Mattel 2014 Annual Report Download - page 53

At the end of each quarter, management within each business segment, North America, International, and
American Girl, performs a detailed review of its inventory on an item-by-item basis and identifies products that
are believed to be impaired. Management assesses the need for, and the amount of, an obsolescence reserve
based on the following factors:
• Customer and/or consumer demand for the item,
• Overall inventory positions of Mattel’s customers,
• Strength of competing products in the market,
• Quantity on hand of the item,
• Sales price of the item,
• Mattel’s cost for the item, and
• Length of time the item has been in inventory.
The timeframe 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:
2014 2013 2012
(In millions, except percentage
information)
Allowance for obsolescence ............................................. $46.9 $49.1 $46.6
As a percentage of total inventory ......................................... 7.7% 7.9% 9.1%
Management believes that its allowance for obsolescence at December 31, 2014 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.
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