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Note 5 - Reduction of Inventory to Fair Value | 9 Months Ended
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Jul. 31, 2014
Inventory Impairments And Land Option Cost Write Offs [Text Block] [Abstract] |
Inventory Impairments And Land Option Cost Write Offs [Text Block] |
5. | Reduction of Inventory to Fair Value
We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. In the third quarter of fiscal 2014, our discount rate used for the impairment recorded was 16.8%. For the impairment recorded in the second quarter of fiscal 2014, no discount rate was used as the one community impaired was for land held for sale for which a purchase offer price was used to determine the fair value. For the nine months ended July 31, 2013, our discount rate used for the impairments recorded ranged from 18.0% to 18.8%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments. During the nine months ended July 31, 2014, we evaluated inventories of all 492 communities under development and held for future development for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations for nine of those communities (i.e., those with a projected operating loss or other impairment indicators) with an aggregate carrying value of $24.5 million. Of those communities tested for impairment, four communities with an aggregate carrying value of $23.1 million had undiscounted future cash flows that exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded impairment losses, which are included in the Condensed Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory, of $0.1 million for each of the three months ended July 31, 2014 and 2013 and $0.2 million and $1.6 million for the nine months ended July 31, 2014 and 2013, respectively. The following tables represent inventory impairments by homebuilding segment for the three and nine months ended July 31, 2014 and 2013:
(Dollars in millions) |  | Three Months Ended July 31, 2014 |  |  | Three Months Ended July 31, 2013 |
|  | Number of Communities |  |  | Dollar Amount of Impairment |  |  | Pre- Impairment Value(1) |  |  | Number of Communities |  |  | Dollar Amount of Impairment |  |  | Pre- Impairment Value(1) |
Northeast |  | - |  |  | $- |  |  | $- |  |  | 1 |  |  | $0.1 |  |  | $0.4 |
Mid-Atlantic |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
Midwest |  | 1 |  |  | 0.1 |  |  | 0.5 |  |  | - |  |  | - |  |  | - |
Southeast |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
Southwest |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
West |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
Total |  | 1 |  |  | $0.1 |  |  | $0.5 |  |  | 1 |  |  | $0.1 |  |  | $0.4 |
(Dollars in millions) |  | Nine Months Ended July 31, 2014 |  |  | Nine Months Ended July 31, 2013 |
|  | Number of Communities |  |  | Dollar Amount of Impairment |  |  | Pre- Impairment Value(1) |  |  | Number of Communities |  |  | Dollar Amount of Impairment(2) |  |  | Pre- Impairment Value(1) |
Northeast |  | 1 |  |  | $0.1 |  |  | $0.2 |  |  | 3 |  |  | $1.6 |  |  | $5.6 |
Mid-Atlantic |  | - |  |  | - |  |  | - |  |  | 1 |  |  | - |  |  | 0.1 |
Midwest |  | 1 |  |  | 0.1 |  |  | 0.5 |  |  | - |  |  | - |  |  | - |
Southeast |  | - |  |  | - |  |  | - |  |  | 1 |  |  | - |  |  | 0.4 |
Southwest |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
West |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |
Total |  | 2 |  |  | $0.2 |  |  | $0.7 |  |  | 5 |  |  | $1.6 |  |  | $6.1 |
(1) | Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments.
(2) | During the nine months ended July 31, 2013, the Mid-Atlantic had an impairment totaling $2 thousand and the Southeast had an impairment totaling $17 thousand.
The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options, and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $0.6 million and $0.5 million for the three months ended July 31, 2014 and 2013, respectively, and $1.7 million and $1.9 million for the nine months ended July 31, 2014 and 2013, respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total cost written off. The following tables represent write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three and nine months ended July 31, 2014 and 2013:
|  | Three Months Ended July 31, |
|  | 2014 |  |  | 2013 |
(Dollars in millions) |  | Number of Walk-Away Lots |  |  | Dollar Amount of Write-Offs(1) |  |  | Number of Walk-Away Lots |  |  | Dollar Amount of Write-Offs(1)(2) |
Northeast |  | - |  |  | $0.1 |  |  | 73 |  |  | $0.2 |
Mid-Atlantic |  | 276 |  |  | 0.1 |  |  | - |  |  | - |
Midwest |  | 105 |  |  | 0.1 |  |  | 13 |  |  | - |
Southeast |  | 472 |  |  | 0.2 |  |  | 113 |  |  | 0.1 |
Southwest |  | 312 |  |  | 0.1 |  |  | 12 |  |  | 0.2 |
West |  | - |  |  | - |  |  | - |  |  | - |
Total |  | 1,165 |  |  | $0.6 |  |  | 211 |  |  | $0.5 |
|  | Nine Months Ended July 31, |
|  | 2014 |  |  | 2013 |
(Dollars in millions) |  | Number of Walk-Away Lots |  |  | Dollar Amount of Write-Offs(1) |  |  | Number of Walk-Away Lots |  |  | Dollar Amount of Write-Offs(1)(2) |
Northeast |  | 239 |  |  | $0.6 |  |  | 373 |  |  | $0.4 |
Mid-Atlantic |  | 797 |  |  | 0.2 |  |  | 164 |  |  | - |
Midwest |  | 508 |  |  | 0.2 |  |  | 13 |  |  | - |
Southeast |  | 1,397 |  |  | 0.5 |  |  | 113 |  |  | 0.2 |
Southwest |  | 654 |  |  | 0.2 |  |  | 246 |  |  | 1.3 |
West |  | - |  |  | - |  |  | - |  |  | - |
Total |  | 3,595 |  |  | $1.7 |  |  | 909 |  |  | $1.9 |
| (1) | We can incur costs while investigating land options, whereby we decide not to pursue the opportunity before we control the lots. These costs are expensed in the period we decide to no longer pursue the opportunity.
| (2) | During both the three and nine months ended July 31, 2013, there were write-offs in the Midwest totaling $38 thousand. During nine months ended July 31, 2013, there were write-offs in the Mid-Atlantic totaling $23 thousand.
We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the nine months ended July 31, 2014, we did not mothball any new communities, re-activated two previously mothballed communities and sold two mothballed communities. As of July 31, 2014, the net book value associated with our 46 total mothballed communities was $104.1 million, net of impairment charges recorded in prior periods of $413.7 million. From time to time we enter into option agreements that include specific performance requirements, whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with Accounting Standards Codification (“ASC”) 360-20-40-38, we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of July 31, 2014, we had $3.9 million of specific performance options recorded on our Condensed Consolidated Balance Sheets to “Consolidated inventory not owned – specific performance options,” with a corresponding liability of $3.7 million recorded to “Liabilities from inventory not owned.” Consolidated inventory not owned also consists of other options that were included on our Condensed Consolidated Balance Sheets in accordance with GAAP. We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, at July 31, 2014, inventory of $74.5 million was recorded to “Consolidated inventory not owned – other options,” with a corresponding amount of $69.5 million recorded to “Liabilities from inventory not owned.” We have land banking arrangements whereby we sell our land parcels to the land banker and they provide us an option to purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, at July 31, 2014, inventory of $47.8 million was recorded as “Consolidated inventory not owned – other options”, with a corresponding amount of $28.9 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

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