The Board of Directors. HOIST Kredit AB (publ) hereby present the. Annual Report

Transcription

1 The Board of Directors hereby present the Annual Report for the financial year July 1 December 31,

2 Table of contents 1. Administration report Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Statement of changes in shareholders equity Group Consolidated cash flow statement Parent company income statement Parent company statement of comprehensive income Parent company balance sheet Statement of changes in shareholders equity Parent Company Parent Company cash flow statement Corporate information Accounting principles Notes Note 1 Geographical split of income from receivables portfolios Note 2 Interest income Note 3 Interest expense Note 4 Fee and commission result Note 5 Net result from financial transactions Note 6 General and administrative expenses Note 7 Shares and participations in joint ventures Note 8 Group contributions Note 9 Untaxed reserves Note 10 Tax Note 11 Lending to credit institutions Note 12 Lending to corporations Note 13 Receivables portfolios Note 14 Group companies* Note 15 Intangible fixed assets Note 16 Tangible fixed assets Note 17 Other assets Note 18 Deposits and borrowings from the public Note 19 Other liabilities Note 20 Provisions Note 21 Share capital Note 22 Other reserves Note 23 Pledged assets Note 24 Average number of employees Note 25 Wages and other remuneration Note 26 Fees to auditors Note 27 Commitments Note 28 Financial instruments Note 29 Derivative instruments Note 30 Financial risks and financial policies Note 31 Capital adequacy assessment and capital risk Note 32 Critical estimates and assumptions Note 33 Related parties Note 34 Subsequent events Auditors report Page 2

3 1. Administration report The Board of Directors and the Managing Director of (the Company, and, together with its subsidiaries, HOIST or the Group ) hereby submit the annual report and consolidated accounts for the shortened financial year July 1 to December 31,. In order to adapt the Company s financial year to the financial year of its parent company at that time, HOIST Group S.A., it was resolved in a shareholders meeting on, that the Company s financial year will begin on July 1 and end on June 30. Thereafter, following the restructuring of the Group in late, it was determined that all entities within the Group shall have the same financial year starting on January 1 and ending on December 31. As a result, both the previous and the current annual reports contain only six months and the amounts in the income statement, changes in equity, cash flows and related notes are comparable to the previous financial year except for seasonal variations which are considered to be insignificant. The Company is headquartered in Stockholm, Sweden. Its corporate registration number is and its registered address is Nybrogatan 15, P.O. Box 7848, SE Stockholm, Sweden. Parent Company The object of the Company s business is to conduct financing operations, in accordance with the Swedish Banking and Finance Act (2004:297), directly, via branches and through subsidiaries, and may thus: Borrow funds, for example, by accepting deposits from the general public or issuing bonds or other comparable debt instruments; Grant or broker loans, for example, in the form of consumer credits and loans secured by charges over real property or claims; Participate in financing, for example, in acquiring claims and leasing personal property; Negotiate payments; Provide means of payments; Issue guarantees and assume similar obligations; Participate in the issuance of securities; Provide financial advice; Hold securities in safekeeping; Conduct letters of credit operation; Provide bank safety deposit services; Engage in currency trading; Engage in securities operations subject to the conditions prescribed in the Securities Markets Act (SFS 2007:528); Provide credit information subject to the conditions subscribed in Credit Information Act (SFS 1973:1173), and to, within the framework of the Swedish Banking Finance Act (2004:297), operate other areas of business in conjunction with this, e.g. collecting, owning and management real property, lease holds and shares and provide advice and service in connection therewith. Page 3

4 Business Business overview HOIST is a leading European financial services provider specialising in the purchasing and management of non-performing consumer receivables. The Group also draws on its extensive experience and resources to manage receivables on behalf of third parties on a commission fee basis. Since 2009, HOIST has been offering savings deposit accounts targeted at retail clients in Sweden. HOIST is focused on small and medium-sized unsecured consumer receivables. The acquired portfolios mainly consist of retail bank loans to private individuals, as well as receivables originating from telecom, specialist finance, retail, utility companies and the public sector. HOIST s clients and partners thus include private customers, financial institutions and corporate entities. HOIST owns close to 1.3 million receivables with a combined principal value of approximately SEK 51 billion. In addition, the Group services receivables on behalf of third parties., is supervised by Finansinspektionen (the Swedish Financial Supervisory Authority). Market HOIST s geographical focus is Continental Europe. The Group holds portfolios in Germany, France, Belgium, the Netherlands, Italy, Austria, the United Kingdom and Poland, and also has operations in Sweden. Through the sale of receivables, banks and other originators can focus on their core business, release committed capital, management capacity and organisational resources, improve liquidity, mitigate the risk of uncertain payment profiles and improve important performance ratios. HOIST s main competitors include receivables purchase and management companies, integrated players operating a wider range of financial service businesses, as well as specialist investors. Success factors The Group has long-standing and well-established relationships with the largest banks and financial institutions in its markets, and is renowned for managing the receivables portfolios in a reliable, professional and ethical manner. During the past fifteen years, HOIST has built one of the deepest specialist data warehouses in Continental Europe. In combination with its accumulated expertise in the sector and a thorough understanding of portfolio valuation and pricing, HOIST has developed a highly efficient process of portfolio acquisition and receivables management. HOIST uses market-leading technology to ensure that it is constantly able to offer its clients and partners solutions that are tailored towards their specific needs and situation. By employing its amicable settlement approach in the first instance, HOIST is perceived as a solution-oriented partner, which reinforces its admirable reputation and stable operating principals. The HOIST group is privately-owned, which has allowed it to pursue a long-term strategy of developing its business and relationships. The Group is committed to operating in a manner consistent with its philosophy of acting in the interests of clients and partners at all times and providing a marketleading working environment for its employees. Page 4

5 Values, vision and strategy HOIST provides tailored solutions to all clients and partners private individuals, financial institutions and mid-sized companies. The Group always puts its clients first, based on a thorough understanding of their respective objectives and drivers. HOIST applies the most stringent standards of integrity in all its activities. HOIST s vision is to be the obvious partner of choice in the Group s core sector in its chosen markets. HOIST s strategy is to continuously seek to enhance returns on existing portfolios and to perpetually identify and implement operational improvements. Furthermore, HOIST will strengthen its position in its existing markets through acquisition of new portfolios and a selective expansion into new markets and new sectors. Employees HOIST s employees draw from a variety of backgrounds, including legal, financial, research and other complementary professions. The diversity, experience and commitment of its managers and staff are unique and constitute a key component to the success of the Group. As of December 31,, the HOIST Group had 404 employees (corresponding to 363 Full Time Equivalent Employees (FTEs)). As of, the number of employees within the Group was 382 (corresponding to 341 FTEs). Group structure and ownership HOIST International AB (publ) is the Parent Company of. HOIST Kredit AB (publ) acquires and holds most of the unsecured receivables portfolios of the Group and the receivables are managed by its subsidiaries or branches. These companies also provide receivables management services on a commission fee basis to third party clients. The picture below illustrates and its principal active subsidiaries and branches as of December 31,. The consolidated Group that is the subject of this Annual Report (the Group) is marked with the dotted line. Please, refer to Note 14, Group companies for the full legal structure of the Group. Structure of the Group as of December 31, Page 5

6 Development in the financial year July 1, to December 31, Unless otherwise stated, all comparisons of market, financial and operational data are to the first halfyear, corresponding to the previous financial year. Since this financial year also consists of six months, the amounts describing the development for the financial year July December are comparable to the previous financial year, Market development The recovery in portfolio sales activities that was anticipated in 2010 was delayed due to continued market turbulence linked to the escalating European debt crisis. Despite the fact that most banks in Europe continued to remain pre-occupied with strengthening their balance sheets and managing the fallout of the European sovereign debt crisis, the second half of saw a long overdue uptick in transaction volumes across all of the Group s markets. The procrastinated resolution of the crisis together with the upcoming Basel III regulation is likely to keep banks focused on reinforcing their balance sheets and operations for some time. Nevertheless, HOIST believes that the positive trend seen in portfolio sales volumes across Europe will continue throughout This expectation is reinforced by the fact that several large outsourcing transactions are being contemplated by leading pan-european banks in Germany and other markets across Europe. Furthermore, as the number of market participants was diminished during the recession years and no significant new buyers have since entered the market, HOIST expects its conversion rates (the ratio between portfolios bid and won) to remain relatively high in the foreseeable future. The Group holds a cautiously optimistic view of the future. The fact that, during the past 17 years, the Group has grown into one of Europe s leading outsourcing partners for banks with respect to receivables, puts HOIST into an advantageous situation to exploit the anticipated market development going forward. Business I October, HOIST acquired its first receivables portfolio in Italy. In December, HOIST entered the U.K. with the acquisition of a small portfolio; thus during this period HOIST successfully launched activities in two major European jurisdictions creating significant new value accretive opportunities for the Group. Revenues and earnings The Group s revenues decreased by SEK 258 million and amounted to SEK 257 million. The primary reason was the revaluation of the receivables portfolios. Gross collection income for the Group was SEK 348 million in the period, which is roughly in line with the first half of. The acquisition cost for new portfolios was SEK 205 million for the financial year July December, compared to SEK 84 million for January June. The amortisation of receivables portfolios increased from SEK 117 million to SEK 148 million, mainly as a result of the revaluation of the portfolios during the previous financial year. The net interest income, calculated as the net of interest income and interest expenses, which corresponds to the Group s borrowing from the public and placing of excess liquidity with banks and credit institutions, amounted to SEK -28 million (SEK -27 million). The expenses increased both, as a result of a higher interest rate on deposits and an increased deposit stock. The net result from financial transactions grew from SEK -1 million to SEK 26 million as a result of unrealised exchange rate gains and market valuation of derivatives used for the purpose of hedging currency exposure. Page 6

7 Operating expenses increased by four percent to SEK 202 million (SEK 194 million). The major part of the increase is a lump sum and is attributable to the legal restructuring of the Group that was finalised in December. Part of the additional costs relate to consultant fees. Furthermore, during the autumn, parts of the Group s headquarter functions have been transferred from Germany to Sweden and the Group has thus incurred double costs for these functions during the transfer period. The result from joint ventures related to the investment in a receivables portfolio in Poland has had a positive impact on the Group s operating profit by SEK 38 million (SEK 4 million). Profit before tax amounted to SEK 94 million (SEK -71 million). The operating result for the previous financial year of SEK 324 million was charged a group contribution of SEK 396 million and decreased to SEK -71 million consequently. Taking into account the above, the comparable profit before tax has decreased by SEK 238 million, which is explained by the revaluation of the receivables portfolios of SEK 268 million. Capital structure Cash and cash equivalents amounted to SEK 2,430 million as of December 31, (SEK 2,257 million as of ), which by far exceeds HOIST s internal targets for liquidity reserves for its deposit operations. The net debt amounted to SEK 2,064 million (SEK 2,085 million) at the end of the period. Shareholders equity was SEK 511 million (SEK 435 million), representing an equity/total assets ratio of 9.7 percent (8.7 percent). As of December 31,, the Group funded its operations through deposits from the general public. HOIST attracts a substantial amount of deposits from the general public through its competitive product offering. The product offering is covered by the state-backed deposit insurance. Deposits from the general public increased to SEK 4,495 million as of December 31,, compared to SEK 4,347 million as if. Risk report The Group is pro-actively managing the risks of the business through its well-developed Risk Management function. Please, refer to Note 30 Financial risks and financial policies for further details. Other significant events Group structure During November, a legal restructuring of the Group was effected in several steps. The previous Parent Company, HOIST Intressenter AB, divested HOIST International AB (publ) to HOIST Group S.A. which subsequently distributed the shares in HOIST International AB (publ) to Beagle Investment S.A. (42.5 percent) and Olympus S.A. (42.5 percent) and remains part-owner with 15 percent of the shares. has acquired the shares in HOIST Immobilien GmbH from HOIST Group S.A, as well as received the shares in HOIST B.V., HOIST Poland Sp.Z.o.o. and HOIST Collection Services GmbH through a shareholders contribution from HOIST International AB (publ). HOIST Collection Services was thereafter merged with HOIST AG. HOIST International AB (publ) is thus now the Parent Company of the Group that owns HOIST Kredit AB (publ), which in turn owns all the operating entities in the Group. is under the supervision of Finansinspektionen. is from late 2010 reporting not only stand-alone but also as a so called Financial Group (i.e. together with its subsidiaries). Page 7

8 Since 2006, the Group has been in discussions with Finansinspektionen regarding which entities in the Group should be regarded as constituting a so-called Financial Group from a regulatory perspective and related issues. On May 27, 2008, Finansinspektionen took the view that, inter alia, all companies within the HOIST Intressenter AB (publ) Group should be regarded as part of a so called Financial Group for regulatory purposes, rather than on a stand-alone basis. has contested this decision in the Administrative Courts and is now awaiting a decision during the spring of 2012 from the Supreme Administrative Courts as regards review dispensation. As of December 31,, has continued to report in line with previous practice but intends to, irrespective of the verdict, include all companies within HOIST International AB (publ) into the Financial Group starting from the first quarter of Subsequent events No significant events have incurred since the end of the reporting period. Page 8

9 Historical financial overview Consolidated income statement July 1 Dec.31, Total operating income Total operating expenses Profit before income tax Net profit for the year Consolidated balance sheet Cash and lending to credit institutions Lending to the public Shares and participations in joint ventures Intangible fixed assets Tangible fixed assets Other assets Total assets Liabilities to credit institutions Deposits from the public Other liabilities and provisions Shareholders' equity Total equity and liabilities Page 9

10 Proposal for the allocation of profits The following funds are available for allocation: SEK Retained earnings Profit of the period Total profit The Board of Directors and the Managing Director propose that the earnings will be distributed so that SEK are carried forward. Page 10

11 2. Financial statements Consolidated income statement Note Income receivables portfolios Interest income Interest expense Fee and commission income Fee and commission expense Net result from financial transactions Other income Total operating income General and administrative expenses Depreciation and amortisation of tangible and intangible assets 15, Total operating expenses Profit from shares and participations in joint ventures Dividend Profit before income tax Income tax expense Net profit for the period Consolidated statement of comprehensive income Net profit for the period Other comprehensive income Currency translation differences Other comprehensive income for the period, net of tax Total comprehensive income for the period Attributable to Owners of the Parent Company Page 11

12 Consolidated balance sheet ASSETS Note Cash Lending to credit institutions Lending to the public Lending to corporations Receivable portfolios Receivables from affiliated companies Total Shares and participations in joint ventures Intangible assets Goodwill Licenses and software Total Tangible fixed assets Machinery Equipment and furniture Total Other assets Deferred tax assets Prepaid expenses and accrued income Total assets SHAREHOLDERS' EQUITY AND LIABILITIES Note Liabilities Deposits and borrowings from the public Other liabilities Deferred tax liabilities Accrued expenses and prepaid income Provisions Total liabilities Shareholders' equity Share capital Other reserves Retained earnings (losses) carried forward Profit for the year Total shareholders' equity Total liabilities and shareholders' equity Page 12

13 Statement of changes in shareholders equity Group Share capital Other reserves Capital contributions Retained earnings incl. profit for the period Total shareholders' equity Balance as of Jan. 1, Total comprehensive income for the period Net profit for the period Other comprehensive income Currency translation differences Total comprehensive income for the period Transactions with owners, recorded directly in equity Shareholders' contribution Total transactions with owners, recorded directly in equity Balance as of Share capital Other reserves Capital contributions Retained earnings incl. profit for the period Total shareholders' equity Balance as of July 1, Total comprehensive income for the period Net profit for the period Other comprehensive income Currency translation differences Total comprehensive income for the period Balance as of Page 13

14 Consolidated cash flow statement Jul. 1- OPERATING ACTIVITIES Cash flow from collection income on receivables portfolios Interest income Fee and commission income Other operating income Interest expense Fee and commission expenses Administration expenses Other operating expenses Net cash flow from financial transactions Income tax paid Total Acquisition of receivables portfolios Increase/decrease in lending to general public Increase/decrease in deposits from general public Changes in other balance sheet items Total Cash flow from operating activities INVESTING ACTIVITIES Investments in intangible fixed assets Investments in tangible fixed assets Investments in subsidiaries Investments in affiliated companies Cash flow from investing activities Cash flow for the financial year Cash at the beginning of the year Cash at the end of the year Page 14

15 Parent company income statement Note Income receivables portfolios Interest income Interest expense Fee and commission expense Other financial income and expense Other income Total operating income General and administrative expenses Depreciation and amortisation of tangible and intangible assets 15, Total operating expenses Profit from shares and participations in joint ventures Untaxed reserves Profit before income tax Income tax expense Net profit for the period Parent company statement of comprehensive income Dec. 31, June 30, Net profit for the period Other comprehensive income Currency translation differences Other comprehensive income for the period, net of tax Total comprehensive income for the period Attributable to Owners of the Parent Company Page 15

16 Parent company balance sheet ASSETS Note Cash 7 1 Lending to credit institutions Lending to the public Lending to corporations Receivable portfolios Receivables from affiliated companies Total Shares and participations in subsidiaries Shares and participations in joint ventures Intangible assets Licenses and software Total Tangible fixed assets Equipment and furniture Total Other assets Deferred tax assets Prepaid expenses and accrued income Total assets SHAREHOLDERS' EQUITY AND LIABILITIES Note Liabilities Deposits and borrowings from the public Other liabilities Accrued expenses and prepaid income Total liabilities Shareholders' equity Share capital Share premium Other reserves Retained earnings (losses) carried forward Profit for the year Total shareholders' equity Total liabilities and shareholders' equity Pledged assets Commitments Page 16

17 Statement of changes in shareholders equity Parent Company Restricted Non restricted TSEK Share capital Other reserves Capital contributions Retained earnings incl. profit for the period Total shareholders' equity Balance as of Jan. 1, Total comprehensive income for the period Net profit for the period Other comprehensive income Currency translation differences Total comprehensive income for the period Transactions with owners, recorded directly in equity Shareholders' contribution Total transactions with owners, recorded directly in equity Balance as of Restricted Non restricted TSEK Share capital Other reserves Capital contributions Retained earnings incl. profit for the period Total shareholders' equity Balance as of July 1, Total comprehensive income for the period Net profit for the period Other comprehensive income Currency translation differences Total comprehensive income for the period Balance as of Dec 31, Page 17

18 Parent company cash flow statement Jul. 1- OPERATING ACTIVITIES Cash flow from collection income on receivables portfolios Interest income Other operating income Interest expense Fee and commission expenses Administration expenses Other operating expenses Net cash flow from financial transactions Income tax paid Total Acquisition of receivables portfolios Increase/decrease in lending to general public Increase/decrease in deposits from general public Changes in other balance sheet items Total Cash flow from operating activities INVESTING ACTIVITIES Investments in intangible fixed assets Investments in tangible fixed assets Investments in subsidiaries Investments in affiliated companies Cash flow from investing activities Cash flow for the financial year Cash at the beginning of the year Cash at the end of the year Page 18

19 3. Corporate information HOIST International AB (publ) is the ultimate parent company of the HOIST Group, for which consolidated accounts are prepared. The consolidated accounts for HOIST International AB (publ) are available at Nybrogatan 15, P.O. Box 7848, SE Stockholm, Sweden. The annual report and consolidated accounts for the financial year starting July 1,, and ending December 31, for were approved by the Board of Directors on April 2, 2012, and will be presented for adoption at the General Shareholders Meeting. Page 19

20 4. Accounting principles Accounting principles applied The consolidated financial accounts for are prepared in accordance with the International Financial Reporting Standards (IFRS) as approved by the EU. In addition, the Swedish Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL) and RFR 1 Additional rules for Group Accounting have been applied. The Parent Company applies the same accounting principles as the Group except in the cases noted below under the section on the Parent Company s accounting principles. (a) New and amended standards adopted by the Group There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after July 1,, that would be expected to have a material impact on the Group. (b) New standards, amendments and interpretations issued but not effective for the financial year beginning July 1,, and not adopted on forehand IAS 19, Employee benefits was amended in June. The impact on the Group will be as follows: To eliminate the corridor approach and recognise all actuarial gains and losses in other comprehensive income as they occur; to immediately recognise all past service costs; and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The Group is yet to assess the full impact of the amendments. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: Those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, IFRS 10, Consolidated financial statements builds on the existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the Parent Company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group is yet to assess IFRS 10 s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after January 1, IFRS 12, Disclosures of interests in other entities includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The Group is yet to assess IFRS 12 s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after January 1, IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. Page 20

21 The Group is yet to assess IFRS 13 s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after January 1, There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Amendments in accounting principles Group contribution The Swedish Financial Reporting Board ( Rådet för Finansiell Rapportering, RFR) has withdrawn the UFR 2-normative Group Contributions and Capital Contributions that previously governed the accounting rules concerning group contributions. For financial year starting on January 1, 2010 or later, new rules according to RFR are applicable. The new rules stipulate that group contribution that is received by the subsidiaries from the Parent Company is accounted for as a cost in the Parent Company. The tax effect of given group contributions is accounted for in the income statement in accordance with IAS 12. In cases when the Parent Company receives a group contribution from its subsidiaries, the Parent Company accounts for the received group contribution in accordance with usual principles applicable to dividends from subsidiaries, i.e. as a financial income. Tax on the received group contribution is accounted for in the income statement in accordance with the rules in IAS 12. The amended rules concerning group contributions are applied in retrospective for the financial year January June. Assumptions The preparation of financial reports in accordance with IFRS requires the Management to make estimates and assumptions that affect the application of the accounting principles and the carrying values of assets, liabilities, revenue and expenses. Estimates and assumptions are based on historical experience and a number of other factors that under current circumstances seem reasonable. The result of these estimates and assumptions is then used to determine the carrying value of assets and liabilities that otherwise is not clearly indicated by other sources. Actual outcomes may deviate from these estimates and assumptions. Estimates and assumptions are reviewed regularly, and the effect on carrying values is recognised through profit or loss. Changes in estimates are reported in the period in which the change is made, provided it has affected only this period, or the period the change was made and future periods if the change affects both current and future periods. Estimates made by the Management that have a significant impact on the consolidated financial statements and which could affect the consolidated financial statements in subsequent years, are described in more detail in Note 32. Page 21

22 Consolidation Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. Intra-Group receivables and liabilities, revenue and expenses, and unrealised gains and losses that arise from transactions within the Group are eliminated in their entirety in the consolidated financial statements. Joint ventures Shareholdings in affiliated companies (joint ventures) in cases with common decision making are accounted for in accordance with the equity method. According to the equity method, in the beginning the asset is accounted for at its acquisition value. The carrying value is increased or decreased subsequently to reflect the profit share in the investment for the owner company. Changes attributable to foreign exchange gains or losses are reflected directly towards equity. The accounting of the affiliated company follows the same accounting principles as the Group. Currency Functional currency The Parent Company s functional currency is Swedish kronor (SEK), which is also the presentation currency for the Parent Company and for the Group. All amounts, unless indicated otherwise, are rounded off to the nearest thousand. Assets and liabilities are carried at acquisition cost, with the exception of certain financial assets and liabilities, which are carried at fair value. Transactions in foreign currency Group companies prepare their accounts in the local functional currency in the country where they have their operations. Transactions in a currency other than the local functional currency are recognised at the exchange rate in effect on the transaction day. When such transactions are offset or settled, the exchange rate may deviate from the one that applied on the transaction day, in which case a (realised) exchange rate difference arises. Moreover, monetary assets and liabilities in foreign currency are translated at the exchange rates on each balance sheet date, due to which an (unrealised) exchange rate difference arises. Both realised and unrealised exchange rate differences of this type are recognised in the consolidated income statement. Page 22

23 Translation of the financial statements of foreign operations Assets and liabilities in foreign operations, including goodwill and other Group surplus and deficit values, are translated from the functional currency of the operations to the Group s functional currency, at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rate, which serves as an approximation of the rate that was applied on each transaction date. Translation differences arise in the translation of subsidiary accounts in part because the balance sheet date rate changes each period and in part because the average rate deviates from balance sheet date rate. Translation differences are recognised in other comprehensive income as a separate component of equity. The exchange rates of major currencies to SEK developed as follows: Rate as at balance sheet date Annual average rate Jul. 1-Dec. 31, SEK/EUR (Euro) 8,94 9,15 9,01 8,89 SEK/PLN (Polish zloty) 2,03 2,30 2,25 2,26 SEK/CHF (Swiss franc) 7,36 7,56 7,90 8,09 Financial assets and liabilities The Group classifies its financial assets and liabilities in the following categories: At fair value through profit or loss, loans and receivables, and other liabilities. The classification depends on the purpose for which the financial assets or liabilities were acquired. Management determines the classification of its financial assets and liabilities at initial recognition. Financial assets at fair value through profit or loss Portfolios acquired prior to July 1, The Group purchases portfolios of financial assets from banks, insurance companies, property companies and other corporations and institutions. The portfolios contain receivables against mainly private individuals, which were originally consumer loans, residual claims from property or car loans post enforcement of security, insurance contracts, rental contracts or similar claims. The Group s portfolios are financial assets as they constitute rights to receive cash or other financial assets. The Group has opted to categorise its receivables portfolios as at fair value through profit or loss, because these financial assets are managed and their performance is evaluated on a fair value basis, in accordance with the Group's risk management policies. Information about the portfolios is provided internally on that basis to the Group's key management. For the initial recognition at the time of purchase, the purchase price is considered as an external arm s length indication of the fair value of the financial asset. In the consolidated income statement, revenues derived from receivables portfolios are reported as the collected amount less change in the valuation of the portfolios. In connection with the purchase of each portfolio of written-off receivables, a forecast is made of the portfolio s forecast cash flows. Cash flows include all amounts expected to be received from the portfolio, less forecast collection costs. The resulting net collection forecasts are monitored over the course of the year and periodically updated based on, among other things, achieved collection results, agreements reached with debtors on instalment plans, and macroeconomic information; with such Page 23

24 updates being conducted at a minimum once a year for each individual portfolio of receivables. On the basis of the updated net collection forecasts and a market-based internal rate of return, a new carrying value for the portfolio is calculated as at the last day of each financial year. Changes in the portfolio values are recognised as revenue or loss in the consolidated income statement. For further information, see Note 13. The underlying concept of the fair value methodology is to assess an asset s book value by using the asset s best available price. Receivables portfolios are generally not publicly traded, and market prices are therefore not available. However, as most of the competitors in the sector use the same pricing methodology when acquiring a portfolio, it is possible to replicate any portfolio market price by using the same methodology. The Group values portfolios by estimating future cash collections for the next ten years. Standards cost curves (percent of collections, monthly) for primary, secondary or tertiary portfolios are then applied to obtain monthly net collections curve. Every month, the Group will look at the forward ten years net collection forecasts for all portfolios, and discount the forecasts. The result then constitutes the new fair value of the portfolio. Portfolio types are defined as follows: Primary receivables: Up till 180 days post write-off Secondary receivables: Between 180 and 720 days post write-off Tertiary receivables: More than 720 days post write-off The initial classification into primary, secondary and tertiary portfolios reflects the portfolios characteristics as of the acquisition date. As portfolios are held by the Group over time, their classification will change to reflect their increased aging profile. Cost curves The Group is closely monitoring its collection costs and uses standard cost curves for primary, secondary, tertiary and payer portfolios (portfolios with a high level of running collection). These curves are based on the analysis of real collection costs engaged on typical portfolios and are monitored with an ABC Costing Tool developed in 2007 together with Deloitte Consulting GmbH, Dusseldorf. These curves are then used in the calculation of the value of all portfolios. Portfolio forecasts The portfolio forecast curve initially used for the monthly fair value calculation is the portfolio acquisition curve. Every year, the Management in each country adjusts those curves to set new collection budget. Those curves then become the basis for the calculation of the fair value of each portfolio. The claims are to an overwhelming part unsecured and were all originally made to private individuals or have the benefit of recourse to a personal guarantor. For the fair value calculation, the three most influential factors are (i) the gross collections forecast level, (ii) the cost level, and (iii) the internal rate of return. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than twelve months after the balance sheet date. These are classified as non-current assets. The Group s loans and receivables comprise account receivables, other receivables, and cash and cash equivalents in the consolidated balance sheet. Page 24

25 Receivables that have been acquired prior to July 1, are accounted for as a financial asset at fair value. This means that cash-flows related to portfolios that were acquired later than July 1,, are discounted at the IRR that was valid at the time for the acquisition. Other liabilities The Group s other liabilities comprise liabilities to credit institutions, accounts payable and other liabilities in the consolidated balance sheet. Other liabilities are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition or issue of the liability. Subsequent to acquisition, they are carried at amortised cost according to the effective rate method. Receivables and other receivables Receivables and other receivables are stated at cost. Provision is made for impairment of receivables where evidence exists of an inability to recover the receivable. If the anticipated maturity is longer than one year they constitute accounts receivable, and if it is shorter they are other receivables. These receivables fall into the category loans and accounts receivable. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the consolidated balance sheet. Liabilities to credit institutions, accounts payable and other liabilities Liabilities to credit institutions, accounts payable and other liabilities are classified as other financial liabilities, which means, that they are initially recognised at their fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial liability. Subsequent to acquisition, those liabilities are carried at amortised cost according to the effective rate method. Long-term liabilities have an anticipated maturity of more than one year, while short-term liabilities have a maturity of less than one year. Derivatives Derivatives are initially recognised at their fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value at the end of each reporting period. Changes in fair values are recognised in the consolidated income statement as financial income or financial expenses. Intangible fixed assets Capitalised expenses for IT development Expenditures for IT development and maintenance are generally expensed as incurred. Expenditures for software development that can be attributed to identifiable assets under the Group s control and with anticipated future economic benefits are capitalised and recognised as intangible assets. Additional expenditures for previously developed software, etc. are recognised as assets in the consolidated balance sheet if they increase the future economic benefits of the specific asset to which they are attributable, e.g., by improving or extending a computer program s functionality beyond its original use and estimated period of use. IT development costs that are recognised as intangible assets are amortised using the straight-line method over their useful lives, though not more than five years. The asset is recognised at cost less accumulated amortisation and impairment losses. Costs associated with the maintenance of existing computer software are expensed as incurred. Page 25

26 Goodwill When the purchase price, any non-controlling interest and fair value at the acquisition date of previous shareholdings exceed the fair value of identifiable net assets acquired, the exceeding amount is recorded as goodwill. Goodwill from acquisitions of subsidiaries is recorded as intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Profit or loss on disposal of an entity includes the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash generating units ( CGU ) for the purpose of impairment testing. The allocation is made to the cash generating units, or groups of cash generating units, determined in accordance with the Group s operating segments, expected to benefit from the business combination in which the goodwill arose. Other intangible fixed assets Other intangible fixed assets are amortised on a straight-line basis over their estimated period of use. Tangible fixed assets Tangible fixed assets are recognised as an asset in the consolidated balance sheet if it is likely that the future economic benefits will accrue to the Company and the cost of the asset can be reliably estimated. An annual determination is made of each asset s residual value and useful life. Tangible fixed assets are recognised at cost less accumulated depreciation and impairment losses. Principles for depreciation/amortisation of assets Depreciation/amortisation is carried out according to the straight-line method over the estimated useful life of the asset. The following depreciation/amortisation periods are applied: Machinery: 20 years Equipment: 2-5 years Investment in rented premises: 5 years Intangible fixed assets: 3-5 years Leasing Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessee are classified as financing leases. Finance leases are capitalised at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset and the lease term. Page 26