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Note 2 - Summary of Significant Accounting Policies | 12 Months Ended
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Sep. 30, 2016
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of the Daily Journal and Journal Technologies (collectively the “Company”). All intercompany accounts and transactions have been eliminated in consolidation. Concentrations of Credit Risk: The Company extends unsecured credit to most of its advertising customers. The Company recognizes that extending credit and setting appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. Credit exposure also includes the amount of estimated unbilled sales. Credit limits, setting and maintaining credit standards, and managing the overall quality of the credit portfolio is largely centralized. The level of credit is influenced by the customer’s credit and payment history which the Company monitors when establishing a reserve. The Company maintains the reserve account for estimated losses resulting from the inability of its customers to make required payments. If the financial conditions of its customers were to deteriorate or its judgments about their abilities to pay are incorrect, additional allowances might be required and its results of operations could be materially affected. Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Fair Value of Financial Instruments: The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities. In addition, the Company has investments in marketable securities, all categorized as “available-for-sale ” and stated at fair market value, with the unrealized gains and losses, net of tax es, reported in “Accumulated other comprehensive income ” (AOCI) in the accompanying consolidated balance sheets. The unrealized gains and losses included in AOCI represent changes in the fair value of the investments due to changes in both foreign currency exchange rates and market prices. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures . At September 30, 2016, the aggregate fair market value of the Company’s marketable securities was $166,634,000. These investments had approximately $108,256,000 of unrealized gains before taxes of $42,250,000. Most of the unrealized gains were in the common stocks of three U.S. financial institutions. The bonds have a maturity date in 2039 and are classified as “Current assets” because they are available for sale. At September 30, 2015, the Company had marketable securities at fair market value of approximately $166,041,000, including approximately $111,498,000 of unrealized gains before taxes of $43,278,000. Investment in Financial Instruments
|  | September 30, 2016 |  |  | September 30, 2015 |
|  | Aggregate fair value |  |  | Amortized/Adjusted cost basis |  |  | Pretax unrealized gains |  |  | Aggregate fair value |  |  | Amortized/Adjusted cost basis |  |  | Pretax unrealized gains |
Marketable securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common stocks |  | $ | 158,462,000 |  |  | $ | 53,436,000 |  |  | $ | 105,026,000 |  |  | $ | 158,705,000 |  |  | $ | 49,604,000 |  |  | $ | 109,101,000 |
Bonds |  |  | 8,172,000 |  |  |  | 4,942,000 |  |  |  | 3,230,000 |  |  |  | 7,336,000 |  |  |  | 4,939,000 |  |  |  | 2,397,000 |
|  | $ | 166,634,000 |  |  | $ | 58,378,000 |  |  | $ | 108,256,000 |  |  | $ | 166,041,000 |  |  | $ | 54,543,000 |  |  | $ | 111,498,000 |
The Company perform ed separate evaluations for equity securities with a fair value at September 30, 2016 and 2015 below cost to determine if the unrealized losses were other-than-temporary. This evaluation considered a number of factors including, but not limited to, the length of time and extent to which the fair value ha d been less than cost, the financial condition and near term prospects of the issuer and the Company’s ability and intent to hold the securities until fair value recovers. The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management and portfolio objectives. Based on the result of th e evaluation, the Company concluded that as of September 30, 2016, the unrealized loss related to such marketable securities was temporary. As of September 30, 2015, the Company concluded that the unrealized losses related to the marketable securities of one issuer were other-than-temporary and thus recorded impairment losses of $376,000 ($230,000 net of taxes). U.S. GAAP requires that the Company recognize other-than-temporary impairment losses in earnings rather than in accumulated comprehensive income when the security prices remain below cost for a period of time that may be deemed excessive even in instances where the Company possesses the ability and intent to hold the security. However, the recording of these impairment losses does not necessarily indicate that the loss in value of these securities is permanent. In fiscal 2014, there were no unrealized losses related to the marketable securities. Intangible Assets: At September 30, 2016 and 2015, intangible assets were composed of (i) customer relationships of $7,166,000 and $11,698,000 (net of the accumulated amortization expenses of $14,938,000 and $10,406,000), respectively, and (ii) developed technology of $787,000 and $1,292,000 (net of accumulated amortization expenses of $1,738,000 and $1,233,000), respectively. These intangible assets are being amortized over five years or less based on their estimated useful lives. Future annual intangible amortization costs are estimated to be approximately $4,895,000 for fiscal 2017 and $3,058,000 for fiscal 2018 and none thereafter. Intangible amortization expense was $5,037,000, $4,907,000 and $4,866,000 for fiscal 2016, 2015 and 2014, respectively.
Intangible Assets |
|  | September 30, 2016 |  |  | September 30, 2015 |
|  | Customer Relationships |  |  | Developed Technology |  |  | Total |  |  | Customer Relationships |  |  | Developed Technology |  |  | Total |
Gross intangible |  | $ | 22,104,000 |  |  | $ | 2,525,000 |  |  | $ | 24,629,000 |  |  | $ | 22,104,000 |  |  | $ | 2,525,000 |  |  | $ | 24,629,000 |
Accumulated amortization |  |  | (14,938,000 | ) |  |  | (1,738,000 | ) |  |  | (16,676,000 | ) |  |  | (10,406,000 | ) |  |  | (1,233,000 | ) |  |  | (11,639,000 | )
|  | $ | 7,166,000 |  |  | $ | 787,000 |  |  | $ | 7,953,000 |  |  | $ | 11,698,000 |  |  | $ | 1,292,000 |  |  | $ | 12,990,000 |
Goodwill: The Company accounts for goodwill in accordance with ASC 350, Intangibles — Goodwill and Other . Goodwill is not amortized for financial statement purposes but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. The goodwill amount reported in the consolidated balance sheets relates only to Journal Technologies. The Company performed qualitative assessments for Journal Technologies and determined there were no substantive changes during the current year and no indication of impairment. In making this assessment, the Company only considered Journal Technologies’ assets and their revenue generating abilities as required by ASC 350. Goodwill represents the expected synergies in expanding the Company’s software business. Considered factors for potential goodwill impairment evaluation for the reporting units include the current year’s business profitability before intangible amortization, fluctuations of revenues, changes in the market place, the status of installation contracts and new business, among other things. As of September 30, 2016 and 2015, there was goodwill of $13,400,000. Prepaid and Other Current Assets: Included in other assets are in-progress installation service costs of $350,000 for the legacy projects from the acquisition for which revenues have not yet been recognized and are deferred. Inventories: Inventories, comprised of newsprint and paper, are stated at cost, on a first-in, first-out basis, which does not exceed current market value. Property, plant and equipment: Property, plant and equipment are carried on the basis of cost or fair value for assets acquired in business combinations. Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 – 39 years. At September 30, 2016, the estimated useful lives were (i) 5 – 39 years for building and improvements, (ii) 3 – 5 years for furniture, office equipment and software, and (iii) 3 – 10 years for machinery and equipment. Leasehold improvements are amortized over the term of the related leases or the useful life of the assets, whichever is shorter. Assets are depreciated using the straight-line method for financial statements and accelerated method for tax purposes. Depreciation and amortization expenses were $672,000, $624,000 and $650,000 for fiscal 2016, 2015 and 2014, respectively. Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are expensed as incurred. Gains or losses on dispositions of assets are reflected in current earnings. Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. There were no such impairments identified during fiscal 2016, 2015 and 2014. Journal Technologies’ Software Development Costs: Development costs related to software products developed for sale or licensing are expensed as incurred until the technological feasibility of the product has been established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The establishment of technological feasibility and the ongoing assessment of recoverability of costs require considerable judgment by the Company with respect to certain internal and external factors, including, but not limited to, anticipated future product revenue, estimated economic life and changes in hardware and software technology. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date. Revenue Recognition: For the Traditional Business, proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term. Advertising revenues are recognized when advertisements are published and are net of commissions. The change in allowance for doubtful accounts is as follows.
Description |  | Balance at Beginning of Year |  |  | Additions Charged to Costs and Expenses |  |  | Accounts Charged off less Recoveries |  |  | Balance at End of Year |
2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for doubtful accounts |  | $ | 250,000 |  |  | $ | 5,000 |  |  | $ | (55,000 | ) |  | $ | 200,000 |
2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for doubtful accounts |  | $ | 250,000 |  |  | $ | 61,000 |  |  | $ | (61,000 | ) |  | $ | 250,000 |
2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for doubtful accounts |  | $ | 250,000 |  |  | $ | 41,000 |  |  | $ | (41,000 | ) |  | $ | 250,000 |
Journal Technologies recognizes revenues in accordance with the provisions of ASC 985-605, Software—Revenue Recognition . Revenues from license and maintenance contracts generally call for the Company to provide software updates and upgrades to customers and are recognized ratably over the maintenance period. Consulting and other services are recognized upon completion of the services and acceptance by the customers under the completed performance method. The Company elects to use the completed performance method because each customer’s acceptance is unpredictable and reliable estimates of the progress towards completion cannot be made. Only after a customer’s acceptance of a completed task does the customer realize value, and any advances are generally no longer at risk of refund and are therefore considered earned. Other public service fees, as disclosed in the consolidated statements of comprehensive income (loss), are primarily service fees earned and recognized as revenues at the time the Company processes credit card payments on behalf of the courts via its ePayIt secure websites through which the general public uses can pay traffic citations and obtain traffic school information. Approximately 56%, 57% and 53% of the Company’s revenues in fiscal 2016, 2015 and 2014, respectively, were derived from sales and leases of software licenses, annual maintenance agreements and consulting services that typically include implementation and training. The Company has established Vendor Specific Objective Evidence (VSOE) of fair value of the annual maintenance because a substantial majority of the Journal Technologies’ actual maintenance renewals is within a narrow range of pricing as a percentage of the underlying license fees for the legacy contracts and is deemed substantive. Management Incentive Plan: In fiscal 1987, the Company implemented a Management Incentive Plan (the “Incentive Plan”) that entitles a participant to participate in pretax earnings before adjustment for certain items of the Company. In 2003, the Company modified the Incentive Plan to provide participants with three different types of non-negotiable incentive certificates based on the nature of the particular participants’ responsibilities. Each certificate entitles the participant to a specified share of the applicable pretax earnings in the year of grant and to receive the same percentage of pretax earnings to be generated in each of the next nine years provided they remain with the Company or are in retirement after working for the Company to age 65. If a participant dies while any of his or her certificates remain outstanding, future payments under those certificates will be made to the deceased participant’s beneficiaries. In fiscal 2015, after combining Sustain, New Dawn and ISD into one company, the Company converted each existing Sustain Non-negotiable Incentive Certificate along with its supplemental Addendum to a new “Journal Technologies Non-negotiable Incentive Certificate” coupled with a similar supplemental Addendum which defines how the value of the Journal Technologies Certificate will be paid upon a triggering event such as a sale of Journal Technologies or an initial public offering. Employees and consultants of Journal Technologies are eligible to participate in these “Journal Technologies Certificates”. Payouts under the Journal Technologies Certificates are calculated based on the pretax income of Journal Technologies before supplemental compensation expenses, workers’ compensation expenses, intangible amortizations and goodwill impairment. Also effective fiscal 2015, the calculation of payouts under the Daily Journal Non-Consolidated Certificates is based on the pretax earnings of the traditional publishing business before supplemental compensation expenses, workers’ compensation expenses, financing costs of the non-traditional business activities and any write-downs of unrealized losses on investments. The calculation of payouts under the Daily Journal Consolidated Certificate remains unchanged. For any certificate held by an employee who has already met retirement eligibility at age 65, all future commitments are expensed immediately. For any certificate held by an employee who is expected to become retirement eligible during the 10 year period of the certificate, the Company recognizes the future commitments at each fiscal year-end over the period from the grant date through retirement eligibility. Certificate interests entitled participants to receive 4.49%, 4.13% and 3.85% (amounting to $271,350, $198,915 and $265,490, respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and certain other items, 8.30% and 7.07% (amounting to $0 and $10,600 for fiscal 2016 and 2015, respectively) for Journal Technologies and 8.2%, 8.2% and 8.2% (amounting to $0, $0 and $0, respectively) for Daily Journal consolidated in fiscal 2016, 2015 and 2014. The Company accrued $62,000 and $47,000 as of September 30, 2016 and 2015, respectively, for the Plan’s future commitment for those who will still have Certificates at the age of 65. This future commitment included an increase in fiscal 2016 of $15,000 or $.01 per outstanding share on a pretax basis versus a decrease in fiscal 2015 of $733,000 or $.53 per outstanding share on a pretax basis due to increased estimated future pretax income. The estimated Incentive Plan’s future commitment is calculated using Level 3 inputs, as defined in the fair value hierarchy, based on an average of the past year and the current year pretax earnings before certain items, discounted to the present value at 6% since each granted Unit will expire over its remaining life term of up to 10 years. Income taxes: The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of the assets and liabilities. The Company accounts for uncertainty in income taxes under ASC 740-10 which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized. At September 30, 2016, the balance of the accrued tax liability for uncertain and unrecognized tax benefits relative to an acquisition in fiscal 2013 totaled approximately $2,723,000. At September 30, 2015, there were unrecognized tax benefits of $2,991,000. Net income per common share : The net income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,380,746 for fiscal 2016, 2015 and 2014. The Company does not have any common stock equivalents, and therefore basic and diluted net income per share is the same. Use of Estimates: The presentation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The long-term Incentive Plan accrual is calculated using Level 3 inputs, as defined in the fair value hierarchy, based on an average of the past year’s and the current year’s pretax earnings, discounted to the present value at 6% since each granted Unit will expire over its remaining life term of up to 10 years. Actual results could differ from these estimates. Accounting Standard Adopted in 2016 : In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) : Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This update changes the requirements for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity is required to be reported in the discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Further, this update expands the disclosures about an entity’s significant continuing involvement with a discontinued operation. The Company adopted this ASU in fiscal 2016, and the adoption had no impact to the Company’s financial condition, results of operations or disclosures because there was no such kind of discontinued operations during fiscal 2016. New Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . This update clarifies the principles for revenue recognition in transactions involving contracts with customers. The new revenue recognition guidance provides a five-step analysis to determine when and how revenue is recognized. The new guidance will require revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date . This update defers the mandatory effective date of its revenue recognition standard by one year. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is the Company’s fiscal 2019. Early application is permitted for annual reporting periods beginning after December 15, 2016, and interim periods within that annual period, which is the Company’s fiscal 2018. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) : Principal versus Agent Considerations (Reporting Revenue Gross versus Net), providing guidance regarding the application of ASU 2014-09 when another party, along with the reporting entity, is involved in providing a good or a service to a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB further issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients providing guidance in certain narrow areas and adding some practical expedients. The effective dates for these ASUs, which are the same as the effective date for ASU No. 2014-09, Revenue from Contracts with Customers , will be the Company’s fiscal 2019 annual and interim periods. The Company has not yet evaluated what impact, if any, the adoption of these ASUs may have on its financial condition, results of operations or disclosures. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . This update requires deferred tax liabilities and assets to be classified as noncurrent in the consolidated balance sheet. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is the Company’s fiscal 2018. The amendment may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has not yet evaluated what impact the adoption of this guidance may have on its financial condition, results of operations or disclosures. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . This update requires that all leases be recognized by lessees on the balance sheet through a right-of-use asset and corresponding lease liability, including today’s operating leases. This standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is the Company’s fiscal year 2020. The Company has not yet evaluated what impact, if any, the adoption of this guidance may have on its financial condition, results of operations or disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts versus incurred credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write-down. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning January 1, 2020, which is the Company’s fiscal 2021, with early adoption permitted for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company has not yet evaluated what impact, if any, the adoption of this ASU may have on its financial condition, results of operations or disclosures. No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.

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