HR Block 2011 Annual Report Download - page 53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS –Our operating subsidiaries provide a variety of services to the general public,
principally in the United States (U.S.). Specifically, we offer: tax return preparation; tax and consulting services to
business clients; certain retail banking services and tax preparation and related software. Tax preparation services
are also provided in Canada and Australia. Our Tax Services segment comprised 77.2% of our consolidated
revenues from continuing operations for fiscal year 2011.
PRINCIPLES OF CONSOLIDATION –The consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated.
Some of our subsidiaries operate in regulated industries and their underlying accounting records reflect the
policies and requirements of these industries.
MANAGEMENT ESTIMATES –The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Significant
estimates, assumptions and judgments are applied in the determination of our allowance for loan losses,
potential losses from loan repurchase and indemnity obligations associated with our discontinued mortgage
business, contingent losses associated with pending litigation, fair value of reporting units, valuation allowances
based on future taxable income, reserves for uncertain tax positions, credit losses on receivable balances and
related matters. Estimates have been prepared on the basis of the most current and best information available as of
each balance sheet date. As such, actual results could differ materially from those estimates.
CONCENTRATIONS OF RISK –The overall credit quality of our mortgage loans held for investment is impacted
by the strength of the U.S. economy and local economies. Our mortgage loans held for investment include
concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of
changes in real estate values and underlying economic or market conditions related to a particular geographical
location. Approximately 59% of our mortgage loan portfolio consists of loans to borrowers located in the states of
Florida, California, New York and Wisconsin.
CASH AND CASH EQUIVALENTS –Cash and cash equivalents include cash on hand, cash due from banks and
federal funds sold. For purposes of the consolidated balance sheets and consolidated statements of cash flows, all
non-restricted highly liquid instruments purchased with an original maturity of three months or less are
considered to be cash equivalents. We present cash flow activities utilizing the indirect method. Book
overdrafts included in accounts payable totaled $38.8 million and $35.9 million at April 30, 2011 and 2010,
respectively.
CASH AND CASH EQUIVALENTS – RESTRICTED –Cash and cash equivalents — restricted consists primarily of
cash held by H&R Block Bank (HRB Bank) required for regulatory compliance and cash held by our captive
insurance subsidiary that will be used to pay claims.
RECEIVABLES AND RELATED ALLOWANCES –Receivables consist primarily of accounts receivable from
customers of our Business Services segment and receivables from tax clients for tax return preparation. The
allowance for doubtful accounts for these receivables requires management’s judgment regarding collectibility
and current economic conditions to establish an amount considered by management to be adequate to cover
estimated losses as of the balance sheet date. Business Services accounts receivable are charged-off primarily
when we determine that the specific customer does not have the ability to repay the balance in full. Receivables
from tax clients for tax return preparation are not specifically identified and charged off, but are evaluated on a
pooled basis. At the end of each tax season the outstanding balances on these receivables are evaluated based on
collections received and expected collections over subsequent tax seasons.
Our financing receivables consist primarily of mortgage loans held for investment, Emerald Advance lines of
Credit (EAs), tax client receivables related to refund anticipation loans (RALs) and loans made to franchisees.
Emerald Advance lines of credit. EAs are offered to clients in tax offices from late November through mid-
January, currently in an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan
terms, the line of credit can be increased and utilized year-round. These lines of credit are offered by HRB Bank.
Interest income on EAs is calculated using the average daily balance method and is recognized based on the
principal amount outstanding until the outstanding balance is paid or becomes delinquent. Loan commitment fees
on EAs, net of related expenses, are initially deferred and recognized as revenue over the commitment period,
which is typically two months. EAs balances are due on February 15th, and any amounts unpaid by that date are
placed on non-accrual status. Payments on past due amounts are recorded as a reduction in the receivable balance.
H&R BLOCK 2011 Form 10K 41