HR Block 2012 Annual Report Download - page 59

of the stock represents its redemption value, as there is no ready market value. This investment is included in
other assets in the consolidated balance sheets.
PROPERTY AND EQUIPMENT – Buildings and equipment are initially recorded at cost and are depreciated
over the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the remaining term of the respective lease or the estimated
useful life, using the straight-line method. Estimated useful lives are 15 to 40 years for buildings, three to five
years for computers and other equipment and up to eight years for leasehold improvements.
We capitalize certain allowable costs associated with software developed or purchased for internal use.
These costs are typically amortized over 36 months using the straight-line method.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For all lease
agreements, including those with escalating rent payments or rent holidays, we recognize rent expense on a
straight-line basis.
INTANGIBLE ASSETS AND GOODWILL – We test goodwill for impairment annually or more frequently,
whenever 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
(DCF) approach and market comparables. In the first step, we compare the fair value of a reporting unit with
our carrying amount including goodwill using a DCF valuation method. The DCF analyses are based on the
current revenue and expense forecasts and estimated long-term growth estimates for each reporting unit.
Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each
reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference
between the sum of the fair values of the reporting units and our total market capitalization for reasonableness.
If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not
impaired. If the fair value of the reporting unit is less than the carrying value, a second step is performed in
which the implied fair value of the reporting unit’s goodwill is compared to the carrying value of the goodwill.
The implied fair value of the goodwill is determined based on the difference between the fair value of the
reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied
fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
Based on our assessment performed during the fourth quarter of fiscal year 2012, the fair value of the
goodwill within our reporting units substantially exceeded its carrying value.
In addition, long-lived assets, including intangible assets with finite lives, are assessed for impairment
whenever events or circumstances indicate the carrying value may not be fully recoverable by comparing the
carrying value to future undiscounted cash flows. Impairment is recorded for long-lived assets determined not
to be fully recoverable equal to the excess of the carrying amount of the asset over its estimated fair value.
See note 7 for discussion of the impairment of goodwill and intangible assets during fiscal years 2012, 2011
and 2010.
The weighted-average life of intangible assets with finite lives is 34 years. Intangible assets are typically
amortized over the estimated useful life of the assets using the straight-line method.
COMMERCIAL PAPER – During fiscal year 2012, we issued commercial paper to finance temporary liquidity
needs and various financial activities. There was no commercial paper outstanding at April 30, 2012 or 2011.
MORTGAGE LOAN REPRESENTATION AND WARRANTY CLAIMS – In connection with the sale of loans
and/or residential mortgage-backed securities (RMBSs), SCC made certain representations and warranties.
SCC accrues a liability for contingent losses relating to representation and warranty claims by estimating
probable losses for those claims, both known and projected, based on, among other things, historical validity
and severity rates. This accrued liability is included in accounts payable, accrued expenses and other current
liabilities on the consolidated balance sheets. Projections of future claims are based on an analysis that includes
a review of the terms and provisions of applicable agreements, the historical experience under representation
and warranty claims and third-party activity, which includes inquiries from various third- parties. SCC’s
methodology for calculating this accrued liability also includes an assessment of the probability that individual
counterparties (private label securitization trustees on behalf of certificate holders, monoline insurers and
whole-loan purchasers) will assert future claims. See note 18 for additional discussion.
LITIGATION AND RELATED CONTINGENCIES – 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 liability required to be accrued, if any, for these contingencies is made after analysis of
each known issue and an analysis of historical experience. We accrue liabilities related to legal matters for
which we believe it is probable that a loss will be incurred and the amount of the loss can be reasonably
H&R BLOCK 2012 Form 10K 45