Mattel 2014 Annual Report Download - page 56

value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return used in
determining plan expense for its domestic defined benefit pension plans was 8.0% in 2014, 2013, and 2012.
Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected
return on plan assets would result in an increase in benefit plan expense during 2015 of approximately
$4 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 ten years. These trend rates impact the service
and interest cost components of plan expense. Rates ranging from 8.5% in 2014 to 5.4% in 2030, with rates
assumed to stabilize in 2030 and thereafter, were used in determining plan expense for 2014. 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. As of December 31, 2014, Mattel adjusted the
health care cost trend rates for its other postretirement benefit plan obligation to 7.5% for participants younger
than age 65 and 8.8% for participants age 65 and older. For participants younger than age 65, the cost trend rates
are estimated to reduce to 4.5% by 2023, with rates assumed to stabilize in 2023. For participants age 65 and
older, the cost trend rates are estimated to reduce to 4.5% by 2024, with rates assumed to stabilize in 2024.
Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in
the assumed health care cost trend rates would result in an increase in benefit plan expense during 2015 of less
than $1 million.
A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year
would impact the postretirement benefit obligation as of December 31, 2014 by $2.0 million and $(1.7) million,
respectively, and the service and interest cost recognized for 2014 by $0.1 million and $(0.1) million,
respectively.
Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over
the requisite employee service period, net of estimated forfeitures. In determining when additional tax benefits
associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions under
the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing
net operating loss carryforwards.
Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
the expected dividends. Mattel estimates the fair value of options granted using the Black-Scholes valuation
model. The expected life of the options used in this calculation is the period of time the options are expected to
be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected
dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life.
Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
Management believes that these assumptions are “critical accounting estimates” because significant changes in
the assumptions used to develop the estimates could materially affect key financial measures, including net
income.
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