LeapFrog 2009 Annual Report Download - page 75

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
2009, will expire in years 2010 through 2030. In addition, the Company had $2,215 related to excess tax benefits
of stock option deductions which are not included in the net operating loss carryforward amounts above since
they have not met the required realization criteria. The tax benefits from these deductions will increase additional
paid-in capital when realized. As of December 31, 2009, the Company also had federal and California research
and development credit carryforwards of $3,915 and $6,112, respectively. The federal research carryforwards
will begin to expire in 2024, while the California research credits can be carried forward indefinitely. In addition,
the Company has $3,955 in federal foreign tax credits that will begin expiring in 2018.
On January 1, 2007, the Company adopted new accounting provisions that changed the accounting for
uncertainty in income taxes including the way companies should recognize, measure, present, and disclose
uncertain tax positions in their financial statements. The new provisions allow recognition of the tax benefit from
an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. The provisions also provide guidance on the reversal of previously
recognized tax positions, balance sheet classifications, accounting for interest and penalties associated with tax
positions, and income tax disclosures. Initial adoption of the provisions resulted in an increase of $7,284 in the
liability for unrecognized tax benefits as of January 1, 2007. Of this amount, $635 was accounted for as an
increase in the January 1, 2007 opening accumulated deficit. The remaining amount decreased tax loss
carryforwards in the United States, which are fully offset by a valuation allowance
The changes in the balance of gross unrecognized tax benefits, during the years ended December 31, 2009 and
2008 are set out in the following table:
December 31,
2009 2008
Balance at beginning of year ................................................. $28,991 $30,727
Gross increase—tax positions taken during a prior period ........................ 978 1,365
Gross decrease—tax provisions taken during a prior period ...................... (1,214) (3,591)
Tax positions taken during the current period .................................. 633 1,415
Decreases in the unrecognized tax benefits relating to statute of limitations
expiration ............................................................ (7,308) —
Decreases in the unrecognized tax benefits relating to settlements with taxing
authorities ........................................................... — (925)
Balance at end of year ............................................... $22,080 $28,991
The balances of gross unrecognized tax benefits at December 31, 2009 and 2008 are $22,080 and $28,991
respectively, of which $8,044 and $15,769 would affect our effective tax rate if recognized.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Income
tax expense for the years ended December 31, 2009, 2008 and 2007 includes $926, $1,821 and $1,091,
respectively, of interest and penalties. As of December 31, 2009 and 2008 we had approximately $2,648 and
$4,964, respectively, of accrued interest and penalties related to uncertain tax positions.
The Company is monitoring the statutes of limitation for the assessment and collection of income taxes. The
Company believes it is reasonably possible that the total amount of unrecognized tax benefits in the future could
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