Mattel 2014 Annual Report Download - page 74

Design and Development Costs
Product design and development costs primarily include employee compensation and outside services and
are charged to the results of operations as incurred.
Employee Benefit Plans
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering
substantially all employees of these companies. Actuarial valuations are used in determining amounts recognized
in the financial statements for certain retirement and other postretirement benefit plans (see “Note 4 to the
Consolidated Financial Statements—Employee Benefit Plans”).
Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over
the requisite employee service period, net of estimated forfeitures. In determining when additional tax benefits
associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions under
the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing
net operating loss carryforwards.
Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
the expected dividends. Mattel estimates the fair value of options granted using the Black-Scholes valuation
model. The expected life of the options used in this calculation is the period of time the options are expected to
be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected
dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life.
Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
Income Taxes
Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year
in which the differences are expected to reverse.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax
authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a
material impact on Mattel’s consolidated financial statements.
Venezuelan Operations
Since 2010, Mattel has accounted for Venezuela as a highly inflationary economy and, accordingly, Mattel’s
Venezuelan subsidiary uses the US dollar as its functional currency. Mattel’s Venezuelan subsidiary has been
unable to access US dollars as a result of currency restrictions enacted by the Venezuelan government. These
currency restrictions, along with economic and political instability, continue to impact the operating results of
Mattel’s Venezuelan subsidiary. In 2014, Mattel’s Venezuelan subsidiary represented less than 0.1% of Mattel’s
consolidated net sales in 2014 and had approximately $22 million of net monetary assets denominated in
Venezuelan bolivar fuerte as of December 31, 2014. If the Venezuelan bolivar fuerte significantly devalues in the
future, or if the economic or political conditions significantly worsen, Mattel may consider ceasing operations of
its Venezuelan subsidiary, which could result in a pre-tax charge to its consolidated statement of operations of up
to $95 million.
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