HR Block 2012 Annual Report Download - page 82

NOTE 18: COMMITMENTS AND CONTINGENCIES
We offer guarantees under our POM program to tax clients whereby we will assume the cost of additional tax
assessments, up to a cumulative per client limit of $5,500, attributable to tax return preparation error for which
we are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing these
amounts over the term of the guarantee based on historical and actual payment of claims. The related current
asset is included in prepaid expenses and other current assets. The related liability is included in accounts
payable, accrued expenses and other current liabilities in the consolidated balance sheets. The related
noncurrent asset and liability are included in other assets and other noncurrent liabilities, respectively, in the
consolidated balance sheets. A loss on these POM guarantees would be recognized if the sum of expected costs
for services exceeded unearned revenue. Changes in the related balance of deferred revenue are as follows:
(in 000s)
Year ended April 30, 2012 2011
Balance, beginning of the year $ 140,603 $ 141,542
Amounts deferred for new guarantees issued 76,080 77,474
Revenue recognized on previous deferrals (75,603) (78,413)
Balance, end of the year $ 141,080 $ 140,603
In addition to amounts accrued for our POM guarantee, we had accrued $16.3 million and $14.7 million at
April 30, 2012 and 2011, respectively, related to estimated losses under our standard guarantee which is
included with our standard tax preparation services.
We have recorded liabilities totaling $6.8 million and $11.0 million as of April 30, 2012 and 2011, respectively,
in conjunction with contingent payments related to acquisitions of our continuing operations, with the short-
term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included
in other noncurrent liabilities. Our estimate is based on current financial conditions. Should actual results differ
materially from our assumptions, the potential payments will differ from the above estimate and any differences
will be recorded in our consolidated income statement.
We have contractual commitments to fund certain franchises requesting revolving lines of credit. Our total
obligation under these lines of credit was $87.3 million at April 30, 2012, and net of amounts drawn and
outstanding, our remaining commitment to fund totaled $43.2 million.
We are self-insured for certain risks, including, workers’ compensation, property and casualty, professional
liability and claims related to our POM program. These programs maintain various self-insured retentions. In all
but POM, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated
losses for self-insured retentions using actuarial models and assumptions based on historical loss experience.
The nature of our business may subject us to error and omissions, casualty and professional liability lawsuits.
To the extent that we are subject to claims exceeding our insurance coverage, such suits could have a material
effect on our financial position, results of operations or liquidity.
We issued three standby letters of credit to servicers paying claims related to our POM, errors and omissions,
and property and casualty insurance policies. These letters of credit are for amounts not to exceed $5.3 million
in the aggregate. At April 30, 2012, there were no balances outstanding on these letters of credit.
Our self-insured health benefits plan provides medical benefits to employees electing coverage under the
plan. We maintain an accrual for incurred but not reported medical claims and claim development. The accrued
liability is an estimate based on historical experience and other assumptions, some of which are subjective. We
adjust our self-insured medical benefits liability as our loss experience changes due to medical inflation,
changes in the number of plan participants and an aging employee base.
During fiscal year 2006, we entered into a transaction with the City of Kansas City, Missouri, to provide us with
sales and property tax savings on the furniture, fixtures and equipment for our corporate headquarters facility. Under
the transaction, the City purchased equipment by issuing $31.0 million in Industrial Revenue Bonds due in December
2015, and leased the furniture, fixtures and equipment to us for an identical term under a capital lease. Because the
City has assigned the lease to the bond trustee for our benefit as the sole bondholder, we, in effect, control
enforcement of the lease against ourselves. As a result of the capital lease treatment, the furniture, fixtures and
equipment will remain a component of property, plant and equipment in our consolidated balance sheets. As a result
of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated
in consolidation. The transaction provides us with property tax exemptions for the leased furniture, fixtures and
equipment. As of April 30, 2012, we have purchased $31.0 million in bonds in connection with this arrangement.
68 H&R BLOCK 2012 Form 10K