Mattel 2007 Annual Report Download - page 68

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Rate Risk
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory
purchase transactions denominated in the Euro, British pound sterling, Canadian dollar, Mexican peso, Hong
Kong dollar, Indonesian rupiah, and Venezuela bolivar were the primary transactions that caused currency
transaction exposure for Mattel during 2007, 2006, and 2005. Mattel seeks to mitigate its exposure to market risk
by monitoring its currency transaction exposure for the year and partially hedging such exposure using foreign
currency forward exchange contracts primarily to hedge its purchase and sale of inventory, and other
intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of
up to 18 months. For those intercompany receivables and payables that are not hedged, the transaction gains or
losses are recorded in the consolidated statement of operations in the period in which the exchange rate changes
as part of operating income or other non-operating income, net based on the nature of the underlying transaction.
Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated
statement of operations in the period in which the inventory is sold to customers. In addition, Mattel manages its
exposure to currency exchange rate fluctuations through the selection of currencies used for international
borrowings. Mattel does not trade in financial instruments for speculative purposes.
Mattel’s financial position is also impacted by currency exchange rate fluctuations on translation of its net
investment in subsidiaries with non-US dollar functional currencies. Assets and liabilities of subsidiaries with
non-US dollar functional currencies are translated into US dollars at fiscal year-end exchange rates. Income,
expense and cash flow items are translated at weighted average exchange rates prevailing during the fiscal year.
The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive
loss within stockholders’ equity. Mattel’s primary currency translation exposures during 2007 were related to its
net investment in entities having functional currencies denominated in the Euro, Mexican peso, Indonesian
rupiah, British pound sterling, and Brazilian real.
Mattel’s foreign currency forward exchange contracts that were used to hedge firm foreign currency
commitments as of December 31, 2007 are shown in the following table. All contracts are against the US dollar
and are maintained by reporting units with a US dollar functional currency, with the exception of the Indonesian
rupiah contracts, which are maintained by entities with a rupiah functional currency.
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