How Reebok fraud cost Adidas Rs 170 crore

German sportswear maker Adidas has disclosed to the Serious Fraud Investigation Office (SFIO) that it lost around Rs 170 crore (Rs 1.7 billion) because of "goodwill impairment" after it bought Reebok.

The company has said it lost Rs 870 crore (Rs 8.7 billion) due to alleged misappropriation by former employees Subhinder Singh Prem and Vishnu Bhagat.

"We had asked the company for a break-up of the alleged amount of fraud. They have told us some losses were incurred on account of goodwill impairment, along with warehouse losses as some products were produced but not supplied," said an SFIO official.

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Goodwill impairment does not figure in Indian accounting norms. Adidas has stated in its annual accounts the "goodwill" related primarily to the group's acquisition of Reebok and some other brands.

The group, it says in its annual report, determines whether goodwill impairment is necessary to be accounted for, at least on an annual basis.

That, it says, requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated.

Estimating the value in use requires the group to make an estimate of the expected future cash flows from the unit and also to calculate a suitable discount rate to calculate the current value of the cash flows.

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In response to an email sent by Business Standard regarding its latest disclosure, an Adidas Group spokesperson said, "We will not comment on rumours or speculation. As announced earlier, we will provide an update about the financial impact of the commercial irregularities at Reebok India Company during one of our next earnings calls this year."

Prem and Bhagat's counsel Subhash Gulati had denied charges of fraud and misappropriation by Reebok India in its complaint to the Gurgaon police in May.

"All the regular physical stock audits, along with daily cyclical counts, confirmed the accuracy levels and can be verified from the warehouse records," he had said.

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Gulati had said all the stocks had been entered in the receipt register on arrival at the warehouses. Date-wise and customer-wise details of such pending returns were always available with the warehouse team, he had said.

"The keys of the warehouses and the possession of the stock were always with the Reebok warehouse team of 300 people under the supervision of the general manager, operations. The general manager was reporting regularly on the status of these returns in the docking warehouse," he had said.

Gulati had added that all the pending return statements concerning the goods in question as of December 31, 2011, which stood at Rs 62.99 crore (Rs 629 million), were processed and duly reconciled between January and March 2012.

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He had said the complaint filed with the Gurgaon police spoke of the status of goods till December 31, 2011. There was no mention of the status between January and March, when Prem and Bhagat were still employed with Adidas, he had said.

Reebok India's finance director, Shahin Padath, had said fictitious sales over several financial years had resulted in a loss of Rs 870 crore (Rs 8.7 billion) to the company.