HR Block 2012 Annual Report Download - page 56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS – Our operating subsidiaries provide a variety of tax preparation and related
services to the general public, principally in the United States (U.S.). Specifically, we offer: assisted tax return
preparation; H&R Block At Home™ digital services and products, and certain retail banking services. We also
provide tax preparation services in Canada and Australia.
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.
DISCONTINUED OPERATIONS – In fiscal year 2012, we sold RSM McGladrey, Inc. (RSM) and also sold RSM
EquiCo Inc.’s subsidiary, McGladrey Capital Markets LLC (MCM). As of April 30, 2012, the results of operations
of these businesses are presented as discontinued operations in the consolidated financial statements. All
periods presented in the consolidated balance sheets and statements of income have been reclassified to reflect
our discontinued operations. Our discontinued operations also include the results of operations of Sand Canyon
Corporation, formerly known as Option One Mortgage Corporation, and its subsidiaries (SCC), which exited its
mortgage business in fiscal year 2008. See additional information in notes 18, 19 and 20.
MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with generally accepted
accounting principles 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 potential losses from mortgage
loan representation and warranty claims associated with our discontinued mortgage business, contingent losses
associated with pending claims and litigation, allowance for loan losses, fair value of reporting units, valuation
allowances based on future taxable income, reserves for uncertain tax positions 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.
CASH AND CASH EQUIVALENTS – Cash and cash equivalents include cash on hand, cash due from banks,
short-term investments 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 $33.9 million and $34.1 million at
April 30, 2012 and 2011, 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
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. 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), loans made to franchisees and tax client receivables related to refund anticipation loans (RALs).
Emerald Advance lines of credit. EAs are offered to clients in our 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 require an annual paydown on February 15
th
, and any
42 H&R BLOCK 2012 Form 10K