HR Block 2012 Annual Report Download - page 40

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.
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.
In fiscal year 2012, we discontinued service under our ExpressTax brand and closed approximately 200
underperforming company-owned offices as a result of our strategic realignment announced in April 2012. As a
result, we recorded an impairment of goodwill, which totaled $7.4 million, in our Tax Services segment. We
recorded a goodwill impairment of $22.7 million related to our RedGear reporting unit within our Tax Services
segment in fiscal year 2011.
See Item 8, note 7 to the consolidated financial statements.
INCOME TAXES – Income taxes are accounted for using the asset and liability approach under U.S. generally
accepted accounting principles. We calculate our current and deferred tax provision for the fiscal year based on
estimates and assumptions that could differ from the actual results reflected in income tax returns filed during
the applicable calendar year. Adjustments based on filed returns are recorded in the appropriate periods when
identified. We file a consolidated federal tax return on a calendar year basis, generally in the second fiscal
quarter of the subsequent year.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not
to be realized. We have considered taxable income in carry-back periods, historical and forecasted earnings,
future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies
in determining the need for a valuation allowance against our deferred tax assets. Determination of a valuation
allowance for deferred tax assets requires that we make judgments about future matters that are not certain,
including projections of future taxable income and evaluating potential tax-planning strategies. To the extent
that actual results differ from our current assumptions, the valuation allowance will increase or decrease. In the
event we determine that we could not realize all or part of our deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to earnings in the period in which we make such determination.
Likewise, if we later determine it is more likely than not that we could realize the deferred tax assets, we would
reverse the applicable portion of the previously provided valuation allowance.
The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations
by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our
interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal, state
and foreign tax authorities, which may result in proposed assessments, including assessments of interest and/or
penalties. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on
our best judgments. Actual results may differ from our current judgments due to a variety of factors, including
changes in law, interpretations of law by taxing authorities that differ from our assessments, changes in the
jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately
provided for any reasonably foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are
made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax
rate may fluctuate on a quarterly basis.
REVENUE RECOGNITION – We have many different revenue sources, each governed by specific revenue
recognition policies. Our revenue recognition policies can be found in Item 8, note 1 to the consolidated
financial statements.
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY – Our sources of capital include cash from operations, cash from
customer deposits, issuances of common stock and debt. We use capital primarily to fund working capital,
26 H&R BLOCK 2012 Form 10K