Mattel 2007 Annual Report Download - page 79

Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for
buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for
leasehold improvements. Tools, dies, and molds are amortized using the straight-line method over 3 years.
Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The
carrying value of property, plant, and equipment is reviewed when events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Any potential impairment identified is assessed by
evaluating the operating performance and future undiscounted cash flows of the underlying assets. When
property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the
consolidated balance sheet and any resulting gain or loss is included in the results of operations.
Goodwill and Nonamortizable Intangible Assets
Goodwill is allocated to various reporting units, which are either at the operating segment level or one
reporting level below the operating segment for purposes of evaluating whether 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. Mattel tests goodwill for impairment annually in the third quarter, or
whenever events or changes in circumstances indicate that the carrying value may not be recoverable, which is
based on the fair value of the cash flows that the reporting units can be expected to generate in the future.
Mattel also tests its nonamortizable intangible assets, including trademarks and trade names, for impairment
by comparing the estimated fair values of the nonamortizable intangible assets with the carrying values. Mattel
tests nonamortizable intangible assets annually in the third quarter, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The fair value of trademark and trade
name intangibles 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.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s
currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged
receivables and payables balances that are denominated in a currency other than the applicable functional
currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating
activities are recorded in the components of operating income in the consolidated statement of operations. Gains
and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating
income, net in the consolidated statements of operations in the period in which the currency exchange rate
changes. Inventory purchase transactions denominated in the Euro, British pound sterling, Canadian dollar,
Mexican peso, Hong Kong dollar, Indonesian rupiah, and Venezuela bolivar are the primary transactions that
cause foreign currency transaction exposure for Mattel.
Derivative Instruments
Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its
purchases and sales of inventory denominated in foreign currencies. Additionally, Mattel uses fair value hedges
to hedge intercompany loans and advances denominated in foreign currencies.
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