Polaris 2013 Annual Report Download - page 59

and historical rates for each product line. We record these amounts as a liability in the consolidated balance
sheet until they are ultimately paid. At December 31, 2013 and 2012, accrued sales promotions and incentives
were $123.1 million and $107.0 million, respectively, resulting primarily from an increase in the volume of
units sold and an increase in the level of dealer inventories in 2013. Actual results may differ from these
estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs
or if the customer usage rate varies from historical trends. Adjustments to sales promotions and incentives
accruals are made from time to time as actual usage becomes known in order to properly estimate the
amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
Historically, actual sales promotion and incentive expenses have been within our expectations and differences
have not been material.
Dealer holdback programs. Dealer holdback represents a portion of the invoiced sales price that is expected to
be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the
product. Holdback amounts reduce the ultimate net price of the products purchased by our dealers or
distributors and, therefore, reduce the amount of sales we recognize at the time of shipment. The portion of
the invoiced sales price estimated as the holdback is recognized as ‘‘dealer holdback’’ liability on our balance
sheet until paid or forfeited. The minimal holdback adjustments in the estimated holdback liability due to
forfeitures are recognized in net sales. Payments are made to dealers or distributors at various times during
the year subject to previously established criteria. Polaris recorded accrued liabilities of $100.6 million and
$86.7 million for dealer holdback programs in the consolidated balance sheets as of December 31, 2013 and
2012, respectively.
Share-based employee compensation. We recognize in the financial statements the grant-date fair value of stock
options and other equity-based compensation issued to employees. 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.
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 our history of dividend
payouts. We develop an estimate of the number of share-based awards that 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
performance-based restricted stock awards. 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.
At the end of 2013, if all long-term incentive program performance based awards were expected to achieve
the maximum payout, we would have recorded an additional $2.6 million of expense in 2013. Fluctuations in
our stock price can have a significant effect on reported share-based compensation expenses for liability-based
awards. The impact from fluctuations in our stock price is recognized in the period of the change, and is
reflected in our gross margin and operating expenses. At December 31, 2013, the accrual for liability-based
awards outstanding was $74.2 million.
Product warranties. We provide a limited warranty for ORVs for a period of six months, for a period of one
year for our snowmobiles and motorcycles and two years for SVs. We provide longer warranties in certain
geographical markets as determined by local regulations and market conditions and may provide longer
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