HR Block 2009 Annual Report Download - page 52

rate mortgage (ARM) loans prior to rate reset. In cases where we modify a loan and in so doing grant a concession
to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR).
We may consider the borrower’s payment status and history, the borrower’s ability to pay upon a rate reset on an
adjustable-rate mortgage, the size of the payment increase upon a rate reset, the period of time remaining prior to
the rate reset and other relevant factors in determining whether a borrower is experiencing financial difficulty. A
borrower who is current may be deemed to be experiencing financial difficulty in instances where the evidence
suggests an inability to pay based on the original terms of the loan after the interest rate reset and, in the absence of
a modification, may default on the loan. We evaluate whether the modification represents a concession we would
not otherwise consider, such as a lower interest rate than what a new borrower of similar credit risk would be
offered. A loan modified in a troubled debt restructuring, including a loan that was current at the time of
modification, is placed on non-accrual status until we determine future collection of principal and interest is
reasonably assured, which generally requires the borrower to demonstrate a period of performance according to
the restructured terms. TDR loans totaled $160.7 million and $37.2 million at April 30, 2009 and 2008, respectively.
At the time of the modification, we record impairment for TDR loans equal to the difference between the principal
balance of the loan and the present value of expected future cash flows discounted at the loan’s effective interest
rate. However, if we later assess that foreclosure of a modified loan is probable, we record impairment based on
the estimated fair value of the underlying collateral.
PROPERTYAND EQUIPMENT –Buildings and equipment are initially recorded at cost and are depreciated over
the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the term of the respective lease or the estimated useful life,
using the straight-line method. Estimated useful lives are 15 to 40 years for buildings, 3 to 5 years for computers
and other equipment and up to 8 years for leasehold improvements.
We capitalize certain allowable costs associated with software developed or purchased for internal use. These
costs are typically amortized over 36 months using the straight-line method.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For all lease
agreements, including those with escalating rent payments or rent holidays, we recognize rent expense on a
straight-line basis.
INTANGIBLE ASSETS AND GOODWILL –We test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently, whenever events occur or circumstances change which would, more
likely than not, reduce the fair value of a reporting unit below its carrying value. The first step of the impairment
test is to compare the estimated fair value of the reporting unit to its carrying value. If the carrying value is less than
fair value, no impairment exists. If the carrying value is greater than fair value, a second step is performed to
determine the fair value of goodwill and the amount of impairment loss, if any.
In addition, long-lived assets, including intangible assets with finite lives, are assessed for impairment whenever
events or circumstances indicate the carrying value may not be fully recoverable by comparing the carrying value
to future undiscounted cash flows. Impairment is recorded for long-lived assets determined not to be fully
recoverable equal to the excess of the carrying amount of the asset over its estimated fair value.
We recorded $2.2 million and $5.7 million in goodwill impairments in our Tax Services segment in fiscal years
2009 and 2008, respectively. There was no goodwill impairment in our continuing operations during fiscal year
2007. In fiscal year 2007, we recorded $154.9 million in goodwill impairments related to the sale or wind-down of
our discontinued operations. No material impairment adjustments to other intangible assets or other long-lived
assets of continuing operations were made during the three-year period ended April 30, 2009.
The weighted-average life of intangible assets with finite lives is 28 years. Intangible assets are typically
amortized over the estimated useful life of the assets using the straight-line method.
MORTGAGE LOAN REPURCHASE LIABILITY –Sand Canyon Corporation’s (SCC), formerly Option One
Mortgage Corporation, mortgage loan repurchase liability relates to potential losses that could be incurred in
connection with the repurchase of sold loans or indemnification of losses as a result of breaches of
representations and warranties customary to the mortgage banking industry.
The amount of expected losses depends primarily on the frequency of valid claims and the severity of loss
incurred on loans. To the extent actual losses related to repurchase and indemnification activity are different from
estimates, the repurchase reserve may increase or decrease. See note 17 for additional information.
LITIGATION –It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to
legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any,
for these contingencies is made after analysis of each known issue and an analysis of historical experience in
accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (SFAS 5),
and related pronouncements. We record reserves related to certain legal matters for which we believe it is
probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters,
48 H&R BLOCK 2009 Form 10K