Summary of Significant Accounting Policies

Basis of Presentation

Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes.

We prepare our financial statements in accordance with generally accepted accounting principles in the United States, which require us to make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate.

At year-end 2016, we had divested substantially all of our oil and gas working interest properties. As a result of this significant change in our operations, we have reported the results of operations and financial position of these assets as discontinued operations within the consolidated statements of income (loss) and consolidated balance sheets for all periods presented. In addition, in 2016, we changed the name of the oil and gas segment to mineral resources to reflect the strategic shift from oil and gas working interest investments to owned mineral interests.

The transactions included in our net income in the consolidated statements of income (loss) are the same as those that would be presented in other comprehensive income. Thus, our net income equates to other comprehensive income.

We are evaluating the impact of any potential changes in our accounting policies and related party transactions with D.R. Horton post-merger and will update our disclosures accordingly in future periods. The merger was accounted for under the acquisition method in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). D.R. Horton was the acquirer for accounting purposes and our consolidated financial statements will continue to be stated at historical cost.

Cash and Cash Equivalents

Cash and cash equivalents include cash and other short-term instruments with original maturities of three months or less.

Cash Flows

The consolidated statements of cash flows for 2017, 2016 and 2015 reflect cash flows from both continuing and discontinued operations. Expenditures for the acquisition and development of single-family and multifamily real estate that we intend to develop for sale are classified as operating activities. Expenditures for the acquisition and development of properties to be held and operated, investment in oil and gas properties and equipment, and business acquisitions are classified as investing activities.

Change in Fiscal Year

As a result of the Merger with D.R. Horton, we have elected to change our fiscal year-end from December 31 to September 30, effective January 1, 2018. This change will align our fiscal year-end reporting calendar with D.R. Horton.

Environmental and Asset Retirement Obligations

We recognize environmental remediation liabilities on an undiscounted basis when environmental assessments or remediation are probable and we can reasonably estimate the cost. We adjust these liabilities as further information is obtained or circumstances change. With the sale of our remaining oil and gas entities in 2017 we no longer have asset retirement obligations related to the abandonment and site restoration requirements that result from the acquisition, construction and development of oil and gas working interest properties, which we have divested. Prior to the sale, we recorded the fair value of a liability for an asset retirement obligation in the period in which it was incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense related to the asset retirement obligation and depletion expense related to capitalized asset retirement costs are included in cost of mineral resources and in discontinued operations on our consolidated statements of income (loss).

Fair Value Measurements

Financial instruments for which we did not elect the fair value option include cash and cash equivalents, accounts and notes receivables, other assets, debt, accounts payable and other liabilities. With the exception of long-term notes receivable and debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term nature.

Goodwill and Other Intangible Assets

We record goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. We do not amortize goodwill or other indefinite lived intangible assets. Instead, we measure these assets for impairment based on the estimated fair values at least annually or more frequently if impairment indicators exist. We perform the annual impairment measurement in the fourth quarter of each year. Intangible assets with finite useful lives are amortized over their estimated useful lives.

In 2017, we sold our remaining owned mineral assets for approximately $85,700,000 and as a result of this sale we recorded a non-cash impairment charge of $37,900,000 related to the mineral resources reporting unit goodwill which is included in cost of mineral resources on our consolidated statements of income (loss).

At year-end 2016, we performed our annual goodwill impairment evaluation and concluded that goodwill related to our central Texas water assets was impaired because the carrying value exceeded the fair value and recorded a $3,874,000 non-cash impairment charge which is included in cost of other on our consolidated statements of income (loss).

Income Taxes

We provide deferred income taxes using current tax rates for temporary differences between the financial accounting carrying value of assets and liabilities and their tax accounting carrying values. We recognize and value income tax exposures for the various taxing jurisdictions where we operate based on laws, elections, commonly accepted tax positions, and management estimates. We include tax penalties and interest in income tax expense. We provide a valuation allowance for any deferred tax asset that is not likely to be recoverable in future periods.

When we believe a tax position is supportable but the outcome uncertain, we include the item in our tax return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which represents our expectation of the most likely outcome considering the technical merits and specific facts of the position. Changes to liabilities are only made when an event occurs that changes the most likely outcome, such as settlement with the relevant tax authority, expiration of statutes of limitations, changes in tax law, or recent court rulings.

Property and Equipment

We carry property and equipment at cost less accumulated depreciation. We capitalize the cost of significant additions and improvements, and we expense the cost of repairs and maintenance. We capitalize interest costs incurred on major construction projects. We depreciate these assets using the straight-line method over their estimated useful lives as follows:



	Estimated	Year-End
	Useful Lives	2017			2016
		(In thousands)
Buildings and building improvements	10 to 40 years	$	2,162		$	2,700
Property and equipment	2 to 10 years	4,513			4,957
		6,675			7,657
Less: accumulated depreciation		(4,672		)	(4,541		)
		$	2,003		$	3,116

Depreciation expense of property and equipment was $441,000 in 2017, $889,000 in 2016 and $1,067,000 in 2015.

Real Estate

We carry real estate at the lower of cost or fair value less cost to sell. We capitalize interest costs once development begins, and we continue to capitalize throughout the development period. We also capitalize infrastructure, improvements, amenities, and other development costs incurred during the development period. We determine the cost of real estate sold using the relative sales value method. When we sell real estate from projects that are not finished, we include in the cost of real estate sold estimates of future development costs through completion, allocated based on relative sales values. These estimates of future development costs are reevaluated at least annually, with any adjustments being allocated prospectively to the remaining units available for sale. We receive cash deposits from home builders for purchases of vacant developed lots from community development projects. These earnest money deposits are released to the home builders as lots are developed and sold. In certain instances earnest money deposits are subject to mortgages which are secured by the real estate under contract with the home builder. These mortgages expire when the earnest money is released to the home builders as lots are developed and sold. At year-end 2017, $40,408,000 of real estate was subject to earnest money mortgages, including $25,712,000 classified as assets held for sale.

We have agreements with utility or improvement districts, principally in Texas, whereby we agree to convey to the districts water, sewer and other infrastructure-related assets we have constructed in connection with projects within their jurisdiction. The reimbursement for these assets ranges from 70 to 90 percent of allowable cost as defined by the district. The transfer is consummated and we receive payment when the districts have a sufficient tax base to support funding of their bonds. The cost we incur in constructing these assets is included in capitalized development costs, and upon collection, we remove the assets from capitalized development costs. We provide an allowance to reflect our past experiences in collecting these reimbursements.

Impairment of Real Estate Long-Lived Assets

We review real estate long-lived assets held for use for impairment when events or circumstances indicate that their carrying value may not be recoverable. Impairment exists if the carrying amount of the long-lived asset is not recoverable from the undiscounted cash flows expected from its use and eventual disposition. We determine the amount of the impairment loss by comparing the carrying value of the long-lived asset to its estimated fair value. We generally determine fair value based on the present value of future cash flows expected from the sale of the long-lived asset. Non-cash impairment charges related to our owned and consolidated real estate assets are included in cost of real estate sales and other. In 2017, we recorded $3,420,000 in non-cash impairment charges related to the asset group sold in the strategic asset sale to Starwood and one mitigation project. In 2016, we recorded $56,453,000 in non-cash impairment charges related to six non-core community development projects and two multifamily sites.

Reclassifications

In 2017, we have reclassified prior years' restricted cash that was included in other assets to a separate line item on our consolidated balance sheets to conform to the current year presentation.

Real Estate Revenue

We recognize revenue from sales of real estate when a sale is consummated, the buyer’s initial investment is adequate, any receivables are probable of collection, the usual risks and rewards of ownership have been transferred to the buyer, and we do not have significant continuing involvement with the real estate sold. If we determine that the earnings process is not complete, we defer recognition of any gain until earned.

We exclude from revenue amounts we collect from utility or improvement districts related to the conveyance of water, sewer and other infrastructure related assets. We exclude from revenue amounts we collect from customers that represent sales tax or other taxes that are based on the sale. These amounts are included in other accrued expenses until paid.

Share-Based Compensation

We use the Black-Scholes option pricing model to determine the fair value of stock options, and a Monte Carlo simulation pricing model to determine the fair value of market-leveraged stock units and for stock options with market conditions. The fair value of equity-settled awards is determined on the grant date and the fair value of cash-settled awards is determined at period end. We expense share-based awards ratably over the vesting period or earlier based on retirement eligibility.

Owned Mineral Interests

Historically, we leased our mineral interests to third-party exploration and production entities, we retained a royalty interest and may have taken an additional participation in production, including a working interest. In first quarter 2017, we sold our remaining owned mineral assets.

Oil and Gas Properties (Discontinued Operations)

We used the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral interests leased, costs to drill and complete development of oil and gas wells and related asset retirement costs were capitalized. Costs to drill exploratory wells were capitalized pending determination of whether the wells had proved reserves and if determined incapable of producing commercial quantities of oil and gas these costs were expensed as dry hole costs. At year-end 2017, we had no capitalized exploratory well costs pending determination of proved reserves. Exploration costs include dry hole costs, geological and geophysical costs, expired unproved leasehold costs and seismic studies, and were expensed as incurred. Production costs incurred to maintain wells and related equipment were charged to expense as incurred.

Depreciation and depletion of producing oil and gas properties was calculated using the units-of-production method. Proved developed reserves were used to compute unit rates for unamortized tangible and intangible drilling and completion costs. Proved reserves were used to compute unit rates for unamortized acquisition of proved leasehold costs. Unit-of-production amortization rates were revised whenever there was an indication of the need for revision but at least once a year and those revisions were accounted for prospectively as changes in accounting estimates. We no longer own any oil and gas working interest properties.

Impairment of Oil and Gas Properties (Discontinued Operations)

Historically, we evaluated our oil and gas properties, including facilities and equipment, for impairment whenever events or changes in circumstances indicated that the carrying value of the asset may not be recoverable. We estimate the expected undiscounted future cash flows of our oil and gas properties and compared such undiscounted future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount was recoverable. If the carrying amount exceeded the estimated undiscounted future cash flows, we adjusted the carrying amount of the oil and gas properties to fair value. The factors used to determine fair value were subject to our judgment and expertise and included, but were not limited to, recent sales prices of comparable properties, the present value of future cash flows net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.

Assessing unproved leasehold properties to determine impairment required significant judgment. We assessed our unproved leasehold properties periodically for impairment on a property-by-property basis based on remaining lease terms, drilling results or future plans to develop acreage. Impairment expense for proved and unproved oil and gas properties are included in cost of mineral resources and cost of oil and gas producing activities in discontinued operations.

Oil and Gas Working Interest Revenues (Discontinued Operations)

We recognized revenue as oil and gas was produced and sold. There were a significant amount of oil and gas properties which we did not operate and, therefore, revenue was typically recorded in the month of production based on an estimate of our share of volumes produced and prices realized. We obtained the most current available production data from the operators and price indices for each well to estimate the accrual of revenue. Obtaining production data on a timely basis for some wells was not feasible; therefore we utilized past production receipts and estimated sales price information to estimate accrual of working interest revenue on all other non-operated wells each month. Revisions to such estimates were recorded as actual results became known.

A majority of our sales were made under contractual arrangements with terms that were considered to be usual and customary in the oil and gas industry. The contracts were for periods of up to five years with prices determined upon a percentage of pre-determined and published monthly index price. The terms of these contracts did not have an effect on how we recognized revenue.

Mineral Resources Revenues

We recognized revenue from mineral bonus payments when we had received an executed agreement with the exploration company transferring the rights to any oil or gas it may find and requiring drilling be done within a specified period, the payment had been collected, and we had no obligation to refund the payment. We recognized revenue from delay rentals received if drilling had not started within the specified period and when the payment had been collected. We recognized revenue from mineral royalties and non-working interests when the minerals had been delivered to the buyer, the value was determinable, and we were reasonably sure of collection.

Other Revenues

We recognized revenue from timber sales upon passage of title, which occurred at delivery; when the price was fixed and determinable; and we were reasonably sure of collection. We recognized revenue from recreational leases on a straight-line basis over the lease term. We recognize revenue from the sale of water rights or groundwater reservation agreements upon receipt of an executed agreement, when payment has been collected, all conditions to the agreement have been met and we have no further performance obligations. Water delivery revenues are recognized as water is delivered and metered at the delivery point.