Mattel 2006 Annual Report Download - page 74

Derivative Instruments
Mattel uses foreign currency forward exchange and option contracts as cash flow hedges primarily to hedge
its purchases and sales of inventory denominated in foreign currencies. Additionally, Mattel uses fair value
hedges to hedge intercompany loans and advances denominated in foreign currencies.
At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges
and documents the relationship of the hedge to the underlying transaction, for cash flow hedges, or the
recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout
the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value
associated with hedge ineffectiveness, if any, are recorded in the results of operations.
Changes in fair value of Mattel’s cash flow derivatives are deferred and recorded as part of accumulated
other comprehensive loss in stockholders’ equity until the underlying transaction is settled. Upon settlement, any
gain or loss resulting from the derivative is recorded in the results of operations. Transaction gains or losses on
hedged intercompany inventory transactions are recorded in the consolidated statements of operations in the
period in which the inventory is sold to customers. In the event that an anticipated transaction is no longer likely
to occur, Mattel recognizes the change in fair value of the derivative in its results of operations in the period the
determination is made.
Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in foreign
currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these
contracts. Changes in fair value of these derivatives were not significant to the results of operations during any
year.
Revenue Recognition and Sales Adjustments
Revenue is recognized upon shipment or upon receipt of products by the customer, depending on terms,
provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement
exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and
collectibility is reasonably assured. Management assesses the business environment, the customer’s financial
condition, historical collection experience, accounts receivable aging and customer disputes to determine whether
collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale,
Mattel does not recognize revenue until collection occurs. 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.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response
advertising consists primarily of catalog production and mailing costs that are generally amortized within three
months from the date the catalogs are mailed.
Product Recalls
Mattel establishes a reserve for product recalls on a product-specific basis during the period in which the
circumstances giving rise to the recall become known. Facts underlying the recall, including where the product
affected by the recall is located (e.g., with consumers, in customers’ inventory, or in Mattel’s inventory), whether
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