Mattel 2014 Annual Report Download - page 58

time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities.
Deferred income tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax
returns in future years for which Mattel has already recorded a tax benefit in its consolidated statement of
operations. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight
of available evidence, management believes expected future taxable income is not likely to support the use of a
deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least
annually, and more frequently if actual operating results differ significantly from forecasted results.
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 audits, conclusions of tax audits, lapsing of applicable statutes of limitations,
identification of new issues, and any administrative guidance or developments. 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 (a greater than 50 percent likelihood) be realized.
Mattel’s effective tax rate on income before income taxes in 2014 was 15.0%, as compared to 17.8% in
2013. The income tax provision included net tax benefits of $42.6 million, $32.2 million, and $16.0 million in
2014, 2013, and 2012, respectively. The 2014 net tax benefits primarily relate to reassessments of prior years’ tax
liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and
enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT
Entertainment and MEGA Brands operations. The 2013 and 2012 net tax benefits primarily related to the
reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions
around the world, settlements, and enacted tax law changes.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax
authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a
material impact on Mattel’s consolidated financial statements.
New Accounting Pronouncements
See Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial
Statements—Summary of Significant Accounting Policies.”
Non-GAAP Financial Measure
In this Annual Report on Form 10-K, Mattel includes a non-GAAP financial measure, gross sales, which it
uses to analyze its operations and to monitor, assess, and identify meaningful trends in its operating and financial
performance. Net sales, as reported in the consolidated statements of operations, include the impact of sales
adjustments such as trade discounts and other allowances. Gross sales represent sales to customers, excluding the
impact of sales adjustments. Consistent with its segment reporting, Mattel presents changes in gross sales as a
metric for comparing its aggregate, business unit, brand, and geographic results to highlight significant trends in
Mattel’s business. Changes in gross sales are discussed because, while Mattel records the detail of such sales
adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not
associated with individual products, making net sales less meaningful.
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