Mattel 2007 Annual Report Download - page 61

Significant changes in the assumptions used to develop estimates for product recall or withdrawal reserves
could affect key financial measures, including accounts receivable, inventory, net sales, cost of sales, other
selling and administrative expenses, and net income. In addition, estimating product recall or withdrawal reserves
requires a high degree of judgment in areas such as estimating the portion of recalled or withdrawn products sold
to end consumers and the portion held by retailers, return rates, shipping and handling for returns, the way in
which affected products held by consumers may be remediated (e.g., through redeemable vouchers, or a repair kit
being provided), and the costs of meeting regulatory requirements in various countries (e.g., public notification).
The following table summarizes Mattel’s reserves and reserve activity for the 2007 Product Recalls:
2007 Reserve
Charges
Reserves
Used
Reserves at
December 31, 2007
(In thousands)
Impairment of inventory on hand .......................... $ 3,849 $ (3,849) $ —
Product returns / redemptions ............................. 60,887 (48,275) 12,612
Other ................................................ 3,712 (1,352) 2,360
Total ............................................. $68,448 $(53,476) $14,972
Mattel believes that its reserves for the 2007 Product Recalls at December 31, 2007 are adequate and proper.
However, as described above, if the portions of inventory held at retailers and end consumers are different than
estimated, return rates and shipping and handling for returns are higher than expected, or the costs of meeting
regulatory requirements are higher than expected, then the reserves for the 2007 Product Recalls of $15.0 million
at December 31, 2007 may not be sufficient to cover such losses.
Benefit Plan Assumptions
As discussed in Note 5 to the consolidated financial statements, Mattel and certain of its subsidiaries have
retirement and other postretirement benefit plans covering substantially all employees of these companies. Mattel
accounts for its defined benefit pension plans in accordance with SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, SFAS No. 87, Employers’ Accounting for Pensions,
and its other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions. See Item 8 “Financial Statements and Supplementary Data—Note
5 to the Consolidated Financial Statements—Employee Benefit Plans.”
Actuarial valuations are used in determining amounts recognized in financial statements for retirement and
other postretirement benefit plans. These valuations incorporate the following significant assumptions:
• Weighted average discount rate to be used to measure future plan obligations and interest cost component
of plan income or expense;
• Rate of future compensation increases (for defined benefit pension plans);
• Expected long-term rate of return on plan assets (for funded plans); and
• Health care cost trend rates (for other postretirement benefit plans).
Management believes that these assumptions are “critical accounting estimates” because significant changes
in these assumptions could impact Mattel’s results of operations and financial position. Management believes
that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’
experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually
and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in
assumptions are amortized as part of plan income or expense in future periods in accordance with SFAS Nos. 87,
106 and 158.
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