Hasbro 2006 Annual Report Download - page 44

related cash flow projections to be derived from the related product. If sales forecasts and related cash flows
from the particular product do not support the recoverability of the remaining minimum guaranty or, if the
Company decides to discontinue a product line with royalty advances or commitments, a charge to royalty
expense to write-off the remaining minimum guaranty is required. The preparation of revenue forecasts and
related cash flows for these products requires judgments and estimates. Actual revenues and related cash flows
or changes in the assessment of anticipated revenues and cash flows related to these products could result in a
change to the assessment of recoverability of remaining minimum guaranteed royalties. At December 31,
2006, the Company had $181,561 of prepaid royalties, $116,792 of which are included in prepaid expenses
and other current assets and $64,769 which are included in other assets.
Pension Costs and Obligations
The Company, except for certain international subsidiaries, has pension plans covering substantially all of
its full-time employees. Pension expense is based on actuarial computations of current and future benefits
using estimates for expected return on assets, expected compensation increases, and applicable discount rates.
The estimates for the Company’s domestic plans are established at the Company’s measurement date of
September 30 to measure the liabilities and assets of the plans as of that date and to establish the expense for
the upcoming year. As a result of the Company’s adoption of Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”,
(“SFAS No. 158”) in December 2006, the Company will be required to change the measurement date for its
pension plans to match its year-end date by 2008.
The Company estimates expected return on assets using a weighted average rate based on historical
market data for the investment classes of assets held by the plan, the allocation of plan assets among those
investment classes, and the current economic environment. Based on this information, the Company’s estimate
of expected return on domestic plan assets was 8.75% in 2006, 2005 and 2004. A decrease in the estimate
used for expected return on plan assets would increase pension expense, while an increase in this estimate
would decrease pension expense. A decrease of .25% in the estimate of expected return on plan assets would
have increased 2006 pension expense for U.S. plans by approximately $550.
Expected compensation increases are estimated using a combination of historical and expected compen-
sation increases. Based on this analysis, the Company’s estimate of expected long-term compensation increases
for its U.S. plans was 4.0% in 2006, 2005 and 2004. Increases in estimated compensation increases would
result in higher pension expense while decreases would lower pension expense.
Discount rates are selected based upon rates of return at the measurement date on high quality corporate
bond investments currently available and expected to be available during the period to maturity of the pension
benefits. Based on this long-term corporate bond yield at September 30, 2006, the Company’s measurement
date for its pension assets and liabilities, the Company’s discount rate for its domestic plans used for the
calculation of 2007 pension expense was 5.75% compared to a rate of 5.50% used in the calculation of 2006
pension expense and 5.75% used in the calculation of 2005 pension expense. A decrease in the discount rate
would result in greater pension expense while an increase in the discount rate would decrease pension expense.
A decrease of .25% in the Company’s discount rate would have increased 2006 pension expense and the 2006
projected benefit obligation by approximately $756 and $9,395, respectively.
In accordance with Statement of Financial Accounting Standards No. 87, “Employers Accounting for
Pensions”, actual results that differ from the actuarial assumptions are accumulated and, if outside a certain
corridor, amortized over future periods and, therefore generally affect recognized expense in future periods. In
December 2006, the Company adopted SFAS No. 158, which required that the funded status of the plans be
recognized on the Company’s balance sheet and any unrecognized gains or losses be recorded to accumulated
other comprehensive income. At December 31, 2006, the Company has unrecognized actuarial losses of
$48,879 included in accumulated other comprehensive income related to its defined benefit pension plans.
Assets in the plan are valued on the basis of their fair market value on the measurement date.
33