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<br />HUERFANO-CUCHARAS IRRIGATION COMPANY <br />NOTES TO FINANCIAL STATEMENTS <br />DECEMBER 31, 2009 AND 2008 <br /> <br />NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES <br /> <br />Nature of Business – The Huerfano-Cucharas Irrigation Company (“HCIC” or “the Company”) is a mutual ditch irrigation company. It was <br />incorporated in the State of Colorado in 1944 and was formed via a merger of two mutual ditch irrigation companies: The Huerfano Irrigation <br />Company and the Cucharas Irrigation Company. The purpose of the Company is to provide irrigation water for its shareholders via water <br />rights, storage and distribution systems owned by the Company. <br /> <br />Maintenance Assessments – Shareholders are subject to semi-annual assessments to provide funds to the Company. The assessments are <br />set by HCIC’s board of directors and are determined based on a projection of operating expenses, future acquisitions, and major repairs and <br />replacements. The assessments are recognized evenly over the 12 month operating cycle. <br /> <br />Cash and Cash Equivalents - For purposes of reporting cash flows, HCIC considers cash and cash equivalents to include highly liquid <br />investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from <br />fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these <br />financial instruments. <br /> <br />Accounts Receivable – Shareholder assessments not yet paid are recognized as accounts receivable. Shareholders have until the next <br />assessment is declared and invoiced to pay their assessment. In the past, this has been an approximate six month cycle. Assessments <br />remaining unpaid after the next assessment billing are charged 12% per annum on the unpaid balance. After assessments are past due longer <br />than a year, a delinquent letter is sent out requiring payment within 30 days. If still no payment within the 30 days, a second letter is sent <br />stating that if payment is not received within 30 days, their shares may be sold. There is a lengthy process (publication, service, etc.) before <br />the sale can be held. Repayment plans can be accepted by the Company’s Board, if the agreed amount is paid each month. At the open sale, <br />generally at the annual meeting or a shareholders meeting, bidding for the shares is open. The amount due the Company is paid and the <br />remainder to the delinquent shareholder—if they turn in their shares. If the delinquent shareholder cannot be found, the money in excess of <br />the amount due is turned over to the State of Colorado. In the last 10 years, HCIC had more than five sales. In each of the sales, HCIC <br />recovered all of the delinquent amounts. <br /> <br />Based on past experience with collections, no allowance was recorded against the assessment receivables. <br /> <br />Concentration of Credit Risk - Financial instruments that potentially subject HCIC to significant concentrations of credit risk include cash <br />equivalents, and accounts receivable. The Company maintains its cash and investment balances in the form of bank demand deposits, <br />money market accounts, commercial papers and short-term notes with financial institutions that management believes to be of high credit <br />quality. Accounts receivable are collateralized with shares in the Company. <br /> <br /> <br /> <br />Page 8