HR Block 2016 Annual Report Download - page 37

H&R Block, Inc. | 2016 Form 10-K 29
differ from our current judgments due to a variety of factors, including changes in law, interpretations of law by taxing
authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine
tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these
matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities
in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.
As a result, our effective tax rate may fluctuate on a quarterly basis.
As of April 30, 2016, we accrued liabilities for unrecognized tax benefits on uncertain tax positions of approximately
$112 million. Of the total gross unrecognized tax benefit as of April 30, 2016, approximately $82 million would impact
our effective tax rate if ultimately recognized.
INCOME TAXES – VALUATION OF DEFERRED TAX ASSETS –
Nature of Estimates Required. 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.
We record a valuation allowance to reduce our deferred tax assets to the estimated amount that we believe is
more likely than not to be realized. Determination of a valuation allowance for deferred tax assets requires that we
make judgments about future matters that are not certain, including projections of future taxable income and
evaluating potential tax-planning strategies.
Assumptions and Approach Used. Our deferred tax assets include state and foreign tax loss carry-forwards, which
in some cases have been reduced by a valuation allowance. We have considered taxable income in carry-back periods,
historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate,
and tax planning strategies in determining the need for a valuation allowance and the estimated amount of these
deferred tax assets that will more likely than not be realized.
Sensitivity of Estimate to Change. To the extent that actual results differ from our current assumptions, valuation
allowances for deferred tax assets will increase or decrease. In the event we determine that we could not realize all
or part of our deferred tax assets in the future, an adjustment would be charged to earnings in the period in which
we make such determination. Likewise, if we later determine it is more likely than not that we could realize the deferred
tax assets, we would reverse the applicable portion of the previously provided valuation allowance.
As of April 30, 2016, valuation allowances for our deferred tax assets totaled $22 million. As a result of changes in
deferred tax valuation allowances, our effective tax rate decreased 0.5% and increased 0.2% in fiscal years 2016 and
2015, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to the consolidated financial statements for a discussion of recently issued accounting
pronouncements.
FINANCIAL CONDITION
These comments should be read in conjunction with the consolidated balance sheets and consolidated statements
of cash flows included in Item 8.
CAPITAL RESOURCES AND LIQUIDITY –
OVERVIEW – Our primary sources of capital and liquidity include cash from operations (including changes in working
capital), draws on our 2015 CLOC, and issuances of debt. We use our sources of liquidity primarily to fund working
capital, service and repay debt, pay dividends, repurchase shares of our common stock, and acquire businesses.
Our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the
period from January through April. Therefore, we require the use of cash to fund losses from May through December,
and typically rely on available cash balances from the prior tax season and borrowings to meet our off-season liquidity
needs.