Mattel 2014 Annual Report Download - page 54

When performing the quantitative two-step goodwill impairment test, Mattel utilizes the fair value based
upon the discounted cash flows that the business can be expected to generate in the future (the “Income
Approach”). The Income Approach valuation method requires Mattel to make projections of revenue, operating
costs, and working capital investment for the reporting unit over a multi-year period. Additionally, management
must make an estimate of a weighted average cost of capital that a market participant would use as a discount
rate. Changes in these projections or estimates could result in a reporting unit either passing or failing the first
step of the impairment model, which could significantly change the amount of any impairment ultimately
recorded.
During the third quarter of 2014, Mattel assessed its goodwill for impairment by evaluating qualitative
factors, such as reporting unit performance, results of its most recent quantitative assessments, general economic
conditions, access to capital, the industry and competitive environment, current business strategies, and the
interest rate environment, for each of its reporting units and determined that it was not more likely than not that
the fair value of its reporting units were less than the carrying amounts. As a result of this determination, the
quantitative two-step goodwill impairment test was deemed unnecessary.
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 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.
During the second quarter of 2013, Mattel changed its brand strategy for Polly Pocket, which includes a
more focused allocation of resources to support the Polly Pocket brand in specific markets, resulting in a
reduction of the forecasted future cash flows of the brand. As a result of the change, Mattel tested the asset for
impairment. The Polly Pocket trade name, which previously had a carrying value of approximately $113 million,
had a fair value of approximately $99 million, and Mattel recorded an impairment charge of approximately $14
million within other selling and administrative expenses. In conjunction with the impairment test, Mattel
reassessed Polly Pocket’s nonamortizable classification and determined that the nonamortizable classification
could no longer be supported. As such, the Polly Pocket trade name was reclassified as an amortizable intangible
asset, and the remaining fair value of the asset is being amortized over its estimated remaining useful life. See
Item 8 “Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—
Goodwill and Other Intangibles” for additional information.
During the third quarter of 2014, Mattel performed the annual impairment test for the remaining
nonamortizable intangible assets as required and determined that its remaining nonamortizable intangible assets
were not impaired as the fair values of the nonamortizable intangible assets exceeded their carrying values.
Mattel also considered events and circumstances subsequent to these impairment tests in concluding there was no
impairment as of December 31, 2014.
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 $694.6
million, $632.9 million, and $631.7 million during 2014, 2013, and 2012, 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
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