Trouble on the Tracks for Thomas, the Tank Engine: Mattel’s Tax Accounting Woes

This real-world case examines how Mattel Inc., once the world’s largest toy company, manipulated earnings by improperly reclassifying Thomas & Company, an indefinite-lived intangible asset, as a finite-lived asset. The reclassification led to a $109 million misstatement of the valuation allowance for deferred tax assets, income tax expenses, and net income. Ultimately, true to the maxim “the cover-up is worse than the crime,” Mattel restated its financials and paid $98 million to settle a shareholder class-action lawsuit. The case requires students to apply higher-order learning skills, draw on the FASB’s Conceptual Framework, and analyze the use of intangible asset classification as an earnings management tool. Students also construct financial statements reflecting retrospective restatements and explore the interconnectedness of financial reporting and taxation courses. The case is appropriate for intermediate accounting, professional research, and capstone courses at both the undergraduate and graduate levels. JEL Classifications: A22; A23; M40; M41.