Mattel 2001 Annual Report Download - page 40

considers critical in preparing its consolidated financial statements. These policies include significant estimates
made by management using information available at the time the estimates are made. However, as described
below, these estimates could change materially if different information or assumptions were used.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents adjustments to customer trade accounts receivable for
amounts deemed partially or entirely uncollectible. The allowance for doubtful accounts is a reserve used to
reduce gross trade receivables to their net realizable value. Mattel’s reserve is based on management’s
assessment of the business environment, customers’ financial condition, historical trends, receivable aging and
customer disputes.
Mattel’s allowance for doubtful accounts increased from approximately $25 million at year end 2000 to
$56 million at year end 2001. In 2001, bad debt expense increased by approximately $40 million to $58
million. As more fully discussed in the section entitled ‘‘Results of Continuing Operations—2001 Compared to
2000—Consolidated Results,’’ in the fourth quarter of 2001, Mattel recorded a $22.1 million charge related to
the Kmart bankruptcy filing announced in January 2002. Mattel also recorded approximately $9 million in bad
debt expense in the third quarter 2001, primarily related to the bankruptcy declared by a US retailer during the
quarter. The remaining increase in bad debt expense was due to exposure associated with various other
retailers. The difficult domestic retail environment has resulted in bankruptcies of large customers and
represents the underlying cause for the increased bad debt expense in 2001. Mattel will continue to proactively
review its credit risks and adjust its customer terms to reflect the current environment. The increased level of
risk associated with credit given to customers may result in a continuation of bad debt charges at higher levels
than historically experienced or lower sales.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Inventory reserves are recorded for damaged, obsolete, excess and slow-moving inventory. Mattel’s
management uses estimates to record these reserves. Slow-moving inventory is reviewed by category and may
be partially or fully reserved for depending on the type of product and the length of time the product has been
included in inventory. Changes in public and consumer preferences and demand for product or changes in the
buying patterns and inventory management of customers, could adversely impact the inventory valuation.
Impairment of Long-Lived Assets
Long-lived assets, identifiable intangibles and goodwill related to those assets have been reviewed for
impairment based on Statement of Financial Accounting Standards (‘‘SFAS’’) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires that an
impairment loss be recognized whenever the sum of the expected future cash flows (undiscounted and without
interest charges) resulting from the use and ultimate disposal of an asset is less than the carrying amount of the
asset. Mattel’s management reviews for indicators that might suggest an impairment loss exists. Testing long-
lived assets, identifiable intangibles and goodwill for recoverability requires estimates of expected cash flows to
be generated from the use of the assets. Various uncertainties, including changes in consumer preferences,
deterioration in the political situation in a country or adverse changes in the general economic conditions in the
US and internationally, could adversely impact the expected cash flows to be generated by an asset or group of
assets. See discussion under ‘‘New Accounting Pronouncements’’ regarding SFAS No. 144, which supercedes
SFAS No. 121 effective the first quarter of 2002.
Deferred Tax Assets
Mattel records valuation allowances against its deferred tax assets. In determining the requisite allowance,
management considers all available evidence for certain tax credit, net operating loss, and capital loss
carryforwards that would likely expire prior to their utilization. Management believes that it is more likely than
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