HR Block 2014 Annual Report Download - page 59

H&R Block, Inc. | 2014 Form 10-K 51
We classify loans as non-accrual when full and timely collection of interest or principal becomes uncertain, or when
they are 90 days past due. Interest previously accrued, but not collected, is reversed against current interest income
when a loan is placed on non-accrual status. Accretion of deferred fees is discontinued for non-accrual loans. Payments
received on non-accrual loans are recognized as interest income when the loan is considered collectible and applied
to principal when it is doubtful that all contractual payments will be collected. Loans are not placed back on accrual
status until collection of principal and interest is reasonably assured as a result of the borrower bringing the loan into
compliance with the contractual terms of the loan. Prior to restoring a loan to accrual status, management considers
a borrower's prospects for continuing future contractual payments.
From time to time, as part of our loss mitigation process, we may agree to modify the contractual terms of a
borrower's loan. We have developed loan modification programs designed to help borrowers refinance adjustable-
rate mortgage loans prior to rate reset or who may otherwise have difficulty making their payments. In cases where
we modify a loan and in so doing grant a concession to a borrower experiencing financial difficulty, the modification
is considered a troubled debt restructuring (TDR). We may consider the borrower's payment status and history, the
borrower's ability to pay upon a rate reset on an adjustable-rate mortgage, the size of the payment increase upon a
rate reset, the period of time remaining prior to the rate reset, and other relevant factors in determining whether a
borrower is experiencing financial difficulty. A borrower who is current may be deemed to be experiencing financial
difficulty in instances where the evidence suggests an inability to pay based on the original terms of the loan after
the interest rate reset and that, in the absence of a modification, may default on the loan. We evaluate whether the
modification represents a concession we would not otherwise consider, such as a lower interest rate than what a new
borrower of similar credit risk would be offered. A loan modified in a TDR, including a loan that was current at the
time of modification, is placed on non-accrual status until we determine future collection of principal and interest is
reasonably assured, which generally requires the borrower to demonstrate a period of performance according to the
restructured terms. At the time of the modification, we record impairment for TDR loans equal to the difference
between the principal balance of the loan and the present value of expected future cash flows discounted at the loan's
effective interest rate. However, if we later assess that foreclosure of a modified loan is probable, we record an
impairment based on the estimated fair value (typically appraised value less costs to sell) of the underlying collateral.
INVESTMENTS – Our investments in marketable securities are classified as available-for-sale (AFS) and are reported
at fair value. Unrealized gains and losses are calculated using the specific identification method and reported, net of
applicable taxes, as a component of accumulated other comprehensive income. Realized gains and losses on the sale
of these securities are determined using the specific identification method.
We monitor our AFS investment portfolio for impairment and consider many factors in determining whether the
impairment is deemed to be other-than-temporary. These factors include, but are not limited to, the length of time
the security has had a market value less than the cost basis, the severity of loss, our intent to sell (including regulatory
or contractual requirements to sell), recent events specific to the issuer or industry, external credit ratings and recent
downgrades in such ratings.
For investments in mortgage-backed securities, amortization of premiums and accretion of discounts are recognized
in interest income using the interest method, adjusted for anticipated prepayments where applicable. We update our
estimates of expected cash flows periodically and recognize changes in calculated effective yields as appropriate.
PROPERTY AND EQUIPMENT – Buildings and equipment are initially recorded at cost and are depreciated over the
estimated useful life of the assets using the straight-line method. Leasehold improvements are initially recorded at
cost and are amortized over the lesser of the remaining term of the respective lease or the estimated useful life, using
the straight-line method. Estimated useful lives are 15 to 40 years for buildings, three to five years for computers and
other equipment, three years for purchased software and up to eight years for leasehold improvements.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For all lease agreements,
including those with escalating rent payments or rent holidays, we recognize rent expense on a straight-line basis.
GOODWILL AND INTANGIBLE ASSETS – Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. Goodwill is not amortized, but rather is tested for impairment annually, or more
frequently if indications of potential impairment exist.