HR Block 2005 Annual Report Download - page 113

mortgage loans are classified as trading based on management’s We estimate future cash flows from these residuals and value
intentions, carried at market value based on discounted cash flow them using assumptions we believe to be consistent with those of
models and marked to market through the consolidated income unaffiliated third-party purchasers. We estimate the fair value of
statements. These securities are included in prepaid expenses residuals by computing the present value of the excess of the
and other current assets on the consolidated balance sheets. weighted-average interest rate on the loans sold plus estimated
RECEIVABLES FROM CUSTOMERS, BROKERS, DEALERS AND collection of prepayment penalty fee income over the sum of
CLEARING ORGANIZATIONS AND ACCOUNTS PAYABLE TO (1) the coupon on the securitization bonds, (2) a contractual
CUSTOMERS, BROKERS AND DEALERS ⬎⬎⬎ Customer servicing fee paid to the servicer of the loans, which is usually
receivables and payables consist primarily of amounts due on Option One, (3) expected losses to be incurred on the portfolio of
margin and cash transactions. These receivables are the loans sold, as projected to occur, over the lives of the loans,
collateralized by customers’ securities held, which are not (4) fees payable to the trustee and insurer, if applicable, and
reflected in the accompanying consolidated financial statements. (5) payments made to investors on NIM bonds, if applicable. The
Receivables from brokers are collateralized by securities in our residual valuation takes into consideration the current and
physical possession, or on deposit with us, or receivables from expected interest rate environment, including projected changes
customers or other brokers. The allowance for doubtful accounts in future interest rates and the timing of such changes.
represents an amount considered by management to be adequate Prepayment and loss assumptions used in estimating the cash
to cover potential losses. flows are based on evaluation of the actual experience of the
Securities borrowed and securities loaned transactions are servicing portfolio, the characteristics of the applicable loan
generally reported as collateralized financing. These transactions portfolio, as well as also taking into consideration the current and
require deposits of cash and/or collateral with the lender. expected economic and interest rate environment and its
Securities loaned consist of securities owned by customers that expected impact. The estimated cash flows are discounted at an
were purchased on margin. When loaning securities, cash interest rate we believe an unaffiliated third-party purchaser
collateral approximately equal to the value of the securities would require as a rate of return on a financial instrument with a
loaned is received. The amount of cash collateral is adjusted, as similar risk profile. We evaluate, and adjust if necessary, the fair
required, for market fluctuations in the value of the securities values of residual interests quarterly by updating the actual
loaned. Interest rates paid on the cash collateral fluctuate as performance and expected assumptions in the discounted cash
short-term interest rates change. flow models based on current information and events and by
RECEIVABLES ⬎⬎⬎ Receivables consist primarily of Business estimating, or validating with third-party experts, if necessary,
Services’ accounts receivable and mortgage loans held for sale. what a market participant would use in determining the current
Mortgage loans held for sale are carried at the lower of aggregate fair value. To the extent that actual excess cash flows are
cost or market value as determined by outstanding commitments different from estimated excess cash flows, the fair value of the
from investors or current investor-yield requirements calculated residual would increase or decrease.
on an aggregate basis. The allowance for doubtful accounts BENEFICIAL INTEREST IN TRUSTS – TRADING ⬎⬎⬎ The
requires management’s judgment regarding current market beneficial interest in Trusts is recorded as a result of daily non-
indicators concerning general economic trends to establish an prime whole loan sales to Trusts. The beneficial interest is
amount considered by management to be adequate to cover classified as a trading security, based on management’s
potential losses related to our non-mortgage loan receivable intentions, is carried at market value and is marked to market
balance. through the consolidated income statements. Market value is
RESIDUAL INTERESTS IN SECURITIZATIONS ⬎⬎⬎ Residual calculated as the present value of future cash flows, limited by
interests classified as available-for-sale securities are carried at the ultimate expected outcome from the disposition of the loans
market value based on discounted cash flow models with by the Trusts.
unrealized gains included in other comprehensive income. The MORTGAGE SERVICING RIGHTS ⬎⬎⬎ MSRs retained in the
residual interests are accreted over the estimated life of the sale of mortgage loans are recorded at allocated carrying
securitization structure. If the carrying value exceeds market amounts based on relative fair values at the time of the sale. The
value, the residual is written down to market value with the MSRs are carried at the lower of cost or fair value. Fair values of
realized loss, net of any unrealized gain previously recorded in MSRs are determined based on the present value of estimated
other comprehensive income, included in gains on sales of future cash flows related to servicing loans. Assumptions used in
mortgage assets in the consolidated income statements. estimating the value of MSRs include market discount rates and
H&R BLOCK 2005 Form 10K
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