Mattel 2008 Annual Report Download - page 68

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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. Actuarial valuations are used in determining amounts recognized
in the financial statements for retirement and other postretirement benefit plans (see “Note 7 to the Consolidated
Financial Statements—Employee Benefit Plans”).
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
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.
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.
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
Mattel recognized compensation expense of $9.5 million, $7.4 million, and $23.9 million for stock options
during 2008, 2007, and 2006, respectively, as a component of other selling and administrative expenses. Stock
option expense in 2006 included $19.3 million related to prior period unintentional stock option accounting
errors (see “Note 10 to the Consolidated Financial Statements—Share-Based Payments”). Compensation expense
recognized related to grants of restricted stock and restricted stock units (“RSUs”) to certain employees and
non-employee Board members was $26.2 million, $14.8 million, and $3.6 million in 2008, 2007, and 2006,
respectively, and is a component of other selling and administrative expenses. As of December 31, 2008, total
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