Mattel 2006 Annual Report Download - page 60

year ended December 31, 2006 as a component of other selling and administrative expenses. Prior to January 1,
2006, no compensation expense was recognized in the consolidated statements of operations for stock options.
Compensation expense recognized related to grants of restricted stock and restricted stock units (“RSUs”) to
certain employees and non-employee Board members was $3.6 million during the year ended December 31,
2006. As of December 31, 2006, total unrecognized compensation cost related to unvested share-based payments
totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years.
Income Taxes
Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected
future income, US and foreign statutory income tax rates, and tax regulations and planning opportunities in the
various jurisdictions in which Mattel operates. Management believes that the accounting estimate related to
income taxes is a “critical accounting estimate” because significant judgment is required in interpreting tax
regulations in the US and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and
assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those
judgments, and changes in judgments could materially affect Mattel’s consolidated financial statements.
Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. As a result, the tax expense reflected in Mattel’s consolidated statements of operations is different than
that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent,
such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over time, such as
depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income
tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax returns in future
years for which Mattel has already recorded a tax benefit in its consolidated statement of operations. Mattel
records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available
evidence, management believes expected future taxable income is not likely to support the use of a deduction or
credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and
more frequently if actual operating results differ significantly from forecasted results.
Mattel accrues a tax reserve for additional income taxes and interest, which may become payable in future
years as a result of audit adjustments by tax authorities. Mattel applies a consistent methodology to estimate any
additional tax liabilities based on management’s assessment of all relevant information, including prior audit
experiences. The tax reserves are periodically reviewed and are adjusted as circumstances warrant and as events
occur that affect Mattel’s liability for additional taxes, such as the lapsing of applicable statutes of limitations,
conclusion of tax audits, identification of new issues, and any administrative guidance or administrative
developments.
As of December 31, 2006, Mattel’s tax reserves totaled approximately $127 million, and related to potential
income tax audit adjustments by US federal, state and foreign tax authorities primarily in areas such as transfer
pricing and challenges to Mattel’s global intercompany pricing structure; challenges to tax credits claimed by
local tax authorities; income tax nexus and apportionment issues for which local tax authorities may challenge
Mattel’s nexus activities and apportionment among entities and jurisdictions; and issues identified in current
income tax audits. Mattel will adopt FIN 48 as of January 1, 2007.
In 2006, Mattel recognized total income tax benefits of $63.0 million related to settlements of ongoing
audits with foreign tax authorities and a settlement with a state tax authority for tax years 1997 and 1998. Of the
$63.0 million of total income tax benefit recorded, $57.5 million represents refunds of previously paid taxes,
recorded as an expense in previous years. These refunds were recorded as a reduction to income tax expense in
the period the refunds were received by Mattel. The remainder of the tax benefit recorded in 2006 is a net
reduction to total income tax reserves resulting from tax settlements with foreign and state tax authorities.
In 2005, Mattel reduced its total income tax reserves by $38.6 million as a result of tax benefits primarily
relating to audit settlements reached with certain tax authorities in both the US and abroad. The ultimate
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