Mattel 2012 Annual Report Download - page 57

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the first step of the impairment model, which could significantly change the amount of any impairment
ultimately recorded. During the third quarter, Mattel performed the annual impairment test for goodwill as
required and determined that its goodwill was not impaired since, for each of the reporting units, the fair value of
the reporting unit substantially exceeded its carrying value. Mattel also considered events and circumstances
subsequent to the annual impairment tests in concluding there was no impairment at December 31, 2012.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the
assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks
and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value is
measured using either a multi-period excess earnings method, which reflects the incremental after-tax cash flows
attributable to the trademark and trade names after deducting the appropriate contributory asset charges, or a multi-
period royalty savings method, which reflects the savings realized by owning the trademarks and trade names, and
thus not having to pay a royalty fee to a third party. During the third quarter, Mattel performed the annual
impairment test for nonamortizable intangible assets as required and determined that its nonamortizable intangible
assets were not impaired since the fair value of the nonamortizable intangible assets exceeded its carrying value.
Mattel also considered events and circumstances subsequent to these impairment tests in concluding there was no
impairment at December 31, 2012. However, during 2012, for one of Mattel’s nonamortizable intangible assets with
a carrying value of approximately $113 million, the fair value did not exceed the carrying value by a significant
margin. Future changes in estimates resulting in lower than currently anticipated future cash flows and fair value
could negatively affect the valuation, which may result in Mattel recognizing an impairment charge in the future.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer
promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily
on customer purchases, customer performance of specified promotional activities, and other specified factors
such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross
revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $631.7
million, $575.1 million, and $530.4 million during 2012, 2011, and 2010, respectively.
The above-described programs primarily involve fixed amounts or percentages of sales to customers.
Accruals for such programs are calculated based on an assessment of customers’ purchases and performance
under the programs and any other specified factors. While the majority of sales adjustment amounts are readily
determinable at period end and do not require estimates, certain of the sales adjustments require management to
make estimates. In making these estimates, management considers all available information, including the overall
business environment, historical trends, and information from customers. Management believes that the accruals
recorded for customer programs at December 31, 2012 are adequate and proper.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering
substantially all employees of these companies. See Item 8 “Financial Statements and Supplementary Data—
Note 4 to the Consolidated Financial Statements—Employee Benefit Plans.”
Actuarial valuations are used in determining amounts recognized in the financial statements for certain 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 pension plans);
• Expected long-term rate of return on plan assets (for funded plans); and
• Health care cost trend rates (for other postretirement benefit plans).
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