Mattel 2006 Annual Report Download - page 56

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goodwill and other intangible assets subsequent to their acquisition. In accordance with the adoption of
SFAS No. 142, Mattel ceased amortization of goodwill effective January 1, 2002.
Management believes that the accounting estimate related to the valuation of its goodwill is a “critical
accounting estimate” because significant changes in the assumptions used to develop the estimate could
materially affect key financial measures, including net income and noncurrent assets, specifically goodwill. The
valuation of goodwill involves a high degree of judgment since the first step of the impairment test required by
SFAS No. 142 consists of a comparison of the fair value of a reporting unit with its book value. Based on the
assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit
and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the
reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is
allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value
of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s
goodwill exceeds the estimated fair value of that goodwill.
SFAS No. 142 requires that goodwill be 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 for are: Mattel Girls Brands US, Mattel Boys Brands US (including
newly acquired Radica), Fisher-Price Brands US, American Girl Brands and International. Goodwill is allocated
to Mattel’s reporting units based on an allocation of brand-specific goodwill to the reporting units selling those
brands. For each of the reporting units, the fair value of the reporting unit exceeded its carrying amount. As of
September 30, 2006, Mattel performed the annual impairment test required by SFAS No. 142 and determined
that its goodwill was not impaired. There were no events or circumstances that indicated the impairment test
should be performed again at December 31, 2006.
Mattel utilizes the fair value of the cash flows that the business can be expected to generate in the future
(Income Approach) to test for impairment. The Income Approach valuation method requires Mattel to make
projections of revenue, operating costs and working capital investment for the reporting unit over a multi-year
period. Additionally, management must make an estimate of its weighted average cost of capital to be used as a
discount rate. Changes in these projections or estimates could result in a reporting unit either passing or failing
the first step in the SFAS No. 142 impairment model, which could significantly change the amount of any
impairment ultimately recorded.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer
promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily
on customer purchases, customer performance of specified promotional activities, and other specified factors
such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross
revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled
$507.9 million, $444.5 million, and $443.3 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
These programs primarily involve fixed amounts or percentages of sales to customers. Accruals for such
programs are calculated based on an assessment of customers’ purchases and performance under the programs
and any other specified factors. While the majority of sales adjustment amounts are readily determinable at
period end and do not require estimates, certain of the sales adjustments require management to make estimates.
In making these estimates, management considers all available information, including the overall business
environment, historical trends and information from customers. Management believes that the accruals recorded
for customer programs at December 31, 2006 are adequate and proper.
Benefit Plan Assumptions
As discussed in Note 4 to the consolidated financial statements, Mattel and certain of its subsidiaries have
retirement and other postretirement benefit plans covering substantially all employees of these companies. Mattel
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