HR Block 2013 Annual Report Download - page 58

H&R Block 2013 Form 10-K 51
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. EA balances require an annual paydown on February 15th, and any amounts unpaid are placed on non-
accrual status as of March 1st. Payments on past due amounts are applied to principal.
We review the credit quality of these receivables based on pools, which are segregated by the year of origination.
We determine our allowance for these receivables based on a review of receipts taking into consideration historical
experience. These receivables are not specifically identified, but are evaluated on a pooled basis. 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 receivables to an amount we believe represents the net realizable value.
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 assessed at an individual franchisee level, 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 collectibility 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 territory serves as collateral for the loan. In the event the franchisee is unable to repay the loan, we revoke
franchise rights, write off the remaining balance of the loan and refranchise the territory or begin operating it as company-
owned.
CashBack receivables. During the tax season, our Canadian operations advance refunds due to certain clients
from the Canada Revenue Agency (CRA), in exchange for a fee. The total fee we charge for this service is mandated
by the CRA. The client assigns to us the full amount of the tax refund to be issued by the CRA and the refund is then
sent by the CRA directly to us. The amount we advance to clients under this program is the amount of their estimated
refund, less our fees, any amounts expected to be withheld by the CRA for amounts the client may owe to government
authorities and any amounts owed to us from prior years. The CRA's system for tracking amounts due to various
government agencies also indicates if the client has already filed a return, does not exist in the CRA's records or is
bankrupt. This serves to greatly reduce the amounts of uncollectible receivables and the risk of fraudulent returns.
Interest is not charged on these balances, in accordance with CRA regulations.
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. In September
of each fiscal year, any balances remaining from the previous tax season are charged-off against the related allowance.
Credit card receivables. In November 2012, HRB Bank began offering unsecured credit cards. These credit
cards are offered to selected customers, primarily previous H&R Block clients, based on their credit profile and have
a maximum available credit limit of $2,500.
Interest income on credit cards is calculated using the average daily balance method and is recognized based on the
principal amount outstanding. In accordance with accounting and regulatory guidelines, credit card receivables are
generally exempt from being placed on nonaccrual status; therefore, interest and fees continue to accrue until the
receivable is charged-off or paid in full. The estimated uncollectible portion of accrued interest and fee income on credit
card receivables is included in the related allowance. Annual fees on credit cards, net of related expenses, are initially
deferred and recognized as revenue over the commitment period, which is typically twelve months.
We recorded an allowance for credit card receivables based on a combination of industry information for similar
credit cards and our experience to date. We may adjust our allowance in the future as more payment and delinquency
trends become available.