LeapFrog 2005 Annual Report Download - page 39

We disclose our allowances for doubtful accounts on the face of the balance sheet. Our other receivable
allowances include allowances for product returns, chargebacks, defective products and promotional markdowns.
These other allowances totaled $44.4 million and $45.8 million at December 31, 2005 and 2004 respectively. The
decrease in other receivable allowances was primarily due to lower allowance for price corrections, offset by
higher promotional allowances. These allowances are recorded as reductions of gross accounts receivable.
Inventory Valuation
Inventories are stated at the lower of cost, on a first-in, first-out basis, or market value. Our estimate of an
allowance for slow-moving, excess and obsolete inventories is based on our management’s review of on hand
inventories compared to their estimated future usage, demand for our products, anticipated product selling prices
and products planned for discontinuation. If actual future usage, demand for our products and anticipated product
selling prices are less favorable than those projected by our management, additional inventory write-downs may
be required. Management monitors these estimates on a quarterly basis. When considered necessary,
management makes additional adjustments to reduce inventory to its net realizable value, with corresponding
increases to cost of goods sold. Allowances for excess and obsolete inventory were $24.2 million and $17.4
million in 2005 and 2004, respectively, and are recorded as a reduction of gross inventories.
Valuation of work-in-process inventory is an estimation of our liability for products in production at the end
of each fiscal period. This estimation is based upon normal production lead-times for products we have
scheduled to receive in subsequent periods, plus a valuation of products we specifically know are either
completed or delayed in production beyond the normal lead-time flow. To the extent that actual work-in-process
differs from the Company’s estimates, inventory and accounts payable may need to be adjusted.
Intangible Assets
Intangible assets includes the excess purchase price over the cost of net assets acquired, or goodwill.
Goodwill arose from our September 23, 1997 acquisition of substantially all the assets and business of our
predecessor, LeapFrog RBT, and our acquisition of substantially all the assets of Explore Technologies on
July 22, 1998. Our intangible assets had a net balance of $27.6 million and $29.5 million at December 31, 2005
and 2004, respectively and is allocated to our U.S. Consumer segment Pursuant to Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and other
intangibles with indefinite lives are tested for impairment at least annually. At December 31, 2005 and 2004, we
had $19.5 million of goodwill and other intangible assets with indefinite lives. We tested our goodwill and other
intangible assets with indefinite lives for impairment during the fourth quarter by comparing their carrying values
to their estimated fair values. As a result of this assessment, we determined that no adjustments were necessary to
the stated values.
Intangible assets with other than indefinite lives include patents, trademarks and licenses, one of which is a
ten-year technology license agreement entered into in January 2004 to jointly develop and customize our optical
scanning technology. The determination of related useful lives and whether the intangible assets are impaired
involves significant judgment. Changes in strategy or market conditions could significantly impact these
judgments and require that adjustments be recorded to asset balances. We review intangible assets, as well as
other long-lived assets, for impairment at least annually or whenever events or circumstances indicate that the
carrying value may not be fully recoverable.
Stock-Based Compensation
Our stock-based compensation programs include stock awards, restricted stock units, performance-based
equity awards and employee and non-employee stock options. For stock awards and restricted stock units, the
market value of the awards at the time of grant is recorded in “Deferred Compensation” and is amortized to
compensation expense on a straight-line basis over the vesting period. The vesting periods are generally three
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