Mattel 2008 Annual Report Download - page 52

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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), Accounting for Stock-Based Compensation 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.
Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation
model. The expected life of the options used in this calculation is the period of time the options are expected to
be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected
dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life.
Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
Management believes that these assumptions are “critical accounting estimates” because significant changes in
the assumptions used to develop the estimates could materially affect key financial measures, including net
income.
The following weighted average assumptions were used in determining the fair value of options granted:
2008 2007 2006
Expected life (in years) .................................................... 4.8 4.7 5.1
Risk-free interest rate ...................................................... 3.2% 4.6% 4.9%
Volatility factor .......................................................... 25.6% 22.8% 28.0%
Dividend yield ........................................................... 3.7% 2.8% 2.8%
Weighted average fair value per granted option ................................. $3.67 $4.76 $4.51
The following table summarizes the sensitivity of valuation assumptions within the calculation of stock
option fair values, if all other assumptions are held constant:
Increase in
Assumption
Factor
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years) .................................................... 1year 5.5
Risk-free interest rate ..................................................... 1% 8.8
Volatility factor .......................................................... 1% 4.1
Dividend yield ........................................................... 1% (12.9)
(Decrease) in
Assumption
Factor
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years) .................................................... (1)year (7.1)
Risk-free interest rate ..................................................... (1)% (8.5)
Volatility factor .......................................................... (1)% (4.1)
Dividend yield ........................................................... (1)% 14.2
48