PURE CYCLE CORP - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - July 13, 2012

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Note 2 - Fair Value Measurements
 9 Months Ended
May 31, 2012
Fair Value Disclosures [Text Block]
NOTE 2 – 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 May 31, 2012.

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 May 31, 2012, its marketable securities.  The value of the Company’s marketable securities is based on observable market data obtained from the financial institutions at which the marketable securities are held.

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 May 31, 2012, the Tap Participation Fee liability, which is described in greater detail in Note 4 below.

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

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

         
Cost / Other
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
   
Accumulated Unrealized Gains and
 
   
Fair Value
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
(Losses)
 
Marketable securities
  $ 2,803,700     $ 2,803,900     $ -     $ 2,803,700     $ -     $ (200 )
Tap Participation Fee liability
  $ 67,432,800     $ 67,432,800     $ -     $ -     $ 67,432,800     $ -  

Level 2 Asset – Marketable Securities.  The Company’s marketable securities are the Company’s only financial asset measured on a recurring basis.  The fair value of the marketable securities is 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.  As further described in Note 4, the Tap Participation Fee liability is valued by projecting new home development in the Company’s targeted service area over an estimated development period.

The following table presents the changes in the Tap Participation Fee for the three and nine months ended May 31, 2012:

   
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"
    -       2,586,800       (2,586,800 )
  Increase in estimated value (to be realized in future periods)
    7,450,000       -       7,450,000  
Purchases, sales, issuances, payments, and settlements
    -       (142,300 )     142,300  
Transfers in and/or out of Level 3
    -       -       -  
Balance at May 31, 2012
  $ 120,597,700     $ 67,432,800     $ 53,164,900  

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