HR Block 2015 Annual Report Download - page 38

H&R Block, Inc. | 2015 Form 10-K 31
loss is probable or reasonably estimable related to these indemnification claims or reserved contribution rights,
therefore there is no accrued liability for these contingent losses as of April 30, 2015.
See additional discussion in Item 1A, "Risk Factors," "Critical Accounting Estimates" below and in Item 8, note 18
to the consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our financial statements, as they require
the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are
inherently uncertain. Specific methods and assumptions for these critical accounting estimates are described in the
following paragraphs. We have reviewed and discussed each of these estimates with the Audit Committee of our
Board of Directors. For all of these estimates, we caution that future events rarely develop precisely as forecasted and
estimates routinely require adjustment and may require material adjustment.
See Item 8, note 1 to the consolidated financial statements, which discusses accounting policies we have selected
when there are acceptable alternatives and new or proposed accounting standards that may affect our financial
reporting in the future.
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 counterparties that have made
a significant majority of previously denied representation and warranty claims. These tolling agreements toll the
running of any applicable statute of limitations related to potential lawsuits regarding representation and warranty
claims and other claims against SCC.
Beginning in the fourth quarter of fiscal year 2013 and continuing through fiscal year 2015, 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 certain 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. On December 5, 2014, SCC entered into a settlement agreement to
resolve certain of these claims. The amount paid under the settlement agreement was fully covered by prior accruals. In
the event that the ongoing 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 (described below) 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 SCC's 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, bulk settlement methodologies
used and publicly disclosed by other market participants, 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 expected to result from ongoing bulk settlement discussions,
which have been primarily influenced by the bulk settlement methodologies used and publicly disclosed by other
market participants and 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.