Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): November 15, 2018

H&R BLOCK, INC.
(Exact name of registrant as specified in charter)
 
 
 
 
Missouri
(State of Incorporation)
1-06089
(Commission File Number)
44-0607856
(I.R.S. Employer
Identification Number)

One H&R Block Way, Kansas City, MO 64105
(Address of Principal Executive Offices) (Zip Code)
(816) 854-3000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 






Item 8.01. Other Events.

H&R Block, Inc. (the “Company”) is providing additional financial statement disclosures required under Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," (ASU 2014-09) pursuant to applicable Securities and Exchange Commission (“SEC”) rules in order to facilitate its filing of a new universal shelf registration statement on Form S-3ASR. The Company intends to file such registration statement as of the date hereof for the purpose of replacing its universal registration statement that expired in September 2018, and not in connection with any specific offering.
As previously reported, effective May 1, 2018, the Company adopted ASU 2014-09 applying the full retrospective transition method. The Company is filing this Current Report on Form 8-K to add the additional disclosures required under ASU 2014-09 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2018 (the "2018 Form 10-K"). The adoption of this guidance did not have a significant impact on our consolidated financial statements and no adjustments were made to prior year periods to be in compliance with ASU 2014-09. The 2018 Form 10-K was originally filed with the SEC on June 15, 2018.
The financial statement disclosures contained in Part II, Item 8. Financial Statements and Supplementary Data for the fiscal years ended April 30, 2018, 2017, and 2016 are filed as Exhibit 99.1 to this Current Report and are incorporated by reference into this Item 8.01.
Except as set forth in the exhibits hereto, all information provided in the 2018 Form 10-K remains unchanged and this Current Report does not modify or update the disclosures in the 2018 Form 10-K. This Current Report does not reflect events occurring after the filing of the 2018 Form 10-K and should be read in conjunction with other information that the Company has filed with the SEC.


Item 9.01.    Financial Statements and Exhibits.
(d)    Exhibits
Exhibit Number    Description
23.1
99.1
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Extension Calculation Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase

2



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
H&R BLOCK, INC.
 
 
Date: November 15, 2018
By:/s/ Scott W. Andreasen
 
     Scott W. Andreasen
 
     Vice President and Secretary



3

Exhibit


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-118020, 333-184343, and 333-206790 on Form S-3 of Block Financial LLC and Registration Statement Nos. 333-206790, 333-118020-01, 333-154611 and 333-184343-01 on Form S-3 and Nos. 333-160957, 333-42736, 333-70402, 333-106710, 333-183913, 333-183915, and 333-220555 on Form S-8 of H&R Block, Inc. of our reports dated June 15, 2018 (November 15, 2018 as it relates to the adoption of ASU 2014-09 as discussed in Note 1 and Note 16 of the financial statements), relating to the consolidated financial statements of H&R Block, Inc. and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company’s adoption of ASU 2014-09), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Current Report on Form 8-K of H&R Block, Inc.

/s/ Deloitte & Touche LLP

Kansas City, Missouri
November 15, 2018




Document
Table of Contents

EXPLANATORY NOTE
"H&R Block," "the Company," "we," "our" and "us" are used interchangeably in this Exhibit 99.1 to refer to H&R Block, Inc. or to H&R Block, Inc and its subsidiaries, as appropriate to the context.
As disclosed in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2018, we adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," (ASU 2014-09) effective May 1, 2018 applying the full retrospective transition method.
We are filing this Exhibit 99.1 to our Current Report on Form 8-K to add the additional disclosures required under ASU 2014-09. The adoption of this guidance did not have a significant impact on our consolidated financial statements and no adjustments were made to prior year periods to be in compliance with ASU 2014-09. See note 1 “Summary of Significant Accounting Policies” and note 16 “Revenue Recognition” to the consolidated financial statements for further discussion of the adoption of ASU 2014-09. Except the disclosure changes described above, we have not updated this Exhibit 99.1 to our Current Report for any development or event occurring after June 15, 2018, the date on which the Company’s fiscal year 2018 Form 10-K was filed with the Securities and Exchange Commission (SEC).
This Exhibit 99.1 to the Company's Current Report includes only updates to comply with ASU 2014-09. Unaffected items of our Annual Report on Form 10-K for the year ended April 30, 2018 have not been repeated in, and are not amended or modified by, this exhibit. The information in this exhibit should be read in conjunction with our Annual Report on Form 10-K for the year ended April 30, 2018, our Quarterly Report on Form 10-Q for the quarter ended July 31, 2018, and the Company's other filings with the SEC subsequent to June 15, 2018.


Table of Contents

PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DISCUSSION OF FINANCIAL RESPONSIBILITY
H&R Block's management is responsible for the integrity and objectivity of the information contained in this document. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the U.S. are properly applied. In discharging this responsibility, management maintains an extensive program of internal audits and requires members of management to certify financial information within their scope of management. Our system of internal control over financial reporting also includes formal policies and procedures, including a Code of Business Ethics and Conduct that reinforces our commitment to ethical business conduct and is designed to encourage our employees and directors to act with high standards of integrity in all that they do.
The Audit Committee of the Board of Directors, composed solely of independent outside directors, meets periodically with management, the independent auditor and the Vice President, Audit Services (our chief internal auditor) to review matters relating to our financial statements, internal audit activities, internal accounting controls and non-audit services provided by the independent auditors. The independent auditor and the Vice President, Audit Services have full access to the Audit Committee and meet with the committee, both with and without management present, to discuss the scope and results of their audits, including internal controls and financial matters.
Deloitte & Touche LLP audited our consolidated financial statements for fiscal years 2018, 2017 and 2016. The audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 12a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework, as of April 30, 2018.
Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that as of April 30, 2018, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO, using the 2013 framework. The Company's external auditor, Deloitte & Touche LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting.
/s/ Jeffrey J. Jones II
 
/s/ Tony G. Bowen
Jeffrey J. Jones II
 
Tony G. Bowen
President and Chief Executive Officer
 
Chief Financial Officer

33
2018 Form 10-K | H&R Block, Inc.

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of H&R Block, Inc. and subsidiaries (the "Company") as of April 30, 2018 and 2017, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended April 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 30, 2018, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 15, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 and Note 16 to the financial statements, the Company has changed its method of accounting for revenue in all periods presented due to the adoption of ASU 2014-09, Revenue from Contracts with Customers, on a retrospective basis.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 15, 2018 (November 15, 2018 as it relates to the adoption of ASU 2014-09 as discussed in Note 1 and Note 16 of the financial statements)
We have served as the Company's auditor since 2007.

H&R Block, Inc. | 2018 Form 10-K
34

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.


Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of H&R Block, Inc. and subsidiaries (the "Company") as of April 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended April 30, 2018 of the Company and our report dated June 15, 2018 (November 15, 2018, as it relates to the adoption of ASU 2014-09 as discussed in Note 1 and Note 16 of the financial statements), expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 15, 2018

35
2018 Form 10-K | H&R Block, Inc.

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
 
(in 000s, except per share amounts)
 
Year ended April 30,
 
2018

 
2017

 
2016

REVENUES:
 
 
 
 
 
 
Service revenues
 
$
2,766,426

 
$
2,648,349

 
$
2,653,936

Royalty, product and other revenues
 
393,505

 
387,965

 
384,217

 
 
3,159,931

 
3,036,314

 
3,038,153

OPERATING EXPENSES:
 
 
 
 
 
 
Costs of revenues
 
1,739,729

 
1,644,377

 
1,685,552

Selling, general and administrative
 
668,152

 
675,953

 
719,409

Total operating expenses
 
2,407,881

 
2,320,330

 
2,404,961

 
 
 
 
 
 
 
Other income (expense), net
 
6,054

 
6,254

 
5,249

Interest expense on borrowings
 
(89,372
)
 
(92,951
)
 
(68,962
)
Income from continuing operations before income taxes
 
668,732

 
629,287

 
569,479

Income taxes
 
41,823

 
208,370

 
185,926

Net income from continuing operations
 
626,909

 
420,917

 
383,553

Net loss from discontinued operations, net of tax benefits of $7,016, $6,986 and $5,414
 
(13,760
)
 
(11,972
)
 
(9,286
)
NET INCOME
 
$
613,149

 
$
408,945

 
$
374,267

 
 
 
 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
Continuing operations
 
$
2.99

 
$
1.97

 
$
1.54

Discontinued operations
 
(0.06
)
 
(0.05
)
 
(0.04
)
Consolidated
 
$
2.93

 
$
1.92

 
$
1.50

 
 
 
 
 
 
 
DILUTED EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
Continuing operations
 
$
2.98

 
$
1.96

 
$
1.53

Discontinued operations
 
(0.07
)
 
(0.05
)
 
(0.04
)
Consolidated
 
$
2.91

 
$
1.91

 
$
1.49

 
 
 
 
 
 
 
COMPREHENSIVE INCOME:
 
 
 
 
 
 
Net income
 
$
613,149

 
$
408,945

 
$
374,267

Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the year, net of taxes of $ - , ($9) and ($2,270)
 
1

 
(16
)
 
(3,530
)
Reclassification adjustment for losses (gains) included in income, net of taxes of $ - , $ - and ($3,214)
 

 

 
(4,982
)
Change in foreign currency translation adjustments
 
995

 
(4,050
)
 
(4,461
)
Other comprehensive income(loss)
 
996

 
(4,066
)
 
(12,973
)
Comprehensive income
 
$
614,145

 
$
404,879

 
$
361,294

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | 2018 Form 10-K
36

Table of Contents

CONSOLIDATED BALANCE SHEETS
 
(in 000s, except share and 
per share amounts)
 
As of April 30,
 
2018

 
2017

ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,544,944

 
$
1,011,331

Cash and cash equivalents - restricted
 
118,734

 
106,208

Receivables, less allowance for doubtful accounts of $81,813 and $55,296
 
146,774

 
162,775

Income taxes receivable
 
12,310

 

Prepaid expenses and other current assets
 
68,951

 
65,725

Total current assets
 
1,891,713

 
1,346,039

Property and equipment, at cost, less accumulated depreciation and amortization of $745,397 and $678,161
 
231,888

 
263,827

Intangible assets, net
 
373,981

 
409,364

Goodwill
 
507,871

 
491,207

Deferred tax assets and income taxes receivable
 
34,095

 
83,728

Other noncurrent assets
 
101,401

 
99,943

Total assets
 
$
3,140,949

 
$
2,694,108

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
LIABILITIES:
 
 
 
 
Accounts payable and accrued expenses
 
$
251,975

 
$
217,028

Accrued salaries, wages and payroll taxes
 
141,499

 
183,856

Accrued income taxes and reserves for uncertain tax positions
 
263,050

 
348,199

Current portion of long-term debt
 
1,026

 
981

Deferred revenue and other current liabilities
 
186,101

 
189,216

Total current liabilities
 
843,651

 
939,280

Long-term debt
 
1,494,609

 
1,493,017

Deferred tax liabilities and reserves for uncertain tax positions
 
229,430

 
159,085

Deferred revenue and other noncurrent liabilities
 
179,548

 
163,609

Total liabilities
 
2,747,238

 
2,754,991

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
 
Common stock, no par, stated value $.01 per share, 800,000,000 shares
authorized, shares issued of 246,198,878
 
2,462

 
2,462

Additional paid-in capital
 
760,250

 
754,912

Accumulated other comprehensive loss
 
(14,303
)
 
(15,299
)
Retained earnings (deficit)
 
362,980

 
(48,206
)
Less treasury shares, at cost, of 36,944,789 and 39,027,573
 
(717,678
)
 
(754,752
)
Total stockholders' equity (deficiency)
 
393,711

 
(60,883
)
Total liabilities and stockholders' equity
 
$
3,140,949

 
$
2,694,108

 
 
 
 
 
See accompanying notes to consolidated financial statements.

37
2018 Form 10-K | H&R Block, Inc.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
 
(in 000s)

Year ended April 30,
 
2018

 
2017

 
2016

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income
 
$
613,149

 
$
408,945

 
$
374,267

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
183,295

 
182,168

 
173,598

Provision for bad debt
 
74,489

 
52,776

 
75,395

Deferred taxes
 
112,140

 
46,455

 
36,276

Stock-based compensation
 
21,954

 
19,285

 
23,540

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
 
 
Receivables
 
(65,602
)
 
(77,873
)
 
(70,721
)
Prepaid expenses and other current assets
 
(3,365
)
 
(4,542
)
 
4,321

Other noncurrent assets
 
(1,421
)
 
(6,364
)
 
4,197

Accounts payable and accrued expenses
 
32,610

 
(30,472
)
 
16,723

Accrued salaries, wages and payroll taxes
 
(43,142
)
 
22,789

 
17,388

Deferred revenue and other current liabilities
 
(3,562
)
 
(59,998
)
 
(77,510
)
Deferred revenue and other noncurrent liabilities
 
12,689

 
4,314

 
3,055

Income tax receivables, accrued income taxes and income tax reserves
 
(75,491
)
 
129

 
(12,499
)
Other, net
 
(7,740
)
 
(5,415
)
 
(23,477
)
Net cash provided by operating activities
 
850,003

 
552,197

 
544,553

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Sales, maturities and payments received on available-for-sale securities
 

 
1,144

 
436,471

Principal payments and sales of mortgage loans and real estate owned, net
 

 
207,174

 
38,481

Capital expenditures
 
(98,583
)
 
(89,255
)
 
(99,923
)
Payments made for business acquisitions, net of cash acquired
 
(42,539
)
 
(54,816
)
 
(88,776
)
Franchise loans funded
 
(22,320
)
 
(34,473
)
 
(22,820
)
Payments received on franchise loans
 
39,968

 
61,437

 
55,007

Other, net
 
11,417

 
8,108

 
11,075

Net cash provided by (used in) investing activities
 
(112,057
)
 
99,319

 
329,515

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Repayments of line of credit borrowings
 
(830,000
)
 
(1,700,000
)
 
(1,465,000
)
Proceeds from line of credit borrowings
 
830,000

 
1,700,000

 
1,465,000

Proceeds from issuance of long-term debt
 

 

 
996,831

Transfer of HRB Bank deposits
 

 

 
(419,028
)
Customer banking deposits, net
 

 

 
(326,705
)
Dividends paid
 
(200,469
)
 
(187,115
)
 
(201,688
)
Repurchase of common stock, including shares surrendered
 
(9,147
)
 
(322,850
)
 
(2,018,338
)
Proceeds from exercise of stock options
 
28,340

 
2,371

 
25,775

Other, net
 
(9,388
)
 
(22,830
)
 
(18,576
)
Net cash used in financing activities
 
(190,664
)
 
(530,424
)
 
(1,961,729
)
 
 
 
 
 
 
 
Effects of exchange rate changes on cash
 
(1,143
)
 
(4,464
)
 
(10,590
)
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents and restricted cash
 
546,139

 
116,628

 
(1,098,251
)
Cash, cash equivalents and restricted cash, beginning of the year
 
1,117,539

 
1,000,911

 
2,099,162

Cash, cash equivalents and restricted cash, end of the year
 
$
1,663,678

 
$
1,117,539

 
$
1,000,911

 
 
 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
 
 
Income taxes paid, net of refunds received
 
$
8,276

 
$
163,539

 
$
165,154

Interest paid on borrowings
 
84,320

 
87,185

 
59,058

Accrued additions to property and equipment
 
3,010

 
2,433

 
2,822

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | 2018 Form 10-K
38

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(amounts in 000s, except per share amounts)
 
 
 
Common Stock
 
Additional
Paid-in
Capital

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Retained
Earnings

 
Treasury Stock
 
Total
Stockholders’
Equity

 
 
Shares

 
Amount

 
 
 
 
Shares

 
Amount

 
Balances as of May 1, 2015
 
316,628

 
$
3,166

 
$
783,793

 
$
1,740

 
$
1,836,442

 
(41,353
)
 
$
(792,192
)
 
$
1,832,949

Net income
 

 

 

 

 
374,267

 

 

 
374,267

Other comprehensive loss
 

 

 

 
(12,973
)
 

 

 

 
(12,973
)
Stock-based compensation
 

 

 
23,540

 

 

 

 

 
23,540

Stock-based awards exercised or vested
 

 

 
(15,257
)
 

 
(2,848
)
 
2,262

 
43,451

 
25,346

Acquisition of treasury shares
 

 

 

 

 

 
(610
)
 
(18,102
)
 
(18,102
)
Repurchase and retirement of common shares
 
(56,409
)
 
(564
)
 
(33,846
)
 

 
(1,965,826
)
 

 

 
(2,000,236
)
Cash dividends declared - $0.80 per share
 

 

 

 

 
(201,688
)
 

 

 
(201,688
)
Balances as of April 30, 2016
 
260,219

 
2,602

 
758,230

 
(11,233
)
 
40,347

 
(39,701
)
 
(766,843
)
 
23,103

Net income
 

 

 

 

 
408,945

 

 

 
408,945

Other comprehensive loss
 

 

 

 
(4,066
)
 

 

 

 
(4,066
)
Stock-based compensation
 

 

 
19,285

 

 

 

 

 
19,285

Stock-based awards exercised or vested
 

 

 
(14,191
)
 

 
(1,915
)
 
928

 
17,921

 
1,815

Acquisition of treasury shares
 

 

 

 

 

 
(255
)
 
(5,830
)
 
(5,830
)
Repurchase and retirement of common shares
 
(14,020
)
 
(140
)
 
(8,412
)
 

 
(308,468
)
 

 

 
(317,020
)
Cash dividends declared - $0.88 per share
 

 

 

 

 
(187,115
)
 

 

 
(187,115
)
Balances as of April 30, 2017
 
246,199

 
2,462

 
754,912

 
(15,299
)
 
(48,206
)
 
(39,028
)
 
(754,752
)
 
(60,883
)
Net income
 

 

 

 

 
613,149

 

 

 
613,149

Other comprehensive income
 

 

 

 
996

 

 

 

 
996

Stock-based compensation
 

 

 
21,713

 

 

 

 

 
21,713

Stock-based awards exercised or vested
 

 

 
(16,375
)
 

 
(1,494
)
 
2,389

 
46,221

 
28,352

Acquisition of treasury shares
 

 

 

 

 

 
(306
)
 
(9,147
)
 
(9,147
)
Cash dividends declared - $0.96 per share
 

 

 

 

 
(200,469
)
 

 

 
(200,469
)
Balances as of April 30, 2018
 
246,199

 
$
2,462

 
$
760,250

 
$
(14,303
)
 
$
362,980

 
(36,945
)
 
$
(717,678
)
 
$
393,711

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS – Our subsidiaries provide assisted and do-it-yourself (DIY) tax return preparation solutions through multiple channels (including in-person, online and mobile applications, and desktop software) and distribute H&R Block-branded products and services, including those of our financial partners, to the general public primarily in the United States (U.S.), Canada, Australia, and their respective territories.
PRINCIPLES OF CONSOLIDATION – The consolidated financial statements include the accounts of the Company and our subsidiaries. Intercompany transactions and balances have been eliminated.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See notes 11 and 12 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with accounting principles generally accepted in the U. S. (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, the impact of legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Legislation) and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS – All non-restricted highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
Outstanding checks in excess of funds on deposit (book overdrafts) included in accounts payable totaled $27.2 million and $29.6 million as of April 30, 2018 and 2017, respectively.
CASH AND CASH EQUIVALENTS RESTRICTED – Cash and cash equivalents – restricted consists primarily of cash held by our captive insurance subsidiary that is expected to be used to pay claims.
RECEIVABLES AND RELATED ALLOWANCES – Our trade receivables consist primarily of accounts receivable from tax clients for tax return preparation and related fees. The allowance for doubtful accounts for these receivables requires management's judgment regarding collectibility and current economic conditions to establish an amount considered by management to be adequate to cover estimated losses as of the balance sheet date. Credit losses from tax clients for tax return preparation and related fees are not specifically identified and charged off; instead they are evaluated on a pooled basis. At the end of each tax season the outstanding balances on these 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.
Our financing receivables consist primarily of participations in H&R Block Emerald Advance® lines of Credit (EAs), loans made to franchisees, and amounts due under our Instant Cash Back® program in Canada.
H&R Block Emerald Advance® lines of credit. EAs are typically offered to clients in our offices from late November through December, currently in an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be utilized year-round. 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 lines of credit are offered by BofI Federal Bank, a federal savings bank (BofI). We purchase participation interests in their loans, as discussed further in note 11.
Credit losses from EAs are not specifically identified and charged off; instead we review the credit quality of these receivables on a pooled basis, segregated by the year of origination. At the end of the fiscal year, the outstanding balances on these 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.

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Loans made to franchisees. The credit quality of these receivables is assessed at origination at an individual franchisee level. 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 additional protection in the event a franchisee defaults on the loan, as we may revoke franchise rights, write off the remaining balance of the loan and refranchise the territory or begin operating it as company-owned.
Instant Cash Back® receivables. 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. 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.
Credit losses from these receivables are not specifically identified and charged off; instead we review the credit quality of these receivables on a pooled basis, segregated by the year of origination. At the end of each tax season the outstanding balances on these 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.
PROPERTY AND EQUIPMENT – Buildings and equipment are initially recorded at cost and are depreciated over the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially recorded at cost and are amortized over the lesser of the remaining term of the respective lease or the estimated useful life, using the straight-line method. Estimated useful lives are generally 15 to 40 years for buildings, two to five years for computers and other equipment, three to five years for purchased software and up to eight years for leasehold improvements.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For all lease agreements, including those with escalating rent payments or rent holidays, we recognize rent expense on a straight-line basis.
GOODWILL AND INTANGIBLE ASSETS – Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but rather is tested for impairment annually, or more frequently if indications of potential impairment exist.
Intangible assets, including internally-developed software, with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The weighted-average life of intangible assets with finite lives is 18 years. Intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method.
TREASURY SHARES – We record shares of common stock repurchased by us as treasury shares, at cost, resulting in a reduction of stockholders' equity. Periodically, we may retire shares held in treasury as determined by our Board of Directors. We typically reissue treasury shares as part of our stock-based compensation programs. When shares are reissued, we determine the cost using the average cost method.
FAIR VALUE MEASUREMENT – We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:
Level 1 inputs to the valuation are quoted prices in an active market for identical assets.
Level 2 inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.
Level 3 valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.
Assets measured on a recurring basis are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. There were no transfers between hierarchy levels during the fiscal years ended April 30, 2018 and 2017.     

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Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.
Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
Receivables, net - short-term - For short-term balances the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1).
Receivables, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise territories serving as collateral (Level 1). Long-term EA and Refund Transfer (RT) receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates.
Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2). See note 6 for fair value.
Contingent consideration - Fair value approximates the carrying amount (Level 3). See note 11 for the carrying amount.
REVENUE RECOGNITION – On May 1, 2018, we adopted ASU 2014-09 using the full retrospective approach for all contracts as of the adoption date. As the adoption of this guidance did not have a significant impact on our consolidated financial statements, no adjustments were made to the prior year periods to be in compliance with ASU 2014-09.
Revenue is recognized upon satisfaction of performance obligations by the transfer of a product or service to the customer. Revenue is the amount of consideration we expect to receive for our services and products, and excludes sales taxes. When providing the majority of our tax preparation services, we generally have multiple performance obligations that are provided simultaneously at a point in time and revenue is recognized at that time. Our Peace of Mind® Extended Service Plan (POM) and Tax Identity Shield® (TIS) products have multiple performance obligations that are provided over time. The transaction price for POM and TIS, which is due at the time of purchase, is allocated to the various performance obligations based on relative stand alone selling prices. Revenues for POM and TIS are deferred until the respective performance obligations have been satisfied. We have determined that these contracts do not contain a significant financing component.
Service revenues consist primarily of fees for preparation and filing of tax returns, both in offices and through our online programs, fees earned on Refund Transfers (RTs), interchange income associated with our H&R Block Emerald Prepaid Mastercard® (Emerald Card) program, fees associated with our POM and fees associated with our TIS program. Service revenues are recognized when performance obligations are satisfied as follows:
Assisted and DIY online tax preparation revenues are recorded when a completed return is electronically filed or accepted by the customer. The value of point-of-sale discounts and coupons are recorded as a reduction of revenue.
Fees for electronic filing of tax returns prepared using our DIY tax return preparation solutions are recorded when the return is electronically filed.
Fees related to RTs are recognized when the Internal Revenue Service (IRS) acknowledgment is received and the bank account is established at BofI.
Revenues associated with our Emerald Card® program consist of interchange income from the use of debit cards and fees from the use of ATM networks, net of volume-based amounts retained by BofI in connection with our agreement. Interchange income is a fee paid by a merchant bank to BofI through the interchange network. Net revenue associated with our Emerald Card® is recognized based on cardholder transactions.
Under POM we (1) represent our clients if they are audited by a taxing authority, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. POM revenues are deferred and recognized over the term of the plan, based on the historical pattern of actual claims paid, as claims paid represent the transfer of POM services to the customer. The plan covers the life of the tax return, which can be up to six years; however, the majority of claims are incurred in years two and three after the sale of POM.

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Our TIS program offers clients assistance in helping protect their tax identity and access to services to help restore their tax identity, if necessary. Prevention services include a daily scan of the dark web for personal information, a pre-tax season identity theft risk assessment, notifying clients if their information is detected on a tax return filed through H&R Block, and obtaining additional IRS identity protections when eligible. TIS revenues are deferred and are recognized as the various services are provided to the client, either by us or a third party, throughout the term of the contract, which ends on April 30th of the following year.
Royalty, product and other revenues are recognized when performance obligations are satisfied as follows:
Royalties, which are based on contractual percentages of franchise gross receipts, are generally recorded in the period in which the services are provided by the franchisee to the customer.
Revenue from the sale of DIY desktop software is recognized when the product is sold to the end user. Rebates and other incentives paid in connection with these sales are recorded as a reduction of revenue.
Participation revenue on EAs is recorded over the life of the underlying loan.
Interest on loans 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 becomes delinquent.
ADVERTISING EXPENSE – Advertising costs for radio, television and online ads are expensed over the course of the tax season, with print and mailing advertising expensed as incurred. Marketing and advertising expenses totaled $249.1 million, $261.3 million and $297.8 million for fiscal years 2018, 2017 and 2016, respectively.
EMPLOYEE BENEFIT PLANS – We have a 401(k) defined contribution plan covering eligible full-time and seasonal employees following the completion of an eligibility period. Employer contributions to this plan are discretionary and totaled $16.4 million, $13.8 million and $14.3 million for continuing operations in fiscal years 2018, 2017 and 2016, respectively.
We have severance plans covering executives and eligible regular full-time or part-time active employees of a participating employer who incur a qualifying termination. Expenses related to severance benefits of continuing operations totaled $4.0 million, $5.6 million and $12.0 million in fiscal years 2018, 2017 and 2016, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Restricted Cash in Statement of Cash Flows. In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," (ASU 2016-18). This guidance requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows. This guidance must be applied retrospectively to all periods presented. We adopted ASU 2016-18 effective May 1, 2017. All prior periods have been adjusted to conform to the current period presentation, which resulted in an increase in cash provided by operations of $2.1 million and $12.2 million for fiscal years 2017 and 2016, respectively.
Stock-based compensation. In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," (ASU 2016-09). This guidance requires that, among other things: (1) all excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement; and (2) excess tax benefits would not be separated from other income tax cash flows and, thus, would be classified along with other cash flows as an operating activity. The transition requirements for this guidance cover several aspects of share-based payment accounting, but the changes applicable to us were applied prospectively. We adopted ASU 2016-09 effective May 1, 2017. We recorded a discrete tax benefit of $5.2 million related to stock-based compensation during fiscal year 2018.
Leases. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases" (ASU 2016-02), which will require the recognition of lease assets and lease liabilities by lessees for leases previously classified as operating leases. ASU 2016-02 also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. This guidance will be effective for us on May 1, 2019, with early adoption permitted, and requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the impact of ASU 2016-02 on our consolidated financial statements. However we expect the impact of this guidance

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on our consolidated financial statements could be significant, as our future minimum operating lease commitments totaled $820.9 million as of April 30, 2018.
Revenue recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09 which is a comprehensive new revenue recognition model that requires an entity to recognize the amount of revenue which reflects the consideration it expects to receive in exchange for the transfer of the promised goods or services to customers. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract, and clarifies guidance for multiple-element arrangements. This guidance replaced most existing revenue recognition guidance in GAAP when it became effective. The new standard was effective for us on May 1, 2018, and we adopted using the full retrospective transition method. The adoption of this guidance did not have a significant impact on our consolidated financial statements. See note 16 to the consolidated financial statements for additional information.
Income Taxes. In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory," (ASU 2016-16). The new guidance eliminates the exception for intra-entity transfers other than inventory and requires the recognition of current and deferred income taxes resulting from such a transfer when the transfer occurs. This guidance is effective for us on May 1, 2018 on a modified retrospective basis. We will recognize a cumulative-effect adjustment to increase retained earnings by approximately $100 million, which will also result in increases in deferred tax assets and reserves for uncertain tax positions.
NOTE 2: EARNINGS PER SHARE
Basic and diluted earnings per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
Year ended April 30,
 
2018

 
2017

 
2016

Net income from continuing operations attributable to shareholders
 
$
626,909

 
$
420,917

 
$
383,553

Amounts allocated to participating securities
 
(1,492
)
 
(1,005
)
 
(718
)
Net income from continuing operations attributable to common shareholders
 
$
625,417

 
$
419,912

 
$
382,835

 
 
 
 
 
 
 
Basic weighted average common shares
 
208,824

 
212,809

 
249,009

Potential dilutive shares
 
1,389

 
1,286

 
1,809

Dilutive weighted average common shares
 
210,213

 
214,095

 
250,818

Earnings per share from continuing operations attributable to common shareholders:
 
 
 
 
 
 
Basic
 
$
2.99

 
$
1.97

 
$
1.54

Diluted
 
2.98

 
1.96

 
1.53

 
 
 
 
 
 
 
Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 0.6 million, 0.3 million and 0.1 million shares of stock for fiscal years 2018, 2017 and 2016, respectively, as the effect would be antidilutive.

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NOTE 3: RECEIVABLES
Receivables, net of their related allowance, consist of the following:
(in 000s)
 
As of April 30,
 
2018
 
2017
 
 
Short-term

 
Long-term

 
Short-term

 
Long-term

Loans to franchisees
 
$
30,596

 
$
35,212

 
$
39,911

 
$
36,614

Receivables for U.S. assisted and DIY tax preparation and related fees
 
41,572

 
5,503

 
23,025

 
6,316

Instant Cash Back® receivables
 
27,192

 
2,057

 
34,940

 

H&R Block Emerald Advance® lines of credit
 
15,642

 
5,754

 
16,202

 
5,069

Software receivables from retailers
 
6,769

 

 
16,715

 

Royalties and other receivables from franchisees
 
9,239

 
761

 
13,275

 
1,585

Other
 
15,764

 
3,147

 
18,707

 
3,314

 
 
$
146,774

 
$
52,434

 
$
162,775

 
$
52,898

 
 
 
 
 
 
 
 
 
Balances presented above as short-term are included in receivables, while the long-term portions are included in other noncurrent assets in the consolidated balance sheets.
Loans to Franchisees. Franchisee loan balances consist of term loans made primarily to finance the purchase of franchises and revolving lines of credit primarily for the purpose of funding off-season working capital needs. As of April 30, 2018 and 2017, we had $0.1 million loans more than 90 days past due. We had no loans to franchisees on non-accrual status as of April 30, 2018 or 2017.
Instant Cash Back® Program. Instant Cash Back amounts are generally received from the CRA within 60 days of filing the client's return, with the remaining balance collectible from the client. As of April 30, 2018 and 2017, we had $2.7 million and $1.5 million, respectively, of Instant Cash Back balances more than 60 days old.
We review the credit quality of our Instant Cash Back receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. As of April 30, 2018, gross balances of $31.9 million, $0.5 million and $0.7 million, were originated in fiscal years 2018, 2017, and 2016 and prior, respectively.
H&R Block Emerald Advance® lines of credit. These lines of credit are originated by BofI, and we purchase a participation interest in them. We review the credit quality of our EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid.
Beginning in fiscal year 2018, we now charge-off older balances in December while in prior years, these charge-offs happened in April. This change was made to align with our practices on other financial receivables. Current balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by year of origination, are as follows:
 
 
 
 
 
 
 
 
(in 000s)

As of April 30,
 
2018
 
 
 
2017
Year of Origination
 
Current Balance
 
Non-Accrual
 
Year of Origination
 
Current Balance
 
Non-Accrual
 
 
 
 
 
 
 
 
 
 
 
2018
 
$
25,835

 
$
25,835

 
2017
 
$
10,160

 
$
10,160

2017
 
3,955

 
3,955

 
2016
 
4,527

 
4,527

2016 and prior
 
4,502

 
4,502

 
2015 and prior
 
2,709

 
2,709

Revolving loans
 
13,726

 
11,067

 
Revolving loans
 
13,998

 
10,600

 
 
48,018

 
$
45,359

 
 
 
31,394

 
$
27,996

Allowance (1)
 
(26,622
)
 
 
 
Allowance (1)
 
(10,123
)
 
 
Net balance
 
$
21,396

 
 
 
Net balance
 
$
21,271

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
As of April 30, 2018, the allowance relates to estimated uncollectible balances from the 2018 tax season and past due revolving loans. As of April 30, 2017, the allowance related solely to revolving loans.

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Allowance for Doubtful Accounts. Activity in the allowance for doubtful accounts for our receivables is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of May 1, 2015
 
$
7,353

 
$
47,174

 
$
54,527

Provision
 
24,939

 
48,743

 
73,682

Charge-offs
 
(23,285
)
 
(47,913
)
 
(71,198
)
Balances as of April 30, 2016
 
9,007

 
48,004

 
57,011

Provision
 
12,713

 
40,063

 
52,776

Charge-offs
 
(11,597
)
 
(42,894
)
 
(54,491
)
Balances as of April 30, 2017
 
10,123

 
45,173

 
55,296

Provision
 
16,499

 
57,990

 
74,489

Charge-offs
 

 
(47,972
)
 
(47,972
)
Balances as of April 30, 2018
 
$
26,622

 
$
55,191

 
$
81,813

 
 
 
 
 
 
 
In fiscal years 2018 and 2017, we recorded recoveries of $2.9 million and $6.8 million, respectively, on EAs against our allowance, compared to none in fiscal year 2016.
NOTE 4: PROPERTY AND EQUIPMENT
The components of property and equipment, net of accumulated depreciation and amortization, are as follows:
(in 000s)
 
As of April 30,
 
2018

 
2017

Buildings
 
$
62,451

 
$
69,904

Computers and other equipment
 
91,388

 
111,618

Leasehold improvements
 
69,029

 
74,112

Purchased software
 
7,642

 
6,570

Land and other non-depreciable assets
 
1,378

 
1,623

 
 
$
231,888

 
$
263,827

 
 
 
 
 
Depreciation and amortization expense of property and equipment for continuing operations for fiscal years 2018, 2017 and 2016 was $103.4 million, $103.2 million and $100.8 million, respectively.
During fiscal year 2018, we decided to permanently close approximately 400 tax offices after this year's tax season and, as a result, wrote off $7.4 million in related leasehold improvements, furniture and signage. This expense is included in selling, general and administrative expenses in the consolidated statements of income and comprehensive income.

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NOTE 5: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the years ended April 30, 2018 and 2017 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of May 1, 2016
 
$
503,054

 
$
(32,297
)
 
$
470,757

Acquisitions
 
19,261

 

 
19,261

Disposals and foreign currency changes, net
 
1,189

 

 
1,189

Impairments
 

 

 

Balances as of April 30, 2017
 
523,504

 
(32,297
)
 
491,207

Acquisitions
 
15,983

 

 
15,983

Disposals and foreign currency changes, net
 
681

 

 
681

Impairments
 

 

 

Balances as of April 30, 2018
 
$
540,168

 
$
(32,297
)
 
$
507,871

 
 
 
 
 
 
 
We tested goodwill for impairment in the fourth quarter of fiscal year 2018, and did not identify any impairment.
Components of intangible assets are as follows:
(in 000s)
 
As of April 30,
 
2018
 
2017
 
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

Reacquired franchise rights
 
$
339,779

 
$
(113,856
)
 
$
225,923

 
$
331,150

 
$
(90,877
)
 
$
240,273

Customer relationships
 
256,137

 
(164,005
)
 
92,132

 
234,603

 
(133,207
)
 
101,396

Internally-developed software
 
140,255

 
(111,734
)
 
28,521

 
139,709

 
(108,379
)
 
31,330

Noncompete agreements
 
32,899

 
(29,673
)
 
3,226

 
32,408

 
(27,559
)
 
4,849

Franchise agreements
 
19,201

 
(12,054
)
 
7,147

 
19,201

 
(10,774
)
 
8,427

Purchased technology
 
54,700

 
(37,770
)
 
16,930

 
54,700

 
(31,973
)
 
22,727

Acquired assets pending final allocation (1)
 
102

 

 
102

 
362

 

 
362

 
 
$
843,073

 
$
(469,092
)
 
$
373,981

 
$
812,133

 
$
(402,769
)
 
$
409,364

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)    Represents recent business acquisitions for which final purchase price allocations have not yet been determined.
The increase in the gross carrying amount of intangible assets resulted primarily from the acquisition of approximately 110 offices to our company-owned network. The amounts and weighted-average lives of assets acquired or added during fiscal year 2018 are as follows:
(dollars in 000s)
 
 
Amount

 
Weighted-Average Life (in years)
Reacquired franchise rights
 
$
8,480

 
5
Customer relationships
 
24,518

 
6
Internally-developed software
 
16,821

 
2
Noncompete agreements
 
453

 
5
Total
 
$
50,272

 
4
 
 
 
 
 
Amortization of intangible assets of continuing operations for the years ended April 30, 2018, 2017 and 2016 was $79.9 million, $78.9 million and $72.8 million, respectively. Estimated amortization of intangible assets for fiscal years 2019, 2020, 2021, 2022 and 2023 is $68.6 million, $51.9 million, $36.5 million, $25.2 million and $13.4 million, respectively.

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NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
(in 000s)
 
As of April 30,
 
2018

 
2017

Senior Notes, 4.125%, due October 2020
 
$
650,000

 
$
650,000

Senior Notes, 5.500%, due November 2022
 
500,000

 
500,000

Senior Notes, 5.250%, due October 2025
 
350,000

 
350,000

Capital lease obligation, due over the next 5 years
 
5,628

 
6,610

Debt issuance costs and discounts
 
(9,993
)
 
(12,612
)
 
 
1,495,635

 
1,493,998

Less: Current portion
 
(1,026
)
 
(981
)
 
 
$
1,494,609

 
$
1,493,017

 
 
 
 
 
UNSECURED COMMITTED LINE OF CREDIT – On September 22, 2017, we entered into a Second Amended and Restated Credit and Guarantee Agreement (2017 CLOC), which further amended our First Amended and Restated Credit and Guarantee Agreement (2016 CLOC), extending the scheduled maturity date from September 22, 2021 to September 22, 2022. Other material terms remain unchanged from our 2016 CLOC. The 2017 CLOC provides for an unsecured senior revolving credit facility in the aggregate principal amount of $2.0 billion, which includes a $200.0 million sublimit for swingline loans and a $50.0 million sublimit for standby letters of credit. We may request increases in the aggregate principal amount of the revolving credit facility of up to $500.0 million, subject to obtaining commitments from lenders and meeting certain other conditions. The 2017 CLOC will mature on September 22, 2022, unless extended pursuant to the terms of the 2017 CLOC, at which time all outstanding amounts thereunder will be due and payable. The 2017 CLOC includes an annual facility fee, which will vary depending on our then current credit ratings.
The 2017 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on April 30, July 31, and October 31 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur certain additional debt, incur liens, merge or consolidate with other companies, sell or dispose of assets (including equity interests), liquidate or dissolve, engage in certain transactions with affiliates or enter into certain restrictive agreements. The 2017 CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the 2017 CLOC may be used for working capital needs or for other general
corporate purposes. We were in compliance with these requirements as of April 30, 2018.
As of April 30, 2018, amounts available to borrow under the 2017 CLOC were limited by the debt-to-EBITDA covenant to approximately $1.7 billion; however, our cash needs at April 30 generally do not require us to borrow on our CLOC at that time, and we had no balance outstanding under the 2017 CLOC as of April 30, 2018.
SENIOR NOTES – On September 25, 2015, we issued $650.0 million of 4.125% Senior Notes due October 1, 2020, and $350.0 million of 5.250% Senior Notes due October 1, 2025. The Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. Proceeds of the Senior Notes issued in September 2015, along with cash on hand, were used to repurchase shares in fiscal year 2016, as discussed in note 7.
On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes due November 1, 2022. The Senior Notes are not redeemable by the bondholders prior to maturity.
The interest rates on our Senior Notes are subject to adjustment based upon our credit ratings.

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OTHER INFORMATION – The aggregate payments required to retire long-term debt are $1.0 million, $1.1 million, $651.1 million, $1.2 million, $501.2 million and $350.0 million in fiscal years 2019, 2020, 2021, 2022, 2023 and beyond, respectively.
The estimated fair value of our long-term debt as of April 30, 2018 and 2017 totaled $1.5 billion and $1.6 billion, respectively.
NOTE 7: STOCKHOLDERS' EQUITY
We had no repurchases or retirements of common stock in fiscal year 2018. During fiscal year 2017, we repurchased and immediately retired 14.0 million shares of common stock at an aggregate cost of $317.0 million, or an average price of $22.61 per share. During fiscal year 2016, we repurchased and immediately retired 56.4 million shares of common stock at an aggregate cost of $2.0 billion, or an average price of $35.46 per share.
As of April 30, 2018 and 2017, substantially all of the balance of our accumulated comprehensive loss consisted of foreign currency translation adjustments.
NOTE 8: STOCK-BASED COMPENSATION
We have a stock-based Long Term Incentive Plan (Plan), under which we can grant stock options, restricted shares, performance-based share units, restricted share units, deferred stock units and other forms of equity to employees, non-employee directors and consultants. Stock-based compensation expense of our continuing operations totaled $22.0 million, $19.3 million and $23.5 million in fiscal years 2018, 2017 and 2016, respectively, net of related tax benefits of $6.9 million, $6.0 million and $9.5 million, respectively. We realized tax benefits of $15.3 million, $5.9 million and $20.9 million in fiscal years 2018, 2017 and 2016, respectively.
As of April 30, 2018, we had 14.6 million shares reserved for future awards under our Plan. We issue shares from our treasury stock to satisfy the exercise or vesting of stock-based awards and believe we have adequate treasury stock balances available for future issuances.
We measure the fair value of options on the grant date or modification date using the Black-Scholes-Merton (Black-Scholes) option valuation model based upon the expected term of the options. We measure the fair value of nonvested shares and share units based on the closing price of our common stock on the grant date. We measure the fair value of performance-based share units based on the Monte Carlo valuation model, taking into account as necessary those provisions of the performance-based nonvested share units that are characterized as market conditions. We generally expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis.
Options, nonvested shares and nonvested share units (other than performance-based nonvested share units) granted to employees typically vest pro-rata based upon service over a three-year period with a portion vesting each year. Performance-based nonvested share units granted to employees typically cliff vest at the end of a three-year period based upon satisfaction of both service-based and performance-based requirements. The number of performance-based share units that ultimately vest can range from zero up to 250 percent of the number granted, based on the form of the award, which can vary by year of grant. The performance metrics for these awards typically consist of earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA growth, return on equity, return on invested capital, total shareholder return or our stock price. Deferred stock units granted to non-employee directors vest when they are granted and are settled six months after the director separates from service as a director of the Company, except in the case of death.
All share units granted to employees and non-employee directors receive cumulative dividend equivalents to the extent of the units ultimately vesting at the time of distribution. Options granted under our Plan have a maximum contractual term of ten years.

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NONVESTED SHARES AND SHARE UNITS – A summary of nonvested shares, nonvested share units and deferred stock units, including those that are performance-based, for the year ended April 30, 2018, is as follows:
(shares in 000s)
 
 
 
Nonvested Shares and Nonvested Share Units
 
Performance-Based Nonvested Share Units
 
 
Shares
 
Weighted-Average
Grant Date 
Fair Value

 
Shares
 
Weighted-Average
Grant Date 
Fair Value

Outstanding, beginning of the year
 
1,616

 
$
23.50

 
1,099

 
$
30.22

Granted
 
667

 
30.03

 
273

 
32.66

Released
 
(635
)
 
24.11

 
(197
)
 
37.20

Forfeited
 
(109
)
 
28.22

 
(48
)
 
29.55

Outstanding, end of the year
 
1,539

 
$
25.54

 
1,127

 
$
29.01

 
 
 
 
 
 
 
 
 
The total fair value of shares and units vesting during fiscal years 2018, 2017 and 2016 was $22.6 million, $20.3 million and $28.8 million, respectively. As of April 30, 2018, we had $30.5 million of total unrecognized compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of two years.
When valuing our performance-based nonvested share units on the grant date, we typically estimate the expected volatility using historical volatility for H&R Block, Inc. and selected comparable companies. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term. The following assumptions were used to value performance-based nonvested share units using the Monte Carlo valuation model during the periods:
Year ended April 30,
 
2018

 
2017

 
2016

Expected volatility
 
13.33% - 81.19%

 
13.92% - 74.53%

 
12.85% - 55.27%

Expected term
 
3 years

 
3 years

 
3 years

Dividend yield (1)
 
0% - 3.23%

 
0% - 3.68%

 
0% - 2.70%

Risk-free interest rate
 
1.42% - 1.55%

 
0.84
%
 
0.95
%
Weighted-average fair value
 
$
32.66

 
$
25.38

 
$
30.00

 
 
 
 
 
 
 
(1) 
The valuation model assumes that dividends are reinvested by the Company on a continuous basis.
STOCK OPTIONS A summary of options for the fiscal year ended April 30, 2018, is as follows:
(in 000s, except per share amounts)
 
 
 
Shares

 
Weighted-Average
Exercise Price

 
Weighted-Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value

Outstanding, beginning of the year
 
1,702

 
$
17.99

 
 
 
 
Granted
 
274

 
29.73

 
 
 
 
Exercised
 
(1,495
)
 
17.94

 
 
 
 
Forfeited or expired
 

 

 
 
 
 
Outstanding, end of the year
 
481

 
$
24.84

 
7 years
 
$
1,965

 
 
 
 
 
 
 
 
 
Exercisable, end of the year
 
190

 
$
18.08

 
4 years
 
$
1,853

Exercisable and expected to vest
 
435

 
$
24.34

 
7 years
 
$
1,958

 
 
 
 
 
 
 
 
 
The total intrinsic value of options exercised during fiscal years 2018, 2017 and 2016 was $18.9 million, $1.0 million and $11.7 million, respectively. As of April 30, 2018, we had $1.1 million of total unrecognized compensation cost related to outstanding options. The cost is expected to be recognized over a weighted-average period of two years.

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When valuing our options on the grant date, we typically estimate the expected volatility using our historical stock price data. We also use historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term.
The weighted-average fair values for stock options granted during fiscal years 2018, 2017 and 2016 were $5.02, $3.31 and $5.28, respectively.

NOTE 9: INCOME TAXES
We file a consolidated federal income tax return in the U.S. with the Internal Revenue Service (IRS) and file tax returns in various state, local, and foreign jurisdictions. Tax returns are typically examined and either settled upon completion of the examination or through the appeals process. Our U.S. federal income tax returns for 2015 and 2016 have not been audited and remain open to examination. During the current quarter, the IRS completed its examination of our 2014 federal income tax return with no significant adjustments made. As a result, we consider 2014 to be closed for federal income tax purposes. Our U.S. federal income tax returns for 2013 and all prior periods are closed. With respect to state and local jurisdictions and countries outside of the United States, we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of the tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits.
On December 22, 2017, the U.S. government enacted Tax Legislation, which makes broad and complex changes to the U.S. tax code that impacted our financial statements, the most significant being a reduction in the U.S. federal corporate income tax rate from 35% to 21% and the imposition of a one-time transition tax on certain earnings of foreign subsidiaries. In addition, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of Tax Legislation. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Legislation’s enactment date for companies to complete their analysis and apply the provisions of Tax Legislation to their financial statements. To the extent a company’s accounting for certain income tax effects of Tax Legislation is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of Tax Legislation.
During the fourth quarter of fiscal year 2018, we continued our assessment of the corporate income tax impacts expected to result from Tax Legislation. Significant impacts of Tax Legislation to our financial statements include (1) a decrease to current income taxes payable compared to the prior year due to the decrease in the corporate income tax rate from 35% to 21%, (2) re-measurement of our deferred tax assets and liabilities, (3) the repeal of the domestic production activities deduction (DPAD), (4) accrual of a transition tax liability, which is payable in installments over a period of up to eight years, and (5) the tax on Global Intangible Low Taxed Income (GILTI). The Company considers the impact of the repeal of the DPAD as recorded in our April 30, 2018 financial statements to be final. Our financial statements reflect reasonable provisional estimates of the effects of Tax Legislation in computing our deferred taxes, the one-time transition tax, the impact of GILTI, unrecognized tax benefits, and, the indirect impacts of Tax Legislation on state and local taxes. During the three month period ending April 30, 2018, the Company recognized immaterial adjustments to the provisional amounts recorded at January 31, 2018 and included these adjustments as a component of tax expense from continuing operations.
We are in the process of finalizing our assessment of the impact of Tax Legislation and our provisional estimates may change as a result of additional analysis of the underlying calculations or additional regulatory guidance that clarifies the interpretations of Tax Legislation. Additionally, due to the complexity of Tax Legislation as it related to GILTI, we are continuing to evaluate how the income tax provision will be accounted for under U.S. GAAP, which permits companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the company is subject to the rules, or (ii) account for GILTI in the company’s measurement of deferred taxes. Currently, we have not elected a method and will do so only after we complete our analysis of the GILTI provisions.

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The components of income from continuing operations upon which domestic and foreign income taxes have been provided are as follows:
(in 000s)
 
Year ended April 30,
 
2018

 
2017

 
2016

Domestic
 
$
547,101

 
$
535,378

 
$
513,746

Foreign
 
121,631

 
93,909

 
55,733

 
 
$
668,732

 
$
629,287

 
$
569,479

 
 
 
 
 
 
 
Foreign income consists principally of intercompany transactions and our tax operations in Canada and Australia.
The reconciliation between the income tax provision and the amount computed by applying the statutory U.S. federal tax rate to income taxes of continuing operations is as follows:
Year ended April 30,
 
2018

 
2017

 
2016

U.S. statutory tax rate
 
21.0
 %
 
35.0
 %
 
35.0
 %
Change in tax rate resulting from:
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
2.2
 %
 
1.6
 %
 
2.2
 %
Earnings taxed in foreign jurisdictions
 
(4.9
)%
 
(4.6
)%
 
(2.0
)%
Permanent differences
 
0.4
 %
 
(0.4
)%
 
(0.2
)%
Uncertain tax positions
 
3.6
 %
 
4.3
 %
 
2.8
 %
Remeasurement of deferred tax assets and liabilities
 
(2.6
)%
 
 %
 
 %
Tax benefit due to effective date of statutory rate change
 
(15.9
)%
 
 %
 
 %
One-time transition tax
 
2.9
 %
 
 %
 
 %
Tax deductible write-down of foreign investment
 
(2.4
)%
 
 %
 
 %
Change in valuation allowance - domestic
 
1.1
 %
 
(0.1
)%
 
 %
Change in valuation allowance - foreign (1)
 
2.9
 %
 
0.3
 %
 
(0.5
)%
Significant state apportionment changes
 
 %
 
 %
 
(4.3
)%
Other
 
(2.0
)%
 
(3.0
)%
 
(0.3
)%
Effective tax rate
 
6.3
 %
 
33.1
 %
 
32.7
 %
 
 
 
 
 
 
 
(1) Primarily relates to the tax deductible write-down of foreign investment.
The effective tax rate for fiscal year 2018 decreased 26.8% compared to the prior year. The reduced effective tax rate results primarily from the decrease in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The impact of the rate decrease is exaggerated in fiscal year 2018 due to the seasonality of our business and our differing year ends for corporate income tax filing and financial reporting purposes, which is included as "tax benefit due to effective date of statutory rate change" in the table above. Our tax returns for the U.S. are filed on a calendar year-end basis. Therefore, pretax losses for the eight months ended December 31, 2017 resulted in income tax benefits based on the statutory rate of 35%, while the pretax income generated in the four months ended April 30, 2018 was taxed at the statutory rate of 21%.

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The components of income tax expense (benefit) for continuing operations are as follows:
(in 000s)
 
Year ended April 30,
 
2018

 
2017

 
2016

Current:
 
 
 
 
 
 
Federal
 
$
(53,630
)
 
$
147,961

 
$
167,233

State
 
25,240

 
15,118

 
(26,980
)
Foreign
 
9,953

 
10,678

 
8,735

 
 
(18,437
)
 
173,757

 
148,988

Deferred:
 
 
 
 
 
 
Federal
 
50,505

 
39,299

 
19,937

State
 
24,666

 
(5,064
)
 
13,801

Foreign
 
(14,911
)
 
378

 
3,200

 
 
60,260

 
34,613

 
36,938

Total income taxes for continuing operations
 
$
41,823

 
$
208,370

 
$
185,926

 
 
 
 
 
 
 
The negative current federal income tax is driven primarily by the decrease in the federal income tax rate combined with the seasonality of our business and the differing year ends for corporate income tax filing and financial reporting purposes.
The net loss from discontinued operations for fiscal years 2018, 2017 and 2016 totaled $13.8 million, $12.0 million and $9.3 million, respectively, and was net of tax benefits of $7.0 million, $7.0 million and $5.4 million, respectively.
The significant components of deferred tax assets and liabilities are reflected in the following table:
<
(in 000s)
 
As of April 30,
 
2018

 
2017

Deferred tax assets:
 
 
 
 
Accrued expenses
 
$
3,847

 
$
4,491

Deferred revenue
 
9,482

 
36,305

Allowance for credit losses and related reserves
 
25,058