LeapFrog 2009 Annual Report Download - page 47

At December 31, 2009, we had no outstanding borrowings or letters of credit under our asset-backed line of
credit facility with Bank of America, N.A. At December 31, 2009, we had $75.0 million of potential availability
on the line. In addition, we had commitments to purchase inventory totaling approximately $42.3 million at
December 31, 2009.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP” or “GAAP”). Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. We believe that certain accounting policies, which we refer to as critical accounting policies, are
particularly important to the portrayal of our financial position and results of operations and require the use of
significant estimates and the application of significant judgment by our management. On an on-going basis, we
evaluate our estimates, particularly those related to our critical accounting policies.
The following discussion highlights those policies and the underlying estimates and assumptions, which we
consider critical to an understanding of the financial information in this report.
Revenue Recognition, Allowance for Doubtful Accounts, and Other Revenue Reserves
Revenue derived from sales of our technology-based learning products and related proprietary content is
recognized when products are shipped and title passes to the customer, provided that there is evidence of a
commercial arrangement, delivery has occurred, there is a fixed or determinable fee and collection is reasonably
assured. For online content 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. 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. A
small portion of our revenue related to subscriptions is recognized as revenue over the period of the subscription.
The accounts receivable balance is reduced by an allowance for amounts we believe may become uncollectible.
Determining the amounts that may become uncollectible requires judgment, the result of which 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. If changes in the economic
climate or in the financial condition of any of our customers impair or improve their ability to make payments,
adjustments to the allowances may be required.
We provide estimated allowances against accounts receivable and revenue for product returns, defective
products, charge-backs, promotions and cooperative advertising arrangements with customers in the same period
that we record the related revenue. The allowances are estimated utilizing historical information, maximum
known exposures and other available information including current retailer inventory levels, 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.
Accounts receivable are reported on the balance sheet net of all provided allowances. Our provision for bad debts
in 2009 was $1.2 million as compared to $5.0 million in 2008.
Fair Value of Financial Instruments
Fair value is defined by authoritative guidance as the exit price, or the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement
date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
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