LeapFrog 2002 Annual Report Download - page 77

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except share, per share and percent data)
over an 18-month period, based on an estimated period of use of the product. If the Company changes its
estimate of the period of use, revisions to the revenue recognition may be required. At December 31, 2002 and
2001, the Company had deferred revenue of $3,006 and $2,250, respectively. In the year ended December 31,
2002, revenue totaling $2,302 was recognized. No revenue was recognized in 2001 and 2000.
Allowances for Accounts Receivable
The Company has established an allowance for uncollectible accounts based primarily on management’s
evaluation of the customer’s financial condition, past collection history and aging of the accounts receivable
balances.
The Company also provides for allowances related to returns and defective products. These allowances are
recorded on product sales by the Company in the same period that the related revenues are recorded. The
Company bases these estimates on historical sales returns, defective returns, analysis of credit memoranda and
other known factors, as required.
Shipping and Handling Costs
Costs to ship merchandise from the Company’s warehouse facilities to customers are recorded in cost of
goods sold.
Advertising Expense
Production costs of commercials and programming are expensed when the production is first aired. The
costs of advertising, in-store displays and promotion programs are expensed as incurred. Advertising costs
associated with cooperative advertising are accrued as the related revenue is recognized.
Research and Development
The Company capitalizes certain external costs related to the content development of its books.
Amortization of these costs begins when the respective book is initially released for sale and is then amortized
over a three-year life using the sum of the years digits method. In the years ended December 31, 2002 and 2001,
the Company capitalized $3,616 and $5,020, respectively, and amortized $1,991 and $55, respectively, of
external content development costs. In 2000, the Company did not capitalize or amortize any content
development costs. Capitalized content development is included in property and equipment.
All other research and development costs are expensed as incurred.
Translation of Foreign Currencies
Assets, liabilities and operations of the Company’s United Kingdom, Hong Kong and France divisions are
recorded based on their functional currency. When included in these consolidated financial statements, the assets
and liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average
of the monthly exchange rates that were in effect during the year. The resulting translation adjustments are
included as a separate component of equity. Foreign currency transaction gains and losses are included in income
as incurred. In the year ended December 31, 2002 transaction gains included in other expense (income) totaled
$987. In 2001 and 2000, transaction gains/losses were immaterial.
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