LeapFrog 2009 Annual Report Download - page 63

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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.
Capitalized Product Costs
The Company capitalizes certain external costs related to the development of content for its learning products
including design, artwork, animation, layout, editing, voice, audio and software included in the learning products.
Such costs are capitalized once the technological feasibility of the product is established and costs are determined
to be recoverable. Amortization of these costs begins when the products are initially released for sale and
continues over a three-year life using the accelerated method referred to as the “sum of the years’ digits.”
Capitalized content is included in capitalized product costs, net and the related amortization is included in cost of
sales. The Company evaluates the future recoverability of capitalized amounts on a quarterly basis and
recognizes write-downs of these amounts in the statements of operations as needed. Capitalized costs for
products that are cancelled, abandoned or otherwise deemed impaired are charged to expense in the period of
cancellation.
The Company capitalizes external website development costs (“website costs”), which primarily include third-
party costs related to developing applications that are an integral component of certain products the Company
markets, as well as costs incurred to develop or acquire and customize code for web applications, costs to
develop HTML web pages or develop templates and costs to create initial graphics for the website that included
the design or layout of each page. Website costs are amortized on a straight-line basis over two years. The
Company evaluates the future recoverability of capitalized website costs on a quarterly basis and if an
impairment loss is considered to have occurred during the period, records the loss in the statement of operations
in the same period.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated using
the straight-line method over the estimated useful life of the assets, generally between two and three years,
except for leasehold improvements, which are depreciated over the shorter of the estimated related useful life of
the asset or the remaining term of the lease. Amortization of equipment under capital leases is included in
depreciation expense. Depreciation expense for manufacturing tools is included in cost of goods sold.
Goodwill
The Company tests its goodwill for impairment at least annually, and between annual tests if indicators of
potential impairment exist, using a two step test. When evaluating goodwill for impairment, the Company first
compares the fair value of the reporting unit(s) to which the goodwill is allocated, to the carrying value of the
unit(s) to determine if there is an impairment loss. If the fair value of the reporting unit exceeds its carrying
value, goodwill allocated to that unit is considered not impaired. If the inverse is true, the unit is considered to be
impaired and the Company must then complete the second step of the test which calls for a fair value analysis of
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