NOTE 2: REVENUE RECOGNITION

On May 1, 2018, we adopted ASU 2014-09 using the full retrospective approach for all contracts as of the adoption date. As the adoption of this guidance did not have a significant impact on our consolidated financial statements, no adjustments were made to the prior year periods to be in compliance with ASU 2014-09.

Revenue is recognized upon satisfaction of performance obligations by the transfer of a product or service to the customer. Revenue is the amount of consideration we expect to receive for our services and products, and excludes sales taxes. When providing the majority of our tax preparation services, we generally have multiple performance obligations that are provided simultaneously at a point in time and revenue is recognized at that time. Our Peace of Mind® Extended Service Plan (POM) and Tax Identity Shield® (TIS) products have multiple performance obligations that are provided over time. The transaction price for POM and TIS, which is due at the time of purchase, is allocated to the various performance obligations based on relative standalone selling prices. Revenues for POM and TIS are deferred until the respective performance obligations have been satisfied. We have determined that these contracts do not contain a significant financing component.

The majority of our revenues are from our U.S. business. The following table disaggregates our U.S. revenues by major service line, with all international businesses included in a single line, which consists primarily of tax preparation revenues:



							(in 000s)
	Three months ended October 31,				Six months ended October 31,
	2018		2017		2018		2017
Revenues:
U.S. assisted tax preparation	$	41,652	$	36,665	$	72,756	$	66,628
U.S. royalties	8,062		7,008		15,633		13,975
U.S. DIY tax preparation	2,994		4,263		5,775		7,489
International revenues	45,497		47,934		84,676		88,351
Revenues from Refund Transfers	560		1,135		1,984		3,951
Revenues from Emerald Card®	9,478		9,180		23,724		24,167
Revenues from Peace of Mind® Extended Service Plan	24,318		24,585		60,895		56,528
Revenues from Tax Identity Shield®	5,243		257		9,984		511
Interest and fee income on Emerald Advance	397		594		844		1,258
Other	10,670		9,233		17,783		15,798
Total revenues	$	148,871	$	140,854	$	294,054	$	278,656

Service revenues are recognized when performance obligations are satisfied as follows:


▪	Assisted and DIY online tax preparation revenues are recorded when a completed return is electronically filed or accepted by the customer. The value of point-of-sale discounts and coupons are recorded as a reduction of revenue.


▪	Fees for electronic filing of tax returns prepared using our DIY tax preparation solutions are recorded when the return is electronically filed.


▪	Fees related to Refund Transfers (RTs) are recognized when the Internal Revenue Service (IRS) acknowledgment is received and the bank account is established at Axos Bank, formerly known as BofI Federal Bank, a federal savings bank (Axos).

▪

Revenues associated with our Emerald Card® program consist of interchange income from the use of debit cards and fees from the use of ATM networks, net of volume-based amounts retained by Axos in connection with our agreement. Interchange income is a fee paid by a merchant bank to Axos through the interchange network. Net revenue associated with our Emerald Card® is recognized based on cardholder transactions.

▪

Under POM we (1) represent our clients if they are audited by a taxing authority, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. POM revenues and incremental wages are deferred and recognized over the term of the plan, based on the historical pattern of actual claims paid, as claims paid represent the transfer of POM services to the customer. The plan 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.

▪

Our TIS program offers 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 pre-tax season identity theft risk assessment, notifying clients if their information is detected on a tax return filed through H&R Block, and obtaining additional IRS identity protections when eligible. TIS revenues are deferred and are recognized as the various services are provided to the client, either by us or a third party, throughout the term of the contract, which ends on April 30th of the following year.

Royalty, product and other revenues are recognized when performance obligations are satisfied as follows:


▪	Royalties, which are based on contractual percentages of franchise gross receipts, are generally recorded in the period in which the services are provided by the franchisee to the customer.


▪	Revenue from the sale of DIY desktop software is recognized when the product is sold to the end user. Rebates and other incentives paid in connection with these sales are recorded as a reduction of revenue.


▪	Participation revenue on Emerald Advance lines of credit (EAs) is recorded over the life of the underlying loan.

Changes in the balances of deferred revenue and wages for POM are as follows:



										(in 000s)
POM	Deferred Revenue						Deferred Wages
Six months ended October 31,	2018			2017			2018			2017
Balance, beginning of the period	$	218,274		$	211,223		$	32,683		$	31,344
Amounts deferred	3,459			2,913			80			36
Amounts recognized on previous deferrals	(71,074		)	(63,332		)	(10,752		)	(9,230		)
Balance, end of the period	$	150,659		$	150,804		$	22,011		$	22,150

As of October 31, 2018, deferred revenue related to POM was $150.7 million. We expect that $105.7 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following sixty months.

Deferred revenue related to TIS was $36.4 million and $20.6 million at April 30, 2018 and 2017, respectively. As of October 31, 2018 and 2017, TIS deferred revenue was $21.8 million and $24.4 million, respectively. All deferred revenue related to TIS will be recognized within this fiscal year.

A significant portion of our accounts receivable balances, with the exception of those related to EAs, are subject to the new revenue guidance. The majority of our services and products must be paid for at the time of service, and therefore no receivable is recorded unless an RT is purchased. 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 contracts with customers are generally collected on a periodic basis during and subsequent to the tax season. See note 4 for our accounts receivable balances.