Preparing a structured report of 12 pages answering the questions asked in the attached document
ADIDAS: Analysis of 2020 Annual Report The aim of this assignment is for you to get a better understanding of how annual reports are structured and an understanding of the types and different sources of information and the depth of information that can be found in an annual report. By the end of this assignment, you should have learned what your company does (business model, revenue streams, particularities of the industry), how the company has developed over the last year(s) and where its risks / opportunities / strengths / weaknesses lie – in comparison to peer companies. Overall, you should have a fairly good feeling about whether you would want to invest in this company or not. In working on your assignment, please make sure to: • read your company’s annual report 2020, • consult relevant IFRS guidance and IFRS literature (or other legal texts & commentaries) on your assignment topic, if necessary. • In analysing your assigned topic – if applicable / as far as possible – provide context information that can be deduced from different sources in the annual report (e.g., when analysing the cash flow statement, locate information on the underlying facts/circumstances in other areas of the annual report). • Provide your analysis according to academic standards (structure, form, etc.), and carefully reference your sources (e.g., paragraphs of the relevant IFRS, pages in the annual report, and all other literature and sources that you considered; do not use Wikipedia or other webpages as a source, if you find relevant literature online you can of course site the literature itself). • Your paper should be between 10 and 12 double-spaced pages. Questions: 1) Analyse your company’s streams of revenue and profit. Identify at least one question that is relevant when determining revenue in accordance with IFRS 15 (describe this accounting question at hand and how the company addressed this accounting question, e.g., multicomponent, definition of ordinary activity, principal-agent etc.). Which are the most relevant categories of expenses and why? How did these expenses develop compared to the previous year? Explain the background and evaluate this development. 2) Identify the main performance measures (GAAP as well as alternative performance measures, APM) used by your company. Explain these measures in the context of your company’s business model. How did these performance measures develop compared to the previous year? Discuss advantages and disadvantages of APM compared to “IFRS performance measures”. Compare your company’s performance measures and with two other comparable companies (explain your choice of peer companies). 3) How did operating, investing, financing cash flows develop compared to the previous year? Identify the main drivers of the development for each of these cash flows. How did free cash flow develop? Interpret and discuss your findings. Compare your results to two other comparable companies (the same as for (2)) 4) Analyse your company’s goodwill. If possible, find out how the goodwill was acquired and which CGUs it is attributed to. Describe the “asset” that the goodwill represents. Analyse the recoverability of the goodwill as of the balance sheet date. Explain your approach in analysing the recoverability of the goodwill. 2 ANNUAL REPORT 0 A N N U A L R E P O RT 2 0 2 0 2 THROUGH SPORT, POWER CHANGE LIVES WE HAVE OUR MISSION TO BE THE BEST SPORTS BRAND IN THE WORLD THE TO OUR PURPOSE OUR ATTITUDE IMPOSSIBLE IS NOTHING 3 ANNUAL REPORT 2020 ADIDAS ANNUAL REPORT 2020 TO OUR SHAREHOLDERS Letter from the CEO 008 Executive Board 013 Supervisory Board 017 Supervisory Board Report 021 Declaration on Corporate Governance 031 Compensation Report 040 Our Share 063 GROUP MANAGEMENT REPORT OUR COMPANY Strategy 069 Global Brands 074 Global Sales 079 Global Operations 084 Our People 089 Culture 094 Sustainability 101 Our Approach 101 Our Progress 104 Environmental Impacts 104 Social Impacts 112 Working Conditions in Our Supply Chain 114 Non-Financial Statement 124 GROUP MANAGEMENT REPORT FINANCIAL REVIEW Internal Management System 126 Business Performance 130 Income Statement 132 Statement of Financial Position and Statement of Cash Flows 140 Treasury 146 Financial Statements and Management Report of adidas AG 151 Disclosures Pursuant to § 315a Section 1 and § 289a Section 1 of the German Commercial Code and Explanatory Report 154 Business Performance by Segment 161 Outlook 168 Risk and Opportunity Report 172 Illustration of Risks 181 Illustration of Opportunities 188 Management Assessment of Performance, Risks and Opportunities, and Outlook 190 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position 194 Consolidated Income Statement 196 Consolidated Statement of Comprehensive Income 197 Consolidated Statement of Changes in Equity 198 Consolidated Statement of Cash Flows 199 Notes 201 Notes to the Consolidated Statement of Financial Position 221 Notes to the Consolidated Income Statement 274 Additional Information 281 Shareholdings 292 Responsibility Statement 295 Reproduction of the Independent Auditor’s Report 296 Limited Assurance Report of the Independent Auditor Regarding the Combined Non-financial Statement 305 ADDITIONAL INFORMATION Ten-Year Overview 309 Glossary 311 Declaration of Support 314 Financial Calendar 318 4 FINANCIAL HIGHLIGHTS 2020 (IFRS) Financial Highlights 2020 (IFRS) 2020 2019 Change Operating Highlights (€ in millions) Net sales 19,844 23,640 (16%) Gross profit 9,855 12,293 (20%) Other operating expenses 9,229 9,843 (6%) EBITDA 2,079 3,845 (46%) Operating profit 751 2,660 (72%) Net income from continuing operations 429 1,918 (78%) Net income attributable to shareholders1 432 1,976 (78%) Key Ratios Gross margin 49.7% 52.0% (2.3pp) Other operating expenses in % of net sales 46.5% 41.6% 4.9pp Operating margin 3.8% 11.3% (7.5pp) Effective tax rate 25.4% 25.0% 0.3pp Net income attributable to shareholders in % of net sales1 2.2% 8.4% (6.2pp) Average operating working capital in % of net sales 23.5% 18.1% 5.4pp Equity ratio2 30.7% 32.9% (2.2pp) Adjusted net borrowings/EBITDA 1.5 1.1 n.a. Financial leverage2 48.8% 61.4% (12.6pp) Return on equity1, 2 6.7% 29.1% (22.4pp) Balance Sheet and Cash Flow Data (€ in millions) Total assets 21,053 20,680 2% Inventories 4,397 4,085 8% Receivables and other current assets 3,763 4,338 (13%) Operating working capital 3,960 4,007 (1%) Shareholders’ equity 6,454 6,796 (5%) Capital expenditure 442 711 (38%) Net cash generated from operating activities1 1,486 2,819 (47%) Per Share of Common Stock (€) Basic earnings 2.15 9.70 (78%) Diluted earnings 2.15 9.70 (78%) Net cash generated from operating activities1 7.62 14.26 (47%) Dividend3 3.00 – n.a. Share price at year-end 297.90 289.80 3% Other (at year-end) Number of employees4 62,285 65,194 (4%) Number of shares outstanding 195,066,060 195,969,387 0% Average number of shares 195,155,924 197,606,107 (1%) 1 Includes continuing and discontinued operations. 2 Based on shareholders’ equity. 3 Subject to Annual General Meeting approval. 4 2019 figure restated due to inclusion of temporary contracts of up to six months (2019 headcounts excluding temporary contracts of up to six months: 59,333). 1 2 3 4 5 TO OUR SHARE HOLDER S GROUP MANAGEMEN T RE POR T - OUR C OMPA NY GROUP MANAGEMEN T RE POR T - FINANC IA L REV IEW CONSOLIDATE D F INANC IAL STA TEMEN TS ADDITIONAL IN FOR MATION 5 ANNUAL REPORT 2020 ABOUT THIS REPORT With the Annual Report 2020, adidas communicates financial and non-financial information in a combined publication. The report provides a comprehensive overview of the financial, environmental and social performance of adidas in the 2020 financial year. We publish our Annual Report exclusively in a digital format. It is available as a PDF and online version. The Online Report can be found at ► REPORT.ADIDAS.COM To enhance readability, registered trademarks as well as references to rounding differences, which may arise in percentages and totals, are omitted in this publication. In addition, we have used the masculine form throughout, although all such references are not intended to be gender-specific. The adidas Annual Report 2020 is available in English and German. The following symbols indicate important information: ► There is more information online or on a different page within the report. ⌐ ¬ These are parts of the non-financial statement that are covered by a separate limited assurance engagement. Term underlined in red: There is a detailed definition of this term in the glossary. Data and financial reporting standards The reporting period is the financial year from January 1 to December 31, 2020. To ensure this report is as current as possible, it includes all relevant information available up to the date of the Responsibility Statement, February 22, 2021. The consolidated financial statements and the Group Management Report are prepared in accordance with the principles of the International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), and additional requirements pursuant to the German Commercial Code (Handelsgesetzbuch – HGB). Internal Control over