LeapFrog 2012 Annual Report Download - page 55

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 Amended and Restated 2011 Equity and Incentive Plan (‘‘2011 EIP’’), Amended
and Restated 2002 Equity Incentive Plan (‘‘2002 EIP’’) and its 2002 Non-Employee Directors’ Stock Award
Plan (‘‘NEDSAP’’), the Company issues stock options 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. Stock-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 also has an employee stock purchase plan (‘‘ESPP’’),
the Amended and Restated 2002 Employee Stock Purchase Plan.
The Company’s management reviews and updates its estimates of the variables used to calculate grant-date
fair values of the awards and adjusts its valuation model as necessary.
Comprehensive Income
Comprehensive income is comprised of the Company’s net income, gains and losses on the translation of
foreign currency denominated financial statements and temporary gains and non-credit losses on investments.
Net Income per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of
Class A and Class B common stock (‘‘common shares’’) outstanding during the reporting period. Diluted
earnings per share is computed by dividing net income by the combination of dilutive common share
equivalents, which comprises of common shares issued and outstanding under the Company’s stock-based
compensation plans, and the weighted-average number of common shares outstanding during the reporting
period. Dilutive common share equivalents include in-the-money common share equivalents; whether common
share equivalents are ‘‘in-the-money’’ is calculated based on the average share price for each period using the
treasury stock method. Under the treasury stock method, the exercise price of an option, the amount of
compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax
benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used
to repurchase shares in the current period.
3. Fair Value of Financial Instruments and Investments
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 observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs are inputs that market participants would
use in valuing the asset or liability and are developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would use in valuing the asset or liability. The guidance establishes three levels of
inputs that may be used to measure fair value:
• Level 1 includes financial instruments for which quoted market prices for identical instruments are
available in active markets. As of December 31, 2012, the Company’s Level 1 assets consist of
money market funds. These assets are considered highly liquid and are stated at cost, which
approximates market value.
• Level 2 includes financial instruments for which there are inputs other than quoted prices included
within Level 1 that are observable for the instrument. Such inputs could be quoted prices for similar
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