Mattel 2004 Annual Report Download - page 69

receivables and payables balances that are denominated in a currency other than the applicable functional
currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating
activities are recorded in the components of operating income in the consolidated statement of income. Gains and
losses on unhedged intercompany loans and advances are recorded as a component of other non-operating
(income) expense, net in the consolidated statement of income in the period in which the currency exchange rate
changes. Inventory purchase transactions denominated in the Euro, British pound sterling, Mexican peso, Hong
Kong dollar and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure
for Mattel.
Revenue Recognition
Revenue is recognized upon shipment or upon receipt of products by the customer, depending on terms,
provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement
exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and
collectibility is reasonably assured. Management assesses the business environment, the customer’s financial
condition, historical collection experience, accounts receivable aging and customer disputes to determine whether
collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale,
Mattel does not recognize revenue until collection occurs. Accruals for customer discounts and rebates, and
defective returns are recorded when the related revenue is recognized.
During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its
consolidated statement of income. Close out sales are sales of certain products that are no longer included in
current product lines. These sales were previously classified as a reduction of cost of sales. Commencing
October 1, 2003, close out sales are reported as net sales in Mattel’s consolidated statements of income. This
change in classification had no impact on gross profit, operating income, net income or any element of the
consolidated balance sheets or consolidated statements of cash flows for any date or period presented. For the
first three quarters of 2003, and for the year ended 2002, close out sales, which were classified as a reduction of
cost of sales, were $38.1 million and $112.7 million, respectively. Mattel does not believe that these amounts are
material, and therefore has not revised previously reported net sales and cost of sales amounts for these periods.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response
advertising consists primarily of catalog production and mailing costs that are generally amortized within three
months from the date the catalogs are mailed.
Product Recalls
Mattel establishes a reserve for product recalls on a product-specific basis during the period in which the
circumstances giving rise to the recall become known. Facts underlying the recall, including where the product
affected by the recall is located (e.g., with consumers, in customers’ inventory, or in Mattel’s inventory), whether
the product is repairable, cost estimates for communicating the recall to consumers and customers, and cost
estimates for parts and labor if the recalled product is deemed to be repairable, are considered when establishing
a product recall reserve. When facts or circumstances become known that would indicate that the recall reserve is
either not sufficient to cover or exceeds the estimated product recall expenses, the reserve is reassessed and an
adjustment is made to the reserve, as appropriate.
Research and Development Costs
Research and development costs are charged to the results of operations when incurred.
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