H&R BLOCK INC 10-K

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 the fiscal year ended June 30, 2022, the Transition Period ended June 30, 2021, and for the fiscal years ended April 30, 2021 and April 30, 2020. 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 June 30, 2022. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2022, 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 H&R Block, Inc. | 2022 Form 10-K 37 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 June 30, 2022, June 30, 2021 and April 30, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows, for the year ended June 30, 2022, for the two months ended June 30, 2021 (Transition Period) and for the years ended April 30, 2021 and 2020, 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 June 30, 2022, June 30, 2021 and April 30, 2021, and the results of its operations and its cash flows for the year ended June 30, 2022, for the two months ended June 30, 2021 (Transition Period) and for the years ended April 30, 2021 and 2020, 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 June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 16, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Income Taxes - Uncertain Tax Positions - Refer to Note 9 to the consolidated financial statements Critical Audit Matter Description The Company operates in multiple income tax jurisdictions both within the United States and internationally. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on transfer pricing analyses of comparable companies and predictions of future economic conditions. Transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact the mix of earnings in countries with differing statutory tax rates. The Company accrues a liability for unrecognized tax benefits arising from uncertain tax positions reflecting their judgment as to the ultimate resolution of the applicable issues. For each position, management considers all applicable information including relevant tax laws, the taxing authorities' potential position, management’s tax return position, and the 38 2022 Form 10-K | H&R Block, Inc. possible settlement outcomes to determine the amount of liability to record. The Company’s unrecognized tax benefits as of June 30, 2022, were $232 million. We identified the Company’s determination of uncertain tax positions measured in accordance with the Company’s transfer pricing policies as a critical audit matter because of the significant judgment in the application of the tax law in applying the arm’s length standard to intercompany transactions and scrutiny by local tax authorities. The significant level of judgment increases the uncertainty in evaluating the valuation of tax balances, including any uncertain tax positions that relate to the Company’s transfer pricing. As a result, we utilized a high degree of auditor judgment and increased the extent of work performed, including involving our income tax specialists to evaluate whether management’s judgments in interpreting and applying tax laws were appropriate. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s uncertain tax positions for transfer pricing included the following, among others: • We tested the effectiveness of controls over management’s evaluation and determination of uncertain tax positions. This evaluation includes management’s assessment of tax positions taken by the Company on its tax returns, including transfer pricing terms and conditions, and the related recorded amounts for uncertain tax positions. • With the assistance of our income tax specialists, we evaluated the Company’s transfer pricing methodologies and performed the following: ◦ Evaluated the appropriateness of management’s application of jurisdictional tax regulations in applying the arm’s length standard to intercompany transactions. ◦ Evaluated the application of the transfer pricing method to transactions subject to transfer pricing. ◦ Tested the application of the transfer pricing policies by legal entity through an independent calculation. ◦ Evaluated management’s approach to identifying uncertain tax positions related to changes in the transfer pricing terms and conditions and tested the calculation of the tax positions at the individual legal entity level and at the consolidated level. Litigation and Other Related Contingencies - Indemnification Claims - Refer to Note 12 to the consolidated financial statements Critical Audit Matter Description Sand Canyon Corporation (SCC) ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008. SCC has been and may in the future be, subject to indemnification claims pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. Parties including underwriters, depositors, and securitization trustees have been, remain, or may in the future be involved in lawsuits, threatened lawsuits, or settlements related to securitization transactions in which SCC participated. SCC has received notices of potential indemnification obligations relating to such matters and additional lawsuits against the parties to the securitization transactions may be filed in the future and SCC may receive additional notices of potential indemnification. The Company has not established a liability because they have not determined that it is probable that a liability for a loss contingency has been incurred. We have identified the potential liability and disclosure of indemnification claims as a critical audit matter because of the significant amount of judgment required by management in 1) assessing the completeness of available information used in its loss contingency analysis, 2) interpreting and applying relevant laws, 3) predicting outcomes of a litigation and 4) determining SCC’s contractual responsibilities related to the securitization transactions. Given the subjective nature of audit evidence available for indemnification claims, auditing the Company’s conclusion required significant auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the potential liabilities for the indemnification claims included the following, among others: H&R Block, Inc. | 2022 Form 10-K 39 • We tested the effectiveness of management’s internal controls related to the evaluation of potential liabilities from indemnification claims, including controls over the completeness of management’s evaluation of indemnification claims and the disclosure of such matters. • We evaluated the reasonableness of the Company’s determination of potential liabilities from indemnification claims and their conclusion that it is not probable that a liability for a loss contingency has been incurred or that the amount of loss or range of loss cannot be reasonably estimated. • We tested the completeness of management’s evaluation by independently obtaining legal inquiry letters and searching external sources for corroborating and contradictory evidence. • We evaluated the Company’s disclosures for completeness and clarity of the information disclosed. /s/ Deloitte & Touche LLP Kansas City, Missouri August 16, 2022 We have served as the Company's auditor since 2007. 40 2022 Form 10-K | H&R Block, Inc. 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 June 30, 2022, 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 June 30, 2022, 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 June 30, 2022, of the Company and our report dated August 16, 2022, 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 August 16, 2022 H&R Block, Inc. | 2022 Form 10-K 41 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in 000s, except per share amounts) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 REVENUES: Service revenues $ 3,134,686 $ 427,575 $ 3,067,223 $ 2,327,323 Royalty, product and other revenues 328,584 38,531 346,764 312,397 3,463,270 466,106 3,413,987 2,639,720 OPERATING EXPENSES: Costs of revenues 1,881,262 232,763 1,842,092 1,712,276 Impairment of goodwill — — — 106,000 Selling, general and administrative 837,111 98,988 802,268 744,361 Total operating expenses 2,718,373 331,751 2,644,360 2,562,637 Other income (expense), net 2,454 672 5,979 15,637 Interest expense on borrowings ( 88,282 ) ( 14,032 ) ( 106,870 ) ( 96,094 ) Income (loss) from continuing operations before income taxes (benefit) 659,069 120,995 668,736 ( 3,374 ) Income taxes (benefit) 98,423 29,876 78,524 ( 9,530 ) Net income from continuing operations 560,646 91,119 590,212 6,156 Net loss from discontinued operations, net of tax benefits of $ 2,093 , $ 451 , $ 3,883 and $ 4,085 ( 6,972 ) ( 1,509 ) ( 6,421 ) ( 13,682 ) NET INCOME (LOSS) $ 553,674 $ 89,610 $ 583,791 $ ( 7,526 ) BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ 3.31 $ 0.50 $ 3.15 $ 0.03 Discontinued operations ( 0.04 ) ( 0.01 ) ( 0.04 ) ( 0.07 ) Consolidated $ 3.27 $ 0.49 $ 3.11 $ ( 0.04 ) DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ 3.26 $ 0.49 $ 3.11 $ 0.03 Discontinued operations ( 0.04 ) ( 0.01 ) ( 0.03 ) ( 0.07 ) Consolidated $ 3.22 $ 0.48 $ 3.08 $ ( 0.04 ) COMPREHENSIVE INCOME (LOSS): Net income (loss) $ 553,674 $ 89,610 $ 583,791 $ ( 7,526 ) Change in foreign currency translation adjustments ( 21,733 ) ( 4,698 ) 56,362 ( 31,160 ) Other comprehensive income (loss) ( 21,733 ) ( 4,698 ) 56,362 ( 31,160 ) Comprehensive income (loss) $ 531,941 $ 84,912 $ 640,153 $ ( 38,686 ) See accompanying notes to consolidated financial statements. 42 2022 Form 10-K | H&R Block, Inc. CONSOLIDATED BALANCE SHEETS (in 000s, except share and per share amounts) As of June 30, 2022 June 30, 2021 April 30, 2021 ASSETS Cash and cash equivalents $ 885,015 $ 1,434,381 $ 934,251 Cash and cash equivalents - restricted 165,698 149,783 128,669 Receivables, less allowance for doubtful accounts of $ 65,351 , $ 77,518 and $ 70,689 58,447 88,932 197,876 Income taxes receivable 202,838 330,872 333,366 Prepaid expenses and other current assets 72,460 76,414 105,562 Total current assets 1,384,458 2,080,382 1,699,724 Property and equipment, at cost, less accumulated depreciation and amortization of $ 857,468 , $ 842,861 and $ 832,885 123,912 139,276 148,490 Operating lease right of use asset 427,783 445,847 437,246 Intangible assets, net 309,644 351,093 360,148 Goodwill 760,401 754,521 757,659 Deferred tax assets and income taxes receivable 208,948 181,996 182,848 Other noncurrent assets 54,012 61,273 67,531 Total assets $ 3,269,158 $ 4,014,388 $ 3,653,646 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued expenses $ 160,929 $ 164,269 $ 198,084 Accrued salaries, wages and payroll taxes 154,764 168,989 270,982 Accrued income taxes and reserves for uncertain tax positions 280,115 238,863 287,404 Operating lease liabilities 206,898 214,190 206,393 Deferred revenue and other current liabilities 196,107 196,175 200,216 Total current liabilities 998,813 982,486 1,163,079 Long-term debt 1,486,876 1,983,719 1,490,039 Deferred tax liabilities and reserves for uncertain tax positions 226,362 301,658 279,351 Operating lease liabilities 228,820 244,932 242,626 Deferred revenue and other noncurrent liabilities 116,656 113,535 126,150 Total liabilities 3,057,527 3,626,330 3,301,245 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, stated value $ .01 per share, 800,000,000 shares authorized, shares issued of 193,571,309 , 216,665,616 and 216,655,616 1,936 2,167 2,167 Additional paid-in capital 772,182 779,465 783,292 Accumulated other comprehensive income (loss) ( 21,645 ) 88 4,786 Retained earnings 120,405 286,694 248,506 Less treasury shares, at cost, of 33,640,988 , 34,842,125 and 35,189,707 ( 661,247 ) ( 680,356 ) ( 686,350 ) Total stockholders' equity 211,631 388,058 352,401 Total liabilities and stockholders' equity $ 3,269,158 $ 4,014,388 $ 3,653,646 See accompanying notes to consolidated financial statements. H&R Block, Inc. | 2022 Form 10-K 43 CONSOLIDATED STATEMENTS OF CASH FLOWS (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 553,674 $ 89,610 $ 583,791 $ ( 7,526 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 142,178 24,586 156,852 169,536 Provision for bad debt 66,807 4,617 73,451 76,621 Deferred taxes ( 53,352 ) 22,926 ( 22,583 ) ( 8,300 ) Stock-based compensation 34,252 4,700 28,271 28,045 Impairment of goodwill — — — 106,000 Changes in assets and liabilities, net of acquisitions: Receivables ( 37,889 ) 108,470 ( 150,933 ) ( 66,896 ) Prepaid expenses, other current and noncurrent assets ( 1,944 ) 26,753 ( 49,498 ) 39,377 Accounts payable, accrued expenses, salaries, wages and payroll taxes ( 19,645 ) ( 186,754 ) 150,635 ( 124,019 ) Deferred revenue, other current and noncurrent liabilities 7,342 ( 15,809 ) ( 1,160 ) ( 9,096 ) Income tax receivables, accrued income taxes and income tax reserves 118,713 ( 43,476 ) ( 138,152 ) ( 87,423 ) Other, net ( 1,599 ) ( 797 ) ( 4,746 ) ( 7,358 ) Net cash provided by operating activities 808,537 34,826 625,928 108,961 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 61,955 ) ( 5,188 ) ( 52,792 ) ( 81,685 ) Payments made for business acquisitions, net of cash acquired ( 35,920 ) ( 846 ) ( 15,576 ) ( 450,242 ) Franchise loans funded ( 18,467 ) ( 135 ) ( 26,917 ) ( 35,264 ) Payments from franchisees 30,899 8,634 41,215 39,919 Other, net 8,902 1,227 8,547 57,041 Net cash provided by (used in) investing activities ( 76,541 ) 3,692 ( 45,523 ) ( 470,231 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of line of credit borrowings ( 705,000 ) — ( 3,275,000 ) ( 1,335,000 ) Proceeds from line of credit borrowings 705,000 — 1,275,000 3,335,000 Repayments of long-term debt ( 500,000 ) — ( 650,000 ) — Proceeds from issuance of long-term debt — 494,435 647,965 — Dividends paid ( 186,476 ) — ( 195,068 ) ( 204,870 ) Repurchase of common stock, including shares surrendered ( 563,174 ) ( 4,633 ) ( 191,294 ) ( 256,214 ) Proceeds from exercise of stock options 6,334 308 2,140 2,075 Other, net ( 14,030 ) ( 5,584 ) ( 22,566 ) ( 9,143 ) Net cash provided by (used in) financing activities ( 1,257,346 ) 484,526 ( 2,408,823 ) 1,531,848 Effects of exchange rate changes on cash ( 8,101 ) ( 1,800 ) 18,318 ( 5,285 ) Net increase (decrease) in cash and cash equivalents, including restricted balances ( 533,451 ) 521,244 ( 1,810,100 ) 1,165,293 Cash, cash equivalents and restricted cash, beginning of the period 1,584,164 1,062,920 2,873,020 1,707,727 Cash, cash equivalents and restricted cash, end of the period $ 1,050,713 $ 1,584,164 $ 1,062,920 $ 2,873,020 SUPPLEMENTARY CASH FLOW DATA: Income taxes paid, net of refunds received $ 31,689 $ 52,149 $ 236,459 $ 89,204 Interest paid on borrowings 81,960 14,317 103,855 87,426 Accrued additions to property and equipment 4,315 2,085 1,643 1,185 Accrued dividends payable to common shareholders 43,093 48,998 — — See accompanying notes to consolidated financial statements. 44 2022 Form 10-K | H&R Block, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in 000s, except per share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) (1) Retained Earnings Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balances as of May 1, 2019 238,337 $ 2,383 $ 767,636 $ ( 20,416 ) $ 499,386 ( 36,377 ) $ ( 707,462 ) $ 541,527 Net loss — — — — ( 7,526 ) — — ( 7,526 ) Other comprehensive loss — — — ( 31,160 ) — — — ( 31,160 ) Stock-based compensation — — 27,848 — — — — 27,848 Stock-based awards exercised or vested — — ( 14,019 ) — ( 3,419 ) 969 18,874 1,436 Acquisition of treasury shares (2) — — — — — ( 323 ) ( 9,429 ) ( 9,429 ) Repurchase and retirement of common shares ( 10,130 ) ( 101 ) ( 6,078 ) — ( 240,606 ) — — ( 246,785 ) Cash dividends declared - $ 1.04 per share — — — — ( 204,870 ) — — ( 204,870 ) Balances as of April 30, 2020 228,207 $ 2,282 $ 775,387 $ ( 51,576 ) $ 42,965 ( 35,731 ) $ ( 698,017 ) $ 71,041 Net income — — — — 583,791 — — 583,791 Other comprehensive income — — — 56,362 — — — 56,362 Stock-based compensation — — 26,138 — — — — 26,138 Stock-based awards exercised or vested — — ( 11,417 ) — ( 1,900 ) 755 14,748 1,431 Acquisition of treasury shares (2) — — — — — ( 214 ) ( 3,081 ) ( 3,081 ) Repurchase and retirement of common shares ( 11,551 ) ( 115 ) ( 6,816 ) — ( 181,282 ) — — ( 188,213 ) Cash dividends declared - $ 1.04 per share — — — — ( 195,068 ) — — ( 195,068 ) Balances as of April 30, 2021 216,656 $ 2,167 $ 783,292 $ 4,786 $ 248,506 ( 35,190 ) $ ( 686,350 ) $ 352,401 Net income — — — — 89,610 — — 89,610 Other comprehensive loss — — — ( 4,698 ) — — — ( 4,698 ) Stock-based compensation — — 4,285 — — — — 4,285 Stock-based awards exercised or vested — — ( 8,112 ) — ( 2,424 ) 545 10,627 91 Acquisition of treasury shares (2) — — — — — ( 197 ) ( 4,633 ) ( 4,633 ) Cash dividends declared - $ 0.27 per share — — — — ( 48,998 ) — — ( 48,998 ) Balances as of June 30, 2021 216,656 $ 2,167 $ 779,465 $ 88 $ 286,694 ( 34,842 ) $ ( 680,356 ) $ 388,058 Net income — — — — 553,674 — — 553,674 Other comprehensive loss — — — ( 21,733 ) — — — ( 21,733 ) Stock-based compensation — — 28,189 — — — — 28,189 Stock-based awards exercised or vested — — ( 21,622 ) — ( 3,126 ) 1,634 31,937 7,189 Acquisition of treasury shares (2) — — — — — ( 433 ) ( 12,828 ) ( 12,828 ) Repurchase and retirement of common shares ( 23,085 ) ( 231 ) ( 13,850 ) — ( 536,265 ) — — ( 550,346 ) Cash dividends declared - $ 1.08 per share — — — — ( 180,572 ) — — ( 180,572 ) Balances as of June 30, 2022 193,571 $ 1,936 $ 772,182 $ ( 21,645 ) $ 120,405 ( 33,641 ) $ ( 661,247 ) $ 211,631 (1) The balance of our accumulated other comprehensive income (loss) consists of foreign currency translation adjustments. (2) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. See accompanying notes to consolidated financial statements. H&R Block, Inc. | 2022 Form 10-K 45 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, virtual, and desktop software) and distribute H&R Block-branded services and products, including those of our bank partners, to the general public primarily in the United States (U.S.), Canada and Australia. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices, virtually or via an internet review) or prepared and filed by our clients through our DIY tax solutions. We also offer small business solutions through our company-owned or franchise offices and online through Wave. "H&R Block," "the Company," "we," "our" and "us" are used interchangeably to refer to H&R Block, Inc., to H&R Block, Inc. and its subsidiaries, or to H&R Block, Inc.'s operating subsidiaries, as appropriate to the context. 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 note 12 for additional information on loss contingencies related to our discontinued operations. SEGMENT INFORMATION – We report a single segment that includes all of our continuing 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, and fair value of reporting units. 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. CHANGE IN FISCAL YEAR END – On June 9, 2021, the Board of Directors approved a change of the Company's fiscal year end from April 30 to June 30. The Company's 2022 fiscal year began on July 1, 2021 and ended on June 30, 2022. As a result of this change, the Company filed a Transition Report on Form 10-Q that included financial information for the transition period from May 1, 2021 to June 30, 2021 (Transition Period). 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 $ 2.7 million, $ 1.4 million and $ 2.9 million as of June 30, 2022, June 30, 2021 and April 30, 2021, 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. 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 the fiscal year the outstanding balances on these receivables are evaluated based on collections received and expected collections over subsequent tax seasons. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value. 46 2022 Form 10-K | H&R Block, Inc. 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 H&R Block's Instant Refund SM (Instant Refund). Our accounting policies related to receivables and related allowances are discussed further in note 4 . PROPERTY AND EQUIPMENT – Buildings, equipment and leasehold improvements are initially recorded at cost and are depreciated over the estimated useful life of the assets 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. 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 during our third quarter, 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. Intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See additional discussion in note 6 . LEASES – Operating lease right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. The majority of our lease portfolio consists of retail office space in the U.S., Canada, and Australia. The contract terms for these retail offices generally are from May 1 to April 30, and generally run two to five years . We record operating lease ROU assets and operating lease liabilities based on the discounted future minimum lease payments over the term of the lease. We generally do not include renewal options in the term of the lease. As the rates implicit in our leases are not readily determinable, we use our incremental borrowing rate based on the lease term and geographic location in calculating the discounted future minimum lease payments. We recognize lease expenses for our operating leases on a straight-line basis. For lease payments that are subject to adjustments based on indexes or rates, the most current index or rate adjustments were included in the measurement of our ROU assets and lease liabilities at commencement of the lease. Variable lease costs, including non-lease components (such as common area maintenance, utilities, insurance, and taxes) and certain index-based changes in lease payments, are expensed as incurred. Our ROU assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. FOREIGN CURRENCY – The financial statements of the Company’s foreign operations are translated into U.S. dollars. Assets and liabilities are translated at current exchange rates as of the balance sheet date, equity accounts at historical exchange rates, while income statement accounts are translated at the average rates in effect during the year. Translation adjustments are not included in net income, but are recorded as a separate component of other comprehensive income in stockholders' equity. Foreign currency gains and losses included in operating results for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 and the Transition Period ended June 30, 2021 were not material. 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. H&R Block, Inc. | 2022 Form 10-K 47 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. 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, Refund Transfer (RT) and Instant Refund receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical and projected collection rates. ▪ Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2). See note 7 for fair value. ▪ Contingent consideration - Fair value approximates the carrying amount (Level 3). See note 10 for the carrying amount. REVENUE RECOGNITION – 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. The majority of our services and products have multiple performance obligations. We have certain services for which, the various performance obligations are generally provided simultaneously at a point in time, and revenue is recognized at that time. We have certain services and products where we have multiple performance obligations that are provided at various points in time. For these services and products, we allocate the transaction price to the various performance obligations based on relative standalone selling prices and recognize the revenue when the respective performance obligations have been satisfied. We have determined that our contracts do not contain a significant financing component. Service revenues consist of assisted and online tax preparation revenues, fees for electronic filing, revenues from RTs, Emerald Card, Peace of Mind® (POM), Tax Identity Shield (TIS) and Wave. Assisted tax preparation services include tax preparation and electronic filing or printing of the completed tax return. Revenues from tax preparation and printing for clients that choose to print and mail their returns, are recognized when a completed return is accepted by the customer. Revenues for electronic filing are recognized when the return is electronically filed. Royalties are based on contractual percentages of franchise gross receipts and are generally recorded in the period in which the services are provided by the franchisee to the customer. DIY tax preparation services includes fees for online and desktop tax preparation software and for electronic filing or printing. Revenues for online software and printing for clients that choose to print and mail their returns, are recognized when the customer uses the software to complete a return. Revenues for desktop software are recognized when the software is sold to the end user. Revenues for electronic filing are recognized when the return is electronically filed. Refund Transfer revenues are recognized when the IRS filing acknowledgment is received and the bank account is established at our bank partner, Pathward TM , N.A., formerly known as MetaBank®, N.A. (Pathward), a wholly-owned subsidiary of Pathward Financial, Inc. (formerly known as Meta Financial Group, Inc.). 48 2022 Form 10-K | H&R Block, Inc. Emerald Card® revenues consist of interchange income from the use of debit cards and fees paid by cardholders. Interchange income is a fee paid by merchants to our bank partner through the interchange network. Revenue associated with our Emerald Card® is recognized based on authorization of cardholder transactions. Peace of Mind® Extended Service Plan revenues are initially 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 is effective for 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. POM has multiple performance obligations where we represent our clients if they are audited by a taxing authority, and assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. Incremental wages are also deferred and recognized over the term of the plan, in conjunction with the revenues earned. Tax Identity Shield® revenues are initially 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 generally ends on April 30th of the following year. TIS has multiple performance obligations where we provide clients assistance in helping protect their tax identity and access to services to help restore their tax identity, if necessary. Protection services include a daily scan of the dark web for personal information, a monthly scan for the client's social security number in credit header data, notifying clients if their information is detected on a tax return filed through H&R Block, and obtaining additional IRS identity protections when eligible. Interest and fee income on Emerald Advance SM lines of credit is recorded over the life of the underlying loan. Wave® revenues primarily consist of fees received to process payment transactions and are generally calculated as a percentage of the transaction amounts processed. Revenues are recognized upon authorization of the transaction. MARKETING AND ADVERTISING – Advertising costs for radio and television ads are expensed over the course of the tax season, with online, print and mailing advertising expensed as incurred. Marketing and advertising expenses totaled $ 284.2 million, $ 262.0 million and $ 255.1 million for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and $ 11.9 million for the Transition Period. 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 $ 25.1 million, $ 26.6 million and $ 18.8 million for continuing operations for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and $ 3.4 million for the Transition Period. We have severance plans covering executives and eligible regular full-time or part-time active employees who incur a qualifying termination. Expenses related to severance benefits for continuing operations totaled $ 2.6 million, $ 8.4 million and $ 2.5 million for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and $ 1.2 million for the Transition Period. H&R Block, Inc. | 2022 Form 10-K 49 NOTE 2: REVENUE RECOGNITION The majority of our revenues are from our U.S. tax services business. The following table disaggregates our U.S. tax services revenues by major service line, with revenues from our international tax services businesses and from Wave included as separate lines: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Revenues: U.S. assisted tax preparation $ 2,094,612 $ 259,527 $ 2,035,107 $ 1,533,303 U.S. royalties 225,242 29,659 226,253 193,411 U.S. DIY tax preparation 319,086 76,106 313,055 208,901 International 231,335 22,071 249,868 180,065 Refund Transfers 162,893 14,269 163,329 154,687 Emerald Card® 125,444 19,193 136,717 92,737 Peace of Mind® Extended Service Plan 94,637 20,231 98,882 105,185 Tax Identity Shield® 39,114 3,928 40,624 31,797 Interest and fee income on Emerald Advance SM 43,981 299 53,430 60,867 Wave 80,965 12,481 58,277 36,711 Other 45,961 8,342 38,445 42,056 Total revenues $ 3,463,270 $ 466,106 $ 3,413,987 $ 2,639,720 Changes in the balances of deferred revenue for POM are as follows: (in 000s) POM Deferred Revenue Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Balance, beginning of the period $ 172,759 $ 183,871 $ 183,685 $ 212,511 Amounts deferred 110,679 12,464 115,114 95,032 Amounts recognized on previous deferrals ( 109,952 ) ( 23,576 ) ( 114,928 ) ( 123,858 ) Balance, end of the period $ 173,486 $ 172,759 $ 183,871 $ 183,685 Changes in the balances of deferred wages for POM are as follows: (in 000s) POM Deferred Wages Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Balance, beginning of the period $ 17,867 $ 20,169 $ 21,618 $ 27,306 Amounts deferred 12,668 8 11,367 10,708 Amounts recognized on previous deferrals ( 11,040 ) ( 2,310 ) ( 12,816 ) ( 16,396 ) Balance, end of the period $ 19,495 $ 17,867 $ 20,169 $ 21,618 As of June 30, 2022, deferred revenue related to POM was $ 173.5 million. We expect that $ 102.5 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following five years . POM deferred revenues are included in deferred revenue and other liabilities in the consolidated balance sheets. POM deferred wages are included in prepaid expenses and other current assets or other noncurrent assets. As of June 30, 2022, June 30, 2021 and April 30, 2021, TIS deferred revenue was $ 25.8 million, $ 28.3 million, and $ 28.9 million, respectively. The related liabilities are included in deferred revenue and other current liabilities in the consolidated balance sheets. All deferred revenue related to TIS as of June 30, 2022 will be recognized by April 2023 . 50 2022 Form 10-K | H&R Block, Inc. A significant portion of our accounts receivable balances arise from services and products that we provide to our customers, with the exception of those related to EAs, which arise from purchased participation interests with our bank partner. The majority of our receivables are related to our RT product. Generally the prices of our services and products are fixed and determinable at the time of sale. For our RT product, we record a receivable for our fees which is then collected at the time the IRS issues the client’s refund. Our receivables from customers are generally collected on a periodic basis during and subsequent to the tax season. See note 4 for our accounts receivable balances. NOTE 3: EARNINGS PER SHARE Basic and diluted earnings (loss) 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 (loss) from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The computations of basic and diluted earnings (loss) per share from continuing operations are as follows: (in 000s, except per share amounts) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Net income from continuing operations attributable to shareholders $ 560,646 $ 91,119 $ 590,212 $ 6,156 Amounts allocated to participating securities ( 2,468 ) ( 402 ) ( 2,413 ) ( 639 ) Net income from continuing operations attributable to common shareholders $ 558,178 $ 90,717 $ 587,799 $ 5,517 Basic weighted average common shares 168,519 181,473 186,832 196,701 Potential dilutive shares 2,916 3,389 1,945 1,407 Dilutive weighted average common shares 171,435 184,862 188,777 198,108 Earnings per share from continuing operations attributable to common shareholders: Basic $ 3.31 $ 0.50 $ 3.15 $ 0.03 Diluted 3.26 0.49 3.11 0.03 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 0.4 million, 0.8 million and 0.9 million shares of stock for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and 0.3 million shares of stock for the Transition Period as the effect would be antidilutive. H&R Block, Inc. | 2022 Form 10-K 51 NOTE 4: RECEIVABLES Receivables, net of their related allowance, consist of the following: (in 000s) As of June 30, 2022 June 30, 2021 April 30, 2021 Short-term Long-term Short-term Long-term Short-term Long-term Loans to franchisees $ 6,194 $ 22,036 $ 9,497 $ 28,026 $ 16,666 $ 28,909 Receivables for U.S. assisted and DIY tax preparation and related fees 18,893 2,560 41,900 3,793 92,531 3,793 H&R Block's Instant Refund SM receivables 3,491 198 2,357 159 35,665 1,463 H&R Block Emerald Advance ® lines of credit 6,691 8,825 8,248 8,089 9,210 17,095 Software receivables from retailers 3,992 — 2,910 — 4,823 — Royalties and other receivables from franchisees 3,682 73 6,167 178 16,136 196 Wave payment processing receivables 1,393 — 2,187 — 1,569 — Other 14,111 1,172 15,666 1,350 21,276 1,233 $ 58,447 $ 34,864 $ 88,932 $ 41,595 $ 197,876 $ 52,689 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 working capital needs. As of June 30, 2022, June 30, 2021, and April 30, 2021 loans with a principal balance more than 90 days past due, or on non-accrual status, are not material. 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 or more than 90 days past due. 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. H&R Block's Instant Refund SM . 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 system for tracking amounts due to various government agencies also indicates if the client has already filed a return, does not exist in CRA records, or is bankrupt. This serves to greatly reduce the amounts of uncollectible receivables and the risk of fraudulent returns. H&R Block's Instant Refund SM amounts are generally received from the CRA within 60 days of filing the client's return, with the remaining balance collectible from the client. 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 tax return year of origination with older years being deemed more unlikely to be repaid. 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 establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value. 52 2022 Form 10-K | H&R Block, Inc. Current balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by tax return year of origination, as of June 30, 2022 are as follows: (in 000s) Tax return year of origination Current Balance More Than 60 Days Past Due 2021 $ 4,997 $ 2,903 2020 and prior 131 131 5,128 $ 3,034 Allowance ( 1,439 ) Net balance $ 3,689 H&R Block Emerald Advance® lines of credit . EAs are typically offered to clients in our offices from mid-November through mid-January, in amounts up to $ 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 15 th , and any amounts unpaid are placed on non-accrual status as of March 1 st . Payments on past due amounts are applied to principal. These lines of credit are offered by our bank partner. We purchase participation interests in their loans, as discussed further in note 10 . 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 fiscal year of origination with older years being deemed more unlikely to be repaid. 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 establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value. Current balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by fiscal year of origination as of June 30, 2022, are as follows: (in 000s) Fiscal year of origination Current Balance Non-Accrual 2022 $ 26,040 $ 26,040 2021 and prior 458 458 Revolving loans 15,159 12,867 41,657 $ 39,365 Allowance ( 26,141 ) Net balance $ 15,516 H&R Block, Inc. | 2022 Form 10-K 53 Allowance for Credit Losses. Activity in the allowance for credit losses for EAs and all other short-term and long-term receivables for the periods ended June 30, 2022, June 30, 2021, April 30, 2021 and April 30, 2020 is as follows: (in 000s) EAs All Other Total Balances as of May 1, 2019 $ 27,535 $ 53,938 $ 81,473 Provision 21,771 54,850 76,621 Charge-offs, recoveries and other ( 17,272 ) ( 58,342 ) ( 75,614 ) Balances as of April 30, 2020 $ 32,034 $ 50,446 $ 82,480 Provision 14,319 59,132 73,451 Charge-offs, recoveries and other ( 18,649 ) ( 53,774 ) ( 72,423 ) Balances as of April 30, 2021 27,704 55,804 83,508 Provision — 4,617 4,617 Charge-offs, recoveries and other — ( 149 ) ( 149 ) Balances as of June 30, 2021 27,704 60,272 87,976 Provision 14,814 51,993 66,807 Charge-offs, recoveries and other ( 16,377 ) ( 61,139 ) ( 77,516 ) Balances as of June 30, 2022 $ 26,141 $ 51,126 $ 77,267 NOTE 5: PROPERTY AND EQUIPMENT The components of property and equipment, net of accumulated depreciation and amortization, are as follows: (in 000s) As of June 30, 2022 June 30, 2021 April 30, 2021 Buildings $ 34,303 $ 42,379 $ 44,121 Computers and other equipment 48,837 57,560 62,712 Leasehold improvements 38,142 35,768 37,772 Purchased software 1,253 2,192 2,508 Land and other non-depreciable assets 1,377 1,377 1,377 $ 123,912 $ 139,276 $ 148,490 Depreciation expense of property and equipment for continuing operations for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 was $ 64.7 million, $ 73.4 million and $ 85.9 million, respectively and was $ 10.8 million for the Transition Period. The carrying value of long-lived assets held outside the U.S., which is comprised of property and equipment, totaled $ 15.4 million, $ 17.8 million and $ 18.9 million as of June 30, 2022, June 30, 2021 and April 30, 2021, respectively. 54 2022 Form 10-K | H&R Block, Inc. NOTE 6: GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the periods ended June 30, 2022, June 30, 2021, April 30, 2021 and April 30, 2020 are as follows: (in 000s) Goodwill Accumulated Impairment Losses Net Balances as of May 1, 2019 $ 552,234 $ ( 32,297 ) $ 519,937 Acquisition of Wave 300,560 — 300,560 Other acquisitions 23,795 — 23,795 Disposals and foreign currency changes, net ( 26,154 ) — ( 26,154 ) Impairments — ( 106,000 ) ( 106,000 ) Balances as of April 30, 2020 850,435 ( 138,297 ) 712,138 Acquisitions 6,948 — 6,948 Disposals and foreign currency changes, net 38,573 — 38,573 Impairments — — — Balances as of April 30, 2021 895,956 ( 138,297 ) 757,659 Acquisitions 166 — 166 Disposals and foreign currency changes, net ( 3,304 ) — ( 3,304 ) Impairments — — — Balances as of June 30, 2021 892,818 ( 138,297 ) 754,521 Acquisitions 18,696 — 18,696 Disposals and foreign currency changes, net ( 12,816 ) — ( 12,816 ) Impairments — — — Balances as of June 30, 2022 $ 898,698 $ ( 138,297 ) $ 760,401 We test goodwill for impairment annually as of February 1, or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value. In fiscal year 2020, we recorded a goodwill impairment loss of $ 106.0 million related to Wave. H&R Block, Inc. | 2022 Form 10-K 55 Components of intangible assets are as follows: (in 000s) Gross Carrying Amount Accumulated Amortization Net As of June 30, 2022: Reacquired franchise rights $ 379,114 $ ( 197,068 ) $ 182,046 Customer relationships 331,020 ( 278,717 ) 52,303 Internally-developed software 137,638 ( 107,111 ) 30,527 Noncompete agreements 41,789 ( 37,684 ) 4,105 Franchise agreements 19,201 ( 17,388 ) 1,813 Purchased technology 122,700 ( 87,910 ) 34,790 Trade name 5,800 ( 1,740 ) 4,060 $ 1,037,262 $ ( 727,618 ) $ 309,644 As of June 30, 2021: Reacquired franchise rights $ 370,405 $ ( 182,366 ) $ 188,039 Customer relationships 316,547 ( 255,294 ) 61,253 Internally-developed software 160,315 ( 119,460 ) 40,855 Noncompete agreements 41,228 ( 35,802 ) 5,426 Franchise agreements 19,201 ( 16,108 ) 3,093 Purchased technology 122,700 ( 74,913 ) 47,787 Trade name 5,800 ( 1,160 ) 4,640 $ 1,036,196 $ ( 685,103 ) $ 351,093 As of April 30, 2021: Reacquired franchise rights $ 370,112 $ ( 179,356 ) $ 190,756 Customer relationships 316,508 ( 251,160 ) 65,348 Internally-developed software 156,308 ( 116,126 ) 40,182 Noncompete agreements 41,212 ( 35,484 ) 5,728 Franchise agreements 19,201 ( 15,894 ) 3,307 Purchased technology 122,700 ( 72,609 ) 50,091 Trade name 5,800 ( 1,064 ) 4,736 $ 1,031,841 $ ( 671,693 ) $ 360,148 Amortization of intangible assets for continuing operations for the fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 was $ 77.5 million, $ 83.4 million and $ 83.6 million, respectively, and was $ 13.8 million for the Transition Period. Estimated amortization of intangible assets for fiscal years 2023, 2024, 2025, 2026 and 2027 is $ 66.3 million, $ 45.8 million, $ 24.8 million, $ 17.0 million and $ 11.9 million, respectively. We made payments to acquire businesses totaling $ 35.9 million, $ 15.6 million and $ 450.2 million during the fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and $ 0.8 million for the Transition Period. The fiscal year ended April 30, 2020 included the acquisition of Wave. The amounts and weighted-average lives of assets acquired during fiscal year 2022, including amounts capitalized related to internally-developed software, are as follows: (dollars in 000s) Amount Weighted-Average Life (in years) Internally-developed software $ 10,919 3 Customer relationships 16,179 5 Reacquired franchise rights 9,081 4 Noncompete agreements 600 5 Total $ 36,779 4 56 2022 Form 10-K | H&R Block, Inc. During the fiscal year ended April 30, 2020, we acquired Wave for $ 408.4 million. Included in the transaction price was $ 8.2 million which was treated as compensation expense. The assets acquired, net of liabilities assumed on the acquisition date, and the identified intangible assets and goodwill, are as follows: (dollars in 000s) Amount Acquired Weighted-Average Life (in years) Assets acquired and liabilities assumed, net $ 3,928 Deferred tax liability ( 8,126 ) Purchased technology 68,000 10 Customer relationships 23,000 5 Non-compete agreements 7,070 5 Trade name 5,800 10 Total identifiable net assets 99,672 Goodwill (1) 300,560 Total identifiable assets and goodwill $ 400,232 (1) See discussion of Wave's goodwill impairment of $ 106.0 million in fiscal year 2020 above. NOTE 7: LONG-TERM DEBT The components of long-term debt are as follows: (in 000s) As of June 30, 2022 June 30, 2021 April 30, 2021 Senior Notes, 5.500 %, due November 2022 (1) — 500,000 500,000 Senior Notes, 5.250 %, due October 2025 (1) 350,000 350,000 350,000 Senior Notes, 2.500 %, due July 2028 (1) 500,000 500,000 — Senior Notes, 3.875 %, due August 2030 (1) 650,000 650,000 650,000 Debt issuance costs and discounts ( 13,124 ) ( 16,281 ) ( 9,961 ) Total long-term debt 1,486,876 1,983,719 1,490,039 Less: Current portion — — — Long-term portion $ 1,486,876 $ 1,983,719 $ 1,490,039 Estimated fair value of long-term debt $ 1,377,000 $ 2,123,000 $ 1,609,000 (1) 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. The interest rates on our Senior Notes are subject to adjustment based upon our credit ratings. On June 22, 2021, we issued $ 500.0 million of 2.500 % Senior Notes due July 15, 2028. On May 2, 2022, we redeemed the $ 500.0 million 5.5 % Senior Notes originally due in November 2022. The redemption price was 100 % of the outstanding principal amount, plus accrued and unpaid interest up to, but not including, the redemption date. Our unsecured committed line of credit (CLOC) provides for an unsecured senior revolving credit facility in the aggregate principal amount of $ 1.5 billion, which includes a $ 175.0 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 CLOC will mature on June 11, 2026, unless extended pursuant to the terms of the CLOC, at which time all outstanding amounts thereunder will be due and payable. Our CLOC includes an annual facility fee, which will vary depending on our then current credit ratings. The 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, as defined by the CLOC agreement, 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 March 31, June 30, and September 30 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on December 31 of each year; (2) a covenant requiring us to maintain an interest H&R Block, Inc. | 2022 Form 10-K 57 coverage ratio (EBITDA-to-interest expense) 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 CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the CLOC may be used for working capital needs or for other general corporate pu rposes. We were in compliance with these requirements as of June 30, 2022. We had no outstanding balance under our CLOC as of June 30, 2022 and amounts available to borrow were not limited by the debt-to-EBITDA covenant as of June 30, 2022. OTHER INFORMATION – The aggregate payments required to retire long-term debt are $ 350.0 million in fiscal year 2026, $ 500.0 million in fiscal year 2029 and $ 650.0 million in fiscal year 2031. 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 and related tax items are as follows: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Stock based compensation expense $ 34,252 $ 4,700 $ 28,271 $ 28,045 Tax benefit 6,494 1,016 1,802 7,175 Realized tax benefit 5,438 2,356 1,690 5,856 As of June 30, 2022, we had 10.9 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 restricted share units (other than performance-based 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 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 and restricted share units (other than performance-based 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 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 200 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 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 . 58 2022 Form 10-K | H&R Block, Inc. A summary of restricted share units and deferred stock units, including those that are performance-based, for the year ended June 30, 2022, is as follows: (shares in 000s) Restricted Share Units and Deferred Stock Units Performance-Based Share Units Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value Outstanding, beginning of the year 2,012 $ 21.84 1,973 $ 23.49 Granted 1,158 27.30 576 27.94 Released ( 897 ) 22.73 ( 478 ) 24.55 Forfeited ( 303 ) 22.33 ( 153 ) 22.88 Outstanding, end of the year 1,970 $ 24.40 1,918 $ 23.79 The total fair value of shares and units vesting during fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 was $ 33.3 million, $ 16.1 million and $ 22.1 million, respectively, and was $ 12.3 million for the Transition Period. As of June 30, 2022, we had $ 50.2 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 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. There were no performance-based share units issued during the Transition Period. The following assumptions were used to value performance-based share units using the Monte Carlo valuation model during the periods: Year Ended June 30, 2022 Year Ended April 30, 2021 Year Ended April 30, 2020 Expected volatility 23.19 % - 88.48 % 21.14 % - 84.49 % 13.47 % - 66.33 % Expected term 3 years 3 years 3 years Dividend yield (1) 0 % 0 % - 3.95 % 0 %- 3.55 % Risk-free interest rate 0.37 % 0.14 % - 0.18 % 1.70 % Weighted-average fair value $ 27.07 $ 16.74 $ 32.01 (1) The valuation model assumes that dividends are reinvested by the Company on a continuous basis. 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. On July 14, 2021, we filed a U.S. federal income tax form 1139 carryback claim to utilize net operating losses against income earned in tax years 2015 and 2016. Filing this carryback claim has opened our 2015 and 2016 tax years to examination. Consequently, our U.S. federal income tax returns for 2015, 2016, 2018 and later years remain open for examination. Our U.S. federal income tax returns for 2017, 2014 and all years prior to 2014 are closed. With respect to state and local jurisdictions and countries outside of the U.S., we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of 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. H&R Block, Inc. | 2022 Form 10-K 59 The components of income (loss) from continuing operations upon which domestic and foreign income taxes have been provided are as follows: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Domestic $ 478,166 $ 145,714 $ 489,499 $ 56,121 Foreign 180,903 ( 24,719 ) 179,237 ( 59,495 ) $ 659,069 $ 120,995 $ 668,736 $ ( 3,374 ) We operate in multiple income tax jurisdictions both within the U.S. and internationally. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on transfer pricing analyses of comparable companies and predictions of future economic conditions. Although these intercompany transactions reflect arm’s length terms and the proper transfer pricing documentation is in place, transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. The reconciliation between the income tax provision and the amount computed by applying the statutory U.S. federal tax rate to income taxes for continuing operations is as follows: Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 U.S. statutory tax rate 21.0 % 21.0 % 21.0 % 21.0 % Change in tax rate resulting from: State income taxes, net of federal income tax benefit 2.1 % 2.9 % 1.8 % 20.4 % Earnings taxed in foreign jurisdictions ( 2.4 ) % 0.8 % ( 1.2 ) % 619.4 % Permanent differences 0.9 % 0.4 % 0.5 % ( 257.5 ) % Impairment of goodwill — % — % — % ( 832.5 ) % Uncertain tax positions ( 6.3 ) % 2.9 % 7.5 % 508.3 % U.S. tax on income from foreign affiliates 2.0 % ( 1.6 ) % 1.0 % ( 247.4 ) % Remeasurement of deferred tax assets and liabilities ( 0.2 ) % ( 1.0 ) % ( 0.1 ) % 117.6 % Changes in prior year estimates 0.1 % — % ( 0.5 ) % 55.5 % Federal income tax credits ( 2.6 ) % ( 0.5 ) % ( 0.9 ) % 216.3 % Tax impacts of stock-based compensation vesting — % — % — % 44.8 % Tax benefit due to NOL carryback under CARES Act ( 0.1 ) % — % ( 17.5 ) % — % Tax deductible write-down of foreign investment 0.6 % ( 0.2 ) % ( 1.7 ) % — % Change in valuation allowance - domestic 0.2 % — % ( 0.2 ) % 37.1 % Change in valuation allowance - foreign ( 0.3 ) % 0.3 % 1.7 % 20.6 % Other ( 0.1 ) % ( 0.3 ) % 0.3 % ( 41.2 ) % Effective tax rate 14.9 % 24.7 % 11.7 % 282.4 % Our effective tax rate for continuing operations was 14.9 %, 11.7 % and 282.4 % for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020, respectively, and was 24.7 % for the Transition Period. The increase in the effective tax rate for the year ended June 30, 2022 compared to the year ended April 30, 2021 is primarily due to the impact of net operating loss carrybacks under the CARES Act in 2021 to years with a statutory tax rate of 35% offset in part by the expiration of statute of limitation on certain uncertain tax positions during the current year. 60 2022 Form 10-K | H&R Block, Inc. The components of income tax expense (benefit) for continuing operations are as follows: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Current: Federal $ 121,319 $ 11,563 $ 58,834 $ 18,048 State 25,108 743 12,000 ( 16,614 ) Foreign 8,956 ( 1,481 ) 26,032 1,991 155,383 10,825 96,866 3,425 Deferred: Federal ( 58,487 ) 16,950 2,493 1,703 State ( 2,016 ) 4,809 ( 11,368 ) ( 1,516 ) Foreign 3,543 ( 2,708 ) ( 9,467 ) ( 13,142 ) ( 56,960 ) 19,051 ( 18,342 ) ( 12,955 ) Total income taxes (benefit) for continuing operations $ 98,423 $ 29,876 $ 78,524 $ ( 9,530 ) The significant components of deferred tax assets and liabilities are reflected in the following table: (in 000s) As of June 30, 2022 June 30, 2021 April 30, 2021 Deferred tax assets: Accrued expenses $ 1,917 $ 1,735 $ 3,576 Deferred revenue 35,519 7,644 10,445 Allowance for credit losses and related reserves 30,565 34,411 33,027 Deferred and stock-based compensation 6,964 7,111 24,712 Net operating loss carry-forward 105,710 108,446 104,013 Lease liabilities 109,397 114,700 112,249 Federal tax benefits related to state unrecognized tax benefits 19,115 16,177 16,682 Property and equipment 9,846 35,712 40,138 Intangibles - intellectual property 77,123 85,374 86,711 Valuation allowance ( 55,172 ) ( 55,784 ) ( 55,401 ) Total deferred tax assets 340,984 355,526 376,152 Deferred tax liabilities: Prepaid expenses and other ( 4,723 ) ( 9,033 ) ( 11,927 ) Lease right of use assets ( 107,445 ) ( 111,762 ) ( 109,726 ) Income tax method change ( 5,892 ) ( 56,249 ) ( 56,257 ) Intangibles ( 59,424 ) ( 71,941 ) ( 72,650 ) Total deferred tax liabilities ( 177,484 ) ( 248,985 ) ( 250,560 ) Net deferred tax assets $ 163,500 $ 106,541 $ 125,592 A reconciliation of the deferred tax assets and liabilities and the corresponding amounts reported in the consolidated balance sheets is as follows: (in 000s) As of June 30, 2022 June 30, 2021 April 30, 2021 Deferred income tax assets $ 163,500 $ 142,981 $ 141,836 Deferred tax liabilities — ( 36,440 ) ( 16,244 ) Net deferred tax asset $ 163,500 $ 106,541 $ 125,592 H&R Block, Inc. | 2022 Form 10-K 61 Changes in our valuation allowance for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 and for the Transition Period are as follows: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Balance, beginning of the period $ 55,784 $ 55,401 $ 45,124 $ 47,070 Additions charged to costs and expenses 4,752 389 13,492 2,151 Deductions ( 5,364 ) ( 6 ) ( 3,215 ) ( 4,097 ) Balance, end of the period $ 55,172 $ 55,784 $ 55,401 $ 45,124 Our valuation allowance on deferred tax assets has a net decrease of $ 0.6 million during the current period. The gross increase in valuation allowance of $ 4.8 million is related to net operating loss deferred tax assets generated by foreign and domestic losses that we do not expect to utilize in future years. This increase is offset by a $ 5.4 million decrease to our valuation allowance balance for adjustments to certain foreign net operating losses utilized in the current fiscal year and net operating losses that are no longer available. Certain of our subsidiaries file stand-alone returns in various state, local and foreign jurisdictions, and others join in filing consolidated or combined returns in such jurisdictions. As of June 30, 2022, we had net operating losses in various states and foreign jurisdictions. The amount of state and foreign net operating losses varies by taxing jurisdiction. We maintain a valuation allowance of $ 22.7 million on state and federal net operating losses and $ 31.1 million on foreign net operating losses for the portion of such loses that, more likely than not, will not be realized. Of the $ 105.7 million of net operating loss deferred tax assets, $ 26.7 million will expire in varying amounts during fiscal years 2023 through 2041 and the remaining $ 79.0 million have no expiration. Of the total net operating loss deferred tax assets, $ 51.9 million are more likely than not to be realized. We do not currently intend to repatriate non-borrowed funds held by our foreign subsidiaries in a manner that would trigger a tax liability; therefore, no provision has been made for income taxes that might be payable upon remittance of such earnings. The amount of unrecognized tax liability on these foreign earnings, net of expected foreign tax credits, is immaterial as of June 30, 2022. Changes in unrecognized tax benefits for fiscal years ended June 30, 2022, April 30, 2021 and April 30, 2020 and for the Transition Period are as follows: (in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Balance, beginning of the period $ 264,323 $ 264,810 $ 168,062 $ 185,144 Additions based on tax positions related to prior years 2,499 485 121,364 1,501 Reductions based on tax positions related to prior years ( 5,332 ) ( 1,209 ) ( 34,470 ) ( 10,128 ) Additions based on tax positions related to the current year 32,948 679 43,800 12,093 Reductions related to settlements with tax authorities ( 9,800 ) ( 442 ) ( 29,362 ) ( 980 ) Expiration of statute of limitations ( 52,634 ) — ( 4,584 ) ( 19,568 ) Balance, end of the period $ 232,004 $ 264,323 $ 264,810 $ 168,062 The total gross unrecognized tax benefit ending balance as of June 30, 2022, June 30, 2021, April 30, 2021 and April 30, 2020, includes $ 203.7 million, $ 224.5 million, $ 214.9 million and $ 132.3 million, respectively, which if recognized, would impact our effective tax rate. The difference from the gross unrecognized tax benefits recorded and those in the table above results from the requirement to adjust the gross balances for such items as federal, state and foreign deferred items and deductible interest and taxes. Reductions from prior year are primarily related to expirations of statute of limitations and settlements with taxing authorities. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $ 33.6 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations, anticipated closure of various tax matters currently under examination, and settlements 62 2022 Form 10-K | H&R Block, Inc. with tax authorities. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included. Interest and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense. The total gross interest and penalties accrued as of June 30, 2022, June 2021 and April 30, 2021 totaled $ 22.7 million, $ 26.4 million and $ 24.9 million, respectively. NOTE 10: COMMITMENTS AND CONTINGENCIES Assisted tax returns are covered by our 100% accuracy guarantee, whereby we will reimburse a client for penalties and interest attributable to an H&R Block error on a return. DIY tax returns are covered by our 100% accuracy guarantee, whereby we will reimburse a client up to a maximum of $ 10,000 , if our software makes an arithmetic error that results in payment of penalties and/or interest to the IRS that a client would otherwise not have been required to pay. Our liability related to estimated losses under the 100% accuracy guarantee was $ 14.0 million, $ 12.6 million and $ 12.2 million as of June 30, 2022, June 30, 2021 and April 30, 2021, respectively. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets. Liabilities related to acquisitions for (1) estimated contingent consideration based on expected financial performance of the acquired business and economic conditions at the time of acquisition and (2) estimated accrued compensation related to continued employment of key employees were $ 12.9 million, $ 17.3 million and $ 17.6 million as of June 30, 2022, June 30, 2021 and April 30, 2021, respectively, with amounts recorded in deferred revenue and other liabilities. These liabilities will be settled within the next nine years. Should actual results differ from our estimates, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations. We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total oblig ation under these lines of credit was $ 0.6 million as of June 30, 2022, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $ 0.2 million. In March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide economic and other relief as a result of the COVID-19 pandemic. The CARES Act includes, among other items, provisions relating to refundable employee retention payroll tax credits. Due to the complex nature of the employee retention credit computations, any benefits we may receive are uncertain and may significantly differ from our current estimates. We plan to record any benefit related to these credits upon both the receipt of the benefit and the resolution of the uncertainties, including, but not limited to, the completion of any potential audit or examination, or the expiration of the related statute of limitations. During the year ended June 30, 2022, we received $ 7.3 million related to these credits, recognized $ 2.2 million as an offset to related operating expenses, and we have deferred recognition of $ 5.1 million, which is recorded in deferred revenue and other current liabilities. We are self-insured for certain risks, including, employer provide d medical benefits, workers' compensation, property and casualty, tax errors and omissions, and claims related to POM. These programs maintain various self-insured retentions. For all but POM in company-owned offices and employer provided medical benefits, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated losses for self-insured retentions using actuarial models and assumptions based on historical loss experience. We have a deferred compensation plan that permits certain employees to defer portions of their compensation and accrue income on the deferred amounts. Included in deferred revenue and other liabilities is $ 10.5 million, $ 14.7 million and $ 15.0 million as of June 30, 2022, June 30, 2021 and April 30, 2021, respectively, reflecting our obligation under these plans. Emerald Advances are originated by Pathward, and pursuant to our participation agreement, we purchase a 90 % participation interest in each advance made by Pathward. See note 4 for additional information about these balances. Refund Advance loans are originated by Pathward and offered to certain assisted U.S. tax preparation clients, based on client eligibility as determined by Pathward. We pay fees primarily based on loan size and customer type. H&R Block, Inc. | 2022 Form 10-K 63 We have provided a guarantee up to $ 18.0 million related to certain loans to clients prior to the IRS accepting electronic filing. We accrued an estimated liability of $ 0.6 million at June 30, 2022 related to this guarantee. As of June 30, 2021 and April 30, 2021 we had $ 2.6 million accrued under the RA guarantee agreement, and we paid $ 2.6 million, net of recoveries, related to that guarantee during the fiscal year ended June 30, 2022. We offer POM to U.S. and Canadian clients, whereby 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. The additional taxes paid under POM have a cumulative limit of $ 6,000 for U.S. clients and $ 3,000 CAD for Canadian clients with respect to the federal, state/provincial and local tax returns we prepared for applicable clients during the taxable year protected by POM. A loss on POM would be recognized if the sum of expected costs for services exceeded unearned revenue. NOTE 11: LEASES O ur lease costs and other information related to operating leases consisted of the following: (dollars in 000s) Year Ended June 30, 2022 Two Months Ended June 30, 2021 (Transition Period) Year Ended April 30, 2021 Year Ended April 30, 2020 Operating lease costs $ 233,004 $ 36,853 $ 239,357 $ 242,314 Variable lease costs 79,923 14,359 77,758 71,319 Subrental income ( 520 ) ( 52 ) ( 650 ) ( 1,277 ) Total lease costs $ 312,407 $ 51,160 $ 316,465 $ 312,356 Cash paid for operating lease costs $ 236,946 $ 35,394 $ 240,299 $ 223,080 New operating right of use assets and related lease liabilities (1) $ 222,352 $ 48,307 $ 167,827 $ 345,079 Weighted-average remaining operating lease term (years) 2 2 3 3 Weighted-average operating lease discount rate 2.8 % 2.9 % 3.0 % 3.3 % (1) The new operating right of use assets and related lease liabilities for the year ended April 30, 2020 excludes the initial impacts of the adoption of Accounting Standards Update No. 2016-02, “Leases.” Aggregate operating lease maturities as of June 30, 2022 are as follows: (in 000s) 2023 $ 215,348 2024 135,018 2025 70,634 2026 17,190 2027 7,662 2028 and thereafter 3,654 Total future undiscounted operating lease payments 449,506 Less imputed interest ( 13,788 ) Total operating lease liabilities $ 435,718 NOTE 12: LITIGATION AND OTHER RELATED CONTINGENCIES We are a defendant in numerous litigation and arbitration matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits or arbitrations to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, may be sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in handling and resolving numerous claims over an extended period of time. 64 2022 Form 10-K | H&R Block, Inc. The outcome of a matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how courts and arbitrators will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will view the relevant evidence and applicable law. In addition to litigation and arbitration matters, we are also subject to other loss contingencies arising out of our business activities, including as described below. We accrue liabilities for litigation, arbitration and other related loss contingencies and any related settlements when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range. For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that such matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of June 30, 2022. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. As of June 30, 2022, June 30, 2021 and April 30, 2021 our total accrued liabilities were $ 1.7 million, $ 1.6 million and $ 5.5 million, respectively. Our estimate of the aggregate range of reasonably possible losses includes (1) matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability, and (2) matters where a liability has not been accrued but we believe a loss is reasonably possible. This aggregate range only represents those losses as to which we are currently able to estimate a reasonably possible loss or range of loss. It does not represent our maximum loss exposure. Matters for which we are not currently able to estimate the reasonably possible loss or range of loss are not included in this range. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the reasonably possible loss or range of loss, such as precise information about the amount of damages or other remedies being asserted, the defenses to the claims being asserted, discovery from other parties and investigation of factual allegations, rulings by courts or arbitrators on motions or appeals, analyses by experts, or the status or terms of any settlement negotiations. The estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. As of June 30, 2022, we believe the estimate of the aggregate range of reasonably possible losses in excess of amounts accrued, where the range of loss can be estimated, is not material. At the end of each reporting period, we review relevant information with respect to litigation, arbitration and other related loss contingencies and update our accruals, disclosures, and estimates of reasonably possible loss or range of loss based on such reviews. Costs incurred with defending matters are expensed as incurred. Any receivable for insurance recoveries is recorded separately from the corresponding liability, and only if recovery is determined to be probable and reasonably estimable. We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows. H&R Block, Inc. | 2022 Form 10-K 65 LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS – Free File Litigation. On May 6, 2019, the Los Angeles City Attorney filed a lawsuit on behalf of the People of the State of California in the Superior Court of California, County of Los Angeles (Case No. 19STCV15742). The case is styled The People of the State of California v. HRB Digital LLC, et al . The complaint alleges that H&R Block, Inc. and HRB Digital LLC engaged in unfair, fraudulent and deceptive business practices and acts in connection with the IRS Free File Program in violation of the California Unfair Competition Law, California Business and Professions Code §§17200 et seq. The complaint seeks injunctive relief, restitution of monies paid to H&R Block by persons in the State of California who were eligible to file under the IRS Free File Program for the time period starting 4 years prior to the date of the filing of the complaint, pre-judgment interest, civil penalties and costs. The City Attorney subsequently dismissed H&R Block, Inc. from the case and amended its complaint to add HRB Tax Group, Inc. We filed a motion to stay the case based on the primary jurisdiction doctrine, which was denied. A trial date is set for January 17, 2023. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We have also received and are responding to certain governmental inquiries relating to the IRS Free File Program. DISCONTINUED MORTGAGE OPERATIONS – Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC or the Company has been and may in the future be subject to litigation and other loss contingencies, including indemnification and contribution claims, pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. Parties, including underwriters, depositors, and securitization trustees, have been, remain, or may in the future be, involved in lawsuits, threatened lawsuits, or settlements related to securitization transactions in which SCC participated. A variety of claims are alleged in these matters, including violations of federal and state securities laws and common law fraud, breaches of representations and warranties, or violations of statutory requirements. SCC has received notices of potential indemnification or contribution obligations relating to such matters. Additional lawsuits against the parties to the securitization transactions may be filed in the future, and SCC may receive additional notices of potential indemnification, contribution or similar obligations with respect to existing or new lawsuits or settlements of such lawsuits or other claims. We have not concluded that a loss related to any of these potential indemnification or contribution claims is probable, nor have we accrued a liability related to any of these claims. It is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters it is not possible to estimate a reasonably possible loss or range of loss due to, among other things, the inherent uncertainties involved in these matters and the indeterminate damages sought. If the amount that SCC is ultimately required to pay with respect to loss contingencies, together with payment of SCC's related administration and legal expense, exceeds SCC's net assets, the creditors of SCC, other potential claimants, or a bankruptcy trustee if SCC were to file or be forced into bankruptcy, may attempt to assert claims against us for payment of SCC's obligations. Claimants also may attempt to assert claims against or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of June 30, 2022, total approximately $ 264 million and consist of an intercompany note receivable. We believe our legal position is strong on any potential corporate veil-piercing arguments; however, if this position is challenged and not upheld, it could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. OTHER — We are from time to time a party to litigation, arbitration and other loss contingencies not discussed herein arising out of our business operations. These matters may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent others who may be similarly situated. While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay to discharge or settle these other matters will not have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows. 66 2022 Form 10-K | H&R Block, Inc. NOTE 13: TRANSITION PERIOD COMPARATIVE DATA On June 9, 2021, the Board of Directors approved a change of the Company's fiscal year end from April 30 to June 30. The Company's 2022 fiscal year began on July 1, 2021 and ended on June 30, 2022. The following is the statement of operations and comprehensive income for the Transition Period ended June 30, 2021, and the comparable unaudited two-month period ended June 30, 2020. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in 000s, except per share amounts) Two months ended: June 30, 2021 (Transition Period) June 30, 2020 (Unaudited) REVENUES: Service revenues $ 427,575 $ 266,154 Royalty, product and other revenues 38,531 25,294 466,106 291,448 OPERATING EXPENSES: Costs of revenues 232,763 197,431 Selling, general and administrative 98,988 81,670 Total operating expenses 331,751 279,101 Other income (expense), net 672 1,661 Interest expense on borrowings ( 14,032 ) ( 21,410 ) Income (loss) from continuing operations before income taxes 120,995 ( 7,402 ) Income taxes 29,876 1,725 Net income (loss) from continuing operations 91,119 ( 9,127 ) Net loss from discontinued operations, net of tax benefits of $ 451 and $ 424 ( 1,509 ) ( 1,423 ) NET INCOME (LOSS) $ 89,610 $ ( 10,550 ) BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.50 $ ( 0.05 ) Discontinued operations ( 0.01 ) ( 0.01 ) Consolidated $ 0.49 $ ( 0.06 ) DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.49 $ ( 0.05 ) Discontinued operations ( 0.01 ) ( 0.01 ) Consolidated $ 0.48 $ ( 0.06 ) COMPREHENSIVE INCOME: Net income (loss) $ 89,610 $ ( 10,550 ) Change in foreign currency translation adjustments ( 4,698 ) 11,795 Other comprehensive income (loss) ( 4,698 ) 11,795 Comprehensive income $ 84,912 $ 1,245 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements or reportable events requiring disclosure pursuant to Item 304(b) of Regulation S-K.