LeapFrog 2006 Annual Report Download - page 84

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Prior to January 1, 2006, the Company accounted for the stock-based compensation plans under the
measurement and recognition provisions of APB Opinion No.25, “Accounting for Stock Issued to Employees,”
and related Interpretations, permitted under Statement of Financial Accounting Standard No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”). As a result, stock-based compensation was included as a pro
forma disclosure in the Notes to the financial statements.
Effective January 1, 2006, the Company adopted the recognition provisions of Statement of Financial
Accounting Standard No. 123 (R), “Share-Based Compensation” (“SFAS 123(R)”), using the modified-
prospective transition method. Under this transition method, compensation cost in 2006 included the portion
vesting in the period for (1) all share-based payments granted prior to, but not vested, as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (2) all
share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for the prior periods have not been restated.
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes
option-pricing model. The total grant date fair value is recognized over the vesting period of the options on a
straight-line basis. The weighted-average assumptions for the expected life and the expected stock price volatility
used in the model require the exercise of judgment. The risk-free interest rate used in the model is based on the
assumed expected life. The expected life of the options represent the period of time the options are expected to be
outstanding and is based on the guidance provided in the SEC Staff Accounting Bulletin No. 107 on Share-Based
Payment. Expected stock price volatility is based on a consideration of the stock’s historical and implied
volatilities as well as the volatilities of other public entities in the industry. The risk-free interest rate used in the
model is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the expected
life.
Restricted stock awards and restricted stock units are payable in shares of the Company’s Class A common
stock. The fair value of each restricted stock or unit is equal to the closing market price of the Company’s stock
on the trading day immediately prior to the date of grant. The grant date fair value is recognized in income over
the vesting period of these stock-based awards. The cost of the performance-based stock awards is expensed
based on achieving pre-established financial measures, including certain stock price milestones. The Company
did not achieve the related financial goals in 2004, 2005, and 2006, resulting in cancellation of the associated
share grants. Stock-based compensation arrangements to non-employees are accounted for using a fair value
approach. The compensation costs of these arrangements are subject to re-measurement over the vesting terms.
Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured
by comparison of the carrying amount of the asset to the net undiscounted future cash flows expected to be
generated from the asset. If the future undiscounted cash flows are not sufficient to recover the carrying value of
the assets, the assets’ carrying value is adjusted to fair value. The Company regularly evaluates its long-lived
assets for indicators of possible impairment.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments—An Amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 permits hybrid
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