HR Block 2014 Annual Report Download - page 87

H&R Block, Inc. | 2014 Form 10-K 79
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, described below under "Liability for Estimated Contingent Losses."
LIABILITY FOR ESTIMATED CONTINGENT LOSSES – 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 a high degree of management judgment and estimates may vary significantly period to period.
SCC's loss estimate as of April 30, 2014 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 settlement, 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.
The liability is included in accounts payable, accrued expenses and other current liabilities on the consolidated
balance sheets. A rollforward of SCC's accrued liability for these loss contingencies is as follows:
(in 000s)
Year ended April 30, 2014 2013 2012
Balance, beginning of the year $ 158,765 $ 130,018 $ 126,260
Provisions 25,000 40,000 20,000
Payments —(11,253) (16,242)
Balance, end of the year $ 183,765 $ 158,765 $ 130,018
SCC is taking the legal position, where appropriate, for both contractual representation and warranty claims and
similar claims in litigation, that a valid representation and warranty claim cannot be made with respect to a mortgage
loan that has been liquidated. There is limited and conflicting case law on this issue. These decisions are from lower
courts, are inconsistent in their analysis and receptivity to this defense, and are subject to appeal. It is anticipated
that the liquidated mortgage loan defense will be the subject of future judicial decisions. Until the validity of the
liquidated loan defense is further clarified by the courts or other developments occur, SCC's estimated accrual for
representation and warranty will not take this defense into account.
SCC believes it is reasonably possible that future representation and warranty losses may vary from 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 mentioned above. The actual loss that may be incurred could differ materially
from our accrual or the estimate of reasonably possible losses.
As described more fully in note 17, losses may also be incurred with respect to various indemnification claims by
underwriters and depositors in securitization transactions in which SCC participated. Losses from these indemnification
claims are frequently not subject to a stated term or limit. We have not concluded that a loss related to any of these
indemnification claims is probable, have not accrued a liability for these claims and are not able to estimate a reasonably
possible loss or range of loss for these claims. Accordingly, neither the accrued liability described above totaling $183.8
million, nor the estimated range of reasonably possible losses in excess of the amount accrued described above of
up to approximately $16 million, includes any possible losses which may arise from these indemnification claims.
There can be no assurances as to the outcome or impact of these indemnification claims. In the event of unfavorable