Mattel 2005 Annual Report Download - page 54

• Expected long-term rate of return on plan assets (for funded plans); and
• Health care cost trend rates (for other postretirement benefit plans).
Management believes that these assumptions are “critical accounting estimates” because significant changes
in these assumptions would ultimately impact Mattel’s results of operations and financial position. Management
believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’
experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually
and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in
assumptions are amortized as part of plan income or expense in future periods in accordance with SFAS Nos. 87
and 106.
At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the
projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan
liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost
component of plan income or expense. At December 31, 2005, Mattel determined the discount rate for its
domestic benefit plans to be 5.4% as compared to 5.7% and 6.0% for the years ended 2004 and 2003,
respectively. In estimating this rate, Mattel reviews rates of return on high quality, corporate bond indices.
Assuming all other benefit plan assumptions remain constant, the decrease in the discount rate from 5.7% to
5.4% will result in an increase in benefit plan expense during 2006 of approximately $1.1 million.
The rate of future compensation increases used by Mattel for its domestic defined benefit pension plans
averaged 4.4% for 2005, 2004 and 2003, based on plan demographics. This assumption is reviewed annually
based on historical salary increases for participants in the defined benefit pension plans. This assumption impacts
the service and interest cost components of plan income or expense.
The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets
that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the
arithmetic average of past returns, economic and stock market conditions and future expectations and the long-
term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is
used to calculate the expected return on plan assets that is used in calculating pension income or expense. The
difference between this expected return and the actual return on plan assets is deferred. The net deferral of past
asset gains or losses affects the calculated value of plan assets and, ultimately, future pension income or expense.
Mattel’s long-term rate of return for its domestic defined benefit pension plans was 8.0% in 2005, 2004 and
2003. Assuming all other benefit plan assumptions remain constant, a 1 percentage point decrease in the expected
return on plan assets would result in an increase in benefit plan expense of approximately $2.4 million.
The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect
management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service
and interest cost components of plan expense. Rates ranging from 10.0% in 2005 to 5.0% in 2010, with rates
assumed to stabilize in 2010 and thereafter, were used in determining plan expense for 2005. These rates are
reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit
plans as well as estimates based on current economic conditions. As of December 31, 2005, Mattel adjusted the
health care cost trend rates for its other postretirement benefits plans to range from 9.0% in 2006 reducing to
5.0% in 2010, with rates assumed to stabilize in 2010 and thereafter. Assuming all other postretirement benefit
plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates
would increase benefit plan expense during 2006 by approximately $0.8 million.
A 1 percentage point increase/(decrease) in the assumed health care cost trend rate for each future year
would impact the postretirement benefit obligation as of December 31, 2005 by approximately $6 million and
$(5) million, respectively, while a one percentage point increase/(decrease) would impact the service and interest
cost recognized for 2005 by approximately $0.3 million and $(0.3 million), respectively.
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