Mattel 2002 Annual Report Download - page 47

Download and view the complete annual report

Please find page 47 of the 2002 Mattel annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 112

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112

Valuation of Goodwill and Other Intangible Assets
Effective on January 1, 2002, Mattel adopted SFAS No. 142, Goodwill and Other Intangible Assets, which
superseded APB Opinion No. 17, Intangible Assets. This statement addresses the accounting and reporting of
goodwill and other intangible assets subsequent to their acquisition. In accordance with the adoption of SFAS
No. 142, Mattel ceased amortization of goodwill effective January 1, 2002.
Management believes the accounting estimate related to the valuation of its goodwill and other intangible
assets is a “critical accounting estimate” because significant changes in assumptions could materially affect key
financial measures, including net income and other noncurrent assets, specifically goodwill. The valuation of
goodwill involves a high degree of judgment since the first step of the impairment test required by SFAS No. 142
consists of a comparison of the fair value of a reporting unit with its book value. Based on the assumptions
underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing
that value to the reporting unit’s book value. If the fair value is more than the book value of the reporting unit, an
impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is allocated to all of
its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An
impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the
estimated fair value of that goodwill.
SFAS No. 142 requires that goodwill and other intangible assets be allocated to various reporting units,
which are either at the operating segment level or one reporting level below the operating segment. Mattel’s
reporting units for purposes of applying the provisions of SFAS No. 142 are: Pleasant Company, US Girls, US
Boys-Entertainment, US Infant & Preschool and International. As a result of implementing SFAS No. 142,
Mattel recorded a one-time transition adjustment of $252.2 million, net of tax, as the cumulative effect of change
in accounting principles resulting from the transitional impairment test of the Pleasant Company reporting unit
goodwill. For each of the other reporting units, the fair value of the reporting unit exceeded its carrying amount.
In the third quarter of 2002, Mattel performed the annual impairment test required by SFAS No. 142 and
determined that its goodwill was not impaired as of September 30, 2002.
Mattel utilizes a combination of the fair value of the cash flows that the business can be expected to
generate in the future (Income Approach) and the fair value of the business as compared to other similar publicly
traded companies (Market Approach) to test for impairment. 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 its weighted average cost of capital to
be used as a discount rate. The Market Approach valuation method requires Mattel to identify publicly traded
companies in a similar line of business. Changes in these projections or estimates could result in a reporting unit
either passing or failing the first step in the SFAS No. 142 impairment model, which could significantly change
the amount of impairment recorded.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. All provisions of this statement will be effective at the beginning of
fiscal 2003. Mattel does not expect that the adoption of SFAS No. 143 will have a material effect on its
consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that a liability for a cost associated with an
38