Mattel 2013 Annual Report Download - page 54

The following table summarizes Mattel’s obsolescence reserve at December 31:
2013 2012 2011
(In millions, except percentage
information)
Allowance for obsolescence ................................................. $49.1 $46.6 $39.2
As a percentage of total inventory ............................................ 7.9% 9.1% 7.5%
Management believes that its allowance for obsolescence at December 31, 2013 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 due to the assumptions that underlie
the valuation. For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting
units, which are at the operating segment level. Mattel’s reporting units are: (i) North America, (ii) International,
and (iii) American Girl. Mattel then assesses 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. When the
quantitative two-step goodwill impairment test is necessary, 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 greater
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.
When performing the quantitative two-step goodwill impairment test, 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 the first
step of the impairment model, which could significantly change the amount of any impairment ultimately
recorded.
During the third quarter of 2013, Mattel assessed its goodwill for impairment by evaluating qualitative
factors, such as reporting unit performance, results of its most recent quantitative assessments, general economic
conditions, access to capital, the industry and competitive environment, current business strategies, and the
interest rate environment, for each of its reporting units and determined that it was not more likely than not that
the fair value of its reporting units were less than the carrying amounts. As a result of this determination, the
quantitative two-step goodwill impairment test was deemed unnecessary.
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 excess earnings method, which reflects the incremental after-tax cash flows
attributable to the trademark and trade names after deducting the appropriate contributory asset charges.
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