Mattel 2011 Annual Report Download - page 57

The above-described programs primarily involve fixed amounts or percentages of sales to customers.
Accruals for such programs are calculated based on an assessment of customers’ purchases and performance
under the programs and any other specified factors. While the majority of sales adjustment amounts are readily
determinable at period end and do not require estimates, certain of the sales adjustments require management to
make estimates. In making these estimates, management considers all available information, including the overall
business environment, historical trends, and information from customers. Management believes that the accruals
recorded for customer programs at December 31, 2011 are adequate and proper.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering
substantially all employees of these companies. See Item 8 “Financial Statements and Supplementary Data—
Note 6 to the Consolidated Financial Statements—Employee Benefit Plans.”
Actuarial valuations are used in determining amounts recognized in the financial statements for certain
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, 2011, Mattel determined the discount rate for its
domestic benefit plans used in determining the projected and accumulated benefit obligations to be 4.5%, as
compared to 5.2% and 5.6% for December 31, 2010 and 2009, 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 5.2% to 4.5% would result in an increase in benefit plan expense during 2012 of approximately $3 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 2011, 2010, and 2009, 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
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