Summary Of Significant Accounting Policies (Policy)

12 Months Ended

Dec. 31, 2011

Summary Of Significant Accounting Policies [Abstract]

Principles Of Consolidation

Principles of Consolidation.  The Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC" or the "Company", which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) include the accounts of MDC and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified to conform to the current year's presentation.

Description Of Business

Description of Business.  The Company's homebuilding segments, through separate subsidiaries, have operations in Arizona, California, Colorado, Florida, Illinois, Maryland, (which includes Maryland, Pennsylvania, Delaware and New Jersey), Nevada, Utah, Virginia and Washington. The primary functions of the Company's homebuilding segments include land acquisition and development, home construction, purchasing, marketing, merchandising, sales and customer service. The Company builds and sells primarily single-family detached homes which are designed and built to meet local customer preferences. The Company is the general contractor for all of its projects and retains subcontractors for site development and home construction.

The Company's Financial Services and Other segment consists of HomeAmerican Mortgage Corporation ("HomeAmerican"), which originates mortgage loans, primarily for the Company's homebuyers, American Home Insurance Agency, Inc. ("American Home Insurance"), which offers third-party insurance products to the Company's homebuyers, and American Home Title and Escrow Company ("American Home Title"), which provides title agency services to the Company and its homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group ("Allegiant"), which provides insurance coverage primarily to the Company's homebuilding subsidiaries and certain subcontractors for homes sold by the Company's homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. ("StarAmerican"), a Hawaii corporation and a wholly owned subsidiary of MDC which is a re-insurer of Allegiant claims.

Presentation

Presentation.  The Company's balance sheet presentation is unclassified due to the fact that certain assets and liabilities have both short and long-term characteristics.

Use Of Accounting Estimates

Use of Accounting Estimates.  The preparation of 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. Actual results could differ from those estimates.

Concentration Of Credit Risk

Concentration of Credit Risk.  There are a limited number of third-party purchasers of mortgage loans originated by HomeAmerican. On August 31, 2011, Bank of America, one of the Company's third-party purchasers, announced its intention to sell its third-party mortgage operation and exit its correspondent mortgage lending business. Subsequently, Bank of America amended its prior announcement and indicated that no sale of the third-party mortgage operation was forthcoming, but that it would proceed with its original plan to exit its correspondent mortgage lending business, with the last date that they would purchase a mortgage being December 15, 2011. If other third-party purchasers of mortgage loans exit the business, HomeAmerican's operations could be impacted adversely due to reduced competition and having fewer bidders for originated mortgage loans HomeAmerican sells, which could result in HomeAmerican receiving a lower price for such originated mortgage loans. The following table sets forth the percent of mortgage loans sold by HomeAmerican to its primary third party purchasers during 2011, 2010 and 2009.

	Year Ended December 31,
	2011		2010		2009
Wells Fargo Funding, Inc.		52%		44%		45%
Bank of America, N.A.		17%		38%		34%
JPMorgan Chase Bank, N.A.		29%		16%		18%

Cash And Cash Equivalents

Cash and Cash Equivalents.  The Company periodically invests funds in highly liquid investments with an original maturity of three months or less, such as commercial paper, money market funds and time deposits, which are included in cash and cash equivalents in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows.

Marketable Securities

Marketable Securities.  As of December 31, 2010, the Company classified certain marketable securities as held-to-maturity, as it had the intent and ability to hold its held-to-maturity investments to maturity at the time of their purchase. In July 2011, the Company sold $100 million of held-to-maturity marketable securities prior to their maturity and, as a result, the Company has re-classified all debt securities that were previously accounted for as held-to-maturity as available-for-sale as of December 31, 2011.

The Company's marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of December 31, 2011, all of the Company's marketable securities are treated as available-for-sale investments and, as such, the Company has recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive (loss) income at December 31, 2011.

Restricted Cash

Restricted Cash.  The Company receives cash earnest money deposits ("Deposits") from customers for the sale of a home. In certain states the Company is restricted from using Deposits for general purposes, unless it takes measures to release state imposed restrictions on the Deposits received from homebuyers in conjunction with home sales, which may include posting blanket security bonds. At December 31, 2011 and 2010, the Company had $2.5 million and $4.5 million, respectively, outstanding in blanket security bonds used to release restrictions on certain Deposits. The Company had $0.7 million and $0.4 million in restricted cash related to Deposits at December 31, 2011 and 2010, respectively.

Home Sales Receivables

Home Sales Receivables.  Home sales receivables primarily consist of cash to be received from title companies or outside brokers associated with closed homes. Generally, the Company will receive cash from title companies and outside brokers within a few days of the home being closed.

Mortgage Loans Held-For-Sale, Net

Mortgage Loans Held-for-Sale, Net.  Mortgage loans held-for-sale are recorded at fair value based on quoted market prices and estimated market prices received from an outside third-party. Using fair value allows an offset of the changes in fair values of the mortgage loans and the derivative instruments used to hedge them without the burden of complying with the requirements for hedge accounting.

Inventories

Inventories.  The Company's inventories consist of housing completed or under construction and land and land under development in the Consolidated Balance Sheets. The Company's inventories are primarily associated with subdivisions where the Company intends to construct and sell homes on the land, including model and unsold started homes. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering fees and permits and fees; (4) capitalized interest; and (5) indirect fees. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that the Company begins construction of a home on an owned lot. Costs capitalized to land and land under development primarily include: (1) land costs; (2) development costs for the land; (3) entitlement costs; (4) capitalized interest; and (5) title insurance, taxes and closing costs directly related to the purchase of the land parcel.

Homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. The Company determines impairments on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, the Company reviews, among other things, the following for each subdivision:

• actual and trending "Operating Profit" (which is defined as home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) for closed homes closed;

• estimated future undiscounted cash flows and Operating Profit;

• forecasted Operating Profit for homes in Backlog (as defined);

• actual and trending net and gross home orders;

• base sales price and home sales incentive information for homes that closed and are in Backlog;

• market information for each sub-market; and

• known or probable events indicating that the carrying value may not be recoverable.

If events or circumstances indicate that the carrying value of the Company's inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. If the undiscounted future cash flows are less than the subdivision's carrying value, the carrying value of the subdivision is written down to its then estimated fair value. The Company generally determines the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. The discount rates used in the Company's estimated discounted cash flows generally ranged from 13% to 18% during the years ended December 31, 2011, 2010 and 2009.

Asset Impairments

Asset Impairments.  The following tables set forth, by reportable segment, the asset impairments recorded during the year ended December 31, 2011, 2010 and 2009 (in thousands).

	Year Ended December 31,
Land and Land Under Development	2011		2010		2009
West	$	7,270	$	14,808	$	9,576
Mountain		1,850		555		8,913
East		285		421		1,600
Other Homebuilding		1,519		121		610
Subtotal		10,924		15,905		20,699
Housing Completed or Under Construction
West		1,499		3,163		5,379
Mountain		449		964		1,646
East		-		569		875
Other Homebuilding		93		594		537
Subtotal		2,041		5,290		8,437
Other asset impairments		1,936		452		1,850
Total	$	14,901	$	21,647	$	30,986

During the year ended December 31, 2011, we recorded $14.9 million of asset impairments. These impairments primarily were incurred during the 2011 second and third quarters in select subdivisions primarily in the California and Nevada markets of our West segment, and the Utah market of our Mountain segment. The impairment of these specific subdivisions, most of which were purchased during 2010, primarily resulted from lowering anticipated home sales prices from those that were expected at the time we purchased the land, based on our experience with homes sold or closed in these subdivisions. As a result of declining home sales prices, we determined based upon our impairment evaluation, that the fair market values of the land and homes in these subdivisions were less than their carrying values.

During the year ended December 31, 2010, the impairments were concentrated in the Arizona and Nevada markets of our West segment and primarily resulted from lowering our estimated average selling prices of homes. This was primarily due to: (1) strong competition for sales of new homes; (2) overall low economic activity combined with high unemployment levels; (3) homebuyers having difficulty qualifying for new loans; and (4) the elevated levels of foreclosures and short sales of homes driving real estate values down.

The impairment of the Company's inventories during the year ended December 31, 2009, related to communities in each homebuilding segment and, most notably in the Company's West and Mountain segments. The impairments resulted primarily from declines in the average selling price of homes in each of the 60 communities that were impaired during 2009 resulting from an effort to generate new home sales. The impairments in the West segment were concentrated in the Nevada market and resulted from decreases in the average selling prices of closed homes during 2009, compared with 2008, in response to increased levels of competition in this market and continued high levels of home foreclosures. The impairments in the East and Other Homebuilding segments primarily resulted from lower forecasted average selling prices for communities that are in the close-out phase.

Property And Equipment, Net

Property and Equipment, Net.  Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which range from two to 20 years. Depreciation and amortization expense for property and equipment was $6.1 million, $5.6 million and $5.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.

In accordance with Accounting Standards Codification ("ASC") 350-10, Intangibles—Goodwill and Other, the Company capitalizes certain costs incurred in connection with developing or obtaining software for internal use. Once the software is substantially complete and ready for its intended use, the capitalized costs are amortized over the software's estimated useful life, which is typically 5 years. The Company recorded $4.6 million, $2.5 million and $1.8 million in depreciation expense associated with its computer software and equipment during the years ended December 31, 2011, 2010 and 2009, respectively.

The following table sets forth the cost and carrying value of the Company's property and equipment by major asset category (in thousands).

December 31, 2011	Cost		Accumulated Depreciation		Carrying Value
Airplane	$	28,997	$	5,506	$	23,491
Computer software and equipment		19,719		8,586		11,133
Leasehold improvements		6,902		5,483		1,419
Other		1,936		1,691		245
Total	$	57,554	$	21,266	$	36,288
December 31, 2010
Airplane	$	28,997	$	4,957	$	24,040
Computer software and equipment		18,483		4,109		14,374
Leasehold improvements		8,025		5,889		2,136
Other		2,320		2,044		276
Total	$	57,825	$	16,999	$	40,826

Deferred Tax Asset, Net

Deferred Tax Asset, net.  Deferred tax assets and liabilities are recognized based on temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2011 and 2010, based upon current facts and circumstances, the Company had recorded a valuation allowance against its deferred tax assets of $281.2 million and $231.4 million, respectively.

Prepaid Expenses And Other Assets, Net

Prepaid Expenses and Other Assets, Net.  The following table sets forth the information relating to prepaid expenses and other assets, net (in thousands).

	December 31,
	2011		2010
Deferred marketing costs	$	20,786	$	22,736
Land option deposits		6,952		11,606
Related party assets		6,663		7,393
Goodwill		6,308		-
Prepaid expenses		4,454		5,935
Deferred debt issue costs, net		3,235		5,021
Other		3,012		4,533
IRS Deposit		-		35,562
Total	$	51,410	$	92,786

Deferred Marketing Costs

Deferred Marketing Costs.  Certain marketing costs related to model homes and sales offices are capitalized as they are: (1) reasonably expected to be recovered from the sale of the project; and (2) incurred for (A) tangible assets that are used directly throughout the selling period to aid in the sale of the project or (B) services that have been performed to obtain regulatory approval of sales. Capitalized marketing costs are included in prepaid and other assets in the Consolidated Balance Sheets and are amortized to marketing expense as the homes in the related subdivision are closed. The Company allocates all capitalized marketing costs equally to each house within a subdivision and records expense as homes close over the life of a subdivision. All other marketing costs are expensed as incurred.

Land Option Deposits

Land Option Deposits.  Land option deposits primarily include refundable and non-refundable deposits related to the Company's lot option purchase contracts and are capitalized if all of the following conditions have been met: (1) the costs are directly identifiable with the specific property; (2) the costs would be capitalized if the property were already acquired; and (3) acquisition of the property is probable in that the Company is actively seeking and has the ability to acquire the property and there is no indication that the property is not available for sale. Land option deposits are expensed to other operating expenses on the Consolidated Statements of Operations when the Company believes it is no longer probable that the lots under option will be acquired. The Company expensed to other operating expenses in the Consolidated Statement of Operations $7.0 million, $3.1 million and $2.9 million in land option deposits and pre-acquisition costs for the years ended December 31, 2011, 2010 and 2009, respectively.

Variable Interest Entities

Variable Interest Entities.  In the normal course of business, the Company enters into lot option purchase contracts ("Option Contracts"), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company's capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company's land inventories on its consolidated balance sheets. The Company's obligation with respect to Option Contracts generally is limited to forfeiture of the related non-refundable cash deposits and/or letters of credit, which totaled approximately $7.0 million and $4.3 million, respectively, at December 31, 2011. At December 31, 2011, the Company had the right to acquire 1,721 lots under Option Contracts.

In compliance with ASC 810, Consolidation, ("ASC 810"), the Company analyzes its land option contracts and other contractual arrangements to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that, as of December 31, 2011, it was not the primary beneficiary of any VIEs from which it is purchasing land under land option contracts. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE.

Related Party Assets

Related Party Assets.  The Company's related party assets are debt security bonds acquired from a quasi-municipal corporation in the state of Colorado. (See Note 8 to the Consolidated Financial Statements).

Goodwill

Goodwill.  During 2011, the Company completed an acquisition of substantially all of the assets of a homebuilding company in the Seattle area. As a result of this transaction, the Company recorded $6.3 million of goodwill.

IRS Deposit

IRS Deposit.  During 2008, the Company made a deposit with the Internal Revenue Service ("IRS") of approximately $35.6 million related to the IRS examination of its 2004 and 2005 federal income tax returns. The deposit was made to limit the interest charge on any potential audit adjustments. During the 2011 first quarter, the Company reached a settlement with the IRS on its audit of these returns. (See Note 7 to the Consolidated Financial Statements).

Liability For Unrecognized Tax Benefits

Liability for Unrecognized Tax Benefits.  Accounting literature regarding liabilities for unrecognized tax benefits provides guidance for the recognition and measurement in financial statements of uncertain tax positions taken or expected to be taken in a tax return.

The evaluation of a tax position is a two-step process, the first step being recognition. The Company determines whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.

The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. At December 31, 2011 and 2010, the Company's liability for unrecognized tax benefits was $3.3 million and $55.9 million, respectively, which is included in accrued liabilities in the Company's Consolidated Balance Sheets.

Warranty Reserves

Warranty Reserves.  The Company's homes are sold with limited third-party warranties that generally provide for ten years of structural coverage ("structural warranty"), two years of coverage for plumbing, electrical, heating, ventilation and air conditioning systems, and one year of coverage for workmanship and materials. Under MDC's agreement with the issuer of the third-party warranties, the Company is responsible for performing all of the work for the first two years of the warranty coverage and substantially all of the cost of the work required to be performed during years three through ten of the warranties. As a result, warranty reserves are established based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The establishment of warranty reserves for closed homes and the quarterly evaluation of the Company's warranty reserve balance are based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, trends in the Company's historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

Warranty payments are monitored to determine their nature and, to the extent they are warranty-related payments, they are recorded against the warranty reserve. To the extent this evaluation determines that the payments made are related to completion of a home or land development, the payments are then recorded against the land development and home construction accruals. Additional reserves may be established for known, unusual warranty-related expenditures not included in the warranty reserve established through the Company's actuarial analysis of warranty payments. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded.

Generally, warranty reserves are reviewed quarterly, using historical payment data and other relevant information, to determine the reasonableness and adequacy of both the reserve and the per-unit reserve amount originally included in home cost of sales, as well as the timing of the reversal of any excess reserve. Warranty reserves are included in accrued liabilities in the Consolidated Balance Sheet and adjustments to the Company's warranty reserves are recorded as an increase or reduction to home cost of sales in the Consolidated Statement of Operations. It is possible the Company could be required to record further adjustments to its warranty reserve balance in future reporting periods if warranty payment patterns continue to remain favorable relative to historical experience.

The following table summarizes the warranty reserve activity for the years ended December 31, 2011, 2010 and 2009 (in thousands).

	Year Ended December 31,
	2011			2010			2009
Balance at beginning of period	$	34,704		$	59,022		$	89,318
Expense provisions		4,224			5,320			7,188
Cash payments		(7,925	)		(8,793	)		(9,701	)
Adjustments		(5,478	)		(20,845	)		(27,783	)
Balance at end of period	$	25,525		$	34,704		$	59,022

During the year ended December 31, 2011, and consistent with the years ended December 31, 2010 and 2009, the Company continued to experience lower than anticipated warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to its estimates at the time of home closing, the Company recorded adjustments during the year ended December 31, 2011 to reduce its warranty reserve by $8.9 million, partially offset by increases in the reserve of $3.4 million for certain warranty-related issues specific to a limited number of subdivisions. The $20.8 million in warranty adjustments during the year ended December 31, 2010 was the result of favorable warranty payment experience relative to the Company's estimates at the time of home closings. During the year ended December 31, 2009, the Company recorded adjustments to reduce its warranty reserve by $27.8 million, $22.6 million being associated with on-going favorable payment experience relative to its estimates at the time of home closings. Also during 2009, the Company reached a settlement of a construction defect claim in the Nevada market of the West segment. As a result of this settlement, the costs of which were paid by insurance providers, the Company released $5.6 million of warranty reserves that were established during previous reporting periods for these construction defect claims. Each of the foregoing warranty reserve adjustments were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations.

Insurance Reserves

Insurance Reserves.  The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by StarAmerican and Allegiant; (2) self-insurance, including workers compensation; and (3) deductible amounts under the Company's insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business conducted, and changing regulatory and legal environments.

The following table summarizes the insurance reserve activity for the years ended December 31, 2011, 2010 and 2009 (in thousands).

	Year Ended December 31,
	2011			2010			2009
Balance at beginning of period	$	52,901		$	51,606		$	59,171
Expense provisions		2,305			3,602			3,771
Cash payments		(7,545	)		(6,451	)		(6,213	)
Adjustments		2,798			4,144			(5,123	)
Balance at end of period	$	50,459		$	52,901		$	51,606

The $2.8 million and $4.1 million of adjustments to increase the Company's insurance reserves during the years ended December 31, 2011 and 2010, respectively, primarily resulted from increases in the severity and frequency of insurance claim experience relative to prior period estimates. The $5.1 million adjustment to reduce insurance reserves during 2009 primarily resulted from a reduction in the Company's incurred but not reported insurance reserves associated with StarAmerican and Allegiant.

Mortgage Loan Loss Reserves

Mortgage Loan Loss Reserves.  In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican's sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. The Company's mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations. See Note 10 to the Consolidated Financial Statements.

Litigation Reserves

Litigation Reserves.  The Company and certain of its subsidiaries have been named as defendants in various cases. The Company reserves for estimated exposure with respect to these cases based upon currently available information on each case. Due to uncertainties in the estimation process, actual results may differ from those estimates.

Revenue Recognition For Homebuilding Segments

Revenue Recognition for Homebuilding Segments.  In the process of selling our homes, the Company negotiates the terms of a home sales contract with a prospective homebuyer, including base sales price, any options and upgrades (such as upgraded appliances, cabinetry, flooring, etc.), and any home sales incentive. The Company's home sales incentives generally come in the form of: (1) discounts on the sales price of the home ("Sales Price Incentives"); (2) homebuyer closing cost assistance paid by Richmond to a third-party ("Closing Cost Incentives"); (3) mortgage loan origination fees paid by the Company's homebuilding subsidiaries to HomeAmerican ("Mortgage Loan Origination Fees"); and (4) interest rate buydowns by HomeAmerican in mortgage loan financing offered to the Company's homebuyers. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors' pricing. Revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives or Mortgage Loan Origination Fees.

Revenue from home closings and land sales is recognized when the closing has occurred, title has passed, adequate initial and continuing investment by the buyer is received, possession and other attributes of ownership have been transferred to the buyer and the Company is not obligated to perform significant additional activities after closing and delivery. If the buyer has provided sufficient initial and continuing investment, and all other revenue recognition criteria have been met, revenue is recognized on the date of closing.

The Company utilizes the installment method of accounting for home closings if all of the following criteria are present: (1) HomeAmerican originates the mortgage loan; (2) HomeAmerican has not sold the mortgage loan, or loans, as of the end of the pertinent reporting period; and (3) the homebuyer's down payment does not meet the initial or continuing investment criteria. Accordingly, the corresponding Operating Profit is deferred, by recording a reduction to home sales revenue in the Consolidated Statements of Operations, and the deferral is subsequently recognized at the time HomeAmerican sells the homebuyer's mortgage loan, or loans, to a third-party purchaser. In the event the Operating Profit is a loss, the Company recognizes such loss at the time the home is closed. The Company's deferral of Operating Profit associated with homes that closed for which the initial or continuing investment criteria were not met was immaterial at December 31, 2011 and 2010.

Revenue Recognition For HomeAmerican

Revenue Recognition for HomeAmerican.  The Company's mortgage loans generally are sold to third-party purchasers with anti-fraud, warranty and limited early payment default provisions. Sale of a mortgage loan has occurred when the following criteria have been met: (1) the payment from the third-party purchaser is not subject to future subordination; (2) the Company has transferred all the usual risks and rewards of ownership that is in substance a sale; and (3) the Company does not have a substantial continuing involvement with the mortgage loan. Revenue from the sale of mortgage loan servicing is recognized upon the exchange of consideration for the mortgage loans and related servicing rights between the Company and the third-party purchaser.

The Company measures mortgage loans held-for-sale at fair value with the changes in fair value being reported in earnings at each reporting date. Using fair value allows an offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. The impact of recording changes in fair value to earnings did not have a material impact on the Company's financial position, results of operations or cash flows during the years ended December 31, 2011, 2010 or 2009. Gains on sales of mortgage loans, net, were $17.8 million, $21.8 million and $20.3 million for the years ended December 31, 2011, 2010 and 2009, respectively, and are included as a component of Other revenue in the Consolidated Statements of Operations.

Home Cost of Sales

Home Cost of Sales.  Home cost of sales includes the specific construction costs of each home and all applicable land acquisition, land development and related costs, both incurred and estimated to be incurred, warranty costs and finance and closing costs, including Closing Cost Incentives. The Company uses the specific identification method for the purpose of accumulating home construction costs and allocates costs to each lot within a subdivision associated with land acquisition and land development based upon relative market value of the lots prior to home construction. Lots within a subdivision typically have comparable market values, and, as such, the Company generally allocates costs equally to each lot within a subdivision. The Company records all home cost of sales when a home is closed on a house-by-house basis.

When a home is closed, the Company generally has not yet paid and recorded all costs necessary to complete the construction of the home and certain land development costs. At the time of a home closing, the Company compares the home construction budgets to actual recorded costs to determine the additional costs remaining to be paid on each closed home. For amounts not incurred or paid as of the time of closing a home, the Company records an estimated accrual associated with certain home construction and land development costs. Generally, these accruals are established based upon contracted work which has yet to be paid, open work orders not paid at the time of home closing, punch list items identified during the course of the homebuyer's final walkthrough of the home, as well as land completion costs more likely than not to be incurred, and represent estimates believed to be adequate to cover the expected remaining home construction and land development costs. The Company monitors the adequacy of these accruals on a house-by-house basis and in the aggregate on both a market-by-market and consolidated basis. At December 31, 2011 and 2010, the Company had $10.6 million and $12.5 million, respectively, of land development and home construction accruals for closed homes. Actual results could differ from such estimates.

The Company may offer to pay all or a portion of a homebuyer's closing costs as an incentive. Closing Cost Incentives represent expenses that, over and above the price of the home, the Company and the homebuyer normally incur to complete the sales transaction. These costs may include items payable to third-parties such as mortgage loan origination fees, discount points, appraisal fees, document preparation fees, insurance premiums, title search and insurance fees, as well as government recording and transfer charges. The Company records Closing Cost Incentives at the time a home is closed and presents them as a component of home cost of sales in the Consolidated Statements of Operations.

Stock-Based Compensation Expense

Stock-Based Compensation Expense.  Stock-based compensation expense for all share-based payment awards is based on the grant date fair value. The grant date fair value for stock option awards is estimated using the Black-Scholes option pricing model and the grant date fair value for restricted stock awards is based upon the closing price of the Company's common stock on the date of grant. The Company recognizes these compensation costs net of estimated forfeitures and recognizes stock-based compensation expense for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is currently the vesting term of up to seven years.

Derivative Financial Instruments

Derivative Financial Instruments.  The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At December 31, 2011, the Company had $22.9 million in interest rate lock commitments and $12.5 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the changes in fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company's derivatives were not material during the year ended December 31, 2011, 2010 or 2009.

Advertising Expenses

Advertising Expenses.  The Company expenses advertising costs as incurred. Advertising expenses were $9.2 million, $10.9 million and $8.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Earnings (Loss) Per Common Share

Earnings (Loss) Per Common Share.  For purposes of calculating earnings (loss) per share ("EPS"), a company that has participating security holders (for example, unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method for calculating earnings per share. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company's participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders, based on their respective rights to receive distributed earnings (i.e. dividends) and undistributed earnings (i.e. net income or loss). Currently, the Company has one class of security and has participating security holders consisting of shareholders of unvested restricted stock. The basic and diluted EPS calculations are shown below (in thousands, except per share amounts).

	Year Ended December 31,
	2011		2010		2009
Basic and Diluted (Loss) Earnings Per Common Share
Net (loss) income	$	(98,390)	$	(64,770)	$	24,679
Less: distributed and undistributed earnings allocated to participating securities		(711)		(523)		(393)
Net (loss) income attributable to common stockholders	$	(99,101)	$	(65,293)	$	24,286
Basic weighted-average shares outstanding		46,796		46,628		46,537
Unvested restricted stock and stock options, net		-		-		382
Dilutive weighted-average shares outstanding		46,796		46,628		46,919
Basic (Loss) Earnings Per Common Share	$	(2.12)	$	(1.40)	$	0.52
Dilutive (Loss) Earnings Per Common Share	$	(2.12)	$	(1.40)	$	0.52

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the years ending December 31, 2011 and 2010 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.3 million shares and 0.4 million shares during the years ended December 31, 2011 and 2010, respectively.