Note 7 - Inventories

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

7 . Inventories

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:

	March 31,		December 31,
	2018		2017
	(Dollars in thousands)
Housing completed or under construction:
West	$	531,072	$	489,136
Mountain		357,926		328,897
East		120,199		118,652
Subtotal		1,009,197		936,685
Land and land under development:
West		586,824		517,697
Mountain		322,262		309,072
East		55,574		66,282
Subtotal		964,660		893,051
Total inventories	$	1,973,857	$	1,829,736

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. Costs capitalized to land and land under development primarily include: (

1

) land costs; (

2

) land development costs; (

3

) entitlement costs; (

4

) capitalized interest; (

5

) engineering fees; and (

6

) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (

1

) land costs transferred from land and land under development; (

2

) direct construction costs associated with a house; (

3

) real property taxes, engineering fees, permits and other fees; (

4

) capitalized interest; and (

5

) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

In accordance with ASC Topic

360,

Property, Plant, and Equipment

(“ASC

360”

), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision

may

not

be recoverable.  We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

• actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

• estimated future undiscounted cash flows and Operating Margin;

• forecasted Operating Margin for homes in backlog;

• actual and trending net home orders;

• homes available for sale;

• market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

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

If events or circumstances indicate that the carrying value of our inventory

may

not

be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) 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. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level

3

inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level

3

inputs.

If land is classified as held for sale, in accordance with ASC

360,

we measure it at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price which is a Level

2

input. If a negotiated price is

not

available, we will consider several factors including, but

not

limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell. 

Impairments of homebuilding inventory by segment for the

three

months ended

March 31, 2018

and

2017

are shown in the table below.

	Three Months Ended
	March 31,
	2018		2017
	(Dollars in thousands)
West	$	375	$	4,100
Mountain		175		-
East		-		750
Total inventory impairments	$	550	$	4,850

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

	Impairment Data								Quantitative Data
Three Months Ended	Total Subdivisions Tested		Inventory Impairments		Fair Value of Inventory After Impairments		Number of Subdivisions Impaired		Discount Rate
	(Dollars in thousands)
March 31, 2018		24	$	550	$	5,223		2	12%
March 31, 2017		33	$	4,850	$	19,952		2	12%	to	18%

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements