HR Block 2012 Annual Report Download - page 60

estimated. With respect to other matters, management has concluded that a loss is only reasonably possible or
remote, or not reasonably estimable and, therefore, we do not accrue a liability. Management discloses the facts
regarding material matters, and a range of potential exposure if estimable, for losses assessed as reasonably
possible to occur. Costs incurred with defending claims are expensed as incurred. Any receivable for insurance
recoveries is recorded separately from the corresponding litigation liability, and only if recovery is determined
to be probable.
INCOME TAXES – We account for income taxes under the asset and liability method, which requires us to
record deferred income tax assets and liabilities for future tax consequences attributable to differences
between the financial statement carrying value of existing assets and liabilities and their respective tax basis.
Deferred taxes are determined separately for each tax-paying component within each tax jurisdiction based on
provisions of enacted tax law. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Our deferred tax assets include capital loss and state and foreign tax loss carry-forwards and are
reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Our current deferred tax assets are included in prepaid
expenses and other current assets in the consolidated balance sheets. Noncurrent deferred tax assets are
included in other assets on the consolidated balance sheets. Noncurrent deferred tax liabilities are included in
other noncurrent liabilities on the consolidated balance sheets.
We evaluate the sustainability of each uncertain tax position based on its technical merits. If we determine it
is more likely than not a tax position will be sustained based on its technical merits, we record the impact of the
position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of
being realized upon ultimate settlement. We do not record a tax benefit for tax positions where we have
concluded it is not more likely than not to be sustained. Differences between a tax position taken or expected to
be taken in our tax returns and the amount of benefit recognized and measured in the financial statements
result in unrecognized tax benefits, which are recorded in the balance sheet as either a liability for unrecognized
tax benefits or reductions to recorded tax assets, as applicable.
We file a consolidated federal tax return on a calendar year basis and state tax returns on a consolidated or
combined basis, as permitted by authorities. We report interest and penalties as a component of income tax
expense.
TREASURY SHARES – Shares of common stock repurchased by us are recorded, at cost, as treasury shares
and result in a reduction of stockholders’ equity. Periodically, we may retire shares held in treasury as
determined by our Board of Directors. We reissue treasury shares as part of our stock-based compensation
programs or for acquisitions. When shares are reissued, we determine the cost using the average cost method.
REVENUE RECOGNITION – Service revenues consist primarily of fees for preparation and filing of tax
returns, both in offices and through our online programs and fees associated with our Peace of Mind (POM)
guarantee program and interchange income associated with our H&R Block Prepaid Emerald MasterCard
®
program. Service revenues are recognized in the period in which the service is performed as follows:
䡲Assisted and online tax preparation revenues are recorded when a completed return is electronically filed or
accepted by the customer.
䡲POM revenues are deferred and recognized over the term of the guarantee, based on historical and actual
payment of claims.
䡲Revenues associated with our H&R Block Prepaid Emerald MasterCard
®
program consist of interchange
income from the use of debit cards and fees from the use of ATM networks. Interchange income is a fee
paid by a merchant bank to the card-issuing bank through the interchange network, and is based on
cardholder purchase volumes. Interchange income is recognized as earned.
Product and other revenues in the current year include royalties from franchisees and sales of software
products, and are recognized as follows:
䡲Upon granting of a franchise, franchisees pay a refundable deposit generally in the amount of $2,500, but
pay no initial franchise fee. We record the payment as a deposit liability and recognize no revenue in
connection with the initial granting of a franchise. Franchise royalties, which are based on contractual
percentages of franchise revenues, are recorded in the period in which the franchise provides the service.
䡲Revenue from the sale of software such as H&R Block At Home™ is recognized when the product is sold to
the end user, either through assisted, online or other channels. Rebates, slotting fees and other incentives
paid in connection with these sales are recorded as a reduction of revenue. Revenue from the sale of
46 H&R BLOCK 2012 Form 10K