HR Block 2005 Annual Report Download - page 114

anticipated prepayment speeds including default, estimated limited to, revenue trends, discounted operating cash flows and
ancillary fee income and other economic factors. The prepayment other operating factors to determine the impairment amount. No
speeds are estimated using our historical experience and third- material impairment adjustments to other intangible assets or
party market sources. The MSRs are amortized to earnings in other long-lived assets were made during the three-year period
proportion to, and over the period of, estimated net future ended April 30, 2005. The weighted-average life of intangible
servicing income. MSRs are reviewed quarterly for potential assets with finite lives is nine years.
impairment. Impairment is assessed based on the fair value of COMMERCIAL PAPER ⬎⬎⬎ Short-term borrowings are used to
each risk stratum. MSRs are stratified by the fiscal year of the finance temporary liquidity needs and various financial activities.
loan sale date, which approximates date of origination, and loan There was no commercial paper outstanding at April 30, 2005 and
type, usually 6-month adjustable, 2- to 3-year adjustable and fixed 2004.
rate. LITIGATION ⬎⬎⬎ Our policy is to routinely assess the
PROPERTY AND EQUIPMENT ⬎⬎⬎ Buildings and equipment likelihood of any adverse judgments or outcomes related to legal
are initially recorded at cost and are depreciated over the matters, as well as ranges of probable losses. A determination of
estimated useful life of the assets using the straight-line method. the amount of the reserves required, if any, for these
Leasehold improvements are initially recorded at cost and are contingencies is made after thoughtful analysis of each known
amortized over the lesser of the term of the respective lease or issue and an analysis of historical experience in accordance with
the estimated useful life, using the straight-line method. Statement of Financial Accounting Standards No. 5, ‘‘Accounting
Estimated useful lives are 15 to 40 years for buildings, 3 to 5 years for Contingencies,’’ and related pronouncements. We record
for computers and other equipment and up to 8 years for reserves related to certain legal matters for which it is probable
leasehold improvements. that a loss has been incurred and the range of such loss can be
We capitalize certain allowable costs associated with software estimated. With respect to other matters, management has
developed or purchased for internal use. These costs are concluded that a loss is only reasonably possible or remote and,
amortized over 36 months using the straight-line method. therefore, no liability is recorded.
INTANGIBLE ASSETS AND GOODWILL ⬎⬎⬎ We account for INCOME TAXES ⬎⬎⬎ We account for income taxes in
intangible assets and goodwill in accordance with Statement of accordance with Statement of Financial Accounting Standards
Financial Accounting Standards No. 142, ‘‘Goodwill and Other No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS 109’’). SFAS 109
Intangible Assets,’’ (‘‘SFAS 142’’). We test goodwill and other requires us to record deferred income tax assets and liabilities for
indefinite life intangible assets for impairment annually or more future tax consequences attributable to differences between the
frequently, whenever events occur or circumstances change financial statement carrying value of existing assets and liabilities
which would, more likely than not, reduce the fair value of a and their respective tax bases. Our deferred tax assets include
reporting unit below its carrying value. We have defined our tax loss and credit carryforwards and are reduced by a valuation
reporting units as our operating segments or one level below. The allowance if, based on available evidence, it is more likely than
first step of the impairment test is to compare the estimated fair not that some portion or all of the deferred tax assets will not be
value of the reporting unit to its carrying value. If the carrying realized. Our current deferred tax assets are included in prepaid
value is less than fair value, no impairment exists. If the carrying expenses and other current assets on the consolidated balance
value is greater than fair value, a second step is performed to sheets. Noncurrent deferred tax assets are included in other
determine the fair value of goodwill and the amount of assets on our consolidated balance sheets.
impairment loss, if any. These tests were completed and no We file a consolidated Federal tax return on a calendar year
indications of goodwill impairment were found during fiscal year basis.
2005 or 2004. During fiscal year 2003, impairment charges of REVENUE RECOGNITION ⬎⬎⬎ Service revenues consist
$108.8 million and $13.5 million were recorded in the Investment primarily of fees for preparation and filing of tax returns, both in
Services and Business Services segments, respectively. offices and through our online programs, fees associated with our
In addition, long-lived assets, including intangible assets with POM guarantee program, mortgage loan-servicing fees, fees for
finite lives, are assessed for impairment whenever events or consulting services and brokerage commissions. Generally,
circumstances indicate the carrying value may not be fully service revenues are recorded in the period in which the service
recoverable by comparing the carrying value to future is performed. Retail and online tax preparation revenues are
undiscounted cash flows. To the extent there is impairment, an recorded when a completed return is filed or accepted by the
analysis is performed based on several criteria, including, but not customer. POM revenues are deferred and recognized over the
H&R BLOCK 2005 Form 10K
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