LeapFrog 2013 Annual Report Download - page 42
Download and view the complete annual report
Please find page 42 of the 2013 LeapFrog annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Goodwill and Other Intangible Assets
We review goodwill for impairment at least annually, and between annual tests if events occur or
circumstances change that warrant a review. These events or circumstances could include a significant change
in the business climate, legal factors or operating performance indicators.
In September 2011, the Financial Accounting Standards Board (‘‘FASB’’) issued new guidance that permits an
entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test. Under this guidance, if an entity determines, after assessing such
qualitative factors, that it is not more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount, then performing the two-step impairment test is unnecessary. If the qualitative assessment
concludes that it is probable that there is impairment, then a quantitative assessment must be performed. We
early adopted this guidance for our December 31, 2011 annual goodwill impairment test.
Our qualitative assessment includes consideration of relevant events and circumstances that may impact the
carrying amount of the reporting unit to which our goodwill is allocated. The identification of relevant events
and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve
significant judgment and assumptions. Relevant events and circumstances identified include, but are not
limited to: macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance, LeapFrog-specific events and share price trends. Additional judgment is required to determine
relative importance and impact of each factor.
Application of the two-step goodwill impairment test, if determined necessary, requires significant judgment,
including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
goodwill to reporting units, determination of the fair value of each reporting unit, and projections of future
net cash flows, which are inherently uncertain. 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 revenue implied by
their market values. The discounted cash flow methodology requires management to exercise judgment in
selecting an appropriate discount rate and to make 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 2013 or planned to be introduced in 2014.
After analyzing our goodwill at December 31, 2013 and 2012, we concluded no impairment charge was
required in either period. At December 31, 2013 and 2012, we had $19.6 million and $20.5 million,
respectively, of goodwill and other intangible assets.
Income Taxes
We account for income taxes using the asset and liability method. We calculate our deferred tax assets and
liabilities 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. We are subject to
income taxes in the U.S. and foreign jurisdictions. The determination of our income tax assets, liabilities and
expense requires us 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. 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. Determination of whether or not a valuation allowance is warranted requires
consideration of all available positive and negative evidence, 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.
In 2006, we recorded a $60.4 million non-cash charge to establish a valuation allowance against all of our
gross domestic deferred tax assets as we could not assert, at the required more-likely-than-not level of
certainty, that the level of future profitability needed to realize the benefit of our domestic deferred tax assets
34