Mattel 2008 Annual Report Download - page 49

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goodwill as required by SFAS No. 142 and determined that its goodwill was not impaired since, for each of the
reporting units, the fair value of the reporting unit exceeded its carrying amount. Mattel also considered events
and circumstances subsequent to the annual impairment tests in concluding there was no impairment at
December 31, 2008.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the
assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks
and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value
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. As of September 30, 2008,
Mattel performed the annual impairment test for nonamortizable intangible assets as required by SFAS No. 142
and determined that its nonamortizable intangible assets were not impaired. Mattel also considered events and
circumstances subsequent to the annual impairment tests in concluding there was no impairment at December 31,
2008.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer
promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily
on customer purchases, customer performance of specified promotional activities, and other specified factors
such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross
revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $568.0
million, $622.8 million, and $507.9 million during 2008, 2007, and 2006, respectively.
The above-described programs primarily involve fixed amounts or percentages of sales to customers.
Accruals for such programs are calculated based on an assessment of customers’ purchases and performance
under the programs and any other specified factors. While the majority of sales adjustment amounts are readily
determinable at period end and do not require estimates, certain of the sales adjustments require management to
make estimates. In making these estimates, management considers all available information, including the overall
business environment, historical trends and information from customers. Management believes that the accruals
recorded for customer programs at December 31, 2008 are adequate and proper.
Product Recalls and Withdrawals
During 2007, Mattel recalled products with high-powered magnets that may become dislodged and other
products, some of which were produced using non-approved paint containing lead in excess of applicable
regulatory and Mattel standards. During the second half of 2007, additional products were recalled, withdrawn
from retail stores, or replaced at the request of consumers as a result of safety or quality issues (collectively, the
“2007 Product Recalls”). In the second quarter of 2008, Mattel determined that certain products had been shipped
into foreign markets in which the products did not meet all applicable regulatory standards for those markets.
None of these deficiencies related to lead or magnets. Mattel withdrew these products from retail stores in these
markets and, although not required to do so, also withdrew the products from the US and other markets because
they did not meet Mattel’s internal standards (the “2008 Product Withdrawal”).
Mattel establishes a reserve for product recalls and withdrawals on a product-specific basis when
circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall
or withdrawal, including where the product affected by the recall or withdrawal is located (e.g., with consumers,
in customers’ inventory, or in Mattel’s inventory), cost estimates for shipping and handling for returns, whether
the product is repairable, cost estimates for communicating the recall or withdrawal to consumers and customers,
and cost estimates for parts and labor if the recalled or withdrawn product is deemed to be repairable, are
considered when establishing a product recall or withdrawal reserve. These factors are updated and reevaluated
each period and the related reserves are adjusted when these factors indicate that the recall or withdrawal reserve
is either not sufficient to cover or exceeds the estimated product recall or withdrawal expenses.
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