LeapFrog 2007 Annual Report Download - page 87

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
financial statements for each period for which an income statement is presented. The guidance is effective for all
periods beginning after December 15, 2006. We adopted EITF 06-03 in January 2007. The adoption did not have
a material impact on our consolidated financial statements.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). As a result of the implementation of FIN 48, we recognized
approximately a $7,284 increase in the liability for unrecognized tax benefits. Of this amount, $635 was
accounted for as an increase to the January 1, 2007 balance of accumulated deficit. The remaining amount
decreased deferred tax assets for net operating loss carryforwards in the United States. As these tax assets are
fully offset by a valuation allowance, the decrease in the deferred tax assets was offset by a reduction in the
valuation allowance and there was no impact on accumulated deficit.
Effective First Quarter of 2008
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value
measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. Adoption of SFAS 157 is not
expected to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities —including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands
the use of fair value measurement, which permits companies to elect to measure many financial instruments and
certain eligible items (available-for-sale and held-to-maturity securities, firm commitments for financial
instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a
warrantor is permitted to pay a third party to provide the warranty goods or services) at fair value. The fair value
election is irrevocable and generally applied on an instrument-by-instrument basis (entire instrument and not to
only specified risks, specific cash flows, or portions of that instrument). If the use of fair value is elected, any
upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue
costs. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected
are reported as a cumulative adjustment to beginning retained earnings, retrospective treatment is not permitted.
Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of
SFAS 159 on our consolidated financial statements.
3. Fair Value of Financial Instruments
At December 31, 2007 and 2006, the carrying values of financial instruments, including cash and cash
equivalents, short-term investments, foreign exchange transactions, receivables, accounts payable and accrued
liabilities, approximated their fair values.
4. Investments
The Company accounts for its investments in debt and equity securities according to the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt
and Equity Securities, which requires securities classified as “available-for-sale” to be stated at fair value.
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