Mattel 2006 Annual Report Download - page 61

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settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s
provision for income taxes, net income and deferred income tax assets and liabilities.
In the normal course of business, Mattel is regularly audited by federal, state and foreign tax authorities.
Mattel is currently under audit by the IRS for the 2004 and 2005 tax years. The ultimate settlement of any
particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated
financial statements.
New Accounting Pronouncements
SFAS No. 156
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which
requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value,
if practicable. The standard permits an entity to choose either the amortization method or the fair value
measurement method for each class of separately recognized servicing assets and servicing liabilities. Under the
amortization method, an entity amortizes servicing assets or servicing liabilities in proportion to and over the
period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities
for impairment or increased obligation based on fair value at each reporting date. Under the fair value
measurement method, an entity measures servicing assets or servicing liabilities at fair value at each reporting
date and reports changes in fair value in earnings in the period in which the changes occur. SFAS No. 156 is
effective as of the beginning of the first fiscal year beginning after September 15, 2006. Mattel does not expect
the adoption of SFAS No. 156 to have a material impact on its results of operations and financial position.
FIN 48
In July 2006, the FASB issued Final Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold an uncertain tax position is required to meet before tax benefits associated with
such uncertain tax positions are recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. In addition, FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for
Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the
amounts recognized in the consolidated balance sheets prior to the adoption of FIN 48 and the amounts reported
after adoption are accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings
upon adoption of FIN 48. FIN 48 also requires that amounts recognized in the balance sheet related to uncertain
tax positions be classified as a current or noncurrent liability, based upon the timing of the ultimate payment to a
taxing authority. Mattel currently records tax reserves related to uncertain tax positions as a current liability and
upon adoption of FIN 48, will reclassify to noncurrent liabilities those uncertain tax positions for which a cash
tax payment is not expected within the next twelve months. Mattel will adopt FIN 48 as of January 1, 2007 and
does not believe that the adoption of FIN 48 will have a material impact on results of operations.
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance
for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for
expanded information about the extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers
to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the market in which the reporting entity transacts. SFAS No. 157 clarifies the principle that
fair value should be based on the assumptions market participants would use when pricing the asset or liability
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