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Note 4 - Reduction of Inventory to Fair Value

3 Months Ended

Jan. 31, 2016

Inventory Impairments And Land Option Cost Write Offs [Abstract]

Inventory Impairments And Land Option Cost Write Offs [Text Block]

4.	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 first quarter of fiscal 2016, no discount rate was used as the six communities impaired during the quarter were land held for sale for which purchase offer prices were used to determine the fair value. In the first quarter of fiscal 2015, our discount rate used for the one impairment recorded was 19.0%. 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 three months ended January 31, 2016 and 2015, we evaluated inventories of all 512 and 488 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations during the three months ended January 31, 2016 and 2015 for eleven and five of those communities (i.e., those with a projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $46.2 million and $20.2 million, respectively. Of those communities tested for impairment during the three months ended January 31, 2016 and 2015, four and three communities with an aggregate carrying value of $17.3 million and $11.0 million, respectively, had undiscounted future cash flow that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded impairment losses for the three months ended January 31, 2016 and 2015, which is 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 $9.7 million for six communities being held for sale mainly in the Midwest, with a pre-impairment value of $28.7 million, and $0.9 million for one community in the Southeast, with a pre-impairment value of $5.7 million, respectively. The inventory impaired in fiscal 2016 was written down to fair value based on recent offers received for the properties. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment.

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 $2.0 million and $1.3 million for the three months ended January 31, 2016 and 2015, 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 costs written off. The number of lots walked away from during the three months ended January 31, 2016 and 2015 were 1,256 and 1,700, respectively. The walk-aways were located in all segments except the West, with the majority in the Southeast, Mid-Atlantic and Northeast in the first quarter of fiscal 2016, and in all segments in the first quarter of fiscal 2015, with the majority in the Midwest and Southeast.

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 on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first quarter of fiscal 2016, we did not mothball any additional communities, but re-activated one previously mothballed community and contributed one previously mothballed community to a new joint venture which is beginning construction. As of January 31, 2016 and October 31, 2015, the net book value associated with our 29 and 31 total mothballed communities was $76.3 million and $103.0 million, respectively, which was net of impairment charges recorded in prior periods of $296.2 million and $334.5 million, respectively.

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 January 31, 2016 and October 31, 2015, we had $0.5 million and $1.2 million, respectively, of specific performance options recorded on our Condensed Consolidated Balance Sheets to “Consolidated inventory not owned,” with a corresponding liability of $0.5 million and $1.2 million, respectively, recorded to “Liabilities from inventory not owned.”

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 Sheets, at January 31, 2016 and October 31, 2015, inventory of $97.9 million and $95.9 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $90.1 million and $87.9 million, respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. 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 Sheets, at January 31, 2016 and October 31, 2015, inventory of $239.6 million and $25.1 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $151.8 million and $16.8 million, respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.