LeapFrog 2008 Annual Report Download - page 68

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
FASB Statement No. 157” (“FSP 157-2”), which was issued in February 2008. 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”). The Company is currently following the guidance in FSP 157-3 as
applicable.
In accordance with the provisions of SFAS 157, the fair values of the Company’s financial instruments,
consisting of short-term money market funds and long-term investments in auction rate securities (“ARS”),
reflect the estimates of amounts that would be either received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (exit price).
Investments are considered impaired when their fair values decline below their carrying values. The
Company employs a systematic methodology on a quarterly basis that considers available quantitative and
qualitative evidence in evaluating investments for potential impairment. If the cost of an investment exceeds its
fair value, management evaluates, among other factors, general market conditions, the duration of and the extent
to which the fair value is less than cost and the Company’s intent and ability to hold the investment. Further, the
Company considers specific adverse conditions related to the financial health of and business outlook for the
investees, rating agency actions, the overall financial health of the macro-economy and the financial markets, as
well as the ability to liquidate the investments at par, given prevailing and anticipated circumstances. The
Company retains qualified third parties to perform independent valuations of its ARS quarterly and considers
these evaluations in its impairment evaluation process. Their reports supported conclusions reached by
management as of December 31, 2008 and 2007.
The Company recognizes impairments to the carrying values of its financial instruments in accordance with
the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS
115”). Unrealized losses that are deemed to be temporary are recorded in “accumulated other comprehensive
income,” a component of stockholders’ equity; losses deemed to be other-than-temporary are recorded in the
statements of operations in “other, net.” The characterization of losses as temporary or other-than-temporary
requires management to make complex and subjective judgments, using currently available data as well as
projections about the potential impact of possible future events and conditions, which judgments and projections
are inherently uncertain.
Inventory Valuation
Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. The Company
records inventory costs on the balance sheet based on third-party contract manufacturer invoices, which include
the contract manufacturers’ costs for materials, labor and manufacturing overhead related to our products.
Inventory valuation primarily requires estimation of slow-moving, obsolete or excess products. The Company’s
estimate of write-downs for slow-moving, excess and obsolete inventories is based on management’s review of
on-hand inventories compared to their estimated future usage, product demand forecast, anticipated product
selling prices, the expected product lifecycle, and products planned for discontinuation. If actual future usage,
demand for the Company’s products and anticipated product selling prices were less favorable than those
projected by management, additional inventory write-downs would be required, resulting in a negative impact on
the gross margin.
The Company monitors the estimates of inventory write-downs on a quarterly basis. When considered
necessary, the Company makes additional adjustments to reduce inventory to its net realizable value, with
corresponding increases to cost of sales.
F-10