LeapFrog 2003 Annual Report Download - page 77

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
unrealized gains and losses, if any, reported as a component of stockholders’ equity. The cost of securities sold is
based on the specific identification method.
Concentration of credit risk is limited by diversifying investments among a variety of high credit-quality
issuers.
Inventories
Inventories, net of an allowance for slow-moving, excess quantities and obsolescence, are stated at the lower
of cost (first-in, first-out basis) or market value. The Company’s estimate for excess and obsolete inventory is
based on a review of inventories on hand compared to their estimated future usage and demand for products. If
actual future usage and demand for the products are less favorable than those projected by the Company,
additional allowances may be required.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated
using the straight-line method over the estimated useful life of the assets, generally two to five years, except for
leasehold improvements, which are depreciated over the shorter of the estimated related useful life of the asset or
the remaining term of the lease.
Included in property and equipment are manufacturing tools used to produce the Company’s products.
These tools are generally depreciated over two years on a straight-line basis. The Company periodically reviews
its capitalized manufacturing tools to ensure that the related product line is still in production and that the
estimated useful lives of the manufacturing tools are consistent with the Company’s depreciation policy.
Depreciation expense for manufacturing tools is included in costs of goods sold.
The Company capitalizes website development costs in accordance with Emerging Issues Task Force
(“EITF”) No. 00-02, “Accounting for Website Development Costs.” The costs capitalized included those to
develop or acquire and customize code for web applications, costs to develop HTML web pages or develop
templates and costs to create initial graphics for the website that included the design or layout of each page.
These costs are amortized on a straight-line basis over two years. For the years ended December 31, 2003 and
2002, the Company amortized $2,083 and $3,037, respectively, of website development costs. At December 31,
2003, all capitalized website development costs were fully amortized.
Intangible Assets
Intangible assets consist principally of trademarks and tradenames; product design and existing technology;
patents and goodwill and are amortized on a straight-line basis over their estimated useful lives, ranging from 3
to 15 years. The Company periodically evaluates the recoverability of its intangible assets, including goodwill,
by comparing the projected undiscounted net cash flows associated with such assets against its respective
carrying value. Impairment, if any, is based on the excess of the carrying value over the fair value.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,”
and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 141 specifies the criteria that intangible
assets acquired in a purchase business combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 requires, among other things, that the assembled workforce be reclassified to goodwill and that goodwill
(including the assembled workforce) and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with SFAS No. 142. The Company adopted the
F-9
FINANCIALS