Accounting Policies section of Financial Report Analysis

Instructions

1. A discussion of the accounting policy choices made by the company along with an assessment of why certain policies were chosen and the impact on the financial statements if another choice allowed within IFRS had been made.

Discussion of policies for which the company has choices

This should NOT be copy and paste OR paraphrase from the financial statements.

It should be a deeper discussion of the possible choices and the impact of the company’s choice on the relevance of the financial statements

Don’t discuss every policy

Pick the most interesting/important policies (3 or 4) and discuss them well

Outline

• Depreciation of Property, Plant and Equipment

Follow the three steps below for each paragraph

Policy Choice: Straight-line Method

Reason why:

Impact on statement if other policy used:

“Property, plant and equipment Property, plant and equipment are measured at amortized cost. This comprises all costs directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by Management less any accumulated depreciation and accumulated impairment losses. Depreciation is recognized for those assets, with the exception of land and construction in progress, over the estimated useful life utilizing the ‘straight-line method’ and taking into account any potential residual value, except where the ‘declining-balance method’ is more appropriate in light of the actual utilization pattern. Parts of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item are depreciated separately. Estimated useful lives are as follows: Expenditure for repairs and maintenance is expensed as incurred. Renewals and improvements are capitalized and depreciated separately, if the recognition criteria are met”. Direct quote from Adidas 2019 financial report

• Revenue Recognition

Policy Choice:

Reason why:

Impact on statement if other policy used:

“Revenue Revenue derived from the sale of goods is recognized when adidas has satisfied the respective performance obligation by transferring the promised goods to the customer. The goods are transferred at the point in time when the customer obtains control of the respective goods. The timing of the transfer of control depends on the individual terms of the sales agreement (terms of delivery). The amount of recognizable revenue is measured at the fair value of the consideration received or receivable, net of returns, early payment discounts and rebates. Under certain conditions and in accordance with contractual agreements, the company’s customers have the right to return products and to either exchange them for similar or other products or to return the products against the issuance of a credit note. Amounts for estimated returns related to revenues are accrued based on past experience of average return rates and average actual return periods by means of a refund liability. The return assets are measured at the former carrying amount of the inventories/products, less any handling costs and any potential impairment. Provided that the customers meet certain predefined conditions, adidas grants its customers different types of globally aligned performance-based rebates. Examples are rebates for customers’ sales growth for adidas products, and loyalty as well as sell-out support, e.g. through retail space/ franchise store management. As soon as it is assumed that the customer fulfills the requirements for being granted the rebate, this amount is accrued by means of an accrued liability for marketing and sales. Customer incentives which were not contractually agreed upon as well as promises that were implied by adidas’ customary business practice and did not bear the characteristics of a discount are accounted for as marketing and point-of-sale expenses. Customer incentives and options as well as any obligation for adidas to pay for the delivery of goods to the customer do not create separate performance obligations under IFRS 15 and are separated from revenue. In addition, adidas generates revenue from the licensing-out of the right to use the adidas and Reebok brands to third parties. The resulting sales-based royalty and commission income is recognized based on the contract terms on an accrual basis. Contracts with guaranteed minimum income result in contract assets and contract liabilities depending on the timing of yearly payments received from customers. The performance obligation related to these contract assets and liabilities is satisfied over the life of the contract, whereby payments are recorded as arranged in the contract with the customer.”

Direct quote from Adidas 2019 financial report

• Cost of Inventory

Policy Choice: Average Cost Method

Reason why:

Impact on statement if other policy used:

“Inventories Finished goods and merchandise are valued at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Costs are determined using a standard valuation method, the ‘average cost method’. Costs of finished goods include cost of raw materials, direct labor and the components of the manufacturing overheads which can be reasonably attributed to finished goods. The allocation of overheads is based on the planned average utilization. The net realizable value allowances are computed consistently throughout the company based on the age and expected future sales of the items on hand.” Direct quote from Adidas 2019 financial report

I ALSO POSTED A SAMPLE ESSAY FOR GUIDANCE ONLY LOOK AT THE ACCOUNTING POLICIES SECTION