Business Context and Reporting Period
This Form 8-K Current Report was filed by H&R Block, Inc. on June 7, 2005. The filing addresses executive compensation decisions, a material restatement of prior financial statements, and a corporate stock split. The reporting period for the financial restatement covers fiscal years ended April 30, 2003, 2004, and 2005.
Key Financial Metrics and Material Changes
The filing does not provide specific revenue, profit, or cash flow figures for the current period, as the primary financial disclosure is a restatement of prior periods. The material changes involve corrections to previously issued financial statements due to accounting errors:
- Acquisition Accounting Error: An error regarding the acquisition of Olde Financial Corporation (fiscal 2000) resulted in an understatement of deferred tax liabilities and goodwill of approximately $129 million. This caused an overstatement of the provision for income taxes of approximately $11 million for each of the fiscal years ended April 30, 2004, and 2003.
- Gain on Sale Error: An error in calculating a gain on the sale of securitized residuals in fiscal 2003 resulted in a net overstatement of revenues of approximately $36 million. This will be corrected by deferring the gain and recognizing revenue from accretion in subsequent years, including approximately $18 million in fiscal 2004.
- Lease Accounting Error: Errors in accounting for leases (rent holidays and escalations) resulted in a cumulative overstatement of retained earnings of approximately $7 million as of April 30, 2004.
- Tax Provision Errors: Control weaknesses in corporate tax accounting led to calculation errors resulting in a cumulative overstatement of retained earnings of approximately $10 million to $14 million as of April 30, 2004.
- Expense Accrual Errors: An understatement of pre-tax expense of $12.4 million in fiscal 2004 due to an incentive compensation accrual error in the Mortgage Services segment. Additionally, an understatement of pre-tax expense of approximately $4 million in fiscal 2004 and $2 million in fiscal 2003 due to the overstatement of capitalized branch office costs in the Investment Services segment.
Guidance, Outlook, and Management Commentary
Executive Compensation: The Board approved fiscal 2005 short-term incentive awards and fiscal 2006 long-term incentive awards (stock options and restricted stock) for Named Executive Officers. Base salaries for fiscal 2006 were also approved, effective July 1, 2005. Fiscal 2006 short-term incentive criteria will be 80% based on financial targets (including diluted EPS growth and client growth) and 20% discretionary.
Stock Split: The Board approved a two-for-one common stock split, effective August 22, 2005, payable to stockholders of record as of August 1, 2005.
Restatement Status: The company has not completed the preparation of restated consolidated financial statements. The effects of the identified errors are preliminary and subject to change. Restated statements will be filed in the Form 10-K for the fiscal year ended April 30, 2005, or via amendment to previous filings.
Investor Verification Checklist
- Verify the final impact of the $129 million goodwill and deferred tax liability adjustment on future earnings.
- Confirm the timeline for the filing of restated financial statements in the upcoming Form 10-K.
- Review the revised revenue recognition schedule for the $36 million gain on sale of securitized residuals.
- Assess the implications of the identified internal control weaknesses in the corporate tax accounting function.
- Monitor the execution of the two-for-one stock split effective August 22, 2005.