11 » 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 € 48 million and negative € 49 million is recorded for the years ending December 31, 2021 and 2020, respectively.

adidas determines whether goodwill impairment is necessary at least on 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 four-year period in total. The planning is based on long-term expectations of the company and in total for the groups of cash-generating units, reflects 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 improve to a level of between 12% and 14% for the Group, and for individual groups of cash-generating units to a level of between 11% and 17% by 2025, primarily driven by an improvement in 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 four-year period are extrapolated using steady growth rates of 1.7% (2020: 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 that are responsible for the distribution of the adidas brands The regional markets are Europe, Middle East and Africa (EMEA), North America, Greater China, Asia-Pacific (APAC), and Latin America. The number of groups of cash-generating units amount to a total of five at the end of 2021 (2020: nine).

Following the company’s internal management reporting by markets, the number of cash-generating units decreased to a total of six effective January 1, 2021. In the first quarter 2021, the number of cash-generating units further decreased to a total of five as the cash-generating unit North America Reebok is classified as disposal group and shown in ‘Assets/liabilities classified as held for sale.’

Due to the changes in segmental reporting, the carrying amounts of acquired goodwill have been reallocated to the new groups of cash-generating units in the first quarter 2021 as follows:

Due to the change in the composition of the company’s operating segments and associated cash-generating units respectively, in the first quarter 2021, adidas assessed whether goodwill impairment was required. The underlying value drivers and key assumptions for impairment testing purposes remained in principle unchanged compared to the impairment test performed for the consolidated financial statements as of December 31, 2020. In this context, there was no need for goodwill impairment.

Due to the classification of Reebok as discontinued operations and disposal group, the goodwill allocated to the group of cash generating units Europe, Middle East and Africa (EMEA), North America, Greater China and Asia-Pacific (APAC) was split and re-allocated between adidas and Reebok cash-generating units based on relative values (fair values), respectively.

In the first quarter 2021, the goodwill re-allocated to the Reebok disposal group was initially measured according to IAS 36 Impairment of Assets and was subsequently transferred to ‘Assets/liabilities classified as held for sale’ due to the concrete plans to divest Reebok.

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 16 percentage points or a reduction of planned free cash inflows by up to approximately 76% 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.