Mattel 2012 Annual Report Download - page 58

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, 2012, Mattel determined the discount rate for its
domestic benefit plans used in determining the projected and accumulated benefit obligations to be 4.0%, as
compared to 4.5% and 5.2% for December 31, 2011 and 2010, 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 4.5% to 4.0% would result in an increase in benefit plan expense during 2013 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 2012, 2011, and 2010, 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 2012, 2011, and 2010. 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 2013 of approximately $3 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 7.5% in 2012 to 5.0% in 2017, with rates
assumed to stabilize in 2017 and thereafter, were used in determining plan expense for 2012. 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, 2012, Mattel adjusted the
health care cost trend rates for its other postretirement benefit plan obligation to 8.5% for participants younger
than age 65 and 7.5% for participants age 65 and older. The cost trend rates are estimated to reduce to 6.1% for
participants younger than age 65 and 5.4% for participants age 65 and older by 2030, with rates assumed to
stabilize in 2030. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage
point increase in the assumed health care cost trend rates would increase benefit plan expense during 2013 by
$0.2 million.
A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year
would impact the postretirement benefit obligation as of December 31, 2012 by $1.8 million and $(1.5) million,
respectively, while a one percentage point increase/(decrease) would impact the service and interest cost
recognized for 2012 by $0.1 million and $(0.1) million, respectively.
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