Mattel 2011 Annual Report Download - page 54

Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized upon
shipment or upon receipt of products by the customer, depending on the 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.
Value added taxes are recorded on a net basis, and are excluded from revenue. Credit limits and payment terms
are established based on the underlying criteria that collectibility must be reasonably assured at the levels set for
each customer. Extensive evaluations are performed on an ongoing basis throughout the fiscal year of each
customer’s financial performance, cash generation, financing availability, and liquidity status. Customers are
reviewed at least annually, with more frequent reviews being performed, if necessary, based on the customer’s
financial condition and the level of credit being extended. For customers who are experiencing financial
difficulties, management performs additional financial analyses prior to shipping to those customers on credit.
Customer terms and credit limits are adjusted, if necessary, to reflect the results of the review. Mattel uses a
variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a
credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with
unrelated third parties, or requiring cash in advance of shipment.
The following table summarizes Mattel’s allowance for doubtful accounts at December 31:
2011 2010 2009
(In millions, except percentage
information)
Allowance for doubtful accounts ........................................ $ 26.3 $ 21.8 $ 24.5
As a percentage of total accounts receivable ............................... 2.1% 1.9% 3.2%
Mattel’s allowance for doubtful accounts is based on management’s assessment of the business
environment, customers’ financial condition, historical collection experience, accounts receivable aging, and
customer disputes. Changes in the allowance for doubtful accounts reflect management’s assessment of the
factors noted above, including past due accounts, disputed balances with customers, and the financial condition
of customers. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts
receivable balances are actually written off.
Mattel believes that its allowance for doubtful accounts at December 31, 2011 is adequate and proper.
However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should
one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts
may not be sufficient to cover such losses. Any incremental bad debt charges would negatively affect the results
of operations of one or more of Mattel’s business segments.
Inventories—Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess and slow-moving inventory.
Inventory allowances are charged to cost of sales and establish a lower cost basis for the inventory. Management
believes that the accounting estimate related to the allowance for obsolescence is a “critical accounting estimate”
because changes in the assumptions used to develop the estimate could materially affect key financial measures,
including gross profit, net income, and inventories. As more fully described below, valuation of Mattel’s
inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in
the buying patterns of both retailers and consumers and inventory management of customers.
In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual
shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines,
strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and
consumers, and overall economic conditions. Unexpected changes in these factors could result in excess
inventory in a particular product line, which would require management to record a valuation allowance on such
inventory.
42