HR Block 2005 Annual Report Download - page 102

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
INTEREST RATE RISK ⬎⬎⬎ We have established a formal exchange rates. The currencies involved are the Canadian dollar,
investment policy to help minimize the market risk exposure of the Australian dollar and the British pound. We translate revenues
our cash equivalents and available-for-sale securities, which are and expenses related to these operations at the average of
primarily affected by credit quality and movements in interest exchange rates in effect during the period. Assets and liabilities
rates. These guidelines focus on managing liquidity and of foreign subsidiaries are translated into U.S. dollars at exchange
preserving principal and earnings. Most of our interest rate- rates prevailing at the end of the year. Translation adjustments
sensitive assets and liabilities are managed at the subsidiary level. are recorded as a separate component of other comprehensive
Our cash equivalents are primarily held for liquidity purposes income in stockholders’ equity. Translation of financial results
and are comprised of high quality, short-term investments, into U.S. dollars does not presently materially affect, and has not
including qualified money market funds. As of April 30, 2005, our historically materially affected, our consolidated financial results,
non-restricted cash and cash equivalents had an average maturity although such changes do affect the year-to-year comparability of
of less than three months with an average credit quality of AAA. the operating results in U.S. dollars of our international
With such a short maturity, our portfolio’s market value is businesses. We estimate a 10% change in foreign exchange rates
relatively insensitive to interest rate changes. We hold by itself would impact consolidated pretax income in fiscal years
investments in fixed income securities at our captive insurance 2005 and 2004 by approximately $1.3 million and cash balances at
subsidiary. See the table below for sensitivities to changes in April 30, 2005 and 2004 by $4.7 million and
interest rates. See additional discussion of interest rate risk $6.1 million, respectively.
included below in Mortgage Services and Investment Services.
MORTGAGE SERVICES
At April 30, 2005, no commercial paper was outstanding. For
INTEREST RATE RISK – PRIME ORIGINATIONS ⬎⬎⬎ We
fiscal year 2005, the average issuance term was 29 days and the
regularly enter into rate-lock commitments with our customers to
average outstanding balance was $388.2 million. As commercial
fund prime mortgage loans within specified periods of time. The
paper and bank borrowings are seasonal, interest rate risk
fair value of rate-lock commitments is calculated based on the
typically increases through our third fiscal quarter and declines to
current market pricing of short sales of FNMA, FHLMC and
zero by fiscal year-end. See Item 7, ‘‘Financial Condition’’ for
GNMA mortgage-backed securities and the coupon rates of the
additional information.
eligible loans. At April 30, 2005, we recorded an asset of
Our current portion of long-term debt and long-term debt at
$0.8 million related to rate-lock commitments.
April 30, 2005 consists primarily of fixed-rate Senior Notes;
We sell short FNMA, FHLMC and GNMA mortgage-backed
therefore, a change in interest rates would have no impact on
securities to reduce the risk related to our prime commitments to
consolidated pretax earnings. See Item 8, note 10 to our
fund fixed-rate prime loans. The position on certain, or all, of the
consolidated financial statements.
fixed-rate mortgage loans is closed approximately 10-15 days
EQUITY PRICE RISK ⬎⬎⬎ We have exposure to the equity
prior to standard Public Securities Association (‘‘PSA’’)
markets in several ways. The largest exposures are through our
settlement dates. At April 30, 2005 we recorded a liability of
deferred compensation plans and equity investments at our
$0.8 million related to these instruments.
captive insurance subsidiary. Within the deferred compensation
To finance our prime originations, we use a warehouse facility
plans we have mismatches in asset and liability amounts and
with capacity up to $25 million, which bears interest at one-
investment choices (both fixed-income and equity). At April 30,
month LIBOR plus 140 to 200 basis points. As of April 30, 2005,
2005 and 2004, the impact of a 10% market value change in the
the balance outstanding under this facility was $4.4 million.
combined equity assets held by our deferred compensation plans
INTEREST RATE RISK – NON-PRIME ORIGINATIONS ⬎⬎⬎
and our captive insurance subsidiary would be approximately
Interest rate changes impact the value of the loans in our
$9.3 million and $8.9 million, respectively, assuming no offset for
origination pipeline, the beneficial interest in Trusts and forward
the liabilities.
loan sale commitments.
TAX SERVICES We are exposed to interest rate risk associated with loans in
FOREIGN EXCHANGE RATE RISK ⬎⬎⬎ Our operations in our origination pipeline, consisting of fixed- and adjustable-rate
international markets are exposed to movements in currency loans, which are generally sold through whole loan sales or
H&R BLOCK 2005 Form 10K
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