Mattel 2010 Annual Report Download - page 50

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The following table summarizes Mattel’s obsolescence reserve at December 31:
2010 2009 2008
(In millions, except percentage information)
Allowance for obsolescence ................................... $ 46.9 $ 40.8 $ 59.1
As a percentage of total inventory .............................. 9.2% 10.3% 10.8%
The increase in the allowance for obsolescence from 2009 to 2010 was mainly due to higher levels of excess
inventory in 2010. Management believes that its allowance for obsolescence at December 31, 2010 is adequate
and proper. However, the impact resulting from the aforementioned factors could cause actual results to vary.
Any incremental obsolescence charges would negatively affect the results of operations of one or more of
Mattel’s business segments.
Recoverability of Goodwill and Nonamortizable Intangible Assets
Mattel tests goodwill and nonamortizable intangible assets for impairment annually, or more often if an
event or circumstance indicates that an impairment may have occurred. Management believes that the accounting
estimate related to the recoverability of its goodwill and nonamortizable intangible assets is a “critical accounting
estimate” because significant changes in the assumptions used to develop the estimates could materially affect
key financial measures, including net income, goodwill, and other intangible assets.
The recoverability of goodwill involves a high degree of judgment since the first step of the required
impairment test consists of a comparison of the fair value of a reporting unit with its book value. Based on the
assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit
and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the
reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is
allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value
of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s
goodwill exceeds the estimated fair value of that goodwill.
For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units,
which are either at the operating segment level or one reporting level below the operating segment. Mattel’s
reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price Brands US, American Girl
Brands, and International. Goodwill is allocated to Mattel’s reporting units based on an allocation of brand-
specific goodwill to the reporting units selling those brands. Mattel utilizes the fair value based upon the
discounted cash flows that the business can be expected to generate in the future (the “Income Approach”) when
evaluating goodwill for impairment. The Income Approach valuation method requires Mattel to make projections
of revenue, operating costs, and working capital investment for the reporting unit over a multi-year period.
Additionally, management must make an estimate of a weighted average cost of capital that a market participant
would use as a discount rate. Changes in these projections or estimates could result in a reporting unit either
passing or failing the first step of the impairment model, which could significantly change the amount of any
impairment ultimately recorded. As of September 30, 2010, Mattel performed the annual impairment test for
goodwill as required and determined that its goodwill was not impaired since, for each of the reporting units, the
fair value of the reporting unit substantially exceeded its carrying amount. Mattel also considered events and
circumstances subsequent to the annual impairment tests in concluding there was no impairment at December 31,
2010.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the
assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks
and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value
is measured using a multi-period royalty savings method, which reflects the savings realized by owning the
trademarks and trade names, and thus not having to pay a royalty fee to a third party. As of September 30, 2010,
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