Mattel 2004 Annual Report Download - page 51

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 that the accounting estimate related to the valuation of its goodwill is a “critical
accounting estimate” because significant changes in the assumptions used to develop the estimate could
materially affect key financial measures, including net income and 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 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: Mattel Brands US Girls division, Mattel Brands US Boys
division, Fisher-Price Brands US, American Girl Brands and International. Goodwill is allocated to Mattel’s
reporting units based on an allocation of brand-specific goodwill to the reporting units selling those brands. As a
result of implementing SFAS No. 142, Mattel recorded a transition adjustment of $252.2 million, net of tax, as
the cumulative effect of a change in accounting principle resulting from the transitional impairment test of the
American Girl Brands reporting unit goodwill. For each of the other reporting units, the fair value of the
reporting unit exceeded its carrying amount. In 2004, Mattel performed the annual impairment test required by
SFAS No. 142 and determined that its goodwill was not impaired as of September 30, 2004.
Mattel utilizes the fair value of the cash flows that the business can be expected to generate in the future
(Income 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. 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 any
impairment ultimately recorded.
Income Taxes
Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected
future income, US and foreign statutory income tax rates, and tax regulations and planning opportunities in the
various jurisdictions in which Mattel operates. Management believes that the accounting estimate related to
income taxes is a “critical accounting estimate” because significant judgment is required in interpreting tax
regulations in the US and in foreign jurisdictions, determining Mattel’s worldwide tax positions, and assessing
the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and
changes in judgments could materially affect key financial measures, including the provision for income taxes,
net income, and deferred income tax assets and liabilities.
Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. As a result, the effective tax rate reflected in Mattel’s consolidated statements of income is different
than that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are
permanent, such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over
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
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