Mattel 2008 Annual Report Download - page 51

At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the
projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan
liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost
component of plan income or expense. At December 31, 2008, Mattel determined the discount rate for its
domestic benefit plans used in determining the projected and accumulated benefit obligations to be 5.4% as
compared to 6.2% and 5.7% for 2007 and 2006, respectively. In estimating this rate, Mattel reviews rates of
return on high-quality, corporate bond indices, which approximate the timing and amount of benefit payments.
Assuming all other benefit plan assumptions remain constant, the decrease in the discount rate from 6.2% to
5.4% will result in an increase in benefit plan expense during 2009 of approximately $4.0 million.
The rate of future compensation increases used by Mattel for the benefit obligation of its domestic defined
benefit pension plans averaged 3.75% for 2008 and 2007, and 4.0% for 2006, based on plan demographics. The
rate of future compensation increases used by Mattel for the net periodic pension cost of its domestic defined
benefit pension plans averaged 3.75% for 2008, 4.0% for 2007, and 4.4% for 2006, based on plan demographics.
These assumptions are reviewed annually based on historical salary increases for participants in the defined
benefit pension plans. This assumption impacts the service and interest cost components of plan income or
expense.
The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets
that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the
arithmetic average of past returns, economic and stock market conditions and future expectations and the long-
term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is
used to calculate the expected return on plan assets that is used in calculating pension income or expense. The
difference between this expected return and the actual return on plan assets is deferred, net of tax, and is included
in accumulated other comprehensive loss. The net deferral of past asset gains or losses affects the calculated
value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return for its
domestic defined benefit pension plans was 8.0% in 2008, 2007, and 2006. Assuming all other benefit plan
assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result
in an increase in benefit plan expense during 2009 of approximately $2.5 million.
The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect
management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service
and interest cost components of plan expense. Rates ranging from 8.0% in 2008 to 5% in 2011, with rates
assumed to stabilize in 2012 and thereafter, were used in determining plan expense for 2008. These rates are
reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit
plans as well as estimates based on current economic conditions. As of December 31, 2008, Mattel adjusted the
health care cost trend rates for its other postretirement benefit plans to range from 7.0% in 2008 reducing to 5.0%
in 2011, with rates assumed to stabilize in 2012 and thereafter. Assuming all other postretirement benefit plan
assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would
increase benefit plan expense during 2009 by approximately $0.3 million.
A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year
would impact the postretirement benefit obligation as of December 31, 2008 by approximately $4.8 million and
$(4.4) million, respectively, while a one percentage point increase/(decrease) would impact the service and
interest cost recognized for 2008 by approximately $0.3 million and $(0.3) million, respectively.
Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over
the requisite employee service period, net of estimated forfeitures. 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
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