Mattel 2008 Annual Report Download - page 48

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• Quantity on hand of the item;
• Standard retail price of the item;
• Mattel’s cost for the item; and
• Length of time the item has been in inventory.
The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
2008 2007 2006
(In millions, except percentage information)
Allowance for obsolescence ............................... $ 59.1 $ 51.7 $ 43.3
As a percentage of total inventory .......................... 10.8% 10.8% 10.1%
The increases in the allowance for obsolescence from 2007 to 2008 and from 2006 to 2007 were mainly due
to higher levels of excess inventory in 2008 and 2007, respectively. Management believes that its allowance for
obsolescence at December 31, 2008 is adequate and proper. However, the impact resulting from the
aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would
negatively affect the results of operations of one or more of Mattel’s business segments.
Recoverability of Goodwill and Nonamortizable Intangible Assets
Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets,
requires companies to test goodwill and nonamortizable intangible assets for impairment annually, or more often
if an event or circumstance indicates that an impairment may have occurred. Management believes that the
accounting estimate related to the recoverability of its goodwill and nonamortizable intangible assets is a “critical
accounting estimate” because significant changes in the assumptions used to develop the estimates could
materially affect key financial measures, including net income, goodwill, and other intangible assets.
The recoverability of goodwill involves a high degree of judgment since the first step of the impairment test
required by SFAS No. 142 consists of a comparison of the fair value of a reporting unit with its book value.
Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a
reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book
value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the
reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount
representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value
of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
For purposes of evaluating whether goodwill is impaired, SFAS No. 142 requires that goodwill be allocated
to various reporting units, which are either at the operating segment level or one reporting level below the
operating segment. Mattel’s reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price
Brands US, American Girl Brands, and International. Goodwill is allocated to Mattel’s reporting units based on
an allocation of brand-specific goodwill to the reporting units selling those brands. Mattel utilizes the fair value
based upon the discounted cash flows that the business can be expected to generate in the future (the “Income
Approach”) when evaluating goodwill for impairment. The Income Approach valuation method requires Mattel
to make projections of revenue, operating costs and working capital investment for the reporting unit over a
multi-year period. Additionally, management must make an estimate of a weighted average cost of capital to be
used as a discount rate. Changes in these projections or estimates could result in a reporting unit either passing or
failing the first step in the SFAS No. 142 impairment model, which could significantly change the amount of any
impairment ultimately recorded. As of September 30, 2008, Mattel performed the annual impairment test for
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