HR Block 2009 Annual Report Download - page 66

NOTE 14: INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and expense of our continuing operations.
Operating interest expense is included in cost of other revenues, and interest expense on acquisition debt is
included in other income (expense), net on our consolidated statements of operations.
Year Ended April 30, 2009 2008 2007
(in 000s)
Interest income:
Mortgage loans, net $ 46,396 $ 74,895 $ 53,396
Emerald Advance lines of credit 91,019 45,339 –
Investment securities 4,896 12,143 8,174
Other 12,205 19,181 11,682
$ 154,516 $ 151,558 $ 73,252
Operating interest expense:
Borrowings $ 83,193 $ 56,482 $ 43,378
Deposits 14,069 42,878 32,128
FHLB advances 5,113 6,008 836
102,375 105,368 76,342
Interest expense – acquisition debt 1,653 2,019 46,920
Total interest expense $ 104,028 $ 107,387 $ 123,262
NOTE 15: FAIR VALUE
On May 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure
requirements for fair value measurements. We elected to defer the application of SFAS 157 for nonfinancial assets
and nonfinancial liabilities until fiscal year 2010, as provided for by FASB Staff Position FAS 157-2, “Effective Date
of FASB Statement No. 157” (FSP 157-2). We adopted FASB Staff Position No. 115-2 and 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (FSP 115-2), which provides guidance on determining
other-than-temporary impairments for debt securities, as of April 30, 2009. The adoption of these
pronouncements did not have a material impact on our consolidated results of operations or financial position.
FAIR VALUE HIERARCHY – SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value into three broad levels, considering the relative reliability of the inputs, as follows:
쐍Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or
liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume
to provide pricing information on an ongoing basis.
쐍Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuations in which all significant inputs are
observable in the market.
쐍Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These
unobservable inputs reflect our own estimates of assumptions that market participants would use in
pricing the asset or liability.
ESTIMATION OF FAIR VALUE – The following is a description of the valuation methodologies used for assets
and liabilities measured at fair value and the general classification of these instruments pursuant to the fair value
hierarchy.
쐍Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When
available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If
quoted market prices are not available, fair values are estimated using quoted prices of securities with similar
characteristics, discounted cash flows or other pricing models. Available-for-sale securities that we classify as
Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political
subdivisions debt securities and other debt and equity securities.
쐍Residual interests in securitizations – Determination of the fair value of residual interests in securitizations
requires the use of unobservable inputs. We value these securities using a discounted cash flow approach that
incorporates expectations of prepayment speeds and expectations of delinquencies and losses. Risk-adjusted
discount rates are based on quotes from third-party sources. These assets are classified as Level 3.
쐍Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment
are generally based on the lower of (1) the amortized cost adjusted for charge-offs, net of allowance for loan
losses, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans
62 H&R BLOCK 2009 Form 10K