1. ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2011. The Company operates its business as one domestic segment—the production and sale of refined sugar and related products.

The consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. However events and circumstances described below create substantial doubt about the Company's ability to continue as a going concern.

The Company's revolving credit agreement requires the maintenance of certain minimum availability levels or requires the Company meet a financial covenant related to a minimum earnings level. Operating losses, pension plan contributions and capital expenditures have consumed a significant amount of the Company's liquidity. The Company fell below the applicable minimum availability level under the credit agreement in January 2012, triggering the applicability of the financial covenants and other restrictions under the amended credit agreement. While the Company met the minimum earnings level for December 2011 and expects to be in compliance for the two-month period ended January 31, 2012 under the amended credit agreement, there can be no assurance that it will continue to remain in compliance in future periods. Should the Company not be able to sustain compliance with such covenants, it would need to seek a waiver from its lenders in order to avoid an event of default under the credit agreement. There is no assurance that such a waiver will be obtained from our lenders or that the lenders would not condition a waiver on the Company's agreement to terms that could materially limit the Company's ability to make additional borrowings or that could be otherwise disadvantageous. Additionally, future cash needs, including capital expenditures, pension contributions, margin requirements of the commodities futures program, as well as the need to fund possible future operating losses in the event current margin pressures continue, could result in current financial resources being inadequate to meet obligations.

The Company is attempting to enhance operating cash flow by increasing sales prices and improving operating efficiencies, and is reviewing opportunities to improve its liquidity, including potential sales of assets. In December 2011 the Company sold its one-third interest in Louisiana Sugar Refining, LLC ("LSR") rather than make additional capital contributions necessitated by the financial condition of the venture. The Company is in the late stages of exploring with its partner the potential sale of their interests in Wholesome Sweeteners, Inc. ("Wholesome") to a third party. However, there is no assurance that any transaction involving Wholesome will be consummated or that these steps will improve the Company's financial condition sufficiently to avoid the consequences under the bank credit agreement described above.

The Company's continuation as a going concern is dependant upon its ability to generate sufficient cash flows from operations or increase its liquidity through asset sales in order to meet its obligations as they become due. The consolidated financial statements do not include any adjustments relating to the recoverability and reclassification of recorded assets or amounts and reclassification of liabilities that may result from these uncertainties should the Company be unable to continue as a going concern.

Cost of Sales

The Company's sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods. Sugar inventory quantities at December 31, 2011 and 2010 declined below the comparable beginning of the fiscal year levels, resulting in the liquidation of a LIFO inventory layer with costs below the cost of current purchases of approximately $4.4 million and $2.8 million, respectively.

 

Recent Accounting Pronouncements

In May 2011, the FASB issued authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards are similar. This guidance limits the highest and best use measure to non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis. The guidance also expands disclosures of Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, and a description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. This guidance is effective for the Company in the second quarter of fiscal 2012. The implementation of this guidance is not expected to have a material impact on the Company's financial position or results of operations.

In June 2011, the FASB issued authoritative guidance on the 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. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. The guidance required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. In December, the FASB issued guidance which indefinitely deferred the guidance related to the presentation of reclassification adjustments. The guidance is effective for the Company in the first quarter of fiscal 2013 and should be applied retrospectively. The implementation of this guidance will only change the presentation of comprehensive income. It will not have an impact on the Company's financial position or results of operations.