Mattel 2003 Annual Report Download - page 48

The following table summarizes Mattel’s obsolescence reserve at December 31 (in millions, except
percentage information):
2003 2002 2001
Allowance for obsolescence ......................................... $53.6 $49.1 $63.1
As a percentage of total inventory .................................... 12.1% 12.7% 11.5%
A15% increase in year end inventory amounts from 2002 to 2003 was the primary cause for the increase in
the obsolescence reserve during that period. Management believes that a shift in consumer buying to late
December 2003 reduced the inventory re-order flow from Mattel’s customers and was a primary cause for the
aforementioned increase in year end inventory. The decrease in the obsolescence reserve from 2001 to 2002 was
due to Mattel’s focus on reducing its obsolete and slow moving inventory during 2002. Management believes
that its allowance for obsolescence at year end 2003 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
As discussed in Note 4 to the consolidated financial statements, 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)
•Expected long-term rate of return on plan assets (for funded plans)
•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. Management
believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’
experience and advice received from its actuaries. 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. At year end 2003, Mattel determined the discount rate for its domestic
benefit plans to be 6.0% as compared to 6.5% and 7.0% for the years ended 2002 and 2001, respectively. In
estimating this rate, Mattel looks at rates of return on high quality, corporate bond indices. Assuming all other
benefit plan assumptions remain constant, the decrease in the discount rate from 6.5% to 6.0% will result in an
increase in benefit plan expense during 2004 of approximately $2 million.
The rate of future compensation increases used by Mattel for its domestic defined benefit plans ranged from
4.0% to 6.0% for 2003, 2002 and 2001, based on plan demographics. This assumption is reviewed annually
based on historical salary increases for participants in the defined benefit plans. This assumption impacts the
service and interest cost components of plan income or expense.
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