Mattel 2004 Annual Report Download - page 71

Income Taxes
Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year
in which the differences are expected to reverse.
Net Income Per Common Share
Basic net income per common share is computed by dividing reported net income by the weighted average
number of common shares and common shares obtainable upon the exchange of the exchangeable shares of
Mattel’s indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., outstanding during each
period.
Diluted net income per common share is computed by dividing reported net income by the weighted average
number of common shares, common shares obtainable upon the exchange of the exchangeable shares of Mattel’s
indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., and other common equivalent
shares outstanding during each period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share repurchases at average market prices, as
applicable. Nonqualified stock options totaling 25.3 million, 16.1 million and 19.5 million were excluded from
the calculation of diluted net income per common share for 2004, 2003, and 2002, respectively, because they
were anti-dilutive.
A reconciliation of weighted average shares for the years ended December 31 is as follows (in thousands):
2004 2003 2002
Common shares .................................................... 419,235 437,020 435,790
Effect of dilutive securities:
Stock options .................................................. 3,858 5,211 5,355
Warrants ...................................................... — — 147
Common and common equivalent shares ................................ 423,093 442,231 441,292
Derivative Instruments
Mattel uses foreign currency forward exchange and option contracts as cash flow hedges to hedge its
purchases and sales of inventory denominated in currencies other than the US dollar. Additionally, Mattel uses
fair value hedges to hedge intercompany loans and advances denominated in currencies other than the US dollar.
Mattel also entered into a cross currency interest rate swap to convert the interest and principal amounts from
Euros to US dollars on its 200 million Euro notes due 2002.
At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges
and documents the relationship of the hedge to the underlying transaction, for cash flow hedges, or the
recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout
the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value
associated with hedge ineffectiveness, if any, are recorded in the results of operations currently.
Changes in fair value of Mattel’s cash flow derivatives are deferred and recorded as part of accumulated
other comprehensive loss in stockholders’ equity until the underlying transaction is settled. Upon settlement, any
gain or loss resulting from the derivative is recorded in the results of operations. In the event that an anticipated
transaction is no longer likely to occur, Mattel recognizes the change in fair value of the derivative in its results
of operations currently.
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