Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Basis of presentation

Basis of presentation. The accompanying unaudited consolidated financial statements of Polaris Inc. (“Polaris” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with accounting principles generally accepted in the United States for complete financial statements. Accordingly, such statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, equity, and cash flows for the periods presented. Due to the seasonality trends for certain products and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

Fair value measurements

Fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:

Level  1 — Quoted prices in active markets for identical assets or liabilities.

Level  2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Company utilizes the market approach to measure fair value for its non-qualified deferred compensation assets and liabilities, and the income approach for foreign currency contracts and interest rate contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and for the income approach, the Company uses significant other observable inputs to value its derivative instruments used to hedge foreign currency and interest rate transactions.

Inventories

Inventories. Inventory costs include material, labor and manufacturing overhead costs, including depreciation expense associated with the manufacture and distribution of the Company’s products. Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.

New Accounting Pronouncements

New accounting pronouncements.

Financial instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method. The adoption of Topic 326 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s disclosures.

Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify the accounting for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years and interim periods beginning after December 15, 2020, and is effective for the Company’s fiscal year beginning January 1, 2021. The adoption of the ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements.

Revenue from Contract with Customer

Note 2. Revenue Recognition

The following tables disaggregate the Company’s revenue by major product type and geography (in millions):

	Three months ended September 30, 2020
	ORV / Snowmobiles		Motorcycles		Global Adj. Markets		Aftermarket		Boats		Total
Revenue by product type
Wholegoods	$	1,022.0	$	137.7	$	86.1	—		$	155.1	$	1,400.9
PG&A	266.8		29.2		20.5		$	237.2	—		553.7
Total revenue	$	1,288.8	$	166.9	$	106.6	$	237.2	$	155.1	$	1,954.6
Revenue by geography
United States	$	1,090.5	$	120.2	$	52.9	$	224.9	$	152.9	$	1,641.4
Canada	89.6		6.1		0.2		12.3		2.2		110.4
EMEA	71.2		21.6		52.9		—		—		145.7
APLA	37.5		19.0		0.6		—		—		57.1
Total revenue	$	1,288.8	$	166.9	$	106.6	$	237.2	$	155.1	$	1,954.6
	Three months ended September 30, 2019
	ORV / Snowmobiles		Motorcycles		Global Adj. Markets		Aftermarket		Boats		Total
Revenue by product type
Wholegoods	$	950.0	$	127.4	$	92.3	—		$	119.1	$	1,288.8
PG&A	202.4		22.5		21.7		$	236.2	—		482.8
Total revenue	$	1,152.4	$	149.9	$	114.0	$	236.2	$	119.1	$	1,771.6
Revenue by geography
United States	$	964.1	$	105.5	$	60.9	$	224.1	$	117.2	$	1,471.8
Canada	91.1		7.9		0.4		12.1		1.9		113.4
EMEA	63.4		21.7		52.3		—		—		137.4
APLA	33.8		14.8		0.4		—		—		49.0
Total revenue	$	1,152.4	$	149.9	$	114.0	$	236.2	$	119.1	$	1,771.6

	Nine months ended September 30, 2020
	ORV / Snowmobiles		Motorcycles		Global Adj. Markets		Aftermarket		Boats		Total
Revenue by product type
Wholegoods	$	2,404.0	$	365.8	$	225.9	—		$	441.8	$	3,437.5
PG&A	661.4		69.0		56.9		$	646.8	—		1,434.1
Total revenue	$	3,065.4	$	434.8	$	282.8	$	646.8	$	441.8	$	4,871.6
Revenue by geography
United States	$	2,568.8	$	288.2	$	140.5	$	617.7	$	434.0	$	4,049.2
Canada	194.4		14.9		1.8		29.1		7.8		248.0
EMEA	196.0		77.5		137.8		—		—		411.3
APLA	106.2		54.2		2.7		—		—		163.1
Total revenue	$	3,065.4	$	434.8	$	282.8	$	646.8	$	441.8	$	4,871.6
	Nine months ended September 30, 2019
	ORV / Snowmobiles		Motorcycles		Global Adj. Markets		Aftermarket		Boats		Total
Revenue by product type
Wholegoods	$	2,515.1	$	399.2	$	275.6	—		$	486.3	$	3,676.2
PG&A	554.1		65.4		65.3		$	685.6	—		1,370.4
Total revenue	$	3,069.2	$	464.6	$	340.9	$	685.6	$	486.3	$	5,046.6
Revenue by geography
United States	$	2,544.8	$	293.6	$	170.7	$	654.9	$	475.3	$	4,139.3
Canada	217.0		24.3		3.6		30.7		11.0		286.6
EMEA	207.9		101.1		164.6		—		—		473.6
APLA	99.5		45.6		2.0		—		—		147.1
Total revenue	$	3,069.2	$	464.6	$	340.9	$	685.6	$	486.3	$	5,046.6

With respect to wholegood vehicles, boats, and parts, garments and accessories (“PG&A”), revenue is recognized when the Company transfers control of the product to the customer (or distributor). With respect to services provided by the Company, revenue is recognized upon completion of the service or over the term of the service agreement in proportion to the costs expected to be incurred in satisfying the obligations over the term of the service period. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s limited warranties are recognized as expense when the products are sold. The Company recognizes revenue for vehicle service contracts that extend mechanical and maintenance coverage beyond the Company’s limited warranties over the life of the contract. Revenue from goods and services transferred to customers at a point-in-time accounts for the majority of the Company’s revenue. Revenue from products or services transferred over time is discussed in the deferred revenue section.

ORV/Snowmobiles, Motorcycles and Global Adjacent Markets segments

Wholegood vehicles and parts, garments and accessories. For the majority of wholegood vehicles and PG&A, the Company transfers control and recognizes a sale when it ships the product from its manufacturing facility, distribution center, or vehicle holding center to its customer (primarily dealers and distributors). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.

Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., free extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize

the cost for freight and shipping when control over vehicles, parts, garments or accessories has transferred to the customer as an expense in cost of sales.

Extended Service Contracts. The Company sells separately-priced service contracts that extend mechanical and maintenance coverages beyond its base limited warranty agreements to vehicle owners. The separately priced service contracts range from 12 months to 84 months. The Company primarily receives payment at the inception of the contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract.

Aftermarket segment

The Company’s Aftermarket products are sold through dealer, distributor, retail, and e-commerce channels. The Company transfers control and recognizes a sale when products are shipped or delivered to its customer. The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its customers and their customers. When the Company gives its customers the right to return eligible parts and accessories, it estimates the expected returns based on an analysis of historical experience. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.

Service revenue. The Company offers installation services for parts that it sells. Service revenues are recognized upon completion of the service.

Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over parts, garments or accessories has transferred to the customer as an expense in cost of sales.

Boats segment

Boats. The Company transfers control and recognizes a sale when it ships the product from its manufacturing facility or distribution center to its customer (primarily dealers). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The Company has elected to recognize the cost for freight and shipping when control over boats has transferred to the customer as an expense in cost of sales.

Deferred revenue

The Company finances its self-insured risks related to extended service contracts (“ESCs”). The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. Warranty costs are recognized as incurred.

The Company expects to recognize approximately $35.1 million of the unearned amount over the next 12 months and $63.2 million thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	89.8	$	67.7	$	81.6	$	59.9
New contracts sold	15.8		11.1		42.6		32.5
Less: reductions for revenue recognized	(7.3)		(6.4)		(25.9)		(20.0)
Balance at end of period (1)	$	98.3	$	72.4	$	98.3	$	72.4

(1) The unamortized ESC premiums (deferred revenue) recorded in other current liabilities totaled $35.1 million and $30.7 million at September 30, 2020 and 2019, respectively, while the amount recorded in other long-term liabilities totaled $63.2 million and $41.7 million at September 30, 2020 and 2019, respectively.