LeapFrog 2007 Annual Report Download - page 86

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
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).
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 expected life of the options represent the period of time
the options are expected to be outstanding and is currently based on the guidance provided in the SEC Staff
Accounting Bulletin No. 107 on Share-Based Payment as the Company does not have sufficient historical data on
exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
Expected stock price volatility is based on a consideration of our stock’s historical and implied volatilities as well
as consideration volatilities of other public entities within our 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 our Class A common stock. The
fair value of each restricted stock or unit is equal to the closing market price of our 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, which is generally four years. 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.
The Company calculates employee stock-based compensation expense based on awards ultimately expected
to vest and accordingly, the expense has been reduced for estimated forfeitures. The Company’s management
reviews forfeitures periodically and adjusts compensation expense, if considered necessary.
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 June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 06-03, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement” (“EITF 06-3”). EITF 06-03 requires a company to disclose its accounting
policy (i.e. gross vs. net basis) relating to the presentation of taxes within the scope of EITF 06-03. Furthermore,
for taxes reported on a gross basis, an enterprise should disclose the amounts of those taxes in interim and annual
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