Mattel 2007 Annual Report Download - page 60

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goodwill is impaired. Mattel’s reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price
Brands US, American Girl Brands and International. Goodwill is allocated to Mattel’s reporting units based on
an allocation of brand-specific goodwill to the reporting units selling those brands. Mattel utilizes the fair value
of the cash flows that the business can be expected to generate in the future (the “Income Approach”) when
evaluating goodwill for impairment. The Income Approach valuation method requires Mattel to make projections
of revenue, operating costs and working capital investment for the reporting unit over a multi-year period.
Additionally, management must make an estimate of its weighted average cost of capital to be used as a discount
rate. Changes in these projections or estimates could result in a reporting unit either passing or failing the first
step in the SFAS No. 142 impairment model, which could significantly change the amount of any impairment
ultimately recorded. As of September 30, 2007, Mattel performed the annual impairment test for goodwill as
required by SFAS No. 142 and determined that its goodwill was not impaired since, for each of the reporting
units, the fair value of the reporting unit exceeded its carrying amount during 2007, 2006, and 2005. There were
no events or circumstances that indicated the impairment test should be performed again at December 31, 2007.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the
assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks
and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value
is measured using a multi-period royalty savings method, which reflects the savings realized by owning the
trademarks and trade names, and thus not having to pay a royalty fee to a third party. As of September 30, 2007,
Mattel performed the annual impairment test for nonamortizable intangible assets as required by SFAS No. 142
and determined that its nonamortizable intangible assets were not impaired. There were no events or
circumstances that indicated the impairment test should be performed again at December 31, 2007.
Sales Adjustments
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. Sales adjustments for such programs totaled
$622.8 million, $507.9 million, and $444.5 million during 2007, 2006, and 2005, respectively.
The above-described programs primarily involve fixed amounts or percentages of sales to customers.
Accruals for such programs are calculated based on an assessment of customers’ purchases and performance
under the programs and any other specified factors. While the majority of sales adjustment amounts are readily
determinable at period end and do not require estimates, certain of the sales adjustments require management to
make estimates. In making these estimates, management considers all available information, including the overall
business environment, historical trends and information from customers. Management believes that the accruals
recorded for customer programs at December 31, 2007 are adequate and proper.
Product Recalls and Withdrawals
Mattel establishes a reserve for product recalls and withdrawals on a product-specific basis when
circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall
or withdrawal, including where the product affected by the recall or withdrawal is located (e.g., with consumers,
in customers’ inventory, or in Mattel’s inventory), cost estimates for shipping and handling for returns, whether
the product is repairable, cost estimates for communicating the recall or withdrawal to consumers and customers,
and cost estimates for parts and labor if the recalled or withdrawn product is deemed to be repairable, are
considered when establishing a product recall or withdrawal reserve. These factors are updated and reevaluated
each period and the related reserves are adjusted when these factors indicate that the recall or withdrawal reserve
is either not sufficient to cover or exceeds the estimated product recall or withdrawal expenses.
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