Mattel 2012 Annual Report Download - page 80

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In assessing whether uncertain tax positions should be recognized in its financial statements, Mattel first
determines whether it is more-likely-than-not (a greater than 50 percent likelihood) that a tax position will be
sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition
threshold, Mattel presumes that the position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information. For tax positions that meet the more-likely-than-not recognition
threshold, Mattel measures the amount of benefit recognized in the financial statements at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Mattel recognizes
unrecognized tax benefits in the first financial reporting period in which information becomes available
indicating that such benefits will more-likely-than-not be realized.
Mattel records unrecognized tax benefits for US federal, state, local, and foreign tax positions related
primarily to transfer pricing, tax credits claimed, tax nexus, and apportionment. For each reporting period,
management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax
benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its
unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit
experience, the status of current audits, conclusions of tax audits, lapsing of applicable statutes of limitations,
identification of new issues, and any administrative guidance or developments.
A reconciliation of unrecognized tax benefits is as follows:
2012 2011 2010
(In millions)
Unrecognized tax benefits at January 1 ..................................... $262.6 $252.6 $230.0
Increases for positions taken in current year ................................. 14.8 13.5 14.8
Increases for positions taken in a prior year .................................. 21.0 2.3 14.9
Decreases for positions taken in a prior year ................................. (0.7) (1.0) (4.3)
Decreases for settlements with taxing authorities ............................. (0.8) (1.4) (1.7)
Decreases for lapses in the applicable statute of limitations ..................... (11.3) (3.4) (1.1)
Unrecognized tax benefits at December 31 .................................. $285.6 $262.6 $252.6
Of the $285.6 million of unrecognized tax benefits as of December 31, 2012, $277.2 million would impact
the effective tax rate if recognized; however, a valuation allowance would likely be recorded against certain
capital losses included in this amount.
During 2012, Mattel recognized $1.6 million of interest and penalties related to unrecognized tax benefits,
which is reflected in provision for income taxes in the consolidated statements of operations. As of December 31,
2012, Mattel had accrued $10.3 million in interest and penalties related to unrecognized tax benefits. Of this
balance, $9.8 million would impact the effective tax rate if recognized.
In the normal course of business, Mattel is regularly audited by federal, state, local and foreign tax
authorities. In the first quarter of 2012, the IRS issued a Revenue Agent’s Report (“RAR”) related to its
examination of Mattel’s 2008 and 2009 federal income tax returns. In the second quarter of 2012, Mattel
submitted a written protest for all unresolved issues to the IRS Office of Appeals. The first appeals meeting is
scheduled to be held in March 2013. We anticipate the appeals process will involve multiple meetings before
these disputed issues are resolved. Mattel continues to believe in its interpretations of the relevant legal,
administrative, and other applicable guidance on the tax issues disputed by the IRS. However, if the disputed
issues are resolved in a manner inconsistent with Mattel’s expectations, such an outcome could have a material
impact on our financial statements. While it is reasonably possible that a significant increase or decrease in
Mattel’s unrecognized tax benefits may occur in the next twelve months related to the IRS appeals, given the
uncertainty regarding timing and possible outcomes of the appeals process, a current estimate of the range of
reasonably possible outcomes cannot be made at this time.
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