HR Block 2011 Annual Report Download - page 54

We review the credit quality of these receivables based on pools, which are segregated by the year of origination.
Specific bad debt rates are applied to each pool, as well as to those who maintain their loan year-round.
We determine our allowance for these receivables collectively, based on a review of receipts taking into
consideration historical experience. These receivables are not specifically identified and charged-off, but are
evaluated on a pooled basis. Initial bad debt rates also consider whether the loan was made to a new or repeat
client. At the end of each tax season the outstanding balances on these receivables are evaluated based on
collections received and expected collections over subsequent tax seasons. We adjust our allowance accordingly,
with these adjustments reflected as bad debt expense.
Tax client receivables related to RALs. Historically, RALs were offered in our US retail tax offices through a
contractual relationship with HSBC Holdings plc (HSBC). We purchased a 49.9% participation interest in all RALs
obtained through our retail offices. In December 2010, HSBC terminated its contract with us based on restrictions
placed on HSBC by its regulator and RALs were not offered in our tax offices this tax season. In connection with
the contract termination, we obtained the remaining rights to collect on the outstanding balances of RALs
originated in years 2006 and later. All tax client receivables related to RALs outstanding at April 30, 2011 were
originated prior to fiscal year 2011 and are past due. We do not accrue interest on these receivables. Payments on
past due amounts are recorded as a reduction in the receivable balance.
We review the credit quality of these receivables based on pools, which are segregated by the year of origination,
with specific bad debt rates applied to each pool.
These receivables are not specifically identified and charged-off, but are evaluated on a pooled basis. At the end
of each tax season the outstanding balances on these receivables are evaluated based on collections received and
expected collections over subsequent tax seasons. We adjust our allowance accordingly, with these adjustments
reflected as bad debt expense.
Loans made to franchisees. Interest income on loans made to franchisees 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. Loans made to franchisees totaled $172.6 million at April 30, 2011, and consisted of $125.1 million in
term loans made to finance the purchase of franchises and $47.5 million in revolving lines of credit made to
existing franchisees primarily for the purpose of funding their off-season needs. The credit quality of these
receivables is determined on a specific franchisee basis, taking into account the franchisee’s credit score, their
payment history on existing loans and operational amounts due to us, the loan-to-value ratio and debt-to-income
ratio. Credit scores, loan-to-value and debt-to-income ratios are obtained at the time of underwriting. Payment
history is monitored on a regular basis. We believe all loans to franchisees are of similar credit quality. Loans are
evaluated for impairment when they become delinquent. Amounts deemed to be uncollectible are written off to
bad debt expense and bad debt related to these loans has typically been insignificant. Additionally, the franchise
office serves as collateral for the loan. In the event the franchisee is unable to repay the loans, we revoke their
franchise rights, write off the remaining balance of the loans and assume control of the office. As of April 30, 2011,
loans totaling $0.1 million were past due, however we had no loans to franchisees on non-accrual status.
MORTGAGE LOANS HELD FOR INVESTMENT –Mortgage loans held for investment represent loans originated
or acquired with the ability and current intent to hold to maturity. Loans held for investment are carried at
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. Loan fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest income over the life of the related loan. Unearned
income, premiums and discounts on purchased loans are amortized or accreted into income over the estimated life
of the loan using methods that approximate the interest method based on assumptions regarding the loan
portfolio, including prepayments adjusted to reflect actual experience.
We record an allowance representing our estimate of credit losses inherent in the loan portfolio at the balance
sheet date. Loan recoveries and the provision for credit losses increase the allowance, while loan charge-offs
decrease the allowance. A current assessment of the value of the loan’s underlying collateral is made when the loan
is no later than 60 days past due and any loan balance in excess of the value less costs to sell the property is
included in the provision for credit losses.
We evaluate mortgage loans less than 60 days past due on a pooled basis and record a loan loss allowance for
those loans in the aggregate. We stratify these loans based on our view of risk associated with various elements of
the pool and assign estimated loss rates based on those risks. Loss rates consider both the rate at which loans will
become delinquent (frequency) and the amount of loss that will ultimately be realized upon occurrence of a
liquidation of collateral (severity), and are primarily based on historical experience and our assessment of
economic and market conditions.
Loans are considered impaired when we believe it is probable we will be unable to collect all principal and
interest due according to the contractual terms of the note, or when the loan is 60 days past due. Impaired loans are
42 H&R BLOCK 2011 Form 10K