HR Block 2011 Annual Report Download - page 57

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 capital loss and 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. Noncurrent deferred tax liabilities are included in other noncurrent liabilities 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 or for acquisitions. 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 recognized in the period in which the service is performed as
follows:
쐍Retail and online tax preparation revenues are recorded when a completed return is filed or accepted by the
customer.
쐍POM revenues are deferred and recognized over the term of the guarantee, based on historical and actual
payment of claims.
쐍Revenues 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.
쐍Revenues 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. Interchange income is recognized as earned.
Product and other revenues in the current year include royalties from franchisees 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.
쐍Software revenues consist mainly of tax preparation software. Revenue from the sale of software such as
H&R Block At Home
TM
is recognized when the product is sold to the end user, either through retail, online or
other channels. Rebates, slotting fees and other incentives paid in connection with these sales are recorded as
a reduction of revenue. Revenue from the sale of TaxWorks»software is deferred and recognized over the
period for which upgrades and support are provided to the customer.
쐍In fiscal years 2010 and 2009, loan participation revenue was recognized over the life of the loan.
Interest income consists primarily of interest earned on mortgage loans held for investment and EAs and is
recognized as follows:
쐍Interest 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.
쐍Interest income on EAs 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.
H&R BLOCK 2011 Form 10K 45