NOTE 14: STOCK-BASED COMPENSATION

We utilize the fair value method to account for stock-based awards. Stock-based compensation expense of $15.0 million, $14.5 million and $29.4 million was recorded in fiscal years 2012, 2011 and 2010, respectively, net of related tax benefits of $5.4 million, $5.4 million and $10.5 million, respectively. Stock-based compensation expense of our continuing operations totaled $14.2 million, $10.5 million and $22.7 million in fiscal years 2012, 2011 and 2010, respectively.

Accounting standards require excess tax benefits from stock-based compensation to be included as a financing activity in the statements of cash flows. As a result, we classified $0.1 million, $0.5 million and $1.6 million as cash inflows from financing activities for fiscal years 2012, 2011 and 2010, respectively. We realized tax benefits of $4.4 million, $4.4 million and $6.6 million in fiscal years 2012, 2011 and 2010, respectively.

As of April 30, 2012, we had 10.2 million shares reserved for future awards under stock-based compensation plans. We issue shares from our treasury stock to satisfy the exercise or release of stock-based awards and believe we have adequate treasury stock balances available for future issuances.

Our 2003 Long-Term Executive Compensation Plan (2003 Plan) provides for awards of options (both incentive and nonqualified), nonvested shares, nonvested share units, performance-based nonvested share units and other stock-based awards to employees. These awards entitle the holder to shares or the right to purchase shares of common stock as the award vests. Options and nonvested shares typically vest over a three-year or four-year period with a portion vesting each year, while both types of nonvested share units typically cliff vest at the end of a three-year period. Historically, nonvested shares have received dividends during the vesting period, however awards granted after October 1, 2010 do not receive dividends during the vesting period. Nonvested share units and performance-based nonvested share units receive cumulative dividends at the end of the vesting period. We measure the fair value of options on the grant date or modification date using the Black-Scholes option valuation model. We measure the fair value of nonvested shares and nonvested share units based on the closing price of our common stock on the grant date. The fair value of performance-based nonvested share units is determined based on the Monte Carlo valuation model. Generally, we expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis. Awards granted to employees who are of retirement age or early retirement age (age 65 or age 55 and ten years of service) or reach either retirement age prior to the end of the service period of the awards, are expensed over the shorter of the two periods. Options are generally granted at a price equal to the fair market value of our common stock on the grant date. All types of awards granted under the 2003 Plan have a contractual term of ten years.

Our 1999 Stock Option Plan for Seasonal Employees, which provided for awards of nonqualified options to certain employees, was terminated effective December 31, 2009, except for outstanding awards thereunder. These awards were granted to seasonal employees in our Tax Services segment and entitled the holder to the right to purchase shares of common stock as the award vests, typically over a two-year period. We measured the fair value of options on the grant date using the Black-Scholes option valuation model. We expensed the grant-date fair value, net of estimated forfeitures, over the seasonal service period. Options were granted at a price equal to the fair market value of our common stock on the grant date, were exercisable during September through November in each of the two years following the calendar year of the grant, and had a contractual term of 29 months. All outstanding awards under this plan expired during fiscal year 2012.

Our 1989 Stock Option Plan for Outside Directors, which provided for awards of nonqualified options to outside directors, was terminated effective June 11, 2008, except for outstanding awards thereunder. The plan was replaced by the 2008 Deferred Stock Unit Plan for Outside Directors. The number of deferred stock units credited to an outside director's account pursuant to an award is determined by dividing the dollar amount of the award by the average current market value per share of common stock for the ten consecutive trading dates ending on the date the deferred stock units are granted to the outside directors. Each deferred stock unit granted is vested upon award and the settlement of shares occurs six months after the director's separation of service from the Board of Directors. The vested shares receive dividends prior to settlement, which are reinvested and settled in shares at the time of settlement.

Our 2000 Employee Stock Purchase Plan (ESPP) provides employees the option to purchase shares of our common stock through payroll deductions. The purchase price of the stock is 90% of the lower of either the fair market value of our common stock on the first trading day within the Option Period or on the last trading day of the Option Period. The Option Periods are six-month periods beginning on January 1 and July 1 each year. We measure the fair value of options on the grant date utilizing the Black-Scholes option valuation model. The fair value of the option includes the value of the 10% discount and the look-back feature. We expense the grant-date fair value over the six-month vesting period.

A summary of options for the fiscal year ended April 30, 2012, is as follows:

(in 000s, except per share amounts)

Weighted-Average
Exercise Price

Weighted-Average
Remaining
Contractual Term

Aggregate
Intrinsic
Value

Outstanding, beginning of the year

10,790

18.64

Granted

2,658

16.46

Exercised

(658

)

15.32

Forfeited or expired

(5,482

)

18.81

Outstanding, end of the year

7,308

18.02

6 years

2,117

Exercisable, end of the year

4,114

19.86

4 years

751

Exercisable and expected to vest

6,950

18.15

6 years

1,941

The total intrinsic value of options exercised during fiscal years 2012, 2011 and 2010 was $1.0 million, $1.8 million and $5.4 million, respectively. As of April 30, 2012, we had $7.1 million of total unrecognized compensation cost related to these options. The cost is expected to be recognized over a weighted-average period of two years.

We utilize the Black-Scholes option valuation model to value our options on the grant date. We typically estimate the expected volatility using our historical stock price data, unless historical volatility is not representative of expected volatility. We also use historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term.

The following assumptions were used to value options during the periods:


Year ended April 30,	2012		2011		2010
Options – management and director:
Expected volatility		31.75% - 32.34%		28.98% - 30.20%		27.11% - 27.27%
Expected term		5 years		5 years		5 years
Dividend yield		3.43% - 4.80%		4.18% - 5.17%		3.24% - 3.55%
Risk-free interest rate		0.79% - 1.95%		1.26% - 1.92%		2.38% - 2.75%
Weighted-average fair value	$	3.31	$	2.25	$	3.27
Options – seasonal: ⁽¹⁾
Expected volatility						33.81%
Expected term						2 years
Dividend yield						3.48%
Risk-free interest rate						0.85%
Weighted-average fair value					$	2.70
ESPP options:
Expected volatility		24.27% - 33.07%		22.75% - 23.31%		23.68% - 43.20%
Expected term		0.5 years		0.5 years		0.5 years
Dividend yield		3.68% - 4.93%		3.86% - 4.80%		2.65% - 3.46%
Risk-free interest rate		0.06% - 0.10%		0.19% - 0.23%		0.20% - 0.33%
Weighted-average fair value	$	2.78	$	2.16	$	3.66

⁽¹⁾	This plan was terminated in fiscal year 2010, except for outstanding awards thereunder.

A summary of nonvested shares for the year ended April 30, 2012, is as follows:


	(shares in 000s)
	Shares			Weighted-Average Grant Date Fair Value
Outstanding, beginning of the year		1,150		$	15.35
Granted		787			16.28
Released		(522	)		17.22
Forfeited		(180	)		15.46

Outstanding, end of the year		1,235		$	15.12

The total fair value of shares vesting during fiscal years 2012, 2011 and 2010 was $9.0 million, $11.3 million and $12.4 million, respectively. Upon the grant of nonvested shares, unearned compensation cost is recorded as an offset to additional paid-in capital and is amortized as compensation expense over the vesting period. As of April 30, 2012, we had $13.1 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.

A summary of nonvested share units and performance-based nonvested share units for the year ended April 30, 2012, is as follows:


	(shares in 000s)
	Shares			Weighted-Average Grant Date Fair Value
Outstanding, beginning of the year		350		$	17.30
Granted		228			15.75
Released		(162	)		16.71
Forfeited		(10	)		16.89

Outstanding, end of the year		406		$	16.07

For performance-based units, the number of units to be earned will depend on (1) H&R Block, Inc.'s achievement of specified earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue targets and (2) H&R Block, Inc.'s total shareholder return (TSR) ranked against that of other companies that are included in the Standard & Poor's 500 Index during the three-year performance period. Compensation expense for performance-based shares is initially estimated based on target performance and is adjusted as appropriate through the performance period. Performance shares vest each year over a three year period from date of grant but are not distributed until the end of the three-year performance period. The TSR is applied at the end of the three-year performance period.

The total fair value of both types of share units vesting during fiscal years 2012, 2011 and 2010 was $2.9 million, $1.7 million and $3.1 million, respectively. Upon the grant of both types of nonvested share units, unearned compensation cost is recorded as an offset to additional paid-in capital and is amortized as compensation expense over the vesting period. As of April 30, 2012, we had $1.9 million of total unrecognized compensation cost related to these units. This cost is expected to be recognized over a weighted-average period of two years.

We utilize the Monte Carlo valuation model to value performance-based nonvested share units on the grant date. We typically estimate the expected volatility using historical volatility for H&R Block, Inc. and selected comparable companies. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term. The following assumptions were used to value performance-based nonvested share units using the Monte Carlo valuation model during the year ended April 30, 2012:


Expected volatility		20.68% - 143.12 %
Expected term		3 years
Dividend yield		0% ⁽¹⁾
Risk-free interest rate		0.75%
Weighted-average fair value	$	17.46

⁽¹⁾	The valuation model assumes that dividends are reinvested by the issuing entity on a continuous basis.