Polaris 2008 Annual Report Download - page 43

method. In accordance with the modified retrospective method, the consolidated financial statements for prior
periods have been adjusted to give effect to the adoption of SFAS 123(R). Determining the appropriate fair-value
model and calculating the fair value of share-based awards at the date of grant requires judgment. The Company
utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock options consistent with
the provisions of SFAS 123(R). Option pricing models, including the Black-Scholes model, also require the use of
input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate
of return. The Company utilizes historical volatility as it believes this is reflective of market conditions. The
expected life of the awards is based on historical exercise patterns. The risk-free interest rate assumption is based on
observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on the
Company’s history of dividend payouts.
SFAS 123(R) requires the Company to develop an estimate of the number of share-based awards which will be
forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported
share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period
the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate,
then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or
increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect
the Company’s gross margin and operating expenses. The effect of forfeiture adjustments subsequent to the
adoption of SFAS 123(R) in the first quarter of 2006 have been immaterial.
Dealer holdback programs: Polaris provides dealer incentive programs whereby at the time of shipment
Polaris withholds an amount from the dealer until ultimate retail sale of the product. Polaris records these amounts
as a liability on the consolidated balance sheet until they are ultimately paid. Payments are generally made to dealers
twice each year, in the first quarter and the third quarter, subject to previously established criteria. Polaris recorded
accrued liabilities of $80.9 million and $83.9 million for dealer holdback programs in the consolidated balance
sheets as of December 31, 2008 and 2007, respectively.
Product warranties: Polaris provides a limited warranty for ORVs for a period of six months and for a period
of one year for its snowmobiles and motorcycles. Polaris may provide longer warranties related to certain
promotional programs, as well as longer warranties in certain geographical markets as determined by local
regulations and market conditions. Polaris’ standard warranties require the Company or its dealers to repair or
replace defective products during such warranty periods at no cost to the consumer. The warranty reserve is
established at the time of sale to the dealer or distributor based on management’s best estimate using historical rates
and trends. Polaris records these amounts as a liability in the consolidated balance sheet until they are ultimately
paid. At December 31, 2008 and 2007, the warranty reserve was $28.6 million and $31.8 million, respectively.
Adjustments to the warranty reserve are made from time to time based on actual claims experience in order to
properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet
date. While management believes that the warranty reserve is adequate and that the judgment applied is appropriate,
such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
Product liability: Polaris is subject to product liability claims in the normal course of business. Polaris self
insures its product liability claims. The estimated costs resulting from any losses are charged to operating expenses
when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. The Company
utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. At
December 31, 2008 and 2007 the Company had accruals of $11.1 million and $9.3 million, respectively, for the
possible payment of pending claims related to continuing operations. These accruals are included in other accrued
expenses in the accompanying consolidated balance sheets. In addition, the Company had accruals of $1.9 million
and $2.3 million at December 31, 2008 and 2007, respectively, for the possible payment of pending claims related to
discontinued operations. While management believes the product liability reserves are adequate, adverse deter-
mination of material product liability claims made against the Company could have a material adverse effect on
Polaris’ financial condition.
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