Mattel 2014 Annual Report Download - page 73

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Derivative Instruments
Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its
purchases and sales of inventory denominated in foreign currencies. At the inception of the contracts, Mattel
designates these derivatives as cash flow hedges and documents the relationship of the hedge to the underlying
transaction. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge
qualifies for hedge accounting. Changes in fair value associated with hedge ineffectiveness, if any, are recorded
in the results of operations. Changes in fair value of cash flow hedge derivatives are deferred and recorded as part
of accumulated other comprehensive loss in stockholders’ equity until the underlying transaction affects
earnings. In the event that an anticipated transaction is no longer likely to occur, Mattel recognizes the change in
fair value of the derivative in its results of operations in the period the determination is made.
Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and
advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does
not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of
change in the consolidated statements of operations.
Revenue Recognition and Sales Adjustments
Revenue is recognized upon shipment or upon receipt of products by the customer, depending on the terms,
provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement
exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and
collectibility is reasonably assured. Management assesses the business environment, the customer’s financial
condition, historical collection experience, accounts receivable aging, and customer disputes to determine
whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of
sale, Mattel does not recognize revenue until collection occurs. Value added taxes are recorded on a net basis and
are excluded from revenue. 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. The costs of these programs are recorded as sales
adjustments that reduce gross revenue in the period the related revenue is recognized.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response
advertising consists primarily of catalog production and mailing costs, which are generally amortized within
three months from the date the catalogs are mailed.
Product Recalls and Withdrawals
Mattel establishes a reserve for product recalls and withdrawals on a product-specific basis when
circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall
or withdrawal, including where the product affected by the recall or withdrawal is located (e.g., with consumers,
in customers’ inventory, or in Mattel’s inventory), cost estimates for shipping and handling for returns, cost
estimates for communicating the recall or withdrawal to consumers and customers, and cost estimates for parts
and labor if the recalled or withdrawn product is deemed to be repairable, are considered when establishing a
product recall or withdrawal reserve. These factors are updated and reevaluated each period, and the related
reserves are adjusted when these factors indicate that the recall or withdrawal reserve is either not sufficient to
cover or exceeds the estimated product recall or withdrawal expenses.
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