HR Block 2011 Annual Report Download - page 76

is known as an “alternative practice structure” (APS). Through the APS, RSM and M&P offer clients a full range of
attest and non-attest services in compliance with applicable accountancy regulations.
An administrative services agreement between RSM and M&P obligates RSM to provide M&P with
administrative services, information technology, office space, non-professional staff, and other infrastructure
in exchange for market rate fees from M&P. In addition, the agreement allows for professional staff to be
sub-contracted between RSM and M&P at market rates. During fiscal years 2011 and 2010, we received $4.1 million
and $22.6 million, respectively, in management fee revenues from M&P.
All partners of M&P, with the exception of M&P’s Managing Partner, are also managing directors employed by
RSM. Approximately 84% of RSM’s managing directors are also partners in M&P. Certain other personnel are also
employed by both M&P and RSM. M&P partners receive distributions of M&P’s earnings in their capacity as
partners, as well as compensation from RSM in their capacity as managing directors. Distributions to M&P
partners are based on the profitability of M&P and are not capped by the APS. The aggregate compensation
payable to RSM managing directors by RSM in any given year generally equals 67 percent of the combined profits
of M&P and RSM less any amounts paid in their capacity as M&P partners. In practice, this means that variability in
the amounts paid to RSM managing directors under these contracts can cause variability in RSM’s operating
results. RSM is not entitled to any profits or residual interests of M&P, nor is it obligated to fund losses or capital
deficiencies of M&P. Managing directors of RSM have historically participated in stock-based compensation plans
of H&R Block. Beginning in fiscal 2011, participation in those plans ceased and were replaced by a non-
contributory, non-qualified defined contribution plan. RSM is required to pay $60.0 million over five years to
fund contributions to the retirement plan. The administrative services agreement with M&P and compensation
arrangements between RSM and their managing directors represent a variable interest in M&P.
We have concluded that RSM is not the primary beneficiary of M&P and, therefore, we have not consolidated
M&P. RSM does not have an equity interest in M&P, nor does it have the power to direct any activities of M&P and
does not receive any of its income. We have no assets or liabilities included in our consolidated balance sheets
related to our variable interests. We believe RSM’s maximum exposure to economic loss, resulting from various
agreements with M&P, relates primarily to shared office space from operating leases under the administrative
services agreement equal to $94.8 million at April 30, 2011, and variability in our operating results due to the
compensation agreements with RSM managing directors. We do not provide any support that is not contractually
required.
Securitization Trusts – SCC holds an interest in and is the sponsor (issuer) of 56 REMIC Trusts and 14 NIM
Trusts (collectively, “Trusts”) related to previously originated mortgage loans that were securitized. These Trusts
are variable interest entities. The REMIC Trusts hold static pools of sub-prime residential mortgage loans. The NIM
Trusts hold beneficial interests in certain REMIC Trusts. The Trusts were designed to collect and pass through to
the beneficial interest holders the cash flows of the underlying mortgage loans. The REMIC Trusts were financed
with bonds and equity. The NIM Trusts were financed with notes and equity. All bonds and notes are held by third-
party investors.
Our identification of the primary beneficiary of the Trusts was based on a determination that the servicer of the
underlying mortgage loans has the power to direct the most significant activities of the Trusts because the servicer
handles all of the loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the REMIC Trusts. Therefore, SCC is not the primary
beneficiary of the REMIC Trusts because it does not have the power to direct the most significant activities of the
REMIC Trusts, which is the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when certain conditions have been met for specific loans
related to two of the NIM Trusts. As of April 30, 2011, those conditions have been met for a minority portion of the
loans underlying those Trusts. As this right pertains only to a minority of the loans, we have concluded that SCC
does not have the power to direct the most significant activities of these two NIM Trusts, as the servicer has the
power to direct significant activities over the majority of the mortgage loans. In the remaining NIM Trusts, SCC has
a shared right to appoint a servicer under certain conditions. For these NIM Trusts, we have concluded that SCC is
not the primary beneficiary because the power to direct the most significant activities, which is the servicing of the
underlying mortgage loans, is shared with other unrelated parties.
At April 30, 2011, we had no significant assets or liabilities included in our consolidated balance sheets related to
SCC’s variable interests in the Trusts. We have a liability, as discussed in note 18, and a deferred tax asset recorded
in our consolidated balance sheets related to obligations for representations and warranties SCC made in
connection with the transfer of mortgage loans, including mortgage loans held by the securitization trusts. We
have no remaining exposure to economic loss arising from impairment of SCC’s beneficial interest in the Trusts. If
SCC receives cash flows in the future as a holder of beneficial interests we would record gains as other income in
64 H&R BLOCK 2011 Form 10K