Mattel 2004 Annual Report Download - page 72

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Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in
currencies other than the US dollar. Due to the short-term nature of the contracts involved, Mattel does not use
hedge accounting for these contracts. Changes in fair value of these derivatives were not significant to the results
of operations during any year.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R (revised
2004), Share-Based Payment, which replaced SFAS No. 123 and superceded APB Opinion No. 25. 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 American Jobs Creation Act of 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 Staff Position 109-2 (“FSP 109-2”), Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. 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 unremitted foreign
earnings for the purposes of applying SFAS No. 109, Accounting for Income Taxes. As of December 31, 2004,
management had not decided on whether, or to what extent, Mattel may repatriate foreign earnings under the
Jobs Act. Therefore, pursuant to APB Opinion No. 23,Mattel’s 2004 consolidated financial statements do not
include any provision for income taxes on the $3.1 billion cumulative balance of unremitted foreign earnings as
of year end 2004. Based on the analysis to date, Mattel may repatriate up to approximately $2.4 billion in foreign
earnings with a corresponding tax liability of up to approximately $160 million. The computation of the tax
liability does not include the potential favorable effects of the Tax Technical Corrections Act of 2004, which was
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