Mattel 2004 Annual Report Download - page 52

income. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight of
available evidence, management believes expected future taxable income is not likely to support the use of a
deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least
annually, and more frequently if actual operating results differ significantly from forecasted results.
Management believes that Mattel’s tax positions are fully supported, but establishes reserves for certain tax
return positions that are likely to be challenged by the applicable taxing authority. Management reviews these
reserves in light of changing facts and circumstances, such as the progress and ultimate settlement of a tax audit
and interpretations of tax regulations, and adjusts these reserves accordingly. In 2004, Mattel reached a
settlement with the IRS regarding the examination of Mattel’s US federal income tax returns for the years 1998
through 2001. As a result, Mattel adjusted its income tax estimates in 2004 to reflect the terms of that settlement.
The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact
on Mattel’s provision for income taxes, net income, and deferred income tax assets and liabilities.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, which replaced
SFAS No. 123, Accounting for Stock-Based Compensation, and superceded APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair values in the first interim
or annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under
SFAS No. 123 will no longer be an alternative to financial statement recognition. Mattel is required to adopt
SFAS No. 123R in the third quarter of fiscal year 2005, beginning July 1, 2005. Under SFAS No. 123R, Mattel
must determine the appropriate fair value method to be used for valuing share-based payments, the amortization
method of compensation cost and the transition method to be used at the date of adoption. The transition methods
include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated
either as of the beginning of the year of adoption or for all periods presented. The prospective method requires
that compensation cost be recorded for all unvested stock options and nonvested stock at the beginning of the
first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation
cost for all unvested stock options and nonvested stock beginning with the first period restated. Mattel is
evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a
material impact on its results of operations and earnings per share. Mattel has not yet determined the method of
adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future
periods will be similar to the current pro forma disclosures under SFAS No. 123.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs—An Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 amends the guidance in Chapter 4, “Inventory Pricing,” of Accounting Research
Bulletin (“ARB”) No. 43, Restatement and Revision of Accounting Research Bulletins, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (“spoilage”). Among
other provisions, the statement requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. Mattel is currently evaluating
the effect that the adoption of SFAS No. 151 will have on its results of operations and financial position, but does
not expect it to have a material impact.
On October 22, 2004, the Jobs Act was signed into law. Among its various provisions, the Jobs Act creates a
temporary incentive for US corporations to repatriate accumulated income earned abroad by providing an 85%
dividends received deduction for certain qualifying dividends. On December 21, 2004, the FASB issued
FSP 109-2. FSP 109-2 allows companies additional time beyond the financial reporting period in which the Jobs
Act was enacted to evaluate the effect of the Jobs Act on a company’s plan for reinvestment or repatriation of
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