HR Block 2005 Annual Report Download - page 133

throughout the year, reaching its peak during February and established related to the potential loss on repurchase of loans
March for the Canadian tax season. previously sold of $41.2 million and $25.2 million at April 30, 2005
We offer guarantees under our POM program to tax clients and 2004, respectively. Repurchased loans are normally sold in
whereby we will assume the cost, subject to certain limits, of subsequent sale transactions. On an ongoing basis, we monitor
additional tax assessments, up to a cumulative per client limit of the adequacy of this liability, which is established upon the initial
$5,000, attributable to tax return preparation error for which we sale of the loans, and is included in accounts payable, accrued
are responsible. We defer all revenues and direct costs associated expenses and deposits in the consolidated balance sheets. In
with these guarantees, recognizing these amounts over the term determining the adequacy of the recourse liability, we consider
of the guarantee based upon historic and actual payment of such factors as known problem loans, underlying collateral
claims. The related current asset is included in prepaid expenses values, historical loan loss experience, assessment of economic
and other current assets. The related liability is included in conditions and other appropriate data to identify the risks in the
accounts payable, accrued expenses and other on the mortgage loans held for sale.
consolidated balance sheets. The related noncurrent asset and We are responsible for servicing mortgage loans for others of
liability are included in other assets and other noncurrent $47.5 billion and subservicing loans of $20.5 billion at April 30,
liabilities, respectively, on the consolidated balance sheets. A loss 2005.
on these POM guarantees would be recognized if the sum of We are required, under the terms of our securitizations, to build
expected costs for services exceeded unearned revenue. The and/or maintain overcollateralization (‘‘OC’’) to specified levels,
deferred revenue liability increased in fiscal year 2004 by using the excess cash flows received, until specified percentages
$61.5 million due to the change in accounting principle. The of the securitized portfolio are attained. We fund the OC account
changes in the deferred revenue liability for the fiscal years ended from the proceeds of the sale. Future cash flows to the residual
April 30, 2005 and 2004 are as follows: holder are used to amortize the bonds until a specific percentage
(in 000s) of either the original or current balance is retained, which is
April 30, 2005 2004 specified in the securitization agreement. The bondholders’
recourse to us for credit losses is limited to the excess cash flows
Balance, beginning of year $ 123,048 $ 49,280
Amounts deferred for new guarantees issued 77,756 81,803 received and the amount of OC held by the trust. Upon maturity
Revenue recognized on previous deferrals (70,042) (69,522) of the bonds, any remaining amounts in the trust are distributed.
Adjustment resulting from change in accounting The estimated future cash flows to be distributed to us are
principle –61,487 included as part of the residual valuation and are valued upon
Balance, end of year $ 130,762 $ 123,048 distribution from the OC account. As of April 30, 2005 and 2004,
$309.5 million and $316.0 million, respectively, was maintained in
We have commitments to fund mortgage loans to customers as various OC accounts. These accounts are not assets of the
long as there is no violation of any condition established in the Company and are not reflected in the accompanying consolidated
contract. Commitments generally have fixed expiration dates or financial statements, other than to the extent potential OC cash
other termination clauses. The commitments to fund loans flows are included as part of residual interest valuations.
amounted to $3.9 billion and $2.6 billion at April 30, 2005 and Option One provides a guarantee up to a maximum amount
2004, respectively. External market forces impact the probability equal to approximately 10% of the aggregate principal balance of
of commitments being exercised, and therefore, total mortgage loans held by the Trusts before ultimate disposition of
commitments outstanding do not necessarily represent future the loans by the Trusts. This guarantee would be called upon in
cash requirements. the event adequate proceeds were not available from the sale of
We have entered into whole loan sale agreements with the mortgage loans to satisfy the current or ultimate payment
investors in the normal course of business, which include obligations of the Trusts. No losses have been sustained on this
standard representations and warranties customary to the commitment since its inception. The total principal amount of
mortgage banking industry. Violations of these representations Trust obligations outstanding as of April 30, 2005 and 2004 was
and warranties may require us to repurchase loans previously $6.7 billion and $3.2 billion, respectively. The fair value of
sold. In accordance with these loan sale agreements, we mortgage loans held by the Trusts as of April 30, 2005 and 2004
repurchased loans with an outstanding principal balance of was $6.8 billion and $3.3 billion, respectively.
$195.3 million and $192.3 million during the fiscal years ended We are required, in the event of non-delivery of customers’
April 30, 2005 and 2004, respectively. A liability has been securities owed to us by other broker-dealers or by our
H&R BLOCK 2005 Form 10K
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