Mattel 2005 Annual Report Download - page 71

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Derivative Instruments
Mattel uses foreign currency forward exchange and option contracts as cash flow hedges primarily to hedge
its purchase and sale of inventory denominated in foreign currencies. Additionally, Mattel uses fair value hedges
to hedge intercompany loans and advances denominated in foreign currencies.
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. Transaction gains or losses on
hedged intercompany inventory transactions are recorded in the consolidated statement of operations in the
period in which the inventory is sold to customers. 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.
Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in foreign
currencies. 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In December 2004, the FASB issued SFAS No. 123(R), which replaced SFAS No. 123 and superseded APB
Opinion No. 25. SFAS No. 123(R) 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. The pro forma disclosures
previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition.
Under SFAS No. 123(R), Mattel must determine the appropriate fair value method to be used for valuing share-
based payments, the expense attribution method for compensation cost and the transition method to be used at the
time of adoption. The transition methods include prospective and retroactive adoption options. The prospective
method requires that compensation cost be recorded for all unvested stock options, restricted stock and restricted
stock units beginning in the first quarter of adoption of SFAS No. 123(R), whereas the retroactive method
requires recording compensation cost for all unvested stock options, restricted stock and restricted stock units
beginning with the first period restated.
In April 2005, the Securities Exchange Commission amended Rule S-X to delay the effective date for
compliance with SFAS No. 123(R). Based on the amended rule, Mattel is required to adopt SFAS No. 123(R) on
January 1, 2006. In 2006, Mattel plans to use the prospective method of adoption under SFAS No. 123(R), and
for new grants, to attribute expense to the service periods through the straight-line method. In December 2005,
the Compensation Committee of the Board of Directors of Mattel approved the acceleration of vesting of certain
outstanding unvested stock options primarily to avoid future compensation expense for those stock options, and
because there may be future benefits for the provision for income taxes for financial reporting purposes. See
“Stock-Based Compensation.” Mattel is evaluating the requirements of SFAS No. 123(R) and expects that the
adoption of SFAS No. 123(R) will negatively impact its results of operations; however, the amount and
materiality of the impact will depend on the amount and type of share-based payments granted in future periods.
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
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