Mattel 2004 Annual Report Download - page 49

At the end of each quarter, management within each business segment, Mattel Brands US, Fisher-Price
Brands US, American Girl Brands and International, performs a detailed review of its inventory on an item by
item basis and identifies which products are believed to be obsolete or slow-moving. Management assesses the
need for, and the amount of, an obsolescence reserve based on the following factors:
• Customer and/or consumer demand for the item;
• Overall inventory positions of Mattel’s customers;
• Strength of competing products in the market;
• Quantity on hand of the item;
• Standard retail price of the item;
• Standard margin on the item; and
• Length of time the item has been in inventory.
The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31 (in millions, except
percentage information):
2004 2003 2002
Allowance for obsolescence .................................... $ 65.2 $ 53.6 $ 49.1
As a percentage of total inventory ............................... 13.5% 12.1% 12.7%
The increase from 2003 to 2004 in the allowance for obsolescence was mainly due to the specific
identification of excess inventory that was impaired as of year end 2004. A 15% increase in year end inventory
amounts from 2002 to 2003 was the primary cause for the increase in the obsolescence reserve during that period.
Management believes that its allowance for obsolescence at year end 2004 is adequate and proper. However, the
impact resulting from the aforementioned factors could cause actual results to vary. Any incremental
obsolescence charges would negatively affect the results of operations of one or more of Mattel’s business
segments.
Benefit Plan Assumptions
As discussed in Note 4 to the consolidated financial statements, Mattel and certain of its subsidiaries have
retirement and other postretirement benefit plans covering substantially all employees of these companies. Mattel
accounts for its defined benefit pension plans in accordance with SFAS No. 87, Employers’ Accounting for
Pensions, and its other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting
for Postretirement Benefits Other Than Pensions. See Item 8 “Financial Statements and Supplementary Data—
Note 4 to the Consolidated Financial Statements.”
Actuarial valuations are used in determining amounts recognized in financial statements for retirement and
other postretirement benefit plans. These valuations incorporate the following significant assumptions:
• Weighted average discount rate to be used to measure future plan obligations and interest cost component
of plan income or expense;
• Rate of future compensation increases (for defined benefit pension plans);
• Expected long-term rate of return on plan assets (for funded plans); and
• Health care cost trend rates (for other postretirement benefit plans).
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