Mattel 2007 Annual Report Download - page 59

At the end of each quarter, management within each business segment, Mattel Girls & Boys Brands US,
Fisher-Price Brands US, American Girl Brands and International, performs a detailed review of its inventory on
an item-by-item basis and identifies products that are believed to be impaired. Management assesses the need for,
and the amount of, an obsolescence reserve based on the following factors:
• Customer and/or consumer demand for the item;
• Overall inventory positions of Mattel’s customers;
• Strength of competing products in the market;
• Quantity on hand of the item;
• Standard retail price of the item;
• Mattel’s cost for the item; and
• Length of time the item has been in inventory.
The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
2007 2006 2005
(In millions, except percentage information)
Allowance for obsolescence .............................. $ 51.7 $ 43.3 $ 60.5
As a percentage of total inventory ......................... 10.8% 10.1% 13.8%
The increase in the allowance for obsolescence from 2006 to 2007 was mainly due to a higher level of
excess inventory in 2007. The decrease in the allowance for obsolescence from 2005 to 2006 was mainly due to
the 2006 liquidation of excess inventory. Management believes that its allowance for obsolescence at
December 31, 2007 is adequate and proper. However, the impact resulting from the aforementioned factors could
cause actual results to vary. Any incremental obsolescence charges would negatively affect the results of
operations of one or more of Mattel’s business segments.
Recoverability of Goodwill and Nonamortizable Intangible Assets
SFAS No. 142 requires companies to test goodwill and nonamortizable intangible assets for impairment
annually, or more often if an event or circumstance indicates that an impairment may have occurred.
Management believes that the accounting estimate related to the recoverability of its goodwill and
nonamortizable intangible assets is a “critical accounting estimate” because significant changes in the
assumptions used to develop the estimates could materially affect key financial measures, including net income,
goodwill, and other intangible assets.
The recoverability of goodwill involves a high degree of judgment since the first step of the impairment test
required by SFAS No. 142 consists of a comparison of the fair value of a reporting unit with its book value.
Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a
reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book
value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the
reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount
representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value
of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
SFAS No. 142 requires that goodwill be allocated to various reporting units, which are either at the
operating segment level or one reporting level below the operating segment, for purposes of evaluating whether
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