Mattel 2005 Annual Report Download - page 67

level of credit being extended. For customers who are experiencing financial difficulties, management performs
additional financial analyses before shipping to those customers on credit. Mattel uses a variety of financial
arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including
requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties or
requiring cash in advance of shipment.
Mattel records an allowance for doubtful accounts based on management’s assessment of the business
environment, customers’ financial condition, historical collection experience, accounts receivable aging and
customer disputes. When circumstances arise or a significant event occurs that comes to the attention of
management, such as a bankruptcy filing of a customer, the allowance is reviewed for adequacy and adjusted to
reflect the change in the estimated amount to be received from the customer.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for
buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for
leasehold improvements. Tools, dies and molds are amortized using the straight-line method over 3 years.
Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The
carrying value of fixed assets is reviewed when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Any impairment identified is assessed by evaluating the operating
performance and future undiscounted cash flows of the underlying assets. When property is sold or retired, the
cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet
and any gain or loss on the transaction is included in the results of operations.
Goodwill
Goodwill is allocated to various reporting units, which are either at the operating segment level or one
reporting level below the operating segment for purposes of evaluating whether goodwill is impaired. Mattel’s
reporting units are: Mattel Girls Brands US division, Mattel Boys Brands US division, Fisher-Price Brands US,
American Girl Brands and International. Mattel tests its goodwill for impairment annually in the third quarter, or
whenever events or changes in circumstances indicate that the carrying value may not be recoverable, based on
the fair value of the cash flows that the business can be expected to generate in the future.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s
currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged
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 operations. 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 operations 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.
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