Mattel 2006 Annual Report Download - page 58

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and interest cost components of plan expense. Rates ranging from 9.0% in 2006 to 5.0% in 2010, with rates
assumed to stabilize in 2010 and thereafter, were used in determining plan expense for 2006. 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, 2006, 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 2011, with rates assumed to stabilize in 2011 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 2007 by approximately $0.6 million.
A one 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, 2006 by approximately $4.7 million and
$(4.1) million, respectively, while a one percentage point increase/(decrease) would impact the service and
interest cost recognized for 2006 by approximately $0.3 million and $(0.2) million, respectively.
Share-Based Payments
Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Under APB Opinion No. 25, compensation expense is only recognized in the statements
of operations for employee stock options with exercise prices below the measurement date market price of the
company’s stock (see Item 8. “Financial Statements and Supplementary Data—Note 7 to the Consolidated
Financial Statements”). The amount of additional compensation expense that would have resulted if Mattel had
applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, was
included as a proforma disclosure in the financial statement footnotes.
Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R) using
the modified-prospective transition method. Accordingly, results for prior periods have not been restated and
compensation cost in 2006 includes the portion of share-based payment awards attributable to employee service
during the period for (i) grants made prior to January 1, 2006, but not previously included in the proforma
expense disclosures in Mattel’s financial statements, based on the measurement date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (ii) grants made subsequent to January 1, 2006
based on the measurement date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Beginning January 1, 2006 and in connection with the adoption of SFAS No. 123(R), Mattel recognizes the
cost of all new employee share-based payment awards on a straight-line attribution basis over the requisite
employee service period, net of estimated forfeitures; whereas, prior to January 1, 2006, Mattel used the graded
vesting attribution method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. In accounting for
the income tax benefits associated with employee exercises of share-based payments, Mattel has elected to adopt
the alternative simplified method as permitted by FSP No. FAS 123(R)-3, Accounting for the Tax Effects of
Share-Based Payment Awards. FSP No. FAS 123(R)-3 permits the adoption of either the transition guidance
described in SFAS No. 123(R) or the alternative simplified method specified in FSP No. FAS 123(R)-3 to
account for the income tax effects of share-based payment awards. In determining when additional tax benefits
associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions of the
tax law, which allows deductions for share-based payment exercises to be utilized before previously existing net
operating loss carryforwards. In computing dilutive shares under the treasury stock method, Mattel does not
reduce the tax benefit amount within the calculation for the amount of deferred tax assets that would have been
recognized had Mattel previously expensed all share-based payment awards.
Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and
the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation
49