Mattel 2012 Annual Report Download - page 56

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The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
2012 2011 2010
(In millions, except percentage
information)
Allowance for obsolescence ................................................. $46.6 $39.2 $46.9
As a percentage of total inventory ............................................ 9.1% 7.5% 9.2%
Management believes that its allowance for obsolescence at December 31, 2012 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.
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
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, goodwill is not impaired. 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 at the operating segment level. As more fully described in Item 8 “Financial Statements and
Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information,” on January 1,
2012, Mattel changed its operating segments to align with its new organizational structure, which resulted in
changes to its reporting units. The new reporting units are: (i) North America, (ii) International, and
(iii) American Girl. Mattel reassigned goodwill to the new reporting units based on a relative fair value approach.
In 2012, Mattel adopted Accounting Standards Update 2011-08, Intangibles – Goodwill and Other (Topic
350): Testing Goodwill for Impairment, which permits an entity to first assess qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This
qualitative assessment is used as a basis for determining whether it is necessary to perform the quantitative two-
step goodwill impairment test. However, due to the changes in Mattel’s reporting units and the reassignment of
its goodwill, Mattel did not perform this qualitative assessment during 2012, and performed quantitative tests for
each of its reporting units when evaluating goodwill for impairment.
When performing the quantitative assessment to evaluate goodwill for impairment, 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”). 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
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