Mattel 1999 Annual Report Download - page 27

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mattel, Inc. and Subsidiaries
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel, Inc. and its sub-
sidiaries ( “ Mattel” ) . All significant intercompany accounts and transactions have
been eliminated in consolidation, and certain amounts in the financial statements for
prior years have been reclassified to conform with the current year presentation.
Investments in joint ventures and other companies are accounted for by the equity
method or cost basis depending upon the level of the investment and/ or Mattel’s
ability to exercise influence over operating and financial policies. Financial data for all
periods presented reflect the retroactive effect of the merger, accounted for as a pool-
ing of interests, with Learning Company consummated in May 1 99 9 ( see Note 7 ) .
Financial data for 19 97 reflect the retroactive effect of the merger, accounted for as
a pooling of interests, with Tyco consummated in March 19 97 ( see Note 7 ) .
Preparation of the consolidated financial statements in conformity with gener-
ally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accom-
panying notes. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into US dollars at fiscal
year-end exchange rates. Income, expense and cash flow items are translated at
weighted average exchange rates prevailing during the fiscal year. The resulting cur-
rency translation adjustments are recorded as a component of other comprehensive
income ( loss) within stockholders’ equity.
Cash and Short-Term Investments
Cash includes cash equivalents, which are highly liquid investments with maturities
of three months or less when purchased. Because of the short maturities of these
instruments, the carrying amount is a reasonable estimate of fair value.
Marketable Securities
Marketable securities, comprised principally of investments in private and publicly-
traded securities, are stated at market value and classified as securities available-for-
sale. Unrealized gains or losses are reported as a component of other comprehensive
income ( loss) within stockholders’ equity until realized. Quoted market prices, which
approximated cost as of the balance sheet dates, are reasonable estimates of the port-
folio’s fair value. These marketable securities, w hich had a cost basis of $ 2.1 million
and $ 2.7 million as of December 3 1, 1 99 9 and 1 99 8, respectively, are show n in the
consolidated balance sheets as part of other assets.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at
the lower of cost or market. Cost is determined by the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over estimated
useful lives of 1 0 to 4 0 years for buildings, 3 to 10 years for machinery and equip-
ment, and 1 0 to 20 years, not to exceed the lease term, for leasehold improvements.
Tools, dies and molds are amortized using the straight-line method over three years.
Intangibles and Long-Lived Assets
Intangible assets consist of the excess of purchase price over the fair value of net
assets acquired in purchase acquisitions, and the cost of acquired patents and trade-
marks. Intangible assets are amortized using the straight-line method over periods
ranging from 2 to 40 years. Accumulated amortization was $1 ,32 7.8 million and
$1 ,23 6.8 million as of December 31 , 1 99 9 and 19 98 , respectively.
The carrying value of fixed and intangible assets is periodically reviewed to
identify and assess any impairment by evaluating the operating performance and
future undiscounted cash flows of the underlying assets.
Revenue Recognition
Revenue from the sale of toy products is recognized upon shipment. Accruals for
customer discounts and rebates, and defective returns are recorded as the related
revenues are recognized.
Revenue from the sale of softw are products is recognized upon shipment, pro-
vided that no significant obligations remain outstanding and collection of the receivable
is probable. Costs related to insignificant post shipment obligations are accrued w hen
revenue is recognized for the sale of the related products. Allowances for good returns
are provided at the time of sale and allowances for price protection are provided at the
time of commitment and are charged against revenues. The allowances for good
returns and doubtful accounts are developed based on an evaluation of historical and
expected sales experience and by channel of distribution, and are based on information
available as of the reporting date. To the extent the future market, sell-through experi-
ence, customer mix, channels of distribution, product pricing and general economic and
competitive conditions change, the estimated reserves required for returns and
allowances may also change. Revenues from royalty and licensing arrangements are
recognized as earned based upon performance or product shipments.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes place,
except for direct-response advertising, which is capitalized and amortized over its
expected period of future benefits. Direct-response advertising consists primarily of
catalogue production and mailing costs that are generally amortized within three
months from the date catalogues are mailed. Advertising costs associated with cus-
tomer benefit programs are accrued as the related revenues are recognized. Costs
related to various end-user coupon rebate programs are expensed at the time sales
are made and are estimated based on the expected coupon redemption rate on a prod-
uct-by-product basis and are adjusted to actual at the end of each reporting period.
Software Development Costs
Costs for new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. Once techno-
logical feasibility is established, software development costs are capitalized until the
related product is launched. Capitalized software development costs are amortized on
a product-by-product basis using the straight-line method over the estimated economic
life of the product, w hich is generally twelve months from when the product is
launched, which approximates the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that product. As of
December 31 , 1999 and 19 98 , Mattel had net capitalized software development costs
of $7 3.1 million and $ 24 .3 million, respectively, which are included in the consolidated
balance sheets as part of other current assets. Amortization of software development
costs included in cost of goods sold was $6 4.3 million, $ 20 .2 million and $ 12 .1 million
for the years ended December 31 , 1 99 9, 1 99 8 and 1 99 7, respectively.