Mattel 2009 Annual Report Download - page 71

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Venezuelan Operations
Mattel applies to the Venezuelan government’s Foreign Exchange Administrative Commission, CADIVI,
for the conversion of local currency to US dollars at the official exchange rate. The official exchange rate had
been fixed at 2.15 Venezuelan bolivar fuertes to the US dollar through December 31, 2009. For US dollar needs
exceeding conversions obtained through CADIVI, the parallel exchange market, with rates substantially less
favorable than the official exchange rate, may be used to obtain US dollars without approval from CADIVI.
Effective December 31, 2009, Mattel changed the rate it uses to translate its Venezuelan subsidiary’s
transactions and balances from the official exchange rate to the parallel exchange rate, which was quoted at 5.97
Venezuelan bolivar fuertes to the US dollar on December 31, 2009. The resulting foreign currency translation
adjustment of approximately $15 million increased accumulated other comprehensive loss within stockholders’
equity as of December 31, 2009. Mattel’s considerations for changing the rate included recent indicators that the
Venezuelan government is not likely to continue to provide substantial currency exchange at the official rate for
companies importing discretionary products, such as toys, recent difficulties in obtaining approval for the
conversion of local currency to US dollars at the official exchange rate (for imported products and dividends),
delays in previously obtained approvals being honored by CADIVI, and Mattel’s 2009 repatriation of dividends
generated by its Venezuelan subsidiary at the parallel exchange rate.
Effective January 1, 2010, and as required by US GAAP, Mattel will account for Venezuela as a highly
inflationary economy as the three-year cumulative inflation rate for Venezuela using the blended Consumer Price
Index (which is associated with the city of Caracas) and the National Consumer Price Index (developed
commencing in 2008 and covering the entire country of Venezuela) exceeded 100%. Accordingly, Mattel’s
Venezuelan subsidiary will use the US dollar as its functional currency effective January 1, 2010.
On January 11, 2010, the Venezuelan government devalued the Venezuelan bolivar fuerte and changed to a
two-tier exchange structure. The official exchange rate moved from 2.15 bolivar fuerte per US dollar to 2.60 for
essential goods and 4.30 for non-essential goods and services, with Mattel’s products falling into the
non-essential category.
Derivative Instruments
Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its
purchases and sales of inventory denominated in foreign currencies. At the inception of the contracts, Mattel
designates these derivatives as cash flow hedges and documents the relationship of the hedge to the underlying
transaction. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge
qualifies for hedge accounting. Changes in fair value associated with hedge ineffectiveness, if any, are recorded
in the results of operations. Changes in fair value of the cash flow hedge derivatives are deferred and recorded as
part of accumulated other comprehensive income in stockholders’ equity until the underlying transaction affects
earnings. In the event that an anticipated transaction is no longer likely to occur, Mattel recognizes the change in
fair value of the derivative in its results of operations in the period the determination is made.
Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and
advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does
not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of
change in the consolidated statements of operations.
Revenue Recognition and Sales Adjustments
Revenue is recognized upon shipment or upon receipt of products by the customer, depending on terms,
provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement
exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and
collectibility is reasonably assured. Management assesses the business environment, the customer’s financial
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