Mattel 2002 Annual Report Download - page 46

believes that its allowance for obsolescence at year end 2002 is adequate and proper. However, the impact
resulting from the aforementioned factors could cause actual results to vary. Any incremental obsolescence
charges would negatively affect the results of operations of one or more of Mattel’s business segments.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering
substantially all employees of these companies. Mattel accounts for its defined benefit pension plans in
accordance with SFAS No. 87, Employers’ Accounting for Pensions, and its other postretirement benefit plans in
accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.
Actuarial valuations are used in determining amounts recognized in financial statements for retirement and
other postretirement benefit plans. These valuations incorporate the following significant assumptions:
• Weighted average discount rate to be used to measure future plan obligations and interest cost component
of plan income or expense
• Rate of future compensation increases (for defined benefit plans)
• Long-term rate of return on plan assets
• Health care cost trend rates (for other postretirement benefit plans)
Management believes that these assumptions are “critical accounting estimates” since significant changes in
these assumptions would ultimately impact Mattel’s results of operations and financial condition. Mattel reviews
its benefit plan assumptions annually and modifies its assumptions based on current rates and trends as
appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future
periods in accordance with SFAS Nos. 87 and 106.
At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the
projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan
liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost
component of plan income or expense recorded. At year end 2002, Mattel determined this rate to be 6.5% as
compared to 7.0% and 7.5% for the years ended 2001 and 2000, respectively. In estimating this rate, Mattel looks
at rates of return on high quality, corporate bond indices.
The rate of future compensation increases used by Mattel was 4.0% for the years ended 2002, 2001 and
2000. This assumption is reviewed annually based on historical salary increases for participants in the defined
benefit plan. This assumption impacts the service and interest cost components of plan income or expense.
The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets
that secure the defined benefit plan, taking into account the mix of invested assets and the long-term nature of the
projected benefit obligation to which these investments relate. The long-term rate of return is used to calculate
the expected return on plan assets that is used in calculating pension income or expense. The difference between
this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains or losses
affects the calculated value of plan assets and, ultimately, future pension income or expense. Over the last three
years, Mattel lowered its long-term rate of return from 11.0% in 2000 to 10.0% in 2001 to 8.0% in 2002, based
on recent economic and stock market conditions.
The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect
management’s best estimate of expected claim costs over the next five years. Rates ranging from 10.5% in 2003
to 6.0% in 2006, with rates assumed to stabilize at 5.5% in 2007 and thereafter, were used in determining plan
expense for 2002. These rates are reviewed annually and are estimated based on historical costs for participants
in the other postretirement benefit plans as well as estimates based on current economic conditions. These trend
rates impact the service and interest cost components of plan expense.
37