HR Block 2005 Annual Report Download - page 83

INCOME TAXES ⬎⬎⬎ We calculate our current and deferred
Changes in the projections or assumptions could materially affect
tax provision based on estimates and assumptions that could
fair values. The use of different assumptions would increase or
differ from the actual results reflected in income tax returns filed
decrease estimated discounted future operating cash flows and
during the applicable calendar year. Adjustments based on filed
could increase or decrease any impairment charge.
returns are recorded when identified. We file a consolidated
Our goodwill balance was $1.0 billion as of April 30, 2005 and
federal tax return on a calendar year basis, generally in the
$993.5 million as of April 30, 2004. No goodwill impairments were
second fiscal quarter of the subsequent year.
identified during fiscal years 2005 or 2004. In fiscal year 2003, a
We record a valuation allowance to reduce our deferred tax
goodwill impairment charge of $108.8 million was recorded in the
assets to the amount that is more likely than not to be realized.
Investment Services segment due to unsettled market conditions.
We have considered taxable income in carry-back periods,
Also during 2003, our annual impairment test resulted in an
historical and forecasted earnings, future taxable income, the mix
impairment of $13.5 million for a reporting unit within the
of earnings in the jurisdictions in which we operate, and tax
Business Services segment. No other impairments were
planning strategies in determining the need for a valuation
identified.
allowance against our deferred tax assets. In the event we were
LITIGATION ⬎⬎⬎ Our policy is to routinely assess the
to determine that we would not be able to realize all or part of
likelihood of any adverse judgments or outcomes related to legal
our deferred tax assets in the future, an adjustment to the
matters, as well as ranges of probable losses. A determination of
deferred tax assets would be charged to earnings in the period in
the amount of the reserves required, if any, for these
which we make such determination. Likewise, if we later
contingencies is made after thoughtful analysis of each known
determine that it is more likely than not that the deferred tax
issue and an analysis of historical experience in accordance with
assets would be realized, we would reverse the applicable portion
Statement of Financial Accounting Standards No. 5, ‘‘Accounting
of the previously provided valuation allowance.
for Contingencies,’’ and related pronouncements. Therefore, we
The amount of income taxes we pay is subject to ongoing
have recorded reserves related to certain legal matters for which
audits by federal, state and foreign tax authorities, which may
it is probable that a loss has been incurred and the range of such
result in proposed assessments. Our estimate for the potential
loss can be estimated. With respect to other matters, we have
outcome for any uncertain tax issue is highly judgmental. We
concluded that a loss is only reasonably possible or remote and,
believe we have adequately provided for any reasonably
therefore, no liability is recorded.
foreseeable outcome related to these matters. However, our
STOCK-BASED COMPENSATION ⬎⬎⬎ Stock-based
future results may include favorable or unfavorable adjustments
compensation expense is determined based on the grant-date fair
to our estimated tax liabilities in the period the assessments are
value and the number of equity instruments that vest. We use the
made or resolved or when statutes of limitation on potential
Black-Scholes model to calculate the fair value for stock options
assessments expire. As a result, our effective tax rate may
and employee stock purchase plan (‘‘ESPP’’) shares using the
fluctuate on a quarterly basis. As discussed in Item 9A, ‘‘Controls
following assumptions: stock volatility, expected life, risk-free
and Procedures,’’ we reported a material weakness in our internal
interest rate and dividend yield. The fair value of restricted shares
controls over accounting for income taxes as of April 30, 2005.
is the stock price on the date of the grant. We also estimate,
OTHER SIGNIFICANT ACCOUNTING POLICIES ⬎⬎⬎ Other
based on historical data, the percent of equity instruments
significant accounting policies, not involving the same level of
expected to vest. Variations in the assumptions used to calculate
measurement uncertainties as those discussed above, are
fair value could either positively or negatively affect the recorded
nevertheless important to an understanding of the financial
expense. Variations between actual performance and the estimate
statements. These policies require difficult judgments on complex
of vesting could result in timing adjustments recorded at the end
matters that are often subject to multiple sources of authoritative
of the vesting period. Additionally, changes in accounting rules
guidance. Certain of these matters are among topics currently
related to stock-based compensation could result in changes to
under reexamination by accounting standard setters and
our assumptions of fair value and expense recognition.
regulators. Although no specific conclusions reached by these
We began expensing all stock-based compensation awards
standard setters appear likely to cause a material change in our
under the prospective transition method beginning on May 1,
accounting policies, outcomes cannot be predicted with
2003. Therefore, our income statements do not fully reflect the
confidence. Also see Item 8, note 1 to our consolidated financial
expense related to all of our stock options and restricted shares
statements, which discusses accounting policies we have selected
outstanding. We recorded $44.1 million, $25.7 million and
when there are acceptable alternatives.
$2.1 million in stock-based compensation expense during fiscal
years 2005, 2004 and 2003, respectively.
H&R BLOCK 2005 Form 10K
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