Polaris 2008 Annual Report Download - page 63

measure of the fair value of the employee stock options or restricted stock awards. Management will continue to
assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation.
Circumstances may change and additional data may become available over time, which could result in changes to
these assumptions and methodologies and thereby materially impact the fair value determination. If factors change
and the Company employs different assumptions in the application of SFAS 123(R) in future periods, the
compensation expense that was recorded under SFAS 123(R) may differ significantly from what was recorded
in the current period. Refer to Note 2 for additional information regarding share-based compensation.
Accounting for derivative instruments and hedging activities SFAS No. 133: “Accounting for Derivative
Instruments and Hedging Activities,” requires that changes in the derivative’s fair value be recognized currently in
earnings unless specific hedge criteria are met, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. The unrealized losses of the derivative
instruments of $2,041,000 at December 31, 2008 and $4,051,000 at December 31, 2007 were recorded as other
accrued liabilities in the accompanying balance sheet. Polaris derivative instruments consist of the interest rate swap
agreements and foreign exchange and commodity contracts discussed below. The after tax unrealized losses of
$928,000 and $2,528,000 as of December 31, 2008 and 2007, respectively, were recorded as components of
Accumulated other comprehensive income (loss). The Company’s diesel fuel contracts in 2008 did not meet the
criteria for hedge accounting and therefore, the resulting unrealized losses from those contracts totaling $554,000,
pretax, are included in the consolidated statements of income in cost of goods sold.
Interest rate swap agreements: During 2008, Polaris had two interest rate swaps on a combined $50,000,000 of
borrowings, of which $25,000,000 expired in December 2008 and $25,000,000 expires in December 2009. Polaris
entered into another interest rate swap in October 2008 on $25,000,000 of borrowings, which expires in October
2010. All of these interest rate swaps were designated as and met the criteria as cash flow hedges. The fair value of
these swap agreements were calculated by comparing the fixed rate on the agreement to the market rate of financial
instruments similar in nature. The fair values of the swaps on December 31, 2008 and 2007 were unrealized losses
of $1,487,000 and $161,000, respectively, which were recorded as a liability in the accompanying consolidated
balance sheets. Gains and losses resulting from these agreements are recorded in interest expense when realized.
Foreign exchange contracts: Polaris enters into foreign exchange contracts to manage currency exposures of
certain of its purchase commitments denominated in foreign currencies and transfers of funds from time to time
from its Canadian and European subsidiaries. Polaris does not use any financial contracts for trading purposes. At
December 31, 2008, Polaris had no foreign exchange contracts outstanding. Gains and losses on the Canadian dollar
contracts at settlement are recorded in Nonoperating other expense (income). Gains and losses on the Japanese yen
contracts at settlement are recorded in cost of sales.
Commodity derivative contracts: Polaris is subject to market risk from fluctuating market prices of certain
purchased commodity raw materials including steel, aluminum, fuel, and petroleum-based resins. In addition, the
Company purchases components and parts containing various commodities, including steel, aluminum, rubber and
others which are integrated into the Company’s end products. While such materials are typically available from
numerous suppliers, commodity raw materials are subject to price fluctuations. The Company generally buys these
commodities and components based upon market prices that are established with the vendor as part of the purchase
process. From time to time, Polaris utilizes derivative contracts to hedge a portion of the exposure to commodity
risks. During 2008, the company entered into derivative contracts to hedge a portion of the exposure for diesel fuel
for 2009. These diesel fuel contracts did not meet the criteria for hedge accounting and the resulting unrealized loss
of $554,000 was included in the consolidated statements of income as a component of cost of sales.
Comprehensive income: Comprehensive income reflects the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. For the Company, com-
prehensive income represents net income adjusted for foreign currency translation adjustments and the unrealized
gain or loss on derivative instruments and the unrealized gain or loss on securities held for sale. The Company has
chosen to disclose comprehensive income in the accompanying consolidated statements of shareholders’ equity and
comprehensive income.
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POLARIS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)