Restated Consolidated Financial Statements as at December 31, 2011 (including the adjusted adidas AG Opening Consolidated Statement of Financial Position (IFRS) as at January 1, 2011) This excerpt from the adidas Group 2012 Annual Report summarises the figures of the consolidated financial statements as at December 31, 2011 corrected in accordance with IAS 8.41 et seqq. It is also published on our corporate website at www.adidas-group.com/annualreports.
Adjustments according to IAS 8 At Reebok India Company (hereinafter Reebok India ), numerous financial irregularities were identified in March 2012. As a result, the services of the then Managing Director (MD) and Chief Operating Officer were terminated, and a new MD was instated. Immediately on becoming aware of the aforesaid financial irregularities, Reebok India carried out an externally assisted internal investigation and filed a criminal complaint with the police. This resulted in an investigation which is being carried out by the Special Economic Wing of the Gurgaon Police. Additionally, various other regulatory agencies are conducting specific investigations into various aspects of the case. Key findings from the internal investigation include inappropriate recognition of sales due to sales cut-off irregularities, a failure to book sales returns and a failure to correctly post credit notes to accounts receivable. This also resulted in a significant overstatement of the accounts receivable balances as well as materially incorrect accounting for inventories and provisions. During the investigation process, the new management also discovered four secret warehouses not disclosed in the official accounting records. The investigations also revealed that Reebok India had adopted inappropriate procedures to artificially reduce the accounts receivable balance. The findings of the investigations suggest that the practice of inflating sales and profits had been going on for several years. The discovery of these activities resulted in the identification of material errors in the prior period financial statements of Reebok India. As a consequence of these errors, material misstatements are also included in the consolidated financial statements of adidas AG for the 2011 financial year and previous financial years, which have to be corrected in accordance with IAS 8.41 et seqq. These corrections are reflected in the consolidated financial statements as at December 31, 2012, in which the comparative figures for the year 2011 are restated and the opening balance sheet for 2011 is corrected to the extent that earlier periods are affected. The following tables provide an overview of the impact of all corrections: Restated Consolidated Financial Statements as at December 31, 2011 / Page 2
Adjustment of the adidas AG Opening Consolidated Statement of Financial Position (IFRS) as at January 1, 2011 ( in millions) Dec. 31, 2010 (as reported) Adjustments IAS 8 Opening balance Jan. 1, 2011 Cash and cash equivalents 1,156 (6) 1,150 Short-term financial assets 233 233 Accounts receivable 1,667 (47) 1,620 Other current financial assets 197 (19) 178 Inventories 2,119 16 2,135 Income tax receivables 71 71 Other current assets 390 390 Assets classified as held for sale 47 47 Total current assets 5,880 (56) 5,824 Property, plant and equipment 855 855 Goodwill 1,539 (27) 1,512 Trademarks 1,447 1,447 Other intangible assets 142 142 Long-term financial assets 93 93 Other non-current financial assets 54 54 Deferred tax assets 508 (7) 501 Other non-current assets 100 100 Total non-current assets 4,738 (34) 4,704 Total assets 10,618 (90) 10,528 Short-term borrowings 273 11 284 Accounts payable 1,694 3 1,697 Other current financial liabilities 123 9 132 Income taxes 265 265 Other current provisions 470 15 485 Current accrued liabilities 842 842 Other current liabilities 241 0 241 Liabilities classified as held for sale 0 0 Total current liabilities 3,908 38 3,946 Long-term borrowings 1,337 1,337 Other non-current financial liabilities 15 2 17 Pensions and similar obligations 180 180 Deferred tax liabilities 451 451 Other non-current provisions 29 32 61 Non-current accrued liabilities 39 39 Other non-current liabilities 36 36 Total non-current liabilities 2,087 34 2,121 Share capital 209 209 Reserves 563 0 563 Retained earnings 3,844 (153) 3,691 Shareholders equity 4,616 (153) 4,463 Non-controlling interests 7 (9) (2) Total equity 4,623 (162) 4,461 Total liabilities and equity 10,618 (90) 10,528 Rounding differences may arise in percentages and totals. Restated Consolidated Financial Statements as at December 31, 2011 / Page 3
Adjustment of the adidas AG Consolidated Income Statement (IFRS) for the year ending December 31, 2011 ( in millions) Year ending Dec. 31, 2011 (as reported) Adjustments IAS 8 Year ending Dec. 31, 2011 (restated) Net sales 13,344 (22) 13,322 Cost of sales 7,000 (7) 6,993 Gross profit 6,344 (15) 6,329 (% of net sales) 47.5% 47.5% Royalty and commission income 93 93 Other operating income 98 98 Other operating expenses 5,524 43 5,567 (% of net sales) 41.4% 41.8% Operating profit 1,011 (58) 953 (% of net sales) 7.6% 7.2% Financial income 31 31 Financial expenses 115 0 115 Income before taxes 927 (58) 869 (% of net sales) 6.9% 6.5% Income taxes 257 4 261 (% of income before taxes) 27.7% 30.0% Net income 670 (62) 608 (% of net sales) 5.0% 4.6% Net income attributable to shareholders 671 (58) 613 (% of net sales) 5.0% 4.6% Net income attributable to non-controlling interests (1) (4) (5) Basic earnings per share (in ) 3.20 (0.27) 2.93 Diluted earnings per share (in ) 3.20 (0.27) 2.93 Rounding differences may arise in percentages and totals. Restated Consolidated Financial Statements as at December 31, 2011 / Page 4
Adjustment of the adidas AG Consolidated Statement of Financial Position (IFRS) as at December 31, 2011 ( in millions) Dec. 31, 2011 (as reported) Adjustments IAS 8 Dec. 31, 2011 (restated) Cash and cash equivalents 906 906 Short-term financial assets 465 465 Accounts receivable 1,707 (112) 1,595 Other current financial assets 304 (15) 289 Inventories 2,482 20 2,502 Income tax receivables 77 77 Other current assets 469 (0) 469 Assets classified as held for sale 25 25 Total current assets 6,435 (107) 6,328 Property, plant and equipment 963 963 Goodwill 1,580 (27) 1,553 Trademarks 1,503 1,503 Other intangible assets 160 160 Long-term financial assets 97 97 Other non-current financial assets 42 42 Deferred tax assets 493 (9) 484 Other non-current assets 107 107 Total non-current assets 4,945 (36) 4,909 Total assets 11,380 (143) 11,237 Short-term borrowings 289 289 Accounts payable 1,886 1 1,887 Other current financial liabilities 56 10 66 Income taxes 252 252 Other current provisions 507 42 549 Current accrued liabilities 990 2 992 Other current liabilities 301 2 303 Liabilities classified as held for sale 0 0 Total current liabilities 4,281 57 4,338 Long-term borrowings 991 991 Other non-current financial liabilities 6 3 9 Pensions and similar obligations 205 205 Deferred tax liabilities 430 430 Other non-current provisions 55 55 Non-current accrued liabilities 45 45 Other non-current liabilities 36 36 Total non-current liabilities 1,768 3 1,771 Share capital 209 209 Reserves 770 21 791 Retained earnings 4,348 (211) 4,137 Shareholders' equity 5,327 (190) 5,137 Non-controlling interests 4 (13) (9) Total equity 5,331 (203) 5,128 Total liabilities and equity 11,380 (143) 11,237 Rounding differences may arise in percentages and totals. Restated Consolidated Financial Statements as at December 31, 2011 / Page 5
Adjustment of the adidas AG Consolidated Statement of Cash Flows (IFRS) for the year ending December 31, 2011 ( in millions) Year ending Dec.31, 2011 (as reported) Adjustments IAS 8 Year ending Dec.31, 2011 (restated) Operating activities: Income before taxes 927 (58) 869 Adjustments for: Depreciation, amortisation and impairment losses 253 253 Reversals of impairment losses (2) (2) Unrealised foreign exchange gains, net (31) (31) Interest income (30) (30) Interest expense 108 0 108 Losses on sale of property, plant and equipment, net 12 12 Other non-cash income (0) (0) Operating profit before working capital changes 1,237 (58) 1,179 Increase in receivables and other assets (116) 75 (41) Increase in inventories (349) (4) (353) Increase in accounts payable and other liabilities 447 2 449 Cash generated from operations before interest and taxes 1,219 15 1,234 Interest paid (113) (113) Income taxes paid (314) (314) Net cash generated from operating activities 792 15 807 Investing activities: Purchase of trademarks and other intangible assets (58) (58) Proceeds from sale of trademarks and other intangible assets 0 0 Purchase of property, plant and equipment (318) (318) Proceeds from sale of property, plant and equipment 2 2 Acquisition of subsidiaries and other business units net of cash acquired (20) (20) Purchase of short-term financial assets (192) (192) Purchase of investments and other long-term assets (10) (10) Interest received 30 30 Net cash used in investing activities (566) 0 (566) Financing activities: Repayments of long-term borrowings (48) (9) (57) Dividend paid to shareholders of adidas AG (167) (167) Dividend paid to non-controlling interest shareholders (3) (3) Cash repayments of short-term borrowings (273) (273) Net cash used in financing activities (491) (9) (500) Effect of exchange rates on cash 15 0 15 Net decrease of cash and cash equivalents (250) 6 (244) Cash and cash equivalents at beginning of the year 1,156 (6) 1,150 Cash and cash equivalents at end of the year 906 0 906 Rounding differences may arise in percentages and totals. Restated Consolidated Financial Statements as at December 31, 2011 / Page 6
Moreover, as a result of these adjustments relating to the financial year 2011, the consolidated statement of changes in equity, the consolidated statement of comprehensive income and the comparative amounts for 2011 in the Notes to the consolidated financial statements also had to be restated accordingly. In addition, a correction of the consolidated statement of changes in equity at the time of the opening balance as at January 1, 2011 was necessary. In particular, the following errors had to be adjusted: a) Manipulation of sales and accounts receivable Through different practices, Reebok India overstated net sales and accounts receivable, whereas inventories were understated as at December 31, 2011 and in previous financial years. This was achieved through the following practices: / Issuing invoices to customers, even though inventories were not delivered at the time of invoicing, but stored in secret warehouses of Reebok India or in warehouses of a shipping company. / Entering into sales agreements with distributors which did not transfer risk and rewards. / Not recording sales returns received from customers at the time of return and storing the returned inventory in secret warehouses. / Issuing unjustified invoices, for example, for subsequent price increases, or not recording valid credit notes to customers. / The incorrect or omitted recording of contractual obligations towards customers. b) Fictitious cash collections Reebok India recorded fictitious cash collections of outstanding accounts receivable. This scheme involved agreements with business partners, whereby Reebok India transferred money to business partners in January 2011 while at the same time receiving cheques back-dated to December 2010 from those same partners. In addition, in 2011, Reebok India initiated a programme to roll out further franchise stores, whereby the investees had to make a prepayment which was recorded as collection of various outstanding customer accounts instead of recording a financial liability against the investor. The required corrections led to a reduction of cash and cash equivalents of 5 million and an increase in accounts receivable of 27 million as well as an increase in short-term borrowings of 11 million and in other current and non-current financial liabilities of 11 million in the opening consolidated balance sheet as at January 1, 2011. For the year ending December 31, 2011, the correction led to an increase in accounts receivable as well as other current and non-current financial liabilities of 6 million. c) Unrecorded liabilities and provisions A significant number of vendor invoices and provisions relating to commitments given to business partners were not recorded. Amongst others, this included committed subsequent sales discounts as well as termination penalties in connection with store closures. As a result of these practices, the allowances for inventories and the provision for sales returns were also determined incorrectly. The impact on the opening consolidated statement of financial position as at January 1, 2011 and the consolidated statement of financial position as at December 31, 2011 is as follows: Impact on the consolidated financial statements ( in millions) Jan. 1, 2011 Dec. 31, 2011 Furthermore, in the statement of financial position, Reebok India has not recognised onerous contracts relating to contracts with franchisees which will incur losses over the remaining contractual term due to minimum guarantee agreements in favour of the franchisees. The impact on the consolidated financial statements as at December 31, 2011 is as follows: Impact on the consolidated financial statements ( in millions) Jan. 1, 2011 Dec. 31, 2011 Accounts receivable (94) (132) Inventories 16 20 Other current financial liabilities 6 Other current provisions 14 10 Other current liabilities (1) Total equity (92) (127) Net sales (37) Cost of sales (6) Other operating expenses 20 Other current provisions 1 30 Current accrued liabilities 1 Other current liabilities 3 Other non-current provisions 32 Total equity (33) (34) Net sales (6) Other operating expenses 1 Restated Consolidated Financial Statements as at December 31, 2011 / Page 7
d) Goodwill Deducting the overstated sales and income in the business plans established in the previous years would have resulted in full impairment of the goodwill allocated to the cash-generating unit Wholesale India. Therefore, the goodwill of 27 million is impaired in the opening consolidated balance sheet as at January 1, 2011. f) Other adjustments Some balance sheet items as at December 31, 2011 and for previous years could not be substantiated and therefore were written off. Balance sheet items written off ( in millions) Jan. 1, 2011 Dec. 31, 2011 e) Deferred tax assets Deferred tax assets of 7 million and 9 million for the years ending December 31, 2010 and 2011, respectively, were recognised by Reebok India. Deducting the overstated sales and income in the business plans established in the previous years would have resulted in a business plan which does not support the probability of the utilisation of these deferred tax assets. Accounts payable 3 1 Other current provisions 1 2 Other current liabilities 1 Total equity (4) (4) Net sales (1) Cost of sales (1) Other operating expenses 2 The required corrections led to a decrease of deferred tax assets in the opening consolidated balance sheet as at January 1, 2011 of 7 million. For the year ending December 31, 2011, the deferred tax asset was reduced by 9 million and tax expense for the year ending December 31, 2011 was increased by 4 million as the recognition criteria for deferred tax assets were not fulfilled anymore. In addition, the following consolidated balance sheet reclassifications were recorded: Consolidated statement of financial position reclassifications ( in millions) Jan. 1, 2011 Dec. 31, 2011 Accounts receivable 19 13 Other current financial assets (19) (13) Other current assets (1) Accounts payable 1 g) Non-controlling interest 6.85% of the shares of Reebok India are held by a minority shareholder. As a result of the adjustments described in this Note, the non-controlling interest also had to be adjusted accordingly. Earnings per share As a result of the above-mentioned adjustments, basic and diluted earnings per share for the 2011 financial year declined from 3.20 to 2.93. Restated Consolidated Financial Statements as at December 31, 2011 / Page 8