Mattel 2006 Annual Report Download - page 57

accounts for its defined benefit pension plans in accordance with SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, SFAS No. 87, Employers’ Accounting for Pensions,and
its other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting for Postretirement
Benefits Other Than Pensions. See Item 8 “Financial Statements and Supplementary Data—Note 4 to the
Consolidated Financial Statements.”
Actuarial valuations are used in determining amounts recognized in financial statements for retirement and
other postretirement benefit plans. These valuations incorporate the following significant assumptions:
• Weighted average discount rate to be used to measure future plan obligations and interest cost component
of plan income or expense;
• Rate of future compensation increases (for defined benefit pension plans);
• 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, 2006, Mattel determined the discount rate for its
domestic benefit plans to be 5.7% as compared to 5.4% and 5.7% for the years ended 2005 and 2004,
respectively. In estimating this rate, Mattel reviews rates of return on high quality, corporate bond indices, which
approximate the timing and amount of benefit payments. Assuming all other benefit plan assumptions remain
constant, the increase in the discount rate from 5.4% to 5.7% will result in a decrease in benefit plan expense
during 2007 of approximately $1.2 million.
The rate of future compensation increases used by Mattel for the benefit obligation of its domestic defined
benefit pension plans averaged 4.0% for 2006 and 4.4 % for 2005 and 2004, based on plan demographics. The
rate of future compensation increases used by Mattel for the net periodic pension cost of its domestic defined
benefit pension plans averaged 4.4 % for 2006, 2005 and 2004, based on plan demographics. These assumptions
are 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
2006, 2005 and 2004. Assuming all other benefit plan assumptions remain constant, a one percentage point
decrease in the expected return on plan assets would result in an increase in benefit plan expense of
approximately $2.5 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
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