HR Block 2006 Annual Report Download - page 117

the securities loaned. Interest rates paid on the cash collateral fluctuate information and events and by estimating, or validating with third-party
as short-term interest rates change. experts, if necessary, what a market participant would use in
RECEIVABLES –Receivables consist primarily of Business Services’ determining the current fair value. To the extent that actual excess cash
accounts receivable. The allowance for doubtful accounts requires flows are different from estimated excess cash flows, the fair value of
management’s judgment regarding current market indicators the residual would increase or decrease.
concerning general economic trends to establish an amount considered BENEFICIAL INTEREST IN TRUSTS – TRADING –The beneficial
by management to be adequate to cover estimated losses as of the interest in Trusts is recorded as a result of daily non-prime loan sales to
balance sheet date. Trusts. The beneficial interest is classified as a trading security, based
MORTGAGE LOANS HELD FOR SALE –Mortgage loans held for sale on management’s intentions, is carried at fair value and is marked to
are either loans originated but not yet sold or loans repurchased from market through the consolidated income statements. Fair value is
investors and pending resale. Loans held for sale are carried at the calculated as the present value of estimated future cash flows, limited
lower of amortized cost or fair value as determined by outstanding by the ultimate expected outcome from the disposition of the loans by
commitments from investors or current investor-yield requirements the Trusts.
calculated on an aggregate basis. Loan origination and processing fees MORTGAGE SERVICING RIGHTS –MSRs retained in the sale of
and related direct origination costs are deferred until the related loan mortgage loans are recorded at allocated carrying amounts based on
is sold. relative fair values at the time of the sale. The MSRs are carried at the
RESIDUAL INTERESTS IN SECURITIZATIONS –Residual interests lower of cost or fair value. Fair values of MSRs are determined based on
classified as available-for-sale securities are carried at fair value based the present value of estimated future cash flows related to servicing
on discounted cash flow models with unrealized gains included in other loans. Assumptions used in estimating the value of MSRs include
comprehensive income. The residual interests are accreted over the market discount rates and anticipated prepayment speeds including
estimated life of the securitization structure. If the carrying value default, estimated ancillary fee income, estimated third-party servicing
exceeds fair value, the residual is written down to fair value with the costs and other economic factors. The prepayment speeds are estimated
realized loss, net of any unrealized gain previously recorded in other using our historical experience and third-party market sources. The
comprehensive income, included in gains on sales of mortgage assets in MSRs are amortized to earnings in proportion to, and over the period of,
the consolidated income statements. estimated net future servicing income. MSRs are reviewed quarterly for
We estimate future cash flows from these residuals and value them potential impairment. Impairment is assessed based on the fair value of
using assumptions we believe to be consistent with those of unaffiliated each risk stratum. MSRs are stratified by the calendar year of the loan
third-party purchasers. We estimate the fair value of residuals by sale date, which approximates date of origination, and loan type,
computing the present value of the excess of the weighted-average primarily 2- and 3-year adjustable and fixed rate.
interest rate on the loans sold plus estimated collections of prepayment MORTGAGE LOANS HELD FOR INVESTMENT –Mortgage loans held
penalty fee income over the sum of (1) the coupon on the securitization for investment are loans originated with the ability and intent to hold to
bonds, (2) a contractual servicing fee paid to the servicer of the loans, maturity. Loans held for investment are carried at amortized cost less a
which is usually Option One, (3) expected losses to be incurred on the valuation allowance for credit losses incurred as of the balance sheet
portfolio of the loans sold, as projected to occur, over the lives of the date. A loan’s cost includes loan origination and processing fees and
loans, (4) fees payable to the trustee and insurer, if applicable, and related direct origination costs.
(5) payments made to investors on NIM bonds, if applicable. The PROPERTY AND EQUIPMENT –Buildings and equipment are initially
residual valuation takes into consideration the current and expected recorded at cost and are depreciated over the estimated useful life of
interest rate environment. Prepayment and loss assumptions used in the assets using the straight-line method. Leasehold improvements are
estimating the cash flows are based on evaluation of the actual initially recorded at cost and are amortized over the lesser of the term
experience of the servicing portfolio, the characteristics of the of the respective lease or the estimated useful life, using the straight-line
applicable loan portfolio, as well as also taking into consideration the method. Estimated useful lives are 15 to 40 years for buildings, 3 to
current and expected economic and interest rate environment and its 5 years for computers and other equipment and up to 8 years for
expected impact. The estimated cash flows are discounted at an interest leasehold improvements.
rate we believe an unaffiliated third-party purchaser would require as a We capitalize certain allowable costs associated with software
rate of return on a financial instrument with a similar risk profile. We developed or purchased for internal use. These costs are typically
evaluate, and adjust if necessary, the fair values of residual interests amortized over 36 months using the straight-line method.
quarterly by updating the actual performance and expected We are capitalizing interest costs during construction of our new
assumptions in the discounted cash flow models based on current corporate headquarters facility for qualified expenditures based upon
H&R BLOCK 2006 Form 10K
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