HR Block 2009 Annual Report Download - page 31

Determining the allowance for credit losses for loans held for investment requires us to make estimates of losses
that are highly uncertain and requires a high degree of judgment. If our underlying assumptions prove to be
inaccurate, the allowance for loan losses could be insufficient to cover actual losses. Our mortgage loan portfolio
is a static pool, as we are no longer originating or purchasing new mortgage loans, and we believe that factor over
time will limit variability in our loss estimates. Our allowance at April 30, 2009 currently assumes that loans in the
principal amount of approximately $280 million will become delinquent and that we will incur losses on delinquent
loans at an approximate loss severity of 40%. We have estimated that future delinquencies where a loss is probable
as of April 30, 2009, may be as high as $315 million and that loss-severity rates may be subject to variability up to
200 basis points. We have estimated the high end of a range of possible outcomes to be approximately $20 million
greater than presently recorded.
MORTGAGE LOAN REPURCHASE OBLIGATION – SCC is obligated to repurchase loans sold or securitized in
the event of a breach of representations and warranties it made to purchasers or insurers of such loans, or
otherwise indemnify certain third-parties for losses incurred by them. SCC records a liability for contingent losses
relating to representation and warranty claims by estimating loan repurchase volumes and indemnification
obligations for both known claims and projections of expected future claims. Projections of future claims are
based on an analysis that includes a combination of reviewing historical repurchase trends, developing loss
expectations on loans sold or securitized, and predicting the level at which previously originated loans may be
subject to valid claims regarding representation and warranty breaches.
Based on an analysis as of April 30, 2009, SCC estimated its liability for loan repurchase and indemnification
obligations pertaining to claims of breach of representation and warranties to be $206.6 million. Actual losses
charged against this reserve during fiscal year 2009 totaled $44.2 million. To the extent that valid claim volumes in
the future exceed current estimates, or the value of mortgage loans and residential home prices decline, future
losses may be greater than our current estimates and those differences may be significant. See Item 8, note 17 to
our consolidated financial statements.
LITIGATION – It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to
legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any,
for these contingencies is made after analysis of each known issue and an analysis of historical experience in
accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” and related
pronouncements. Therefore, we have recorded reserves related to certain legal matters for which we believe it is
probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters, we
have concluded that a loss is only reasonably possible or remote, or is not estimable and, therefore, no liability is
recorded.
Assessing the likely outcome of pending litigation, including the amount of potential loss, if any, is highly
subjective. Our judgments regarding likelihood of loss and our estimates of probable loss amounts may differ from
actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement
discussions and related activity, predicting the outcome of class certification actions and various other
uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of
damages sought in those claims, actual losses in the future may significantly exceed our current estimates.
VALUATION OF GOODWILL – The evaluation of goodwill for impairment is a critical accounting estimate due
both to the magnitude of our goodwill balances, and the judgment involved in determining the fair value of our
reporting units. Goodwill balances in our continuing operations totaled $850.2 million as of April 30, 2009 and
$831.3 million as of April 30, 2008.
We test goodwill and other indefinite-life intangible assets for impairment annually or more frequently if events
occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below
its carrying value. Our goodwill impairment analysis is based on a discounted cash flow approach and market
comparables. This analysis, at the reporting unit level, requires significant management judgment with respect to
revenue and expense forecasts, anticipated changes in working capital and the selection and application of an
appropriate discount rate. Changes in projections or assumptions could materially affect our estimate of reporting
unit fair values. The use of different assumptions would increase or decrease estimated discounted future
operating cash flows and could affect our conclusions regarding the existence or amount of potential impairment.
Finally, strategic changes in our outlook regarding reporting units or intangible assets may alter our valuation
approach and could result in changes to our conclusions regarding impairment.
Estimates of fair value for certain of our reporting units exceed the corresponding carrying value by a significant
margin. In certain instances, however, the excess of estimated fair value over carrying value is not significant.
Future estimates of fair value may be adversely impacted by declining economic conditions. In addition, if future
operating results of our reporting units are below our current modeled expectations, fair value estimates may
decline. Any of these factors could result in future impairments, and those impairments could be significant.
H&R BLOCK 2009 Form 10K 27