Mattel 2007 Annual Report Download - page 65

Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. As a result, the tax expense reflected in Mattel’s consolidated statements of operations is different than
that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent,
such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over time, such as
depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income
tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax returns in future
years for which Mattel has already recorded a tax benefit in its consolidated statement of operations. Mattel
records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available
evidence, management believes expected future taxable income is not likely to support the use of a deduction or
credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and
more frequently if actual operating results differ significantly from forecasted results.
Effective January 1, 2007, Mattel adopted FIN 48, Accounting for Uncertainty in Income Taxes,an
interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold an uncertain tax position is required to meet before tax benefits associated with such
uncertain tax positions are recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. FIN 48
also requires that amounts recognized in the balance sheet related to uncertain tax positions be classified as a
current or noncurrent liability, based upon the expected timing of the payment to a taxing authority.
Upon adoption of FIN 48, Mattel reclassified tax reserves related to uncertain tax positions for which a cash
tax payment is not expected within the next twelve months to noncurrent liabilities. Mattel’s adoption of FIN 48
did not require a cumulative effect adjustment to the opening balance of its retained earnings. Mattel classifies
interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Mattel records unrecognized tax benefits for US federal, state, local, and foreign tax positions related
primarily to transfer pricing, tax credits claimed, tax nexus and apportionment. For each reporting period,
management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax
benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its
unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit
experience, the status of current audits, conclusions of tax audits, lapsing of applicable statutes of limitations,
identification of new issues, and any administrative guidance or developments. Mattel recognizes unrecognized
tax benefits in the first financial reporting period in which information becomes available indicating that such
benefits are more-likely-than-not of being realized.
The 2007 income tax provision includes net benefits related to prior years of $42.0 million related to
reassessments of tax exposures based on the status of current audits in various jurisdictions around the world,
including settlements, partially offset by enacted tax law changes.
In 2006, Mattel recognized total tax benefits of $63.0 million related to settlements and refunds of ongoing
audits with foreign and state tax authorities. Of the $63.0 million of total tax benefit recorded, $57.5 million
represents refunds of previously paid taxes, which was recorded as an expense in previous years. Accordingly,
these refunds were recorded as a reduction to income tax expense in the period the refunds were received by
Mattel. The remainder of the tax benefit recorded in 2006 is a net reduction to total income tax reserves resulting
from tax settlements with foreign and state tax authorities.
In 2005, Mattel reduced its total income tax reserves by $38.6 million as a result of tax settlements reached
with various tax authorities and reassessments of tax exposures based on the status of current audits in various
jurisdictions around the world.
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