LeapFrog 2013 Annual Report Download - page 58
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Please find page 58 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.LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
2. Summary of Significant Accounting Policies − (continued)
Derivative Financial Instruments
The Company transacts business in various foreign currencies, primarily in the British Pound, Canadian
Dollar, Euro and Mexican Peso. As a safeguard against financial exposure from potential adverse changes in
currency exchange rates, the Company engages in a foreign exchange hedging program. The program utilizes
foreign exchange forward contracts that generally settle within 30 days to enter into fair value hedges of
foreign currency exposures of underlying non-functional currency assets and liabilities that are subject to
remeasurement. The exposures are generated primarily through intercompany sales in foreign currencies and
through USD-denominated sales by the Company’s foreign affiliates. The hedging program is designed to
reduce, but does not always eliminate, the impact of the remeasurement of balance sheet items due to
movements of currency exchange rates.
LeapFrog does not use forward exchange hedging contracts for speculative or trading purposes. All forward
contracts are carried on the balance sheet at fair value as assets or liabilities. The estimated fair values of
forward 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 all available evidence, positive and negative, 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. Adjustments made to the valuation allowance could significantly impact
the Company’s tax provision or benefit.
The Company considers the undistributed earnings of its foreign subsidiaries as of December 31, 2013 to be
indefinitely reinvested, and accordingly, no United States (‘‘U.S.’’) income taxes have been provided thereon.
The Company does not currently intend to repatriate any foreign earnings to the U.S.
The Company records uncertain tax positions that have been taken on a tax return using a two-step process
whereby 1) the Company determines whether the tax positions will be sustained based on its technical merits
and 2) those tax positions meet the more-likely-than-not recognition threshold. The Company recognizes the
largest amount of tax benefit that is more-likely-than-not to be realized upon ultimate settlement with the
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