Mattel 2007 Annual Report Download - page 63

measurement date market price of the company’s stock (see Item 8. “Financial Statements and Supplementary
Data—Note 8 to the Consolidated Financial Statements—Share-Based Payments”). The amount of additional
compensation expense that would have resulted if Mattel had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, was included as a pro forma disclosure in the
financial statement footnotes.
Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R),
Share-Based Payments, using the modified-prospective transition method. Accordingly, results for prior periods
have not been restated and compensation cost in 2006 and 2007 includes the portion of share-based payment
awards attributable to employee service during the applicable period for (i) grants made prior to January 1, 2006,
based on the measurement date fair value estimated in accordance with the original provisions of SFAS No. 123,
and (ii) grants made subsequent to January 1, 2006 based on the measurement date fair value estimated in
accordance with the provisions of SFAS No. 123(R).
Beginning January 1, 2006 and in connection with the adoption of SFAS No. 123(R), Mattel recognizes the
cost of all new employee share-based payment awards on a straight-line attribution basis over the requisite
employee service period, net of estimated forfeitures; whereas, prior to January 1, 2006, Mattel used the graded
vesting attribution method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. In accounting for
the income tax benefits associated with employee exercises of share-based payments, Mattel has elected to adopt
the alternative simplified method as permitted by FASB Staff Position (“FSP”) No. FAS 123(R)-3, Accounting
for the Tax Effects of Share-Based Payment Awards. FSP No. FAS 123(R)-3 permits the adoption of either the
transition guidance described in SFAS No. 123(R) or the alternative simplified method specified in
FSP No. FAS 123(R)-3 to account for the income tax effects of share-based payment awards. In determining
when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the
ordering of deductions under the tax law, which allows deductions for share-based payment exercises to be
utilized before previously existing net operating loss carryforwards. In computing dilutive shares under the
treasury stock method, Mattel does not reduce the tax benefit amount within the calculation for the amount of
deferred tax assets that would have been recognized had Mattel previously expensed all share-based payment
awards.
Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation
model. The expected life of the options used in this calculation is the period of time the options are expected to
be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected
dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life.
Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
Management believes that these assumptions are “critical accounting estimates” because significant changes in
the assumptions used to develop the estimates could materially affect key financial measures, including net
income.
The following weighted average assumptions were used in determining the fair value of options granted:
2007 2006 2005
Expected life (in years) ................................................. 4.7 5.1 4.9
Risk-free interest rate ................................................... 4.6% 4.9% 4.1%
Volatility factor ....................................................... 22.8% 28.0% 27.6%
Dividend yield ........................................................ 2.8% 2.8% 2.4%
Weighted average fair value per granted option .............................. $4.76 $4.51 $4.56
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