HR Block 2007 Annual Report Download - page 64

(dollars in 000s)
the recognition of our initial MSR value through calculation of the gain
Quarter on sale of mortgage assets. Because MSRs are recorded at LOCOM, we
Assumption Change Impact Implemented
are unable to adjust our MSR portfolio value upward, thus have not
Discount rates 18% to 20% ($1,260) or April 30, 2007 recognized the positive impact of the assumption changes on the MSR
(2) basis points
portfolio as a whole.
MSRs with a book value of $253.1 million are included in our
Prepayment rates Further stratification $4,428 or January 31, 2007
consolidated balance sheet at April 30, 2007. While changes in any
of prepayment 8 basis points
assumption could impact the value of our MSRs, the table below shows
rates
the significant drivers and the effect of a variation of a particular
Ancillary fees Decreased average ($3,677) or July 31, 2006
assumption on the fair value of our MSRs without changing any other
number of days of (5) basis points
assumptions. In reality, changes in one factor may result in changes in
interest collected
another, which might magnify or counteract the sensitivities.
related to
prepayments Assumption % Impact on Fair Value
Prepayments (including defaults):
Discount rate 15% to 18% ($2,555) or January 31, 2006 Adverse 10% (9%)
(3) basis pointsAdverse 20% (17%)
Discount rate:
Costs to service Decreased the $12,893 or October 31, 2005 Adverse 10% (3%)
number of days of 11 basis points Adverse 20% (6%)
interest paid to Ancillary fees and income:
investors Adverse 10% (5%)
During fiscal year 2007 we updated our assumptions related to loan
Adverse 20% (10%)
prepayment rates to further stratify by vintage year, loan type, and loans
Costs to service:
Adverse 10% (5%)
with and without prepayment penalties. We also updated assumptions
Adverse 20% (9%)
surrounding investor remittances during the current year, and increased
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the discount rate assumption used to determine the fair value of MSRs VALUATION OF MORTGAGE LOANS HELD FOR SALE –Determining
from 18% to 20% as a result of an analysis of third-party data including the fair value of loans held for sale requires us to make estimates of
rates used by other market participants. During fiscal year 2007, we also losses that are highly uncertain and requires a high degree of judgment.
updated our assumption related to the average number of days of Loans held for sale are carried at the lower of amortized cost or fair
interest collected on funds received as a result of prepayments value. We determine the fair value of loans based primarily on estimated
(Ancillary fees on the table above). We decreased the average number of market prices considering underlying loan defects, if any. Our estimates
days of interest collected following a review of the servicing portfolio may vary depending on the creditworthiness of the borrower and
data. While costs to service increase due to increases in delinquencies economic factors such as home price appreciation and interest rates.
and foreclosures, this increase was offset by higher late fee income. Changes in our estimates can affect our operating results.
During fiscal year 2006, we increased the discount rate assumption used OTHER SIGNIFICANT ACCOUNTING POLICIES –Other significant
to determine the fair value of MSRs from 15% to 18% as a result of an accounting policies, not involving the same level of judgment or
analysis of third-party data including rates used by other market uncertainty as those discussed above, are nevertheless important to an
participants. During fiscal year 2006, we also updated our assumption understanding of the financial statements. These policies may require
for number of days of interest paid to investors (Costs to service on the judgments on complex matters that are often subject to multiple
table above) on monthly loan prepayments upon the completion of a sources of authoritative guidance. Certain of these matters are among
review of the historical performance of the servicing portfolio. The topics currently under reexamination by accounting standard setters
cumulative net impact of the changes outlined above made during the and regulators. Although specific conclusions reached by these
period from May 1, 2006 to April 30, 2007 was an increase of standard setters may cause a material change in our accounting
approximately 1 basis point for MSRs initially recorded in fiscal year policies, outcomes cannot be predicted with confidence. Also see
2007 compared to the prior year. Item 8, note 1 to our consolidated financial statements, which discusses
The updated assumptions outlined above are applied not only when accounting policies we have selected when there are acceptable
we determine the allocated historical cost of MSRs, but are also used in alternatives, and new or proposed accounting standards that may affect
our evaluation of the fair value of the MSR portfolio in conjunction with our financial reporting in the future.
our impairment review. The changes in assumptions primarily impact
H&R BLOCK 2007 Form 10K