LeapFrog 2006 Annual Report Download - page 83

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
weighted average amortization period for these intangibles was approximately 6 years. At December 31, 2006,
the Company tested these intangible assets for impairment and determined that no significant adjustments to the
stated values were necessary.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets
and liabilities are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are provided when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. In determining whether a valuation allowance is warranted, the Company
takes into account such factors as prior earnings history, expected future earnings, carryback and carryforward
periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
During 2006, the Company recorded a non-cash valuation allowance of $60,433, against its gross deferred
tax assets at December 31, 2006 of $60,433, of which $24,993 relates to pre-2006 deferred tax assets. The
amount represents 100% of domestic deferred tax assets. The valuation allowance is calculated in accordance
with the provisions of SFAS 109, which requires an assessment of both positive and negative evidence when
measuring the need for a valuation allowance. The Company’s domestic net operating losses for the most recent
four-year period, the expectation of additional net operating losses in 2007 and changes in its business strategy
increased the uncertainty about whether the level of future profitability needed to record the deferred assets will
be achieved and represented sufficient negative evidence to require a valuation allowance under the provisions of
SFAS 109. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to
support its reversal. Should the Company determine that it would be able to realize all or part of its deferred tax
assets in the future, an adjustment to the valuation allowance would be recorded in the period such determination
was made. The majority of LeapFrog’s domestic deferred tax assets generally have 10-20 years until expiry or
indefinite lives.
The financial statements also include accruals for the estimated amounts of probable future assessments that
may result from the examination of federal, state or international tax returns. The Company’s tax accruals, tax
provision, deferred tax assets or income tax liabilities may be adjusted if there are changes in circumstances, such
as changes in tax law, tax audits or other factors, which may cause management to revise its estimates. The
amounts ultimately paid on any future assessments may differ from the amounts accrued and may result in an
increase or reduction to the effective tax rate in the year of resolution.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and gains and losses on the translation of
foreign currency denominated financial statements.
Stock-Based Compensation
At December 31, 2006, the Company had stock-based compensation plans for employees and nonemployee
directors which authorized the granting of various stock-based incentives including restricted stock, restricted
stock units and stock options. The vesting periods for restricted stock and restricted stock units are generally
three and four years, respectively. The Company also grants stock options to certain of its employees for a fixed
number of shares with an exercise price generally equal to the fair value of the shares on the date of grant. These
options generally vest over a four-year period.
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