HR Block 2005 Annual Report Download - page 115

term of the guarantee based upon historic and actual payment of the foreign currency translation adjustment was $(2.8) million
claims. Revenues for services rendered in connection with the and $(11.8) million, respectively. The net unrealized holding gain
Business Services segment are recognized on a time and on available-for-sale securities relates primarily to residual
materials basis. Investment Services’ production revenue is interests in securitizations.
recognized on a trade-date basis. STOCK-BASED COMPENSATION PLANS ⬎⬎⬎ Effective
Gains on sales of mortgage assets are recognized when control May 1, 2003, we adopted the fair value recognition provisions of
of the assets is surrendered (when loans are sold to Trusts) and Statement of Financial Accounting Standards No. 123,
are based on the difference between cash proceeds and the ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS 123’’), under
allocated cost of the assets sold. the prospective transition method as described in Statement of
Interest income consists primarily of interest earned on Financial Accounting Standards No. 148, ‘‘Accounting for Stock-
customer margin loan balances and mortgage loans, and Based Compensation – Transition and Disclosure’’ (‘‘SFAS 148’’).
accretion income. Interest income on customer margin loan We recognize stock-based compensation expense for the issuance
balances is recognized daily as earned based on current rates of stock options, restricted shares and our ESPP on a straight-line
charged to customers for their margin balance. Accretion income basis over the vesting period. Had compensation cost for all
represents interest earned over the life of residual interests using stock-based compensation plan awards been determined in
the effective interest method. accordance with the fair value accounting method prescribed
Product and other revenues include royalties, RAL under SFAS 123, our net income and earnings per share would
participation revenues and sales of software products. Franchise have been as follows:
(in 000s, except per share amounts)
royalties, which are based upon the contractual percentages of
Restated Restated
franchise revenues, are recorded in the period in which the Year Ended April 30, 2005 2004 2003
franchise provides the service. RAL participation revenue is
Net income $ 635,857 $ 709,249 $ 477,615
recorded when we purchase our participation interest in the RAL. Add: Stock-based compensation
Software revenues consist mainly of tax preparation software and expense included in reported
other personal productivity software. Sales of software are net income, net of taxes 28,819 18,029 1,223
recognized when the product is sold to the end user. Deduct: Total stock-based
Revenue recognition is evaluated separately for each unit in compensation expense
multiple-deliverable arrangements. determined under fair
value method for all awards,
ADVERTISING EXPENSE ⬎⬎⬎ Advertising costs are expensed
net of taxes (39,544) (30,662) (21,025)
the first time the advertisement is run. Total advertising costs
Pro forma net income $ 625,132 $ 696,616 $ 457,813
recorded in fiscal year 2005, 2004 and 2003 totaled $195.4 million,
$188.3 million and $150.8 million, respectively. Basic earnings per share:
As presented $ 1.92 $ 2.00 $ 1.33
FOREIGN CURRENCY TRANSLATION ⬎⬎⬎ Assets and
Pro forma 1.89 1.97 1.27
liabilities of foreign subsidiaries are translated into U.S. dollars at Diluted earnings per share:
exchange rates prevailing at the end of the year. Translation As presented $ 1.88 $ 1.96 $ 1.30
adjustments are recorded as a separate component of other Pro forma 1.86 1.93 1.25
comprehensive income in stockholders’ equity. Revenue and
expense transactions are translated at the average of exchange DERIVATIVE ACTIVITIES ⬎⬎⬎ We record derivative
rates in effect during the period. instruments as assets or liabilities, measured at fair value. The
COMPREHENSIVE INCOME ⬎⬎⬎ Statement of Financial recognition of gains or losses resulting from changes in the values
Accounting Standards No. 130, ‘‘Reporting Comprehensive of those derivative instruments is based on the use of each
Income,’’ establishes standards for reporting and displaying derivative instrument and whether it qualifies for hedge
comprehensive income and its components in stockholders’ accounting.
equity. Our comprehensive income is comprised of net income, We use financial instruments to mitigate interest rate risk and
foreign currency translation adjustments and the change in net loan commitments related to mortgage loans which will be held
unrealized gains or losses on available-for-sale marketable for sale. We use forward loan sale commitments, interest rate
securities. Included in stockholders’ equity at April 30, 2005 and swaps and interest rate caps throughout the year to manage our
2004, the net unrealized holding gain on available-for-sale interest rate risk. We do not enter into derivative transactions for
securities was $71.6 million and $78.0 million, respectively, and speculative or trading purposes. None of our derivative
H&R BLOCK 2005 Form 10K
53