LeapFrog 2007 Annual Report Download - page 40

Revenue Recognition, Allowances for Doubtful Accounts, Product Returns, Defective Products, Discounts
and Promotions
We principally derive revenue from sales of our technology-based learning products and related proprietary
content for education of infant through grade school children at home and in schools. We evaluate the
recognition of revenue based on the criteria set forth in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition” and Emerging Issues Task Force Issue (“EITF”) No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” We recognize revenue when products are shipped and title passes to the customer provided that:
•There is evidence of a commercial arrangement: Evidence of an agreement with the customer that
reflects the terms and conditions to deliver products must be present in order to recognize revenue.
•Delivery has occurred: Delivery is considered to occur when a product is shipped, the risk of loss and
rewards of ownership have been transferred to the customer and no significant post-delivery obligations
exist. For online downloads, delivery is considered to occur when the download occurs. For professional
training services, delivery is considered to occur when the training has been performed.
•There is a fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we
recognize revenue as the amount becomes fixed or determinable. For gift certificates, we recognize
revenues when the certificates are redeemed.
•Collection is reasonably assured: Collection is reasonably assured if we expect the customer to be able
to pay amounts under the arrangement as those amounts become due. If we determine that collection is
not reasonably assured, we recognize revenue upon cash collection.
Net sales represent gross sales less negotiated price allowances based primarily on volume purchasing
levels, estimated returns, allowances for defective products, markdowns and other sales allowances for customer
promotions. A small portion of our revenue related to subscriptions is recognized as revenue over the period of
the subscription.
We reduce accounts receivable by an allowance for amounts we believe may become uncollectible.
Determining the amounts that may become uncollectible requires judgment that may have a significant effect on
the amounts reported in accounts receivable. This allowance is an estimate based primarily on our management’s
evaluation of the customer’s financial condition in the context of current economic conditions, past collection
history and aging of the accounts receivable balances. If changes in the economic climate or the financial
condition of any of our customers result in impairment of their ability to make payments, additional allowances
may be required. We disclose accounts receivable net of our allowances for doubtful accounts on the face of the
balance sheet.
We provide estimated allowances against revenues and accounts receivable for product returns, defective
products, chargebacks, discounts and promotions on product sales, in the same period that we record the related
revenue. We estimate our allowances by utilizing historical information for existing products. For new products,
we estimate our allowances for product returns on specific terms for product returns and our experience with
similar products. We also take into account current inventory levels of our retailers, sell-through of our retailers
and distributors, current trends in retail for our products, changes in customer demand for our products and other
related factors.
We continually evaluate our historical experience and adjust our allowances as appropriate. These
adjustments result in changes in our net sales and accounts receivable. If actual product returns or defective
products were significantly greater than our estimated allowances, additional allowances would be required,
thereby reducing reported net sales and accounts receivable. If actual product returns or defective products were
significantly less than our estimated allowances, an adjustment increasing reported net sales and accounts
receivable would be required.
Allowances for product returns, defective products, chargebacks, discounts and promotions on product sales
as a reduction of accounts receivable totaled $30.2 million, $41.5 million and $44.4 million at December 31,
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