Mattel 2007 Annual Report Download - page 81

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Design and Development Costs
Product design and development costs are charged to the results of operations as incurred.
Employee Benefit Plans
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 Statement of Financial Accounting Standards (“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. Mattel adopted SFAS No. 158 in 2006. Actuarial valuations are
used in determining amounts recognized in the financial statements for retirement and other postretirement
benefit plans (see “Note 5 to the Consolidated Financial Statements—Employee Benefit Plans”).
Share-Based Payments
Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the
recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Under APB Opinion No. 25, compensation expense is
only recognized in the statements of operations for employee stock options with exercise prices below the
measurement date market price of the company’s stock (see “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.
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