is allocated based on planned revenues of the respective Reebok markets. The recoverable amount of the respective Reebok markets was determined on the basis of value in use based on the present value of the expected future cash flows. The individual Reebok markets are defined as the regional markets which are responsible for the distribution of the Reebok brand. The regional Reebok markets are Europe, North America, Asia-Pacific, Russia/CIS, Latin America and Emerging Markets. The number of cash-generating Reebok business units amounted to a total of six at the end of 2020 (2019: six).

This calculation uses cash flow projections based on the financial planning covering a five-year period in total. The planning is based on long-term expectations of the company and reflects in total for the Reebok markets an average annual mid-single to-low-double-digit sales increase with varying forecast growth prospects for the different Reebok markets. 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 of 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 Reebok markets. Cash flows beyond the detailed planning period of the respective Reebok markets are extrapolated using a steady growth rate of 1.7% (2019: 1.7%). According to the company’s expectations, this growth rate does not exceed the long-term average growth rate of the business sector in the individual markets in which Reebok 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 each Reebok market. The discount rates used are after-tax rates and reflect the specific equity and country risk of the relevant Reebok markets. The respective discount rates applied to the cash flow projections of the respective cash-generating Reebok business units range from 7.2% to 11.8% (2019: 6.6% to 9.9%).

A change in the discount rate by approximately 0.1 percentage points or a reduction of planned free cash inflows by approximately 5% would result in an additional impairment requirement of € 15 million. However, future changes in expected cash flows and discount rates may lead to (additional) impairments and reversals of impairment losses of the Reebok trademark.

As part of the impairment tests, the Reebok trademark is allocated on a pro rata basis to the groups of cash-generating units. Thereof, the major shares relate to Europe (€ 307 million), Asia-Pacific (€ 180 million), North America Reebok (€ 160 million), Russia/CIS (€ 50 million) and Emerging Markets (€ 37 million). All other trademarks are part of the respective groups of cash-generating units.

Further information on total depreciation and amortization expenses, impairment losses and reversals of impairment losses is provided in these Notes. See Note 33