LeapFrog 2015 Annual Report Download - page 44

amortized on a straight-line basis over two years. We periodically evaluate the remaining useful life of our
Learning Path development costs to determine whether events and circumstances warrant a revision to the
remaining period of amortization. If the estimate of the remaining useful life is considered to be changed
during the period, we amortize the remaining carrying amount of our Learning Path development costs
prospectively over that revised remaining useful life.
Our evaluations of capitalized content costs require us to make complex and subjective judgments, using
currently available data as well as projections about the potential impact of possible future events and
conditions, which judgments and projections are inherently uncertain. If future events and conditions do not
meet expectations, we make additional adjustments to reduce the expected realizable value of the assets, with
corresponding increases to cost of sales. Capitalized content costs are reported on the balance sheet, net of
accumulated amortization.
Goodwill Impairment
We review goodwill for impairment at least annually on December 31, 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.
The Financial Accounting Standards Board (‘‘FASB’’) 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.
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 fiscal year 2015 or planned to be introduced in fiscal year 2016.
During the quarter ended December 31, 2014, based on various qualitative factors, we determined that sufficient
indicators existed warranting a review to determine if the fair value of our U.S. reporting unit had been reduced to
below its carrying value. These qualitative factors included, among others, our performance during the 2014
holiday season being significantly lower than anticipated, which included the underperformance of products and
product lines newly introduced to the market, and the continuing decrease in trading values of the our Class A
common stock and the corresponding decline in our market capitalization. As a result, we performed the goodwill
impairment test using the required two-step process as of December 31, 2014. The first step of this process
includes comparing the fair value to the carrying value of the reporting unit to which the goodwill is allocated to
identify potential impairment. If the fair value of the reporting unit exceeds its carrying value, goodwill allocated
to that reporting unit is considered not impaired. If the inverse result is observed, the reporting unit is considered
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