Mattel 2010 Annual Report Download - page 52

Actuarial valuations are used in determining amounts recognized in the financial statements for retirement
and other postretirement benefit plans. These valuations incorporate the following significant assumptions:
• Weighted average discount rate to be used to measure future plan obligations and interest cost
component of plan income or expense;
• Rate of future compensation increases (for defined benefit pension plans);
• Expected long-term rate of return on plan assets (for funded plans); and
• Health care cost trend rates (for other postretirement benefit plans).
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, 2010, Mattel determined the discount rate for its
domestic benefit plans used in determining the projected and accumulated benefit obligations to be 5.2%, as
compared to 5.6% and 5.4% for December 31, 2009 and 2008, 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 decrease in the discount rate
from 5.6% to 5.2% would result in an increase in benefit plan expense during 2011 of approximately $2 million.
The rate of future compensation increases used by Mattel for the benefit obligation and the net periodic
pension cost of its domestic defined benefit pension plans averaged 3.8% for 2010, 2009, and 2008, 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 2010, 2009, and 2008. 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 2011 of approximately $2 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 6% in 2010 to 5% in 2011, with rates assumed
to stabilize in 2011 and thereafter, were used in determining plan expense for 2010. 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, 2010, Mattel adjusted the health
44