Polaris 2015 Annual Report Download - page 80

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shifts in product mix, changes in warranty coverage periods, snowfall and its impact on snowmobile usage,
product recalls and any significant changes in sales volume.
The activity in the warranty reserve during the periods presented was as follows (in thousands):
For the Years Ended December 31,
2015 2014 2013
Balance at beginning of year ...................... $ 53,104 $ 52,818 $ 47,723
Additions to warranty reserve through acquisitions ....... 250 160 1,602
Additions charged to expense ...................... 73,716 61,888 56,857
Warranty claims paid ............................ (70,596) (61,762) (53,364)
Balance at end of year ........................... $ 56,474 $ 53,104 $ 52,818
Share-based employee compensation. For purposes of determining the 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 share-based awards.
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 gross margin and operating expenses.
Derivative instruments and hedging activities. Changes in the fair value of a derivative are recognized in
earnings unless the derivative qualifies as a hedge. To qualify as a hedge, the Company must formally
document, designate and assess the effectiveness of transactions that receive hedge accounting.
Polaris enters into foreign exchange contracts to manage currency exposures from certain of its purchase
commitments denominated in foreign currencies and transfers of funds from time to time from its foreign
subsidiaries. Polaris does not use any financial contracts for trading purposes. These contracts met the criteria
for cash flow hedges. Gains and losses on the Canadian dollar, Norwegian krone, Swedish krona and
Australian dollar contracts at settlement are recorded in non-operating other expense (income), net in the
consolidated income statements, and gains and losses on the Japanese yen, Mexican peso and Euro contracts
at settlement are recorded in cost of sales in the consolidated income statements. Unrealized gains and losses
are recorded as a component of accumulated other comprehensive loss, net.
Polaris is subject to market risk from fluctuating market prices of certain purchased commodity raw materials,
including steel, aluminum, diesel fuel, and petroleum-based resins. In addition, the Company purchases
components and parts containing various commodities, including steel, aluminum, rubber, rare earth metals
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
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