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.

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 U.S. Treasury and marketable securities, all categorized as “available-for-sale” and stated at fair market value, with the unrealized gains and losses, net of taxes, reported in “Accumulated other comprehensive income” in the accompanying consolidated balance sheets. 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 Topic 820. At September 30, 2011, the aggregate fair market value of the Company’s U.S. Treasury Bills and marketable securities was $69,216,000. These investments had approximately $24,532,000 of net unrealized gains, consisting of gross unrealized gains of $28,983,000 and gross unrealized losses of $4,451,000 relative to the two marketable securities purchased during the year. The U.S. Treasury Bills have maturity dates of less than one year, and the bonds have a maturity date in 2039. The bonds are classified as “Current assets” because they are available for sale. At September 30, 2010, the Company had U.S. Treasury Bills and marketable securities at fair market value of approximately $63,581,000, including approximately $29,655,000 of unrealized gains.

As of September 30, 2011, the Company performed separate evaluations for impaired equity securities to determine if the unrealized losses were other-than-temporary. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has 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 objectives and securities portfolio objectives. Based on the results of the evaluations, the Company concluded that as of September 30, 2011, the unrealized losses related to equity securities were temporary.

Comprehensive Income: Comprehensive income, which includes net income plus net unrealized gains (losses) on U.S. Treasury and marketable securities, was $4,213,000 and $5,347,000 for the fiscal years ended September 30, 2011 and 2010, respectively. There was an unrealized loss of $3,627,000, net of taxes, for fiscal year ended September 30, 2011 as compared to a net unrealized loss of $2,325,000 in the prior year.

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 records liabilities related to uncertain tax positions in accordance with FASB ASC 740.

Property, plant and equipment: Property, plant and equipment are carried on the basis of cost. 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, 2011, 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.

Sustain Software: The Company is continuing its internal Sustain software development efforts. Costs related to the research and development of new Sustain software products are expensed as incurred until technological feasibility of the product has been established, at which time such costs are capitalized, subject to expected recoverability. In general, “technological feasibility” is achieved when the developer has established the necessary skills, hardware and technology to produce a product and a detailed program design has been (i) completed, (ii) traced to the product specifications and (iii) reviewed for high-risk development issues. If these developments are not successful, there will be a significant and adverse impact on the Company’s ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. Sustain expensed personnel costs of $2,864,000 and $2,316,000 for the development and implementation of its Web-based case management system during fiscal 2011 and 2010, respectively. These development and implementation costs will materially impact earnings at least through fiscal 2012.

Revenue Recognition: 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 Company recognizes revenues from both the lease and sale of software products in accordance with ASC Topic 985-605 Software Revenue Recognition. Revenues from leases of software products are recognized over the life of the lease while revenues from software product sales are recognized normally upon delivery, installation or acceptance pursuant to a signed agreement. Revenues from annual 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 acceptance by the customers.

Management Incentive Plan: In fiscal 1987 the Company implemented a Management Incentive Plan that entitles a participant to participate in pre-tax earnings of the Company. In 2003 the Company modified the 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 pre-tax earnings in the year of grant and to receive the same percentage of pre-tax earnings 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. Certificate interests entitled participants to receive 3.55% and 3.60% (amounting to $548,480 and $616,850, respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and extraordinary items, 5.73% and 3.02% (amounting to $0 for both years) for Sustain and 8.2% and 8.2% (amounting to $1,090,760 and $1,284,640, respectively) for Daily Journal consolidated in fiscal 2011 and 2010. One major participant in the Plan is over 65 but not retired, and the Company has accrued $5,170,000 for the Plan’s future commitment, which includes a decrease in fiscal 2011 of $500,000 due to reduced consolidated pretax profits before the expenses for the Plan.

Treasury stock and net income per common share: Prior to June 2010, the Company owned 66,282 of the 599,409 units of a limited partnership that had no known liabilities and owned as its sole asset 599,409 shares of common stock of Daily Journal Corporation. This investment was considered treasury stock and was excluded from the calculation of weighted average shares. In June 2010, the Company received 66,282 shares of common stock of the Company as a liquidating distribution from the limited partnership. The total cost of the investment was therefore reclassified by an adjustment to Common Stock, Additional Paid-in Capital and Retained Earnings. In addition, the number of outstanding shares of the Company was reduced by these 66,282 shares to reflect the actual number of outstanding shares as of September 30, 2010. 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 both fiscal 2011 and 2010. 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. Actual results could differ from these estimates.

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. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value. There were no such impairments identified during fiscal 2011 and 2010.

Accounting Standards Adopted in 2011: In October 2009 the FASB amended the accounting standards applicable to revenue recognition for multiple deliverable revenue arrangements for both software and non-software elements. The Company adopted this guidance on a prospective basis on October 1, 2010 and therefore applied it to relevant revenue arrangements originating or materially modified on or after that date. Its adoption of this new accounting guidance did not have a significant impact on the timing and pattern of revenue recognition when applied to multiple element arrangements.

New Accounting Pronouncement: In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for the Company in October 2011 and will be applied retrospectively. The Company believes the adoption of ASU 2011-05 will only provide a different presentation of its comprehensive income.