Annual report pursuant to Section 13 and 15(d)

Note 3 - Fair Value Measurements

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Note 3 - Fair Value Measurements
 12 Months Ended
Aug. 31, 2012
Fair Value Disclosures [Text Block]
NOTE 3 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. The Company had none of these instruments at August 31, 2012 or 2011.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had one Level 2 asset at August 31, 2012 and 2011, its marketable securities.  The Company’s principal markets for these securities are the secondary institutional markets and valuations are based on observable market data in those markets.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions.  Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had one Level 3 liability at August 31, 2012 and 2011, the Tap Participation Fee liability, which is described in greater detail in Note 2 – Summary of Significant Accounting Policies and Note 7 – Long-Term Debt And Operating Lease.

The Company maintains policies and procedures to value instruments using the best and most relevant data available.

The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems and other long-lived assets.  See Note 4 for impairment of water rights and land with the associated water  rights held for sale

Level 2 Asset – Marketable Securities Measured on a Recurring Basis. The Company’s marketable securities are the Company’s only financial assets measured on a recurring basis.  The fair values of the marketable securities are based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit.

Level 3 Liability – Tap Participation Fee.  The Company’s Tap Participation Fee liability is the Company’s only financial liability measured on a non-recurring basis.  The Tap Participation Fee liability is valued by projecting new home development in the Company’s targeted service area over an estimated development period. Due to the long-term nature of the Tap Participation Fee, the valuation of the Tap Participation Fee is not sensitive to minor changes.  See further description of the Tap Participation Fee in Note 7 – Long-Term Debt and Operating Lease.

The following table provides information on the assets and liabilities measured at fair value as of August 31, 2012:

               
Fair Value Measurement Using:
 
   
Fair Value
   
Cost / Other Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Unrealized Gains and
(Losses)
 
Marketable securities
  $ 1,101,367     $ 1,101,367     $ -     $ 1,101,367     $ -     $ (1,081 )
Tap Participation Fee
  $ 68,269,176     $ 68,269,176     $ -     $ -     $ 68,269,176     $ -  

Although not required, the Company deems the following table, which presents the changes in the Tap Participation Fee for the year ended August 31, 2012, to be helpful to the users of its financial statements:

   
Fair Value Measurement using Significant Unobservable Inputs (Level 3)
 
   
Gross Estimated Tap Participation Fee Liability
   
Tap Participation Fee Reported Liability
   
Discount - to be imputed as interest expense in future periods
 
Balance at August 31, 2011
  $ 113,147,700     $ 64,988,300     $ 48,159,400  
Total gains and losses (realized and unrealized):
                       
Imputed interest recorded as "Other Expense"
    -       3,470,500       (3,470,500 )
Purchases, sales, issuances, payments, and settlements
    (189,700 )     (189,700 )     -  
Transfers in and/or out of Level 3
    -       -       -  
Balance at August 31, 2012
  $ 112,958,000     $ 68,269,100     $ 44,688,900  

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value are discussed above. The methodologies for other financial assets and liabilities are discussed below.

Cash and Cash Equivalents:  The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held.  These securities primarily include balances in the Company’s operating and savings accounts.  The carrying amount of cash and cash equivalents approximate fair value.

Accounts Receivable and Accounts Payable:  The carrying amounts of accounts receivable and accounts payable approximate fair value due to the relatively short period to maturity for these instruments.

Notes Receivable and Construction Proceeds Receivable:  The carrying amounts of the Company’s notes receivable and construction proceeds receivable approximate fair value as they bear interest at rates which are comparable to current market rates.

Related Party Receivable – HP A&M:  In conjunction with HP A&M defaulting on certain promissory notes, the Company has the right to collect from HP A&M any amounts the Company spends to cure the defaulted notes.  Accordingly the Company has recorded the entire amount of the HP A&M notes as a receivable from HP A&M.  Due to the fact that HP A&M is a related party the fair value of the accounts receivable is not practical to determine.

Notes Payable: Subsequent to fiscal 2012, the Company began acquiring the defaulted and non-defaulted promissory notes that are payable by HP A&M.   The majority of the notes issued by the Company have a five-year term, bear interest at an annual rate of five percent (5%) and require bi-annual payments with a straight-line amortization schedule.  The carrying value of the notes payable approximate the fair value as the rates are comparable to market rates.

Farm Accounts Receivable and Future Farm Income: The Company terminated the Property Management Agreement with HP A&M effective August 3, 2012, and all future farm income is now payable directly to the Company instead of HP A&M. On July 23, 2012, the Company notified all the farm lessees that all lease payments would be billed directly by and paid directly to the Company from the date of the notice forward. All other terms of the leases remained unchanged. Under the farm lease agreements, the farmers are billed twice a year in November and March. The unpaid balances from prior billings (performed by HP A&M) were recorded on the Company's books as accounts receivable less an allowance for uncollectible accounts. The allowance was determined by the Company's specific review of all past due accounts.

Off-Balance Sheet Instruments:  The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA.  Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.  See further discussion in Note 5 – Participating Interests In Export Water.