LeapFrog 2007 Annual Report Download - page 81

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Revenue Recognition
The Company principally derives revenue from sales of its technology-based learning products and related
proprietary content for education of infant through grade school children at home and in schools. The Company
evaluates 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.” The Company recognizes 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. Correspondingly, these allowances are recorded as reductions of gross accounts receivable. A small
portion of our revenue related to subscriptions is recognized as revenue over the period of the subscription.
Sales allowances may vary as a percentage of gross sales due to changes in LeapFrog’s product mix,
defective product allowances or other sales allowances. Sales returns, discounts and allowances, recorded as a
reduction of net sales in 2007 were $78,328, $132,343 and $117,226 for 2007, 2006 and 2005, respectively.
Actual amounts for returns and allowances may differ from estimates.
Allowances for Doubtful Accounts, Product Returns, Defective Products, Discounts and Promotions
The Company reduces accounts receivable by an allowance for amounts management believes 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. The Company discloses
accounts receivable net of our allowances for doubtful accounts on the face of the balance sheet.
The Company provides estimated allowances against revenues and accounts receivable for product returns,
defective products, chargebacks, discounts and promotions on product sales, in the same period that the related
revenue is recorded. The Company estimates allowances by utilizing historical information for existing products.
For new products, the Company estimates allowances for product returns on specific terms for product returns
and its experience with similar products. It also takes into account current inventory levels of our retailers, sell-
through of its retailers and distributors, current trends in retail for its products, changes in customer demand for
its products and other related factors.
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