Mattel 2009 Annual Report Download - page 56

Management believes that these assumptions are “critical accounting estimates” because significant changes
in these assumptions could impact Mattel’s results of operations and financial position. Management believes
that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’
experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually
and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in
assumptions are amortized as part of plan income or expense in future periods.
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, 2009, Mattel determined the discount rate for its
domestic benefit plans used in determining the projected and accumulated benefit obligations to be 5.6%, as
compared to 5.4% and 6.2% for December 31, 2008 and 2007, 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 increase in the discount rate
from 5.4% to 5.6% will result in a decrease in benefit plan expense during 2010 of approximately $0.8 million.
The rate of future compensation increases used by Mattel for the benefit obligation of its domestic defined
benefit pension plans averaged 3.8% for 2009, 2008, and 2007, 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 3.8% for 2009 and 2008, and 4.0% for 2007, 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 2009, 2008 and 2007. 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 2010 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 7% in 2009 to 5% in 2011, with rates assumed
to stabilize in 2011 and thereafter, were used in determining plan expense for 2009. 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, 2009, Mattel adjusted the health
care cost trend rates for its other postretirement benefit plan obligation to range from 6% in 2009 reducing to 5%
in 2011, with rates assumed to stabilize in 2011 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 2010 by approximately $0.1 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, 2009 by approximately $4.5 million and
$(4.0) million, respectively, while a one percentage point increase/(decrease) would impact the service and
interest cost recognized for 2009 by approximately $0.3 million and $(0.2) million, respectively.
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