HR Block 2012 Annual Report Download - page 57

amounts unpaid by that date are placed on non-accrual status as of March 1
st
. Payments on past due amounts
are recorded as a reduction in the receivable balance.
We review the credit quality of these receivables based on pools, which are segregated by the year of
origination. Specific bad debt rates are applied to each pool, as well as to those that maintain their loan year-
round.
We determine our allowance for these receivables collectively, based on a review of receipts taking into
consideration historical experience. These receivables are not specifically identified, but are evaluated on a
pooled basis. Initial bad debt rates also consider whether the loan was made to a new or repeat client. At the
end of each tax season, the outstanding balances on the past-due receivables are evaluated based on collections
received and expected collections over subsequent tax seasons. We charge-off these receivables accordingly.
Loans made to franchisees. Interest income on loans made to franchisees is calculated using the average
daily balance method and is recognized based on the principal amount outstanding until the outstanding
balance is paid or written off. The credit quality of these receivables is determined on a specific franchisee
basis, taking into account the franchisee’s credit score, the franchisee’s payment history on existing loans and
operational amounts due to us, the loan-to-value ratio and debt-to-income ratio. Credit scores, loan-to-value and
debt-to-income ratios are obtained at the time of underwriting. Payment history is monitored on a regular basis.
We believe all loans to franchisees are of similar credit quality. Loans are evaluated for impairment when they
become delinquent. Amounts deemed to be uncollectible are written off to bad debt expense and bad debt
related to these loans has typically been insignificant. Additionally, the franchise office serves as collateral for
the loan. In the event the franchisee is unable to repay the loan, we revoke the franchisee’s franchise rights,
write off the remaining balance of the loan and assume control of the office.
Tax client receivables related to RALs. All tax client receivables related to RALs outstanding at April 30,
2012 were originated prior to fiscal year 2011 and are past due. We do not accrue interest on these receivables.
Payments on past due amounts are recorded as a reduction in the receivable balance.
We review the credit quality of these receivables based on pools, which are segregated by the year of
origination, with specific bad debt rates applied to each pool.
These receivables are not specifically identified, 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. We charge-off these receivables accordingly.
MORTGAGE LOANS HELD FOR INVESTMENT – Mortgage loans held for investment represent loans
originated or acquired with the ability and current intent to hold to maturity. Loans held for investment are
carried at amortized cost adjusted for charge-offs, net of allowance for loan losses, deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan
origination costs are deferred and the net fee or cost is recognized in interest income over the life of the related
loan. Unearned income, premiums and discounts on purchased loans are amortized or accreted into income
over the estimated life of the loan using methods that approximate the interest method based on assumptions
regarding the loan portfolio, including prepayments adjusted to reflect actual experience.
We record an allowance representing our estimate of credit losses inherent in the loan portfolio at the
balance sheet date. Loan recoveries and the provision for credit losses increase the allowance, while loan
charge-offs decrease the allowance. A current assessment of the value of the loan’s underlying collateral is
made when the loan is no later than 60 days past due and any loan balance in excess of the value less costs to
sell the property is included in the provision for credit losses.
We evaluate mortgage loans less than 60 days past due on a pooled basis and record a loan loss allowance for
those loans in the aggregate. We stratify these loans based on our view of risk associated with various elements
of the pool and assign estimated loss rates based on those risks. Loss rates consider both the rate at which
loans will become delinquent (frequency) and the amount of loss that will ultimately be realized upon
occurrence of a liquidation of collateral (severity), and are primarily based on historical experience and our
assessment of economic and market conditions.
Loans are considered impaired when we believe it is probable we will be unable to collect all principal and
interest due according to the contractual terms of the note, or when the loan is 60 days past due. Impaired loans
are reviewed individually and loss estimates are based on the fair value of the underlying collateral. For loans
over 60 days but less than 180 days past due we record a loan loss allowance. For loans 180 days or more past
due we charge-off the loan to the value of the collateral less costs to sell. During fiscal year 2012 we changed
from recording a specific loan loss allowance for loans 180 days or more past due to charging-off those loans.
This change had no income statement impact, but reduced the principal amount of loans outstanding and the
H&R BLOCK 2012 Form 10K 43