Polaris 2011 Annual Report Download - page 72

comprehensive income in the shareholders’ equity section of the accompanying consolidated balance sheets.
Revenues and expenses in all of Polaris’ foreign entities are translated at the average foreign exchange rate in
effect for each month of the quarter. Transaction gains and losses including intercompany transactions
denominated in a currency other than the functional currency of the entity involved are included in “Other
income (expense), net” on our Consolidated statements of income. The net Accumulated other comprehensive
income related to translation gains and losses was a net gain of $9,545,000 and $6,991,000 at December 31, 2011
and 2010, respectively.
Revenue recognition: Revenues are recognized at the time of shipment to the dealer or distributor or other
customers. Product returns, whether in the normal course of business or resulting from repossession under its
customer financing program (see Note 7), have not been material. Polaris sponsors certain sales incentive
programs and accrues liabilities for estimated sales promotion expenses and estimated holdback amounts that are
recognized as reductions to sales when products are sold to the dealer or distributor customer.
Share-based employee compensation: For purposes of determining estimated fair value of share-based
payment awards on the date of grant under ASC Topic 718, Polaris uses the Black-Scholes Model. The Black-
Scholes Model requires the input of certain assumptions that require judgment. Because employee stock options
and restricted stock awards have characteristics significantly different from those of traded options, and because
changes in the input assumptions can materially affect the fair value estimate, the existing models may not
provide a reliable single 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
Topic 718 in future periods, the compensation expense that was recorded under Topic 718 may differ
significantly from what was recorded in the current period. Refer to Note 2 for additional information regarding
share-based compensation.
The Company estimates the likelihood and the rate of achievement for performance sensitive share-based
awards, specifically long-term compensation grants of Long Term Incentive Plan and restricted stock. Changes in
the estimated rate of achievement and fluctuation in the market based stock price can have a significant effect on
reported share-based compensation expenses as the effect of a change in the estimated achievement level and
fluctuation in the market based stock price is recognized in the period that the likelihood factor and stock price
changes. If adjustments in the estimated rate of achievement and fluctuation in the market based stock price are
made, they would be reflected in our gross margin and operating expenses.
Accounting for derivative instruments and hedging activities: ASC Topic 815 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 net unrealized gain of the derivative instruments of $2,241,000 at December 31, 2011 and the
net unrealized loss of $1,256,000 at December 31, 2010 were recorded in the accompanying balance sheets as
other current assets or other current liabilities. Polaris’ derivative instruments consist of foreign exchange and
commodity contracts discussed below. The after tax unrealized gains of $2,478,000 and losses of $1,093,000 as
of December 31, 2011 and 2010, respectively, were recorded as components of Accumulated other
comprehensive income. The Company’s diesel fuel and aluminum contracts in 2011 and 2010 did not meet the
criteria for hedge accounting and therefore, the resulting unrealized gains and losses from those contracts are
included in the consolidated statements of income in Cost of sales. The unrealized gains for the diesel fuel
contracts for 2011 and 2010 totaled $160,000 and $282,000, respectively, pretax, and the unrealized losses for
the aluminum contracts for 2011 and gains for 2010 totaled $1,497,000 and $607,000, respectively, pretax. Refer
to Note 10 for additional information regarding Derivative Instruments and Hedging Activities.
Interest rate swap agreements: At December 31, 2011, Polaris did not have any outstanding interest rate
swaps.
56