HR Block 2014 Annual Report Download - page 37

H&R Block, Inc. | 2014 Form 10-K 29
LOSSES ARISING FROM REPRESENTATIONS AND WARRANTIES –
Nature of Estimates Required. SCC accrues a liability for losses related to representation and warranty claims when
those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subject to
significant management judgment, and estimates may vary significantly period to period.
Assumptions and Approach Used. SCC has entered into tolling agreements with the counterparties that initiated
the majority of claims received by SCC. Beginning in the fourth quarter of fiscal year 2013 and continuing in fiscal year
2014, SCC has been engaged in discussions with these counterparties regarding the bulk settlement of previously
denied and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk
settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the
representation and warranty and other claims that are the subject of these discussions. In the event that current
efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result.
SCC will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for
repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that
vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss
estimate.
SCC's loss estimate for representation and warranty claims is based on the best information currently available,
significant management judgment, and a number of factors that are subject to change, including developments in
case law and the factors mentioned below. These factors include the terms of prior bulk settlements, the terms
expected to result from ongoing bulk settlement discussions, and an assessment of, among other things, historical
claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a
settlement, legal standing of counterparties to provide a comprehensive settlement, the potential pro-rata realization
of the claims as compared to all claims and other relevant facts and circumstances when developing its estimate of
probable loss. SCC believes that the most significant of these factors are the terms of prior bulk settlements and the
terms expected to result from ongoing bulk settlement discussions, which have been primarily influenced by the
anticipated pro-rata realization of the claims of particular counterparties as compared to the anticipated realization
if all claims and litigation were resolved together with payment of SCC's related administration and legal expense.
Changes in any one of the factors mentioned above could significantly impact the estimate.
Sensitivity of Estimate to Change. It is reasonably possible that future representation and warranty losses may
vary from the amounts accrued for these exposures. SCC currently estimates that the range of reasonably possible
loss could be up to approximately $16 million in excess of amounts accrued. This estimated range is based on the best
information currently available, significant management judgment and a number of factors that are subject to change,
including developments in case law and the factors listed above in this Item 7. The actual loss that may be incurred
could differ materially from our accrual or the estimate of reasonably possible losses.
SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and
warranty claims of $183.8 million. SCC accrued incremental loss provisions of $25 million in fiscal year 2014 and $40
million in fiscal year 2013.
If future losses are in excess of SCC's accrued liability, those losses could have a material adverse effect on our
business and our consolidated financial position, results of operations and cash flows, as SCC's financial condition,
operating results and cash flows are included in our consolidated financial statements. The accrued liability does not
include potential losses related to litigation matters discussed in Item 1A, "Risk Factors" and in Item 8, note 17 to the
consolidated financial statements. Also see Item 8, note 18 to the consolidated financial statements.
LITIGATION AND RELATED CONTINGENCIES –
Nature of Estimates Required. We have accrued liabilities related to certain legal matters for which we believe it is
probable that a loss will be incurred and the range of such loss can be reasonably estimated. Assessing the likely
outcome of pending or threatened litigation, including the amount of potential loss, if any, is highly subjective.
Assumptions and Approach Used. We are subject to pending or threatened litigation claims and indemnification
claims, which are described in Item 8, note 17 to the consolidated financial statements. It is our policy to routinely
assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable
losses. A determination of the amount of the liability required to be accrued, if any, for these contingencies is made