HR Block 2009 Annual Report Download - page 53

management has concluded that a loss is only reasonably possible or remote, or not estimable and, therefore, no
liability is recorded. Management discloses the facts regarding material matters, and potential exposure if
determinable, for losses assessed as reasonably possible to occur. Costs incurred with defending claims are
expensed as incurred. Any receivable for insurance recoveries is recorded separately from the corresponding
litigation reserve, and only if recovery is determined to be probable.
INCOME TAXES –We account for income taxes under the asset and liability method, which requires us to record
deferred income tax assets and liabilities for future tax consequences attributable to differences between the
financial statement carrying value of existing assets and liabilities and their respective tax basis. Deferred taxes
are determined separately for each tax-paying component within each tax jurisdiction based on provisions of
enacted tax law. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Our
deferred tax assets include state and foreign tax loss carry-forwards and are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Our current deferred tax assets are included in prepaid expenses and other current assets in the
consolidated balance sheets. Noncurrent deferred tax assets are included in other assets on our consolidated
balance sheets.
We evaluate the sustainability of each uncertain tax position based on its technical merits. If we determine it is
more likely than not a tax position will be sustained based on its technical merits, we record the impact of the
position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of
being realized upon ultimate settlement. We record no tax benefit for tax positions where we have concluded it is
not more likely than not to be sustained. Differences between a tax position taken or expected to be taken in our
tax returns and the amount of benefit recognized and measured in the financial statements result in unrecognized
tax benefits, which are recorded in the balance sheet as either a liability for unrecognized tax benefits or
reductions to recorded tax assets, as applicable.
We file a consolidated federal tax return on a calendar year basis and state tax returns on a consolidated or
combined basis, as permitted by authorities. We report interest and penalties as a component of income tax
expense.
TREASURY SHARES –Shares of common stock repurchased by us are recorded, at cost, as treasury shares and
result in a reduction of stockholders’ equity. We reissue treasury shares as part of our stock-based compensation
programs. When shares are reissued, we determine the cost using the average cost method. Periodically, we may
permanently retire shares held in treasury as determined by our Board of Directors.
REVENUE RECOGNITION –Service revenues consist primarily of fees for preparation and filing of tax returns,
both in offices and through our online programs, fees associated with our Peace of Mind (POM) guarantee program
and fees for consulting services. Service revenues are recorded in the period in which the service is performed.
Retail and online tax preparation revenues are recorded when a completed return is filed or accepted by the
customer. POM revenues are deferred and recognized over the term of the guarantee, based on historical and
actual payment of claims. Revenues for services rendered in connection with the Business Services segment
include fees based on time and materials, which are recognized as the services are performed and amounts are
earned. Revenues associated with our H&R Block Prepaid Emerald MasterCard»program consist of interchange
income from the use of debit cards and fees from the use of ATM networks. Interchange income is a fee paid by a
merchant bank to the card-issuing bank through the interchange network, and is based on cardholder purchase
volumes. HRB Bank recognizes interchange income as earned.
Interest income consists primarily of interest earned on mortgage loans held for investment and Emerald
Advance lines of credit. Interest income on mortgage loans held for investment includes deferred origination fees
and costs and purchase discounts and premiums, which are amortized to income over the life of the loan using the
interest method. Interest income on Emerald Advance lines of credit is calculated using the average daily balance
method and is recognized based on the principal amount outstanding until the outstanding balance is paid or
written-off. Loan commitment fees, net of related expenses, are initially deferred and recognized as revenue over
the commitment period.
Product and other revenues include royalties from franchisees, RAL participation revenues and sales of
software products, and are recognized as follows:
쐍Upon granting of a franchise, franchisees pay a refundable deposit generally in the amount of $2,500, but pay
no initial franchise fee. We record the payment as a deposit liability and recognize no revenue in connection
with the initial granting of a franchise. Franchise royalties, which are based on contractual percentages of
franchise revenues, are recorded in the period in which the franchise provides the service.
쐍Loan participation revenue is recognized over the life of the loan.
H&R BLOCK 2009 Form 10K 49