LeapFrog 2008 Annual Report Download - page 49

tax assets or income tax liabilities may be adjusted if there are changes in circumstances, such as changes in tax
law, tax audits or other factors, which may cause management to revise its estimates. The amounts ultimately
paid on any future assessments may differ from the amounts accrued and may result in an increase or reduction
to the effective tax rate in the year of resolution. Such adjustments could have a material impact on our financial
position, results of operations or cash flows.
We account for stock-based compensation in accordance with the provisions of SFAS No. 123(R), “Share-
Based Compensation” (“SFAS 123(R)”). Under the fair value provisions of SFAS 123(R), stock-based
compensation expense is measured at the grant date based on the fair value of the award and is recognized in
compensation expense over the requisite service period. Determining the fair value of stock-based compensation
awards at grant date requires significant judgment and estimates regarding valuation variables such as volatility,
expected forfeiture rates and the expected term of the awards. Stock-based compensation expense may be
significantly affected by changes in our stock price, our actual forfeiture rates and the extent of future grants of
equity awards. If actual results differ significantly from our estimates, stock-based compensation expense and our
results of operations could be materially affected.
Recent Accounting Pronouncements
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), with
respect to our financial assets and liabilities only, pursuant to the guidance of FASB Staff Position No. FSP FAS
157-2, “Effective Date of FASB Statement No. 157,” (“FSP 157-2”), issued in February 2008. FSP 157-2 is
effective for fiscal years beginning after November 15, 2008. We are currently assessing the potential impact of
SFAS No. 157-2 on our financial statements.
On October 10, 2008, the FASB issued Staff Position No. FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). This pronouncement provides
more detailed guidance on issues such as evaluating when the inputs used to calculate fair value for an instrument
should be considered observable or unobservable and the use of valuation techniques such as the discounted cash
flow approach or reference to broker quotes in an inactive market. We are currently following the guidance in
FSP 157-3 as applicable.
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 permits
entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at
fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value
option is elected will be recognized in net earnings at each subsequent reporting date. The adoption of SFAS 159
in 2008 did not have an effect on our consolidated financial statements during 2008 as we did not elect the fair
value option.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), which requires us to estimate and accrue for all potential income taxes
on uncertain tax positions we have taken.
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