LeapFrog 2010 Annual Report Download - page 63

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
contracts are based on quoted market prices for similar assets and liabilities. The corresponding gains and losses
are recognized immediately in earnings as an offset to the changes in fair value of the assets or liabilities being
hedged. These gains and losses are included in “other income (expense)” in the statements of operations.
The Company believes that the counterparties to these contracts, multinational commercial banks, are
creditworthy; thus, the risks of counterparty nonperformance associated with these contracts are not considered
to be significant. The Company updates its evaluation of the creditworthiness of its counterparties on a quarterly
basis. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no assurance that its
hedging activities will adequately protect against the risks associated with foreign currency fluctuations.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. The determination
of the Company’s income tax assets, liabilities and expense requires management to make certain estimates and
judgments in the calculation of tax benefits, tax credits and deductions. Significant changes in these estimates or
variations in the actual outcome of expected future tax consequences may result in material increases or
decreases in the tax provision or benefit in subsequent periods.
Valuation allowances are provided when it is more likely than not that all or a portion of a deferred tax asset will
not be realized. Determination of whether or not a valuation allowance is warranted requires consideration of
many factors, including 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.
The 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. The Company’s 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 factors, which may cause management to revise its estimates. The
amounts ultimately paid on any future assessments may differ from the amounts accrued and may result in an
increase or reduction to the effective tax rate in the year of resolution.
Stock-Based Compensation
Pursuant to the Company’s 2002 Equity Incentive Plan and its 2002 Non-Employee Directors’ Stock Award
Plan, the Company issues stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to
its employees, directors and occasionally to non-employee service providers, to purchase shares of the
Company’s Class A common stock. Share-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the applicable vesting period of the stock award
(generally four years) using the straight-line method.
The Company’s management reviews and updates its estimates of the variables used to calculate grant date fair
values of the awards quarterly and adjusts its valuation model as necessary.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of the Company’s net loss, gains and losses on the translation of
foreign currency denominated financial statements and temporary gains and non-credit losses on investments.
53