HR Block 2008 Annual Report Download - page 63

insensitive to interest rate changes, interest expense on short-term borrowings will increase and decrease with
changes in the underlying short-term interest rates. See Item 7, “Financial Condition” for additional information.
Our long-term debt at April 30, 2008, consists primarily of fixed-rate Senior Notes; therefore, a change in interest
rates would have no impact on consolidated pretax earnings. See Item 8, note 9 to our consolidated financial
statements.
EQUITY PRICE RISK –We have exposure to the equity markets in several ways. The largest exposure, though
relatively small, is through our deferred compensation plans. Within the deferred compensation plans, we have
mismatches in asset and liability amounts and investment choices (both fixed-income and equity). At April 30, 2008
and 2007, the impact of a 10% market value change in the combined equity assets held by our deferred
compensation plans and other equity investments would be approximately $12.2 million and $12.5 million,
respectively, assuming no offset for the liabilities.
TAX SERVICES
FOREIGN EXCHANGE RATE RISK –Our operations in international markets are exposed to movements in
currency exchange rates. The currencies involved are the Canadian dollar and the Australian dollar. We translate
revenues and expenses related to these operations at the average of exchange rates in effect during the period.
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end
of the year. Translation adjustments are recorded as a separate component of other comprehensive income in
stockholders’ equity. Translation of financial results into U.S. dollars does not presently materially affect and has
not historically materially affected our consolidated financial results, although such changes do affect the year-to-
year comparability of the operating results in U.S. dollars of our international businesses. We estimate a 10%
change in foreign exchange rates by itself would impact consolidated pretax income in fiscal years 2008 and 2007
by approximately $3.2 million and $2.5 million, respectively, and cash balances at April 30, 2008 and 2007 by
$4.0 million and $5.9 million, respectively.
During the third quarter of fiscal year 2008, borrowing needs in our Canadian operations were funded by
corporate borrowings in the U.S. To mitigate the foreign currency exchange rate risk, we used forward foreign
exchange contracts. We do not enter into forward contracts for speculative purposes. In estimating the fair value
of derivative positions, we utilized quoted market prices, if available, or quotes obtained from external sources.
When foreign currency financial instruments are outstanding, exposure to market risk on these instruments
results from fluctuations in currency rates during the periods in which the contracts are outstanding. The
counterparties to our currency exchange contracts consist of major financial institutions, each of which is rated
investment grade. We are exposed to credit risk to the extent of potential non-performance by counterparties on
financial instruments. Any potential credit exposure does not exceed the fair value. We believe the risk of incurring
losses due to credit risk is remote. At April 30, 2008 we had no forward exchange contracts outstanding.
CONSUMER FINANCIAL SERVICES
INTEREST RATE RISK – BANKING –At April 30, 2008, approximately 93% of HRB Bank’s total assets were
residential mortgage loans with 29% of these fixed-rate loans and 71% adjustable-rate loans. These loans are
sensitive to changes in interest rates as well as expected prepayment levels. As interest rates increase, fixed-rate
residential mortgages tend to exhibit lower prepayments. The opposite is true in a falling rate environment. When
mortgage loans prepay, mortgage origination costs are written off. Depending on the timing of the prepayment, the
write-offs of mortgage origination costs may result in lower than anticipated yields.
At April 30, 2008, HRB Bank’s other investments consisted primarily of mortgage-backed securities and FHLB
stock. See table below for sensitivity analysis of our mortgage-backed securities.
HRB Bank’s liabilities consist primarily of transactional deposit relationships, such as prepaid debit card
accounts and checking accounts. Other liabilities include money market accounts, certificates of deposit and
collateralized borrowings from the FHLB. Money market accounts re-price as interest rates change. Certificates of
deposit re-price over time depending on maturities. FHLB advances generally have fixed rates ranging from one
day through multiple years.
Under criteria published by the OTS, HRB Bank’s overall interest rate risk exposure at April 30, 2008, was
characterized as “minimal.” We actively manage our interest rate risk positions. As interest rates change, we will
adjust our strategy and mix of assets and liabilities to optimize our position.
INTEREST RATE RISK – BROKER-DEALER –HRBFA holds interest bearing receivables from customers, brokers
and dealers, which consist of amounts due on margin and stock borrow transactions and are generally short-term
in nature. We fund these short-term assets with short-term variable-rate liabilities from customers, brokers and
dealers, including stock loan activity. As interest rates decline, our yields on these interest-bearing receivables are
negatively impacted, but are partially offset by reduced expenses related to the short-term variable-rate liabilities.
H&R BLOCK 2008 Form 10K 43