Mattel 2003 Annual Report Download - page 49

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 plans, 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 for its domestic defined benefit plans from 11.0% in
2001 to 10.0% in 2002 to 8.0% in 2003, based on economic and stock market conditions. Assuming all other
benefit plan assumptions remain constant, a 1.0% decrease in the expected return on plan assets would result in
an increase in benefit plan expense of approximately $2 million.
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 2004
to 5.5% in 2007, with rates assumed to stabilize in 2007 and thereafter, were used in determining plan expense
for 2003. 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.
Aone percentage point increase/(decrease) in the assumed health care cost trend rate for each future year
would impact the accumulated postretirement benefit obligation as of year end 2003 by approximately $6 million
and $(5) million, respectively, while a one percentage point increase/(decrease) would impact the service and
interest cost recognized for 2003 by approximately $400 thousand and $(300) thousand, respectively.
Valuation of Goodwill and Other Intangible Assets
Effective on January 1, 2002, Mattel adopted SFAS No. 142, which superseded APB Opinion No. 17,
Intangible Assets.This statement addresses the accounting and reporting of goodwill and other intangible assets
subsequent to their acquisition. In accordance with the adoption of SFAS No. 142, Mattel ceased amortization of
goodwill effective January 1, 2002.
Management believes that the accounting estimate related to the valuation of its goodwill and other
intangible assets is a “critical accounting estimate” because significant changes in the assumptions used to
develop the estimate could materially affect key financial measures, including net income and other noncurrent
assets, specifically goodwill. The valuation of goodwill involves a high degree of judgment since the first step of
the impairment test required by SFAS No. 142 consists of a comparison of the fair value of a reporting unit with
its book value. Based on the assumptions underlying the valuation, impairment is determined by estimating the
fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more
than the book value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair
value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess
amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book
value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
SFAS No. 142 requires that goodwill and other intangible assets be allocated to various reporting units,
which are either at the operating segment level or one reporting level below the operating segment. Mattel’s
reporting units for purposes of applying the provisions of SFAS No. 142 are: Mattel Brands US Girls division,
Mattel Brands US Boys division, Fisher-Price Brands US, American Girl Brands and International. Goodwill is
allocated to Mattel’s reporting units based on an allocation of brand-specific goodwill to the reporting units
selling those brands. As a result of implementing SFAS No. 142, Mattel recorded a transition adjustment of
$252.2 million, net of tax, as the cumulative effect of change in accounting principles resulting from the
transitional impairment test of the American Girl Brands goodwill. For each of the other reporting units, the fair
value of the reporting unit exceeded its carrying amount. In the third quarter of 2003, Mattel performed the
annual impairment test required by SFAS No. 142 and determined that its goodwill was not impaired as of
September 30, 2003.
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