LeapFrog 2006 Annual Report Download - page 59

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants
to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”)
approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial
now are considered material based on either approach, no restatement is required so long as management
properly applied its previous approach and all relevant facts and circumstances were considered. If prior years
are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the
beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending on or after November 15,
2006, with earlier adoption encouraged. We adopted the Bulletin during 2006. The adoption did not have any
effect on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value
measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. We have not determined the
impact of the adoption of SFAS 157 in our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We develop products in the United States and market our products primarily in North America and, to a
lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in U.S.
dollars. Sales to our international customers are transacted primarily in the country’s local currency. As a result,
our financial results could be affected by factors such as changes in foreign currency rates or weak economic
conditions in foreign markets.
Beginning in the first quarter of 2004, we began managing our foreign currency transaction exposure by
entering into short-term forward contracts. The purpose of this hedging program was to minimize the foreign
currency exchange gain or loss reported in our financial statements. The net foreign currency exchange gain or
loss for 2006, 2005 and 2004 was approximately loss of $1.0 million, gains of $0.1 million and $1.9 million,
respectively.
Our foreign exchange forward contracts generally have original maturities of one month or less. A summary
of all foreign exchange forward contracts that were outstanding as of December 31, 2006 follows:
Average
Forward
Exchange
Rate per
$1
Notional
Amount in
Local
Currency(1)
Instrument
Fair Value(2)
British Pound (US$/GBP) ............................ 1.974 8,448 $ 37
Euro (US$/Euro) ................................... 1.319 16,520 15
Canadian Dollar (C$/US$) ........................... 1.142 21,416 329
Mexican Peso (MXP/US$) ........................... 10.845 152,513 (10)
Total ............................................ $371
(1) In thousands of local currency.
(2) In thousands of U.S. dollars.
Cash equivalents and short-term investments are presented at fair value on our balance sheet. We invest our
excess cash in accordance with our investment policy. At December 31, 2006 and December 31, 2005, our cash
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