Polaris 2010 Annual Report Download - page 45

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 our history of dividend payouts. We 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 our gross margin and operating expenses.
We estimate the likelihood and the rate of achievement for performance sensitive share-based awards,
specifically long-term compensation grants of long term incentive plan (“LTIP”) and restricted stock. Changes in
the estimated rate of achievement can have a significant effect on reported share-based compensation expenses as
the effect of a change in the estimated achievement level is recognized in the period that the likelihood factor
changes. If adjustments in the estimated rate of achievement are made, they would be reflected in our gross margin
and operating expenses.
Dealer holdback programs: We provide dealer incentive programs whereby at the time of shipment we
withhold an amount from the dealer until ultimate retail sale of the product. We record 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. We recorded accrued
liabilities of $79.7 million and $72.2 million for dealer holdback programs in the consolidated balance sheets as of
December 31, 2010 and 2009, respectively.
Product warranties: We provide a limited warranty for ORVs for a period of six months and for a period of
one year for our snowmobiles and motorcycles. We 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. Our standard warranties require us or our dealers to repair or replace defective products during
such warranty periods at no cost to the consumers. 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. We record these
amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2010 and
2009, the accrued warranty liability was $32.7 million and $25.5 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: We are subject to product liability claims in the normal course of business. We self-insure
our 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. We utilize historical
trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. At December 31, 2010
and 2009, we had accruals of $12.0 million and $11.4 million, respectively, for the possible payment of pending
claims related to continuing operations. These accruals are included in other accrued expenses in the consolidated
balance sheets. In addition, we had an accrual of $1.6 million and $1.9 million at December 31, 2010 and 2009,
respectively, for the possible payment of pending claims related to discontinued operations. While management
believes the product liability reserves are adequate, adverse determination of material product liability claims made
against us could have a material adverse effect on our financial condition.
New Accounting Pronouncements
Improving Disclosure about Fair Value Measurements: In January 2010, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosure about Fair Value
Measurements.” ASU 2010-06 revises two disclosure requirements concerning fair value measurements and
clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair
value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales,
30