Mattel 2011 Annual Report Download - page 56

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estimates related to the fair value estimates of its goodwill and nonamortizable intangible assets are “critical
accounting estimates” 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.
Assessing goodwill for impairment 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. During the third quarter, 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 value. Mattel also considered events and
circumstances subsequent to the annual impairment tests in concluding there was no impairment at December 31,
2011.
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. During the third quarter,
Mattel performed the annual impairment test for nonamortizable intangible assets as required and determined that
its nonamortizable intangible assets were not impaired since the fair value of the nonamortizable intangible assets
exceeded its carrying value. Mattel also considered events and circumstances subsequent to these impairment
tests in concluding there was no impairment at December 31, 2011. However, during 2011, for one of Mattel’s
nonamortizable intangible assets with a carrying value of approximately $113 million, the fair value did not
exceed the carrying value by a significant margin. Future changes in estimates resulting in lower than currently
anticipated future cash flows and fair value could negatively affect the valuation, which may result in Mattel
recognizing an impairment charge in the future.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer
promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily
on customer purchases, customer performance of specified promotional activities, and other specified factors
such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross
revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $575.1
million, $530.4 million, and $503.5 million during 2011, 2010, and 2009, respectively.
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