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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk. Derivative contracts on various currencies are entered into in order to manage foreign currency exposures associated with certain product sourcing activities and intercompany cash flows. Interest rate swaps are entered into in order to maintain a balanced risk of fixed and floating interest rates associated with the Company’s long-term debt.
The Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its U.S. dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. The Company actively manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other. The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. Polaris does not use any financial contracts for trading purposes.
At December 31, 2019 and 2018, Polaris had the following open foreign currency contracts (in thousands):
 
 
December 31, 2019
 
December 31, 2018
Foreign Currency
 
Notional Amounts
(in U.S. dollars)
 
Net Unrealized
Gain (Loss)
 
Notional Amounts
(in U.S. dollars)
 
Net Unrealized
Gain (Loss)
Australian Dollar
 
$
15,971

 
$
(86
)
 
—

 
—

Canadian Dollar
 
101,397

 
(1,069
)
 
$
55,133

 
$
2,564

Mexican Peso
 
16,986

 
1,079

 
19,222

 
564

Total
 
$
134,354

 
$
(76
)
 
$
74,355

 
$
3,128


These contracts, with maturities through December 2020, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
The Company enters into interest rate swap transactions to hedge the variable interest rate payments for the term loan facility. In connection with these transactions, the Company pays interest based upon a fixed rate and receives variable rate interest payments based on the one-month LIBOR.
At December 31, 2019 and 2018, Polaris had the following open interest rate swap contracts (in thousands):
 
 
 
 
December 31, 2019
 
December 31, 2018
Effective Date
 
Termination Date
 
Notional Amounts
 
Net Unrealized Gain (Loss)
 
Notional Amounts
 
Net Unrealized Gain (Loss)
May 2, 2018
 
May 4, 2021
 
$
25,000

 
$
(67
)
 
$
25,000

 
$
397

September 28, 2018
 
September 30, 2019
 
—

 
—

 
250,000

 
(163
)
September 30, 2019
 
September 30, 2023
 
150,000

 
(7,696
)
 
150,000

 
(2,899
)
May 3, 2019
 
May 3, 2020
 
100,000

 
(237
)
 
—

 
—

Total
 
$
275,000

 
$
(8,000
)
 
$
425,000

 
$
(2,665
)

These contracts, with maturities through September 2023, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. Assets and liabilities are offset in the consolidated balance sheet if the right of offset exists. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
The table below summarizes the carrying values of derivative instruments as of December 31, 2019 and 2018 (in thousands):
 
Carrying Values of Derivative Instruments as of December 31, 2019
 
Fair Value—
Assets
 
Fair Value—
(Liabilities)
 
Derivative Net
Carrying Value
Derivatives designated as hedging instruments
 
 
 
 
 
Foreign exchange contracts
$
1,079

 
$
(1,155
)
 
$
(76
)
Interest rate contracts
—

 
(8,000
)
 
(8,000
)
Total derivatives designated as hedging instruments
$
1,079

 
$
(9,155
)
 
$
(8,076
)
 
Carrying Values of Derivative Instruments as of December 31, 2018
 
Fair Value—
Assets
 
Fair Value—
(Liabilities)
 
Derivative Net
Carrying Value
Derivatives designated as hedging instruments
 
 
 
 
 
Foreign exchange contracts
$
3,128

 
—

 
$
3,128

Interest rate contracts
—

 
$
(2,665
)
 
(2,665
)
Total derivatives designated as hedging instruments
$
3,128

 
$
(2,665
)
 
$
463

Assets are included in prepaid expenses and other and liabilities are included in other accrued expenses on the accompanying consolidated balance sheets. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the current income statement.
The amount of gains (losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in other comprehensive loss for the years ended December 31, 2019 and 2018 was $(6,537,000) and $457,000, respectively. 
See Note 9 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income loss into the income statement for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the years ended December 31, 2019 and 2018.