HR Block 2009 Annual Report Download - page 40

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally accepted accounting principles (GAAP). However, we
believe certain non-GAAP performance measures and ratios used in managing the business may provide additional
meaningful comparisons between current year results and prior periods. Reconciliations to GAAP financial
measures for common banking ratios are provided below. These non-GAAP financial measures should be viewed
in addition to, not as an alternative for, our reported GAAP results.
Year Ended April 30, 2009 2008 2007
Banking Ratios
(dollars in 000s)
Net Interest Margin:
Net interest income
(1)
$ 120,075 $ 78,498 $ 23,963
Divided by average earning assets $ 1,324,645 $ 1,417,366 $ 863,737
9.06% 5.54% 2.77%
Pretax Return on Average Assets:
Pretax income $ (14,508) $ 11,484 $ 23,086
Divided by average assets $ 1,403,933 $ 1,442,868 $ 888,320
(1.03%) 0.80% 2.60%
(1)
Includes all interest income related to Emerald Advance activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
INTEREST RATE RISK –We have a formal investment policy that strives to minimize the market risk exposure of
our cash equivalents and available-for-sale (AFS) securities, which are primarily affected by credit quality and
movements in interest rates. These guidelines focus on managing liquidity and preserving principal and earnings.
Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality, short-term
investments, including qualified money market funds. Because our cash and cash equivalents have a relatively
short maturity, our portfolio’s market value is relatively insensitive to interest rate changes. See additional
discussion of interest rate risk included below in Consumer Financial Services.
As our short-term borrowings are generally seasonal, interest rate risk typically increases through our third
fiscal quarter and declines to zero by fiscal year-end. While the market value of short-term borrowings is relatively
insensitive to interest rate changes, interest expense on short-term borrowings will increase and decrease with
changes in the underlying short-term interest rates. See Item 7, “Financial Condition” for additional information.
Our long-term debt at April 30, 2009, consists primarily of fixed-rate Senior Notes; therefore, a change in interest
rates would have no impact on consolidated pretax earnings. See Item 8, note 9 to our consolidated financial
statements.
EQUITY PRICE RISK –We have limited exposure to the equity markets. Our primary exposure is through our
deferred compensation plans. Within the deferred compensation plans, we have mismatches in asset and liability
amounts and investment choices (both fixed-income and equity). At April 30, 2009 and 2008, the impact of a 10%
market value change in the combined equity assets held by our deferred compensation plans and other equity
investments would be approximately $7.3 million and $12.2 million, respectively, assuming no offset for the
liabilities.
TAX SERVICES
FOREIGN EXCHANGE RATE RISK –Our operations in international markets are exposed to movements in
currency exchange rates. The currencies involved are the Canadian dollar and the Australian dollar. We translate
revenues and expenses related to these operations at the average of exchange rates in effect during the period.
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end
of the year. Translation adjustments are recorded as a separate component of other comprehensive income in
stockholders’ equity. Translation of financial results into U.S. dollars does not presently materially affect and has
not historically materially affected our consolidated financial results, although such changes do affect the year-to-
year comparability of the operating results in U.S. dollars of our international businesses. We estimate a 10%
change in foreign exchange rates by itself would impact consolidated net income in fiscal years 2009 and 2008 by
approximately $3.0 million and $3.2 million, respectively, and cash balances at April 30, 2009 and 2008 by
$5.4 million and $4.0 million, respectively.
During fiscal year 2009, borrowing needs in our Canadian operations were funded by corporate borrowings in
the U.S. To mitigate the foreign currency exchange rate risk, we used forward foreign exchange contracts. We do
not enter into forward contracts for speculative purposes. In estimating the fair value of derivative positions, we
36 H&R BLOCK 2009 Form 10K