HR Block 2007 Annual Report Download - page 61

assign estimated loss rates based on those risks. Loss rates are based on INCOME TAXES –We calculate our current and deferred tax
historical experience, our assessment of economic and market provision for the fiscal year based on estimates and assumptions that
conditions and loss rates of comparable financial institutions. Wecould differ from the actual results reflected in income tax returns filed
review non-performing loans individually and record loss estimates during the applicable calendar year. Adjustments based on filed returns
typically based on the value of the underlying collateral. Changes in our are recorded in the appropriate periods when identified. We file a
estimates can affect our operating results. consolidated federal tax return on a calendar year basis, generally in the
VALUATION OF GOODWILL –We test goodwill and other indefinite second fiscal quarter of the subsequent year.
life intangible assets for impairment annually, or more frequently if We record a valuation allowance to reduce our deferred tax assets to
events occur or circumstances change which would, more likely than the amount that is more likely than not to be realized. We have
not, reduce the fair value of a reporting unit below its carrying value. considered taxable income in carry-back periods, historical and
Our goodwill impairment analysis is based on a discounted cash flow forecasted earnings, future taxable income, the mix of earnings in the
approach and market comparables, when available. This analysis, at the jurisdictions in which we operate, and tax planning strategies in
reporting unit level, requires significant management judgment with determining the need for a valuation allowance against our deferred tax
respect to revenue and expense forecasts, anticipated changes in assets. In the event we were to determine that we would not be able to
working capital, and the selection and application of an appropriate realize all or part of our deferred tax assets in the future, an adjustment
discount rate. Changes in the projections or assumptions could to the deferred tax assets would be charged to earnings in the period in
materially affect our estimate of reporting unit fair values. The use of which we make such determination. Likewise, if we later determine that
different assumptions would increase or decrease estimated discounted it is more likely than not that the deferred tax assets would be realized,
future operating cash flows and could effect our conclusions regarding we would reverse the applicable portion of the previously provided
the existence or amount of potential impairment. valuation allowance.
The goodwill balance in our continuing operations was $993.9 million The amount of income taxes we pay is subject to ongoing audits by
as of April 30, 2007 and $941.3 million as of April 30, 2006. No goodwill federal, state and foreign tax authorities, which may result in proposed
impairments were identified in our continuing operations during fiscal assessments. Our estimate for the potential outcome for any uncertain
years 2007, 2006 or 2005. In fiscal year 2007, we recorded $154.9 million tax issue is highly subjective and based on our best judgments. We
33 m
in goodwill impairments related to the sale or wind-down of businesses believe we have adequately provided for any reasonably foreseeable
reported as discontinued operations. outcome related to these matters. However, our future results may
LITIGATION –It is our policy to routinely assess the likelihood of any include favorable or unfavorable adjustments to our estimated tax
adverse judgments or outcomes related to legal matters, as well as liabilities in the period the assessments are made or resolved or when
ranges of probable losses. Assessing the likely outcome of pending statutes of limitation on potential assessments expire. As a result, our
litigation, including the amount of potential loss if any, is highly effective tax rate may fluctuate on a quarterly basis.
subjective. Our estimates may differ from actual results due to GAINS ON SALES OF MORTGAGE ASSETS –We sell substantially all
difficulties in predicting the outcome of jury trial, arbitration hearings, of the non-prime mortgage loans we originate to the Trusts which are
settlement discussions and related activity; predicting the outcome of qualifying special purpose entities (QSPEs), with servicing rights
class certification actions; and various other uncertainties. generally retained. Prime mortgage loans are sold in loan sales,
A determination of the amount of the reserves required, if any, for servicing released, to third-party buyers. Gains or losses on sales of
these contingencies is made after thoughtful analysis of each known mortgage loans are recognized when control of the assets is
issue and an analysis of historical experience in accordance with surrendered (when loans are sold to third-party buyers, including the
Statement of Financial Accounting Standards No. 5, ‘‘Accounting for Trusts) and are based on the difference between net proceeds received
Contingencies,’’ and related pronouncements. Therefore, we have (cash proceeds less repurchase reserves) and the allocated cost of the
recorded reserves related to certain legal matters for which we believe assets sold. We determine the allocated cost of assets sold based on the
it is probable that a loss will be incurred and the range of such loss can relative fair values of net proceeds (i.e. the loans sold), retained MSRs
be estimated. With respect to other matters, we have concluded that a and the beneficial interest in Trusts, which represents our residual
loss is only reasonably possible or remote, or is not estimable and, interest in the ultimate expected outcome from the disposition of the
therefore, no liability is recorded. loans by the Trusts.
H&R BLOCK 2007 Form 10K