HR Block 2006 Annual Report Download - page 127

NOTE 7: PROPERTY AND EQUIPMENT
The components of property and equipment are as follows: As of April 30, 2006 and 2005, we have property and equipment under
(in 000s)
capital lease with a cost of $22.1 million and $16.8 million, respectively,
April 30, 2006 2005 and accumulated depreciation of $4.9 million and $4.2 million,
respectively. During the current fiscal year we entered into an
Land $ 17,152 $ 23,716
Buildings 50,232 67,031
agreement to lease furniture, fixtures and equipment in conjunction
Computers and other equipment 592,610 568,986
with the purchase of Industrial Revenue Bonds from the City of Kansas
Capitalized software 180,591 153,794
City, Missouri as discussed further in note 16. Assets under this capital
Leasehold improvements 189,283 175,048
lease at April 30, 2006 totaled $5.3 million. We also have a separate
Construction in process 118,709 –
agreement to lease real estate and buildings under a noncancelable
1,148,577 988,575
capital lease for the next 15 years with an option to purchase after two
Less: Accumulated depreciation and amortization 704,792 658,425
years. Total assets under this capital lease at April 30, 2006 totaled
$ 443,785 $ 330,150
$16.8 million.
During fiscal year 2006, we capitalized interest costs of $4.7 million
Depreciation and amortization expense for 2006, 2005 and 2004 was
relating to the construction of our new corporate headquarters.
$127.7 million, $122.5 million and $117.6 million, respectively. Included
in depreciation and amortization expense is amortization of capitalized
software of $28.0 million, $23.6 million and $28.2 million, respectively.
NOTE 8: DERIVATIVE INSTRUMENTS
A summary of our derivative instruments is as follows: notional amount of swap arrangements during fiscal years 2006 and
(in 000s)
2005 was $8.4 billion and $2.4 billion, respectively.
We enter into forward loan sale commitments to manage market risk
Asset (Liability) Gain (Loss) in the
Balance at April 30, Year Ended April 30,
associated with commitments to fund mortgage loans. The notional
value and the contract value of the forward commitments at April 30,
2006 2005 2006 2005 2004
2006 were $3.1 billion. Most of our forward commitments give us the
Interest rate swaps $ 8,831 $ (1,325) $ 137,192 $ 47,192 $ (2,703)
option to under- or over-deliver by five to ten percent.
Put options on
Eurodollar futures 3,282 –1,071 ––
We generally enter into interest rate caps or swaps to mitigate interest
Forward loans sale
rate risk associated with mortgage loans that will be securitized and
commitments 1,961 –1,961 ––
trading residual interests that will be sold in a subsequent NIM
Interest rate caps –12,458 802 (106) –
transaction. The caps and swaps enhance the marketability of the
Rate-lock
securitization and NIM transactions. An interest rate cap represents a
equivalents (317) 801 (1,118) 2,187 (13,917)
right to receive cash if interest rates rise above a contractual strike rate,
Prime short sales 777 (805) 1,315 (2,420) 4,663
its value therefore increases as interest rates rise. The interest rates
$ 14,534 $ 11,129 $ 141,223 $ 46,853 $ (11,957)
used in our interest rate caps and the floating rates used in swaps are
We use interest rate swaps, put options on Eurodollar futures and based on LIBOR.
forward loan sale commitments to reduce interest rate risk associated At April 30, 2006, we had commitments to fund both non-prime and
with non-prime loans. We generally enter into interest rate swap prime mortgage loans totaling $4.0 billion for specified periods of time
arrangements related to existing loan applications and applications we at ‘‘locked-in’’ interest rates. These derivative instruments represent
expect to receive prior to our next anticipated change in rates charged commitments to fund loans (rate-lock equivalents).
to borrowers. Interest rate swaps represent an agreement to exchange We sell short FNMA, FHLMC and GNMA mortgage-backed securities
interest rate payments, whereby we pay a fixed rate and receive a to reduce our risk related to our commitments to fund fixed-rate prime
floating rate. Put options on Eurodollar futures represent the right to loans. The position on certain or all of the fixed-rate mortgage loans is
sell a Eurodollar futures contract at a specified price in the future. closed approximately 10-15 days prior to standard Public Securities
These swap and put option contracts increase in value as rates rise and Association (PSA) settlement dates.
decrease in value as rates fall. As a result, these contracts increase in None of our derivative instruments qualify for hedge accounting
value as rates rise and decrease in value as rates fall. The average treatment as of April 30, 2006 and 2005.
H&R BLOCK 2006 Form 10K
57