LeapFrog 2009 Annual Report Download - page 49

amortization of these costs, resulting in an increase in cost of sales in the United States reporting unit of $0.3
million, $2.2 million, and$1.7 million in 2009, 2008 and 2007, respectively.
We also capitalize external website development costs, which presently comprise primarily third-party costs
related to developing applications that are an integral component of certain products we market, as well as some
costs incurred to develop or acquire and customize code for web applications, costs to develop HTML web pages
or develop templates. We evaluate the future recoverability of website costs on a quarterly basis and if an
impairment loss is considered to have occurred during the period, the loss is recorded in the statement of
operations in the same period.
Our evaluations of capitalized content and website costs require us 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. If future events and conditions do not meet
expectations, we make additional adjustments to reduce the expected realizable value of the assets, with
corresponding increases to cost of sales. Capitalized content and website costs are both included in “Capitalized
product costs” on the balance sheet.
Goodwill and Other Intangible Assets
We evaluate goodwill for impairment at the end of each fiscal year and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of the applicable reporting unit below
its carrying value. These events or circumstances could include a significant change in the business climate, legal
factors or operating performance indicators. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and liabilities including goodwill to those
reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is
estimated using a combination of a market approach and a discounted cash flow methodology. The market
approach requires considerable judgment in selecting comparable companies and estimating the multiples of
revenues implied by their market values. The discounted cash flow methodology requires management to
exercise judgment in selecting an appropriate discount rate and in making numerous assumptions in order to
develop future business and financial forecasts and the related estimates of future net cash flows. Future net cash
flows depend primarily on future sales of our products, which are inherently difficult to predict. This is especially
true when a significant portion of our future net sales is expected to be generated by both mature products as well
as products introduced in 2009 and planned to be introduced in 2010. After analyzing our goodwill at
December 31, 2009 and 2008, we concluded no impairment charge was required in either period. At
December 31, 2009 and 2008 we had $22.2 million and $22.6 million of goodwill and other intangible assets,
respectively.
Income Taxes
We account for income taxes using the liability method. We calculate our deferred tax assets and liabilities based
on differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates and
laws that we expect will be in effect when the differences are expected to reverse. In determining our income tax
assets and liabilities we make significant estimates and judgments in assessing the future tax consequences of
events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of
these future tax consequences could materially impact our financial position, results of operations or cash flows.
We provide valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will
not be realized. Determining whether a valuation allowance is warranted requires judgment about factors such as
prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could
potentially enhance the likelihood of realization of a deferred tax asset. Our financial statements also include
accruals for the estimated amounts of probable future assessments that may result from the examination of
federal, state or international tax returns. Our tax accruals, tax provision, deferred 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
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