HR Block 2014 Annual Report Download - page 58

50 2014 Form 10-K | H&R Block, Inc.
Bank. 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.
These receivables are not specifically identified; instead we review the credit quality of these receivables on a
pooled basis, segregated by the year of origination. We determine our allowance for these receivables based on a
review of receipts taking into consideration historical experience. 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. 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. Based upon our
internal analysis and underwriting activities, 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 immaterial. 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.
Cash Back® 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 legislation which is administered by the CRA. Interest is not charged on these balances, in accordance with CRA
regulations. 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.
We do not specifically identify these receivables; instead we determine our allowance for these receivables based
on a review of receipts taking into consideration historical experience. In September of each fiscal year, any balances
remaining from the previous tax season are charged-off against the related allowance.
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.
We record an allowance representing our estimate of credit losses inherent in the loan portfolio at the balance
sheet date. 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 collateral 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 loan, 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.