ANNUAL REPORT 2014 Collection House Limited ACN 010 230 716 Contents Performance highlights Increase in dividends per share Increase in profit after tax Performance highlights The new face of the Collection House Group Our business Chairman’s message Managing Director and Chief Executive Officer’s report Our performance Our leadership Our people Our technology Corporate social responsibility Corporate governance statement Directors’ report Auditor’s independence declaration Financial statements Shareholder information Corporate directory 1 2 3 8 10 14 22 26 28 31 32 42 68 70 140 142 11% Dividends per share (cents) FY11 / 6.2 FY12 / 6.4 FY13 / 7.2 FY14 / 8.0 20% Profit after tax ($M) FY11 / 10.1 FY12 / 12.7 FY13 / 15.6 FY14 / 18.7 Increase in earnings per share 8% FY11 / 10.4 FY12 / 12.1 FY13 / 13.6 FY14 / 14.7 Earnings per share (cents) Increase in PDL collections and commission 11% PDL collections and commission ($M) FY11 / 109.9 FY12 / 126.5 FY13 / 136.1 FY14 / 150.8 Average Return on equity remained steady at Reduction in debt/debt + equity 13% Return on equity (%) FY11 / 10.8 FY12 / 12.4 FY13 / 13.4 FY14 / 13.4 Increase in shareholder equity 27% Shareholder equity (%) FY11 / 95.9 FY12 / 109.2 FY13 / 123.3 FY14 / 156.0 5% FY11 / 44.3 Debt/debt + equity ratio (%) FY12 / 44.5 FY13 / 41.5 FY14 / 39.3 1 The new face of the Collection House Group Collection House Group – diverse and unified The Collection House Group has a new logo. As we continue to grow and expand our service Our new logo reflects the diverse but unified offerings, the interconnected theme enables us nature of our business. We offer a holistic to further diversify through new products and approach and provide resolutions to financial markets. The overall image resonates with today’s matters – for both our customers and clients. Collection House – contemporary, dynamic and Our new logo represents the full spectrum of the receivables management process, leading edge – shifting the paradigm of debt collection services. which includes: The companies captured by the new logo include: • early stage receivables outsourcing; • Collection House Limited; • debt collection; • debt purchasing; • legal and insolvency services; and • consulting and training. The move away from rigid lines to a circular • Lion Finance Pty Ltd; • Reliance Legal Group Pty Ltd (previously Jones King Lawyers Pty Ltd); • Collection House International BPO, Inc.; • Collection House (NZ) Limited; device with interconnecting colours represents • Collective Learning and Development our ability to offer end-to-end solutions Pty Ltd; and across our subsidiaries. It also represents the importance of the people we employ and who work together for the growth and success of the Collection House Group. • CashFlow Financial Advantage Pty Ltd. Our subsidiary, Midstate CreditCollect Pty Ltd (MCC) will continue to use its current logo. This will enable MCC to continue with its specialised brand. Our subsidiary, Midstate CreditCollect Pty Ltd (MCC) will continue to use its current logo. This will enable MCC to continue with its specialised brand. 2 5 Our business Manila 110 Left: Available seats by location. Our ongoing success is a result of our commitment to being the industry’s leader in ethical debt recovery and financial services, together with a strong focus to create value for our customers and clients. Collection House Group (the Group) is Australia’s leading With over 800 staff, our customers and clients benefit receivables management business. We provide solutions from our full service receivables management solutions, that span the entire credit lifecycle - from receivables which include: outsourcing to debt collection and debt purchase. We are listed on the Australian Securities Exchange (ASX). In fact, we are Australia’s only public listed, end-to-end receivables management company with • purchased debt; • collection services; • receivables management; offices in Queensland, New South Wales, Victoria, • legal and insolvency services; and South Australia, New Zealand and the Philippines. Our ASX code is CLH. We have been in business for more than 21 years and our ongoing success is a result of our commitment to being the industry’s leader in ethical debt recovery, a disciplined approach to business and a strong focus to create value for our customers and clients. • credit management training. We enjoy strong business relationships with major Australian and international banks, financial institutions, large corporations, public utilities and governments. We use technology to drive performance and maintain our position as an industry leader. We have created innovative proprietary systems that drive efficiency and productivity, and which will continue to deliver improved functionality and significant intellectual property to the Group. Newcastle 168 Brisbane 456 Sydney 48 Adelaide 78 Melbourne 121 Regional Victoria 45 Auckland 64 Our services Purchased debt We purchase delinquent credit facilities from originators Receivables management We offer a receivables management service for our clients and assume the obligations and benefits of the debt. to assist their customers maintain their credit facility. We then collect on the account to generate profitable returns while achieving positive customer outcomes. Collection services We provide debt collection services on referred default accounts, receiving a commission fee for each successful collection undertaken. Legal and insolvency services We provide specialised legal advice in debt recovery and insolvency matters. Credit management training We deliver development and training services for people working in the collection industry. 3 4 Our business (cont’d) Our vision is to be the household name for consumers and clients who seek quality debt management solutions. Our values Our goals At Collection House Group, we respect our clients, customers and staff. We believe that teamwork and accountability drive our performance. Our focus on innovation allows us to find smarter ways to succeed for our stakeholders. At all times we strive to maintain the highest standards of professionalism and ethics. • Maintain strong relationships with • To be viewed by our staff as a key organisations in selected market segments. • To be proven by our clients as the agency of choice in terms of delivering value and outstanding results. • To be regarded by regulators and consumer representatives as leading the way in ethical practice. first class working environment built on values of accountability, respect, clear communication, teamwork, professionalism and innovation. • Achieve superior risk adjusted shareholder returns. Accountability Professionalism We expect individuals to own their actions We believe in honouring our business Our strategic themes and take responsibility for their work priorities, outcomes and behaviour. Innovation We empower our people to share ideas and think creatively to build a culture of improvement, adaptability and growth. Respect We treat staff, customers and clients respectfully and recognise the importance of diversity. Ethics We demonstrate integrity by being open, honest and fair. and personal commitments. Performance We embrace a performance based culture where results, hard work and determination are recognised. Teamwork We support each other and work together to ensure that we achieve our common goals. Grow, by expanding on our by expanding on our “one stop shop” advantage, engaging in broader markets, and introducing markets, and introducing evolved products to new evolved products to new and existing clients. and existing clients. Develop people, by engaging and investing in our workforce and developing its talent as developing its talent as a primary driver of business growth. Differentiate, through through enhancing our leadership enhancing our leadership in ethical and complaint in ethical and complaint collections, and by emphasising customer collaboration in collection practice as “our way” of doing smart business. Innovative, so as to build Innovative, productivity and contain productivity and contain costs through efficiencies and effective processes. 6 7 The success of Collection House is underpinned by the quality, dedication and resolve of our people to achieve value and outstanding results for our shareholders and clients. Chairman’s message Dear fellow shareholder, The 2014 financial year has been another successful one resources. Collection House remains focused to deliver for the Collection House Group. I am very pleased to strong sustainable growth through the continued pursuit report that we have maintained the momentum of recent of innovation, improved technology, productivity and years and once again posted double-digit growth across operational efficiencies. Our investment in new technology all key businesses. Last year was, in fact, our seventh platforms and data analysis allows us to respond quickly successive year of growth. This demonstrates the Group’s to changes in the market and is a key component of our sustainable business model and highlights the strong ongoing operational success. prospects for continued success in the years ahead. In 2015, Collection House’s growth path will continue In 2014, Collection House delivered a net profit after with expansion into potentially new markets and new tax of $18.7 million, a new record for the Group and an products, which should generate increased sales. increase of 20 percent on last year’s result. Our success The Group will continue to invest in quality PDLs and has created value for all shareholders. Our share price has expand our collection services, while maintaining our continued to perform, which has delivered good capital best-in-class compliance record. The Group will always growth and strong dividend yields. This year Collection look to grow our business through selective partnerships House will pay a full year dividend of eight cents, an and acquisitions in adjacent and complementary service increase of 11 percent on the previous year. We continue areas, and we will continue our strong focus on capital to de-risk the business and have delivered against all management and balance sheet strength. key shareholder value measures, including: While business confidence is seen as sound, • Earnings per share, which has improved following a dip earlier in the year after the federal budget, by 8 percent to 14.7 cents; the diversity of the Group’s full financial service offering • Return on equity, has remained at 13 percent notwithstanding capital raising completed during the year; • Gearing ratio, which has been reduced from 41 percent to 39 percent; and provides strength and resilience to changes in national economic circumstances. Forward indicators point to a modest improvement in the Australian economy and consumer confidence is improving. In fact, consumer spending reached an all-time high during the year. However, there are some worrying factors – • Earnings before interest and tax margin, which has Australian household debt is at reported record levels. improved from 29 percent to 30 percent. Australian house prices appear very high and we have The 2014 financial year also saw the Group invest in areas that will deliver good growth over the long-term. There was record investment in purchased debt ledgers (PDLs), and the Group expanded into high potential market sectors such as government and statutory authorities. We have expanded our national and international operations and made significant investment in human seen a rise in unemployment. Nevertheless, our access to multiple revenue streams from a diverse service offering reduces our dependency on the performance of any single product or market segment and provides strength and resilience to our business. The success of Collection House is underpinned by the quality, dedication and resolve of our people to achieve value and outstanding results for our shareholders and clients. All of our success over the past 12 months has been the result of the commitment and hard work of our Executive Management Team, skilfully led by Managing Director and Chief Executive Officer Matthew Thomas, and all staff across Australia, New Zealand and the Philippines. On behalf of the Board, I thank them all. During the past 12 months, the Group welcomed two new directors to the Board – Philip Hennessy and Julie-Anne Schafer. Both Philip and Julie-Anne have brought tremendous breadth and depth of financial and commercial acumen to our business. They moved seamlessly into their roles and, along with all members of the Board, have executed their duties as directors with great distinction. Finally, the Board remains confident that we will continue to achieve sound growth and returns for shareholders throughout the 2015 financial year. I look forward to your ongoing support and working with the Collection House team so that together we can build shareholder value and go from strength to strength over the next 12 months. Yours faithfully, David Liddy Chair, Collection House Group 8 9 Managing Director and Chief Executive Officer’s report Within my report last year I alluded to a step-change debt ledgers. Debt funding risk has been further ahead in the business, and provided more specific details mitigated over the year through lower gearing, at the Annual General Meeting (AGM) the following syndication of banking facilities between Westpac month. By that stage we had implemented significant and CBA, and long-term hedging of interest rates. changes during the first quarter of the 2014 financial year (FY14), and I indicated that there were further system and business changes planned for the New Year. I knew then, as I can confirm now, that FY14 was not to be a year of “business as usual” but we would deliver as promised. No doubt, for some the journey over FY14 was uncomfortable and at times we saw productivity reduce as the changes were implemented. But this was to be expected, as was the substantial improvements over the same performance metrics in the second half of the year, As I commence my fifth year as Chief Executive Officer, which saw the Group reach new operational records. hopefully regular Annual Report readers will appreciate that “following through” is one of my most important leadership qualities. We have promised year after year to deliver consistent earnings growth, and over the past four years we have achieved an average of 19 percent compound growth in earnings. But this year required us to do more – not only to perpetuate that growth but to unlock opportunities for greater shareholder returns into the future. To do so, we committed to execute a “gear change” within the business and to enhance capabilities in terms of people, structure, systems and balance sheet strength. We followed through, increasing our headcount by 18 percent over the year, implementing a new operational structure and redefining a number of key management positions. We replaced a number of systems including the core collection software platform utilised by Lion Finance, which required substantial data As a result, we successfully implemented the growth investments that needed to be made, while delivering a 20 percent increase in net profit after tax (NPAT) year on year, with an all-time record profit of $18.7 million. This full year result is almost five times that compared to prior to the global financial crisis in financial year 2007. Maintaining our earnings growth despite the extent of internal change has enabled us to increase the FY14 dividend by 11 percent compared to last year – notwithstanding the capital raising completed during the year, as well as keeping steady our rate of return on shareholders’ equity at 13 percent. With the significant operational changes during the year we aimed to maintain earnings before interest and tax (EBIT) margins at FY13 levels, so we’re pleased with the final outcome being a modest increase from 29 to 30 percent. migration and the retraining of all relevant staff. Revenue growth driving the result is again diversified: And we followed through by using the improved balance sheet strength built throughout the 2013 financial year (FY13) and the proceeds of a highly successful capital raising in September 2013 to capture more of the PDL market share. Over the year we increased PDL investments by 50 percent, while reducing gearing from 41 to 39 percent and seeing net debt increase only $12 million despite the record $82 million outlay on new Collection Services revenue increased 12 percent in FY14 compared to FY13, while PDL collections increased 10 percent. Overall, revenue growth has accelerated since FY13 and this is expected to continue. We have promised year after year to deliver consistent earnings growth, and over the past four years we have achieved an average of 19 percent compound growth in earnings. 10 11 Managing Director and Chief Executive Officer’s report (cont’d) Positively, growth in recoveries from the PDL portfolio This commitment was formalised with the introduction has been higher from older portions of the book, of the Corporate Social Responsibility Policy in February with recoveries from three-plus year debt exceeding 2014, using the ISO 26000 standard to integrate social 35 percent, and recoveries from two-plus year debt responsibility into our organisation. As a requirement of exceeding 55 percent. The overall cash yield of the this policy, the Group has released a CSR Scorecard portfolio exceeded seven percent reflecting improving along with our 2014 Annual Report. overall book quality. Underlying the trends above, the Repayment Arrangements and Litigated Account Portfolio grew to $353 million face value as at 30 June 2014. We expect further improvements in recovery from the PDL portfolio from the investments made in better systems and people. One supporting CSR activity of note during the year was the launch of the National Hardship Register (NHR). The concept is based on the reality that while most consumers want to repay outstanding amounts a small number are unlikely to ever to be able to make payment. These most vulnerable consumers are often affected by The primary system enhancement was the deployment of long-term physical or mental illness where there is still the proprietary C5 collection platform, which has enabled no legal relief from unpaid debts other than bankruptcy us to hire and train staff more quickly, while also obtaining more efficiency from experienced staff. Built in a very proceedings or the good faith of individual creditors who may perhaps provide debt waivers. data centric way, C5 allows us to capture and analyse substantial amounts of data and, therefore, work smarter at an individual employee and portfolio level. Recognising that debt recovery activity against such vulnerable consumers is futile and counter-productive for all parties involved, the Group proposed a NHR, Not to be overlooked, almost a third of the Group’s profit which financial counsellors could apply to register is derived from Collection Services (third party servicing) eligible consumers and, therefore, obtain relief from and this segment delivered the highest revenue growth debt collection activities. As a joint project between within the Group. Our strategy to increase sales through new and existing products and clients, with particular focus on leveraging core strengths in compliance, innovation and experience has driven this growth – and will continue to do so in the future. For example, we have had a focus on the government sector for some time. The Group now acts nationally for 53 local government clients and 16 state government departments or statutory authorities. Over the long-term we see further organic growth coming through our specialist subsidiaries – Midstate CreditCollect and Reliance Legal Group (formerly Jones King Lawyers Pty Ltd). We continue to invest in product development of new debt solutions for both clients and customers, explore new debt purchase markets and models, and pursue opportunities for acquisitions or partnership opportunities. Our business is driven by an unwavering commitment to conduct business that is ethical, lawful and respectful of its community and environment. This is expressed through our long-standing goal to “lead the way” in ethical practice and our ongoing emphasis on accountability within the Group as a core feature of our culture. The Group’s existing orientation to ethical conduct, stakeholder engagement and environmental responsibility was further advanced in 2014 with the implementation of corporate social responsibility (CSR) as a specific program with measurable objectives. Financial Counselling Australia and the Australian Collectors and Debt Buyers Association (ACDBA), and after almost two years of planning, a pilot NHR program commenced in January 2014. I am pleased to report that it has produced positive and very encouraging results. Approximately half of the members of the ACDBA are now committed to the pilot program, which entails an obligation to cease collection activity for eligible consumers and waive all known debts within three years from registration. For Collection House, the NHR has been an ideal project to be involved with as it exercises many of our core values: respect, teamwork, accountability, professionalism, innovation, performance and ethics. Like many of the investments in business growth that we have made during the last financial year, the NHR is another platform from which great things can be expected in the future. Finally, thank you to the Board, my fellow Executive Management Team members and the more than 800 staff at Collection House for their considerable efforts and achievements over the year. I look forward to our continued growth journey together. Matthew Thomas Managing Director and Chief Executive Officer 12 13 Our business model is underpinned by multiple revenue streams from the diverse service offerings thereby reducing our dependency on the performance of any single product or market segment, providing strength, resilience and confidence for our stakeholders. Lion Finance – continuous improvement of customer management solutions were achieved to meet the changing Lion Finance Pty Ltd (Lion Finance) is the largest needs of the market and the business. subsidiary of the Group, with over 400 Customer Service Officers (CSOs) in Brisbane, Melbourne, Adelaide, Newcastle, Auckland and Manila. • We commenced a new leadership development program that spans all leadership functions in the business. This program aims to instil and re-enforce At Lion Finance, we focus on the collection of Purchased the Group’s values and ethical collection standards in Debt Ledgers (PDLs). At the end of FY14, we had more all of our leaders. This program is ongoing into FY15, than 263,000 active debt accounts, with a combined as we continue to invest in our people and culture at face value of $1.5 billion. Lion Finance. During FY14, we achieved growth in revenue, while • We launched a new bonus structure across the implementing the latest version of our proprietary business that links the performance of our people collections system and rolling out a new leadership with our strategic business objectives. management approach that focused on customer solutions and employee coaching to uplift productivity and the quality of our services. In addition, we continued to review our approach to purchasing debt ledgers, so that we could meet the Group’s goal to build year-on-year revenue growth. Some key achievements during FY14 include the following. • We implemented our new proprietary collections system that enabled the business to achieve better outcomes, as follows: – our advanced training and skills development program delivered improved productivity metrics and results through more effective conversations with customers; – increased use of our data analysis capabilities selected the most appropriate accounts for our CSOs to approach our customers, in a timely fashion, to achieve the best financial solution and beneficial result for the customer; – automation of previously manual processes significantly improved the collection approach through the use of technology systems and controls; and • We continued to invest in our collection strategy through the use of data analysis, to ensure a consistent approach, improved results and best practice. • We enhanced our Customer Online Portal to provide customers with an on-line solution for settling accounts and negotiating payments in a convenient and non-confronting forum. In FY15, we will focus on the following. • Expand our capacity through our recently opened, second operating division in Brisbane, as well as an increase in CSOs in Manila. • Centralise our campaign leader team program to create a centre of excellence focused on optimising customer contacts and effective use of campaigns to deliver better outcomes for customers and for Lion Finance’s business objectives. • Enhance our debt ledger purchasing strategy and to continue to look for opportunities to further refine and improve our purchase of debt types, linked to our performance objectives. Our performance Collection House Group is a dynamic and diversified growing company. The diversity and range of our financial service offerings provides strength, resilience and growth opportunities for the Group into the future. The Group has delivered seven successive years of increased profit and shareholder value, while investing in the strategic growth and expansion of its business locally and internationally. Our business model is underpinned by multiple revenue streams from the diverse service offerings thereby reducing our dependency on the performance of any single product or market segment, providing strength, resilience and confidence for our stakeholders. Our diversification is further enhanced through our geographical presence, which includes Australia, New Zealand and the Philippines. Here is a summary of the Group’s performance over the past 12 months across each of our subsidiaries and major Our diverse service offerings allow us to deliver shareholder value, while achieving superior outcomes for our clients and beneficial solutions for our customers. business units. 14 15 Our performance (cont’d) Collection Services Collection Services is a division of Collection House Limited that provides account receivables management solutions across the full life cycle of an account payable – starting from overflow reminder calls for missed payments, through to long-term overdue debt management services. Collection Services’ approach is to focus on helping clients to manage overdue payments, to prevent overdue debts from becoming long-term debts and, to find a financial solution for customers that meets both the customer’s repayment capability, as well as our clients’ needs and requirements. Our clients comprise a broad cross-section of Australian commerce and industry including banking, utilities, telecommunications, asset finance and insurance sectors. Our services are provided under varying pricing structures that are linked to the service, the dynamics of the debt type, and the clients’ preferred pricing methodology. • Continuous improvement and cost management across the different early debt management portfolios to protect client revenues as well as maintaining margins in a challenging and competitive environment. • Leveraging our data analysis through the implementation of the Central Campaign Leader team to drive improved service and collection rates for clients. • Marketing our new products and services to increase revenue opportunities and growth for the Group. Central Operations Central Operations is a shared division that provides front-line collection services to businesses within the Group. Central Operations’ largest business unit is Collection House International BPO, Inc. (CHIBI) – the Group’s offshore operation based in Manila, the Some key achievements during FY14 include the Philippines. following. During FY14, a key focus was on the delivery of • Development of innovative and effective early stage sustainable and consistent performance levels to debt management services for clients. Lion Finance and to Collection Services clients. • Enhancement of our client relationships through specific client account management to ensure the delivery of key performance elements for clients Central Operations aims to maximise performance of the Group by leveraging the cost efficiencies gained by operating in the Philippines. Our diverse service offering allows us to deliver shareholder value while achieving superior outcomes for our clients and beneficial solutions for our customers. In FY15, we will focus on the following. In FY15, we will focus on the following. Some key achievements during FY14 include • Implementing phase one of the next three-year the following. strategy that aims to significantly increase call centre • The implementation of a new legal practice capacity by June 2015. • Continuous productivity and performance improvements linked to the implementation of a new training and skills development program that management system that has improved the quality of our legal professional services and enhanced workflow and case management outcomes. • Expansion of our external third party client base, was launched during the last quarter of FY14. diversifying our revenue stream with a broader source This includes leveraging Australian capability, of legal referrals. knowledge, skills and experience coupled with a localised approach to develop the best collections outcome for our clients and customers. • Continuous development of our offshore offering to ensure it is utilised at specific times in the life cycle of an overdue account to maximise net recovery, at a competitive cost. These initiatives will allow the Group to grow our offshore operation and, therefore, our tailored service offerings for our customers and clients. Reliance Legal Group Pty Ltd (formerly Jones King Lawyers Pty Ltd) • Continued increase in overall revenue contribution to the Group. In FY15, we will focus on the following. • Leveraging the opportunities offered by the new legal practice management system by implementing enhanced automated workflows that allow redeployment of resources to other areas of the law practice. • Continuing to expand external third party client revenue by building on the achievements of FY14. • Improving productivity and efficiency for internal legal services within the Group by leveraging economies of scale that the operating model enables. During the second half of FY14, Jones King Lawyers • Implementing a new leadership development Pty Ltd re-branded and changed its name to program that aligns our professional, ethical and Reliance Legal Group Pty Ltd (Reliance). performance culture to the leadership approach Reliance continues to trade as Jones King Lawyers across all levels of the Group. including effective recovery goals, compliance Central Operations offer the Group and their clients and will change to Reliance Lawyers in due course. with the law, ethical practice and customer service. a competitive advantage and a point of difference. • Development of new products and services such Some key achievements during FY14 include as an overflow reminder call service and a new the following. model for the end-to-end outsourcing of a collection function. • Broadened our offshore collection services to cover a wider range of debt types for Lion Finance and, for • Implemented a new leadership development Collection Services. program that aligns our professional, ethical and performance culture to the leadership approach across all levels of the Group. • Expansion of our Manila based operation in line with performance improvement and business flows. • Creation of a three-year strategy for further development of our offshore operation. The launch of Reliance followed extensive consultation with key stakeholders and represented an important step in the continued expansion of the external, third party client practice of the Group’s dedicated legal arm. Reliance is an incorporated legal practice that specialises in debt recovery, debt and commercial litigation and insolvency – personal insolvency, debt administration and corporate insolvency. We are co-located with Collection House in Brisbane, Sydney and Melbourne. 16 17 Our Performance (cont’d) Midstate CreditCollect Midstate CreditCollect Pty Ltd (MCC) represents the In FY15, we will focus on the following. merged businesses of Midstate Credit Management • Implementing the business synergies enabled by Services Pty Ltd and CreditCollect into a unique multi- the roll-out of the new collection services software disciplinary business model being an incorporated legal platform, across all MCC Group services, including practice and commercial agency offering boutique professional credit management, debt collection and legal services to local governments, corporates, water authorities, utilities and education sector clients. MCC Legal. • Leveraging the extensive business development activities of the previous CreditCollect business to build new business opportunities across a wider MCC competes directly with smaller commercial pool of existing and new clients. agencies that provide more of an “account management” service, which often appeals to clients that are smaller to mid-sized organisations. Based in regional Victoria, MCC is a market leader in cash flow management and debt collection for local government and water authorities across the state, which we are now leveraging in both Victoria and other Australian states. Some key achievements during FY14 include the following. • Expanding our business to include New South Wales and South Australia clients, while continuing to grow market share within Victoria. • Marketing our niche expertise in the local government, utilities and telecommunications sectors for specific account and debt types to maximise revenue for clients, as well as MCC. With an experienced and focused management team, and the consolidation and transition to one operating business model complete, the next 12 months represent an exciting • Transition to a multi-disciplinary business model including an incorporated legal practice and time for MCC. We will leverage the Group’s products, services and capabilities, while also offering its own commercial agency that enables a more efficient unique account management service for clients. and broader range of professional service offerings for clients, being fully compliant with legal and regulatory requirements. • Successfully rolled out a new collection services platform across the business to standardise processes and increase operational efficiency in all offices in regional Victoria. • Created a single, post-merger culture in the business that is aligned with the Group’s values. 18 19 Our Performance (cont’d) Collective Learning and Development Collective Learning and Development is our Registered Training Organisation that specialises in the delivery of financial services courses and, in particular, credit and receivables management. Collective Learning and Development is part of the National Training Framework. In addition to providing the Group’s internal training requirements, we also provide staff development and collection training services to a range of external businesses and government agencies. Presently, we have 280 students undertaking traineeship courses in Certificate III in Mercantile Agents, all of whom are Collection House Group employees. Training is delivered across all Australian sites (Sydney, Brisbane, Melbourne, Adelaide and Newcastle) by qualified and experienced training specialists. Some key achievements during FY14 include the following. • We created and facilitated training courses for a range of government departments. • Through consultation and training needs analysis, we tailored training programs to suit our client’s requirements. Over the next 12 months, we plan to expand our student base through new business opportunities, while also maintaining the strong association with our existing internal and external clients. In FY15, we will focus on the following. • Enhance our current learning management system (LMS) to facilitate online and blended learning. • Develop unique courses that are reflective of the current market conditions (including robust hardship training). • Proactively work with the Group’s business development team to build and share client relationships. We also plan to increase our current traineeship base significantly over the next 12 months. 20 21 Our leadership Directors The Collection House Group is led by an experienced and professional Board of Directors, all of whom bring great breadth and depth of financial and commercial acumen to the business. 1 2 3 4 5 6 7 8 The Collection House Group is led He is presently co-Chair of International 4 Tony Coutts 6 David Gray 7 Philip Hennessy 8 Julie-Anne Schafer by an experienced and professional Collectors Group and a Trustee for Board of Directors, all of whom bring Wisconsin’s Carroll University. Mr Coutts has over 38 years of experience in the finance, insurance great breadth and depth of financial and commercial acumen to the business. 1 David Liddy He is a former Director of Attention and debt collection industry, LLC Inc, Analysis and Technology Inc, including 19 years at Collection and co-founder and former Chair of House Limited. He was Collection Payco American Corporation. House Limited’s General Manager Mr Liddy has over 42 years of banking 3 Matthew Thomas experience, including appointments in Australia, London and Hong Kong. He was appointed as Collection House Limited’s Chair in March 2012. Mr Thomas has over 22 years of experience in the finance and collections industry and has been with Collection House Limited for the Mr Liddy is also a Non-executive past 15 years. He was appointed to Director of Steadfast Group Limited the Board in March 2013. and Emerchants Limited, and Chair of Financial Basics Foundation and Financial Basics Community Foundation. Since starting with Collection House as a Customer Service Officer in 1999, Mr Thomas has been promoted Previously, he was MD and CEO of to various positions, including IT Bank of Queensland Limited from Manager and Chief Information from 1995 to 1998. In September 1998 he was appointed as an Executive Director of Collection House Limited with responsibilities for sales. He became a Non-executive Director from 1 July 2006. 5 Kerry Daly Mr Daly has over 30 years of experience in the financial services sector. Mr Daly was appointed a Director of Collection House Limited on 30 October 2009. 2001 to 2011. Officer. In 2007, Mr Thomas was Mr Daly is currently a Non-executive Mr Liddy holds an MBA, is a Senior Fellow of the Financial Services Institute of Australasia and a Fellow of the Australian Institute of Company Directors. 2 Dennis Punches Mr Punches was first appointed to the Collection House Limited’s Board in July 1998. In 2000 he was appointed as Chair of the Board. In 2009 he stepped down as Chair to become the Group’s Deputy Chair. promoted to Chief Operating Officer. Director of Trustees Australia Limited. In this role he had responsibility for all collection operations as well as Group IT strategy and business analysis. Mr Thomas was appointed as the Group’s Chief Executive Officer in July 2010. Mr Thomas is currently Deputy Chair During the period 1987 to December 2000, Mr Daly was MD and CEO of The Rock Building Society Limited where he initiated its demutualisation and was responsible for its ASX listing. From January 2001, he served as Executive Director of the fixed interest of the Australian Collectors and Debt brokerage and investment banking Buyers Association and a Graduate business Grange Securities Limited. Member of the Australian Institute of Company Directors. Mr Gray has more than 20 years Mr Hennessy was, until February Ms Schafer is an accomplished of experience in senior executive 2013, Queensland Chair of KPMG, Director with experience across a positions with large national and Chartered Accountants. After 12 years broad range of industries. She has international companies. He is in that role and some 30 years being worked in a number of Non-executive currently the Chair of Queensland involved in all aspects of corporate Director roles with a focus on Cyber Infrastructure, a position he insolvency and reconstruction, business outcomes, customers, has held since March 2008, Chair he retired from KPMG in July 2013. risk management and governance. of Australian Urban Infrastructure Network, a position he has held since 2010 and is an adjunct professor at QUT. As Queensland Chair of KPMG, She is currently a Non-executive he was responsible for the leadership Director of Territory Insurance Office, of the firm in the Queensland market. Catholic Church Insurance and This role included operational Aviation Australia Pty Ltd. Previously, Mr Gray was Deputy Chair efficiency, strategic direction, go to of the Civil Aviation Safety Authority market strategy, engagement of the (CASA) from 2009 to 2014, a Director firm’s people, engagement with of Brisbane Airport Corporation from its clients and its connection 2010 to 2014, Chair of Queensland to the community. Ms Schafer was previously the Chair of RACQ and RACQ Insurance, also had former directorships including Queensland Rail and was a Commissioner of the National Mr Hennessy is currently a Member of Transport Commission. Motorways from 2006 to 2010, Chair of WaterSecure from 2008 to 2011, MD of Boeing Australia from 1995 to 2006, MD of GEC Marconi (Australia) from 1990 to 1995 and Divisional Chief Executive of GEC (Australia) Heavy Engineering from 1984 to 1990. the Infrastructure Australia Advisory Board, Chair of the Mater Hospital Foundation, Director of the Starlight Children’s Foundation National Board, Member of the University of Queensland Senate, the Chair of the Mr Gray was appointed to University of Queensland Finance Collection House Limited’s Board Committee and a Director of Blue Sky on 28 June 2011 and elected a Alternatives Access Fund Limited. Director on 28 October 2011. Mr Hennessy was appointed to the Board of Collection House Limited on 22 August 2013 and elected a Director on 25 October 2013. Ms Schafer is a facilitator for the Australian Institute of Company Directors in Governance, Strategy and Risk Management. She is also a member of the Australian and New Zealand Institute of Insurance and Finance. Ms Schafer was appointed to the Board of Collection House Limited on 28 January 2014. 22 23 Our leadership (cont’d) Executive Team The five members of the Group’s executive management team (EMT) have extensive experience within the Group and its operations. This knowledge and stability underpins the continued success of the Group. The EMT is uniquely positioned to understand the long-term trends affecting the Group and its markets, as well as the drivers of success. The EMT is focused on delivering sustained growth over time while remaining receptive to new ideas and the continued pursuit of innovation. 1 Matthew Thomas, Managing Director and CEO 2 Paul Freer, Chief Operating Officer Mr Freer was appointed as the Group’s Chief Operating Officer in March 2013. In this role he oversees the operations of several of the Group’s business divisions, including Collection Services, Lion Finance, Midstate CreditCollect, Reliance Legal Group and Collection House International. Mr Freer has over 25 years of experience across financial services incorporating over 13 years in general management and leadership positions in receivables management, risk management, corporate and retail banking, and fund management. During his career he has Mr Thomas has over 22 years of experience in the finance worked in several countries including throughout Africa, and collections industry and has been with the Group for Europe, the Indian Ocean region, the Middle East, the USA the past 15 years. He was appointed to the Board in and the UK. He has worked with organisations such as March 2013. Since starting with Collection House as a Customer Barclays Plc, Lloyds Bank Plc, Fleet Financial Group Inc and National Commercial Bank of Saudi Arabia. Service Officer in 1999, Mr Thomas has been promoted Mr Freer’s current focus is to develop the next generation to various positions, including IT Manager and Chief of leaders within operations as well as expand the Information Officer. In 2007, Mr Thomas was promoted to products and services to deliver improved performance Chief Operating Officer. In this role he had responsibility for clients and to drive revenue growth. 5 3 1 4 2 Our Executive Management Team builds value for our shareholders, customers and clients through superior leadership skills and a focus on innovation, high quality service delivery and long-term sustainable growth of the business. for all collection operations as well as Group IT strategy and business analysis. Mr Thomas was appointed as the Group’s CEO in July 2010. Mr Thomas is currently Deputy Chair of the Australian Collectors and Debt Buyers Association and a Graduate Member of the Australian Institute of Company Directors. 3 Adrian Ralston, Chief Financial Officer 4 Kylie Lynam, General Manager 5 Marcus Barron, Chief Information Officer Mr Ralston is responsible for the overall financial management of the Group. He has been with Collection House for the past ten years. On a day-to-day basis, Mr Ralston oversees all aspects of the Group’s financial management, including financial reporting, financial planning and analysis, merger and acquisition activities, process management and investor relations. Mr Ralston has over 20 years of operational and financial management in the commercial sector. He was formerly General Manager Finance and Administration with Hevi Lift, part of the Swire Group of companies, and was Chief Financial Officer at BDS Group. He holds an MBA from Deakin University, a Bachelor of Business (Accounting), Northern Territory University and is a Fellow of CPA Australia. Human Resources and Corporate Services Mr Barron has been with the Group for the past Ms Lynam has over 17 years of experience in human 11 years. As Chief Information Officer (CIO), Mr Barron resource management and has been with the Group for is responsible for all of the Group’s information the past 14 years. During this time she has held a number technology and data analysis requirements. Applying his of different roles, including Company Secretary in 2006. experience to both the operational and technological Ms Lynam’s principal role is to drive the Group’s human resource management strategy and to ensure that all employees have the right skills and embrace the Group’s divisions of the Group, Mr Barron’s main responsibility is to deliver superior technological systems for internal and external stakeholders. culture to enable strong business performance. He joined the Group as a Customer Service Officer in Ms Lynam leads the compliance, strategic projects, 2001. He then moved into operational management roles, corporate services and training support areas to achieve key was promoted to be a business analyst, and then corporate objectives. She is also responsible for workforce Informational Technology Manager and finally, in 2013, optimisation and continuous improvement initiatives. he joined the EMT as CIO. He holds a Bachelor of Information Technology, University of Queensland, and is a member of the Australian Computer Society. 24 25 Our people The success of the Group is underpinned by the quality and dedication of our people, and their drive to achieve People Performance and training Process value and outstanding results for our stakeholders. We know that talent and strong leadership are Our innovative in-house training and development During FY14, we implemented a new human resources We provide all of our staff with a first-class working mind, over the past 12 months, we refined the Team develop and build their career within the Group. performance management system, which is now integral to the success of our business. With that in programs provide our staff with the opportunity to and payroll system. This included a refresh of our environment that is built upon the mutual values Leader roles to ensure that they were focused on of accountability, respect, clear communication, coaching and developing their team members. professionalism, teamwork and innovation. Given the type and nature of the Group’s diverse e-recruitment system, which is in the final stages of financial services products and services, training and being implemented. known as ‘Perform and Grow’, and the creation of an During FY14, our workforce increased by 18 percent. our people we continued to build on our leadership by the Group. In line with the importance of coaching and developing personal development of our staff is taken very seriously This was partially due to the growth of our Lion Finance development (LEAD) program. In addition, we have business, where we appointed an additional 60 staff for partnered with an external provider to accelerate a new site in Brisbane. We have also seen growth within leadership training for our managers. This training Collection Services and Central Operations divisions. provides managers with a more in-depth understanding As a result, the Group had a total of 820 full-time of effective performance management concepts and equivalent staff at the end of FY14. equips them with the tools to create and enhance a This year we reviewed our front-line positions and focused on improving three key areas – people, We understand the value of a diverse and inclusive performance and process. workforce and, the importance to have the right people positive culture within their teams. in the right jobs, with the rights skills. We improve outcomes by using the life experience of our mature age workers. We recognise the importance of bilingual staff and, the value and opportunity that a multi-cultural workforce offers to better communicate with our diverse customer base. Our training team, plays a pivotal part in the training process from induction training, collection operation techniques, debt collection computer training, telephone collection and negotiating skills training, legal and regulatory training, ASIC and ACCC Debt Collection Guidelines, Privacy Laws, Hardship identification and specific areas of collection practice required in specialised areas such as early stage overdue debt recovery, motor vehicle recovery, banking and finance, insurance, insolvency administration and many more. An increasing number of staff are enrolling in the Certificate III in Mercantile Agents and other specialised courses to enhance their knowledge of the business and to assist them progress within the Group. During FY14, the Group enhanced its development and coaching techniques which created consistency across the Group, and better identified opportunities for improvement in the performance and training area. These process changes have led to better experiences for our people and improved efficiencies for our business. 26 27 We have embraced interactive customer engagement where people may choose to engage with us in a way that best suits them – for example, web-enabled negotiation. Our technology Collection House Group uses technology to drive performance and maintain our position as an industry leader. Over many years, the Group has invested capital and human resources to develop innovative proprietary systems. These systems have become integral to our success and are a central component of our competitive advantage. Consistent with our three-year plan to invest in our While our internal information assets remain the core technology platforms, during the last financial year, the of our technologies business, we also excel in our ability Group remained focused to deliver strong sustainable to provide solutions for our customers and clients. growth through the continued pursuit of innovation, The Group has embraced the use of on-line and mobile improved technology, productivity and operational technologies to interact with customers in a way that best efficiencies. This year, we extended the release of the suits them – such as web-enabled communications Controller 5.0 (C5) platform, which is now used by the and negotiations. majority of our business. Investment in business intelligence, data analysis and new C5 has improved the Group’s productivity and efficiency infrastructure has the Group well positioned for continued through tangible time savings across our operations, growth and success in FY15. particularly with respect to the training of new staff. It has also significantly improved document management, client communication and data exchange, all in a safe and secure environment. The Group is now in the second year of its three-year technology focused strategy. However, given the early successes of enhancement of core systems, the continued growth of the Group and external market Investment in the resourcing of business intelligence will trends, we have already embarked on the next evolution enable the evolution of enterprise-wide data analysis of our strategy. We have begun work to improve capabilities that will: • provide powerful new insights into our businesses, the market and, therefore, assist with high-level decision making; • improve debt acquisition and valuation models; and • enhance the ability to execute operational strategies with robust comparative abilities. integration between our custom software and data analysis platforms, refresh of e-Channel and Contact Centre strategies and concepts, to deal with the continued growth of the Group. As we continue this work, as with all of our technologically driven functions, the goal to deliver meaningful outcomes for our stakeholders is central to all of the Group’s activities in 2015. Existing Portal Users New Portal Users Page Views Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 28 29 Corporate social responsibility The Collection House Group remains committed to business conduct that is ethical, lawful and respectful of 2. Protecting the environment – we will maintain our sustainable business practices as demonstrated its community and environment. This is depicted through through the application of our Environmental our long standing orientation to “leading the way” in Management Policy and related initiatives. ethical practice within our industry. It is also reflected in our established cultural values of accountability, professionalism and ethics. 3. Engaging stakeholders – we will preserve our constructive engagement with stakeholder groups consistent with our commitment to open and Building on our legacy of ethical conduct, in 2013-14 we transparent business practices. introduced a dedicated Corporate Social Responsibility (CSR) program. This program follows the guidance provided by the international standard ISO 26000 Guidance on Social Responsibility and includes: • maintaining behaviour and conduct consistent with the actions and expectations of ISO 26000; 4. Respect for the law – we will continue our strong commitment to the spirit and intent of the law, relevant legislation and the regulatory requirements for each jurisdiction in which we operate. In particular, we will look to deliver innovative CSR activities that leverage off our existing strengths to • informing our stakeholders of the social and generate a lasting positive difference. Some leading environmental impact of our operations through initiatives that we will explore during 2014-15 include: dedicated reporting that is balanced, comparable, accurate, clear and reliable; • providing in-kind professional project management services to non-government organisations to assist • partnering with non-government organisations in them achieve community-focused goals; new initiatives; • continuing to support and drive the National Hardship • deepening our community engagement; Register; • supporting people experiencing financial hardship, • targeting improved environmental protection and outcomes across the Collection House Group, and • continuously improving our CSR practices. • partnering with research institutions to explore the interface between the effects of mental illness and financial hardship outcomes. During 2014-15, we will maintain our current range of CSR affiliated activities and introduce a range of new initiatives. To maintain focus, these activities will be aligned with four key areas. 1. Supporting the community – we will continue to support the communities in which we operate through initiatives such as the Community Engagement Program, Corporate Giving Program and Community Volunteering Program. For comprehensive information about our CSR program and its range of activities, please refer to the Collection House 2013-14 Corporate Social Responsibility Outcomes Report available at www.collectionhouse.com.au Educating young people about sound financial practices provides benefits for both the individual and broader community. Collection House funding has enabled the Financial Basics Foundation to provide our programs to over 1,700 secondary schools across Australia. 30 31 Corporate governance statement Collection House Limited’s Board (the Board) and its Senior Executives are committed to achieving and demonstrating the highest standard of good corporate governance practices. This statement sets out the extent to which Collection House Limited (the Group) has followed the best practice recommendations set by the ASX Corporate Governance Council (the Principles and Recommendations – 2nd Edition) during the year ending 30 June 2014. The Group has, unless otherwise stated, followed those recommendations throughout the year. for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks. The Board Charter sets out a full list of specific functions that are reserved for the Board. The Board Charter is available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Board appointments are made pursuant to formal terms of appointment. The Board has delegated to the Managing Director and Chief Executive Officer (MD and CEO) and the Senior Executives responsibility for matters that are not specifically reserved for the Board – such as the The Group’s key policies, board and committee charters day-to-day management of the Group’s affairs and and a checklist detailing its compliance with the Principles the implementation of its corporate strategy. These and Recommendations are available from its website at delegations are reviewed on an annual basis. www.collectionhouse.com.au under the heading Investors – Corporate Governance. The Board has established processes for evaluating the performance of the MD and CEO and Senior Executives. and procedures, organised in the same order as the each of the Senior Executives is evaluated against the Principles and Recommendations, is set out below. achievement of agreed performance objectives. The Principle 1 Lay solid foundations for management and oversight The relationship between the Board and its Senior Executives is critical to the Group’s long-term success. The Board is responsible to guide and monitor the Group on behalf of its shareholders. In addition, the Board (in conjunction with the Senior Executives) is responsible evaluation process is conducted annually and is followed by the determination of appropriate remuneration for the relevant Senior Executive. Detailed information regarding the Group’s remuneration practices is provided in the Remuneration Report contained in the Directors’ Report of the Annual Report. Senior Executives were evaluated following the end of the financial year in accordance with the processes described in the Remuneration Report. More information The Board’s responsibilities and functions are contained in the Group’s corporate governance policies which are available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Principle 2 Structure the Board to add value Composition of the Board The Board currently comprises eight Directors (including the Chair), seven of whom are Non-executive Directors. During the year, Mr John Pearce retired as a Director (22 August 2013), Mr Philip Hennessy (22 August 2013) and Ms Julie-Anne Schafer (28 January 2014) were appointed to the Board as Independent Non-executive Directors. The Managing Director (Matthew Thomas) is an Executive Director. An induction process was carried out as part of Mr Hennessy and Ms Schafer’s appointment to the Board. This process was designed to enable the immediate, active and valuable contribution by the incoming Directors to the Board’s decision-making processes. The Board considers a Director to be independent if they are independent of Management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgment. In the context of director independence, “materiality” is considered from the perspective of both the Group and individual Director. The determination of materiality requires consideration of both quantitative and qualitative elements. Qualitative factors considered include whether a relationship is strategically important, the competitive landscape, the nature of the relationship and the contractual or other arrangements governing it and other factors which point to the actual ability of the Director in question to act in an independent manner. In accordance with the definition of independence above, and in consideration of the independence criteria set out in box 2.1 of the ASX Principles and Recommendations – 2nd Edition, the Board considers that the following Directors are independent: • David Liddy – Independent, Non-executive Chair; The induction process involved meetings between • Kerry Daly – Independent, Non-executive Director; Mr Hennessy and Ms Schafer and their fellow Directors and members of the Senior Executive to discuss the Group’s strategic objectives, financial affairs, culture, values, risks and operations. An induction pack was also • David Gray – Independent, Non-executive Director; • Philip Hennessy – Independent, Non-executive Director; and provided by the Company Secretary which documented • Julie-Anne Schafer – Independent, Non-executive a wide range of matters relevant to the Group’s Director. governance, including the roles, responsibilities and activities of the Board, its Committees, the Senior Executives and Management. The Board has reviewed the independence status of its Non-executive Directors and has assessed and now considers that Mr Tony Coutts is no longer independent The Board considers that, individually and collectively, the due to his invaluable association with the Group, which Directors have an appropriate mix of skills, qualifications has extended over 19 years. and experience to enable them to appropriately discharge Directors must disclose any interests or relationships, including any related financial or other details, to the Information about each current Director’s qualifications, Board to determine whether that interest or relationship skills, experience and period in office is set out in the could, or could reasonably be perceived to, materially Directors’ Report of the Annual Report. interfere with the exercise of a Director’s unfettered and The roles of Chair and MD and CEO are exercised by separate persons. David Liddy (Independent Non- Executive Director) acts as Chair and Matthew Thomas as the MD and CEO. Independence of Directors The Board is currently comprised of eight Directors, five of whom are Independent Directors. Therefore, a majority of Directors are independent. independent judgment. At each Board meeting, the Board requires each Director to disclose any new information which could, or could reasonably be perceived to, impair the Director’s independence. In applying its policy on independence, the Board’s emphasis is to encourage independent judgment amongst all Directors at all times – irrespective of their background. Nonetheless, the independence of each Director is assessed annually. A summary of the Group’s corporate governance policies The individual performance of the MD and CEO and their duties effectively. 32 33 Corporate governance statement (cont’d) Selection and appointment of new Directors been in office for three or more years and for three or The Chair and the Directors regularly consult with the MD • the efficiencies previously gained from having On 10 July 2014 the Remuneration and Nomination Committee was formed by the Board. Accordingly, more annual general meetings must also retire. Directors who retire are generally eligible for re-election. the role and function in relation to nomination matters Evaluating performance of the Board, its Committees were carried out by the whole Board until this date. and its Directors When considering the selection and appointment of During the reporting period the Board is responsible for a new Director, the Board has adhered to procedures reviewing Collection House’s procedure for the evaluation and CEO, the CFO, members of the Senior Executive and a Nomination Committee no longer existed. the Company Secretary. In addition, Directors may consult with, and request additional information from, any of the Group’s employees. The Board reconsidered its determination on 10 July 2014 and decided that, given the resources and corporate governance best practices, it was now Each Board Committee has the full authority of the appropriate to delegate the Nominations responsibilities Board to: back to a Committee. As a result, the Board formed the Remuneration and Nomination Committee. contained in the Nomination Charter, including, but not of the performance of the Board, its Committees and its • communicate and consult with external and internal limited to: Directors. persons and organisations concerning matters More information • the qualifications, experience and skills appropriate A performance evaluation of the Board and its delegated to the Committee; and for an appointee, having regard to those of the Committees is undertaken annually at the completion • appoint independent experts to provide advice on A full copy of each of the Group’s Charters is available at www.collectionhouse.com.au under the heading Investors Nomination Committee Charter. During the reporting The Board and its Committees were evaluated following establish a Nomination Committee. existing Board members and likely changes to the of the financial year by interviewing Directors, and Board in the foreseeable future; can include written surveys sent to each Board and • upon identifying a potential appointee, specific Committee member. consideration is given to that candidate’s: The performance review is facilitated internally and – competencies and qualifications; – independence; covers the role, composition, procedure and practices of the Board and its Committees. The individual responses provided are confidential to each Board and Committee – other directorships and time availability; and member. The Chair formally discusses the results with the – the effect of their appointment on the overall Directors and the Committees. balance and composition of the Board. The Chair is reviewed by his fellow Directors adjudging The duties, responsibilities and powers of the Board extend to reviewing and approving the Nomination Charter and, from 10 July 2014, the Remuneration and his performance and contributions to the Board, Board discussions, leadership, and in guiding and assisting the Board to comply with its Charter. period, the Board was responsible for implementing and the end of the financial year and in accordance with the developing succession plans to maintain appropriate processes described above. experience, expertise and diversity on the Board. Independent advice On 10 July 2014 the Remuneration and Nomination Committee was formed, which, on and from this date, will be responsible for the implementation of the duties under the Remuneration and Nomination Committee Charter. The Charter of the Remuneration and Nomination Committee, which details its duties, objectives and responsibilities, is available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. The Remuneration and Nomination Committee comprises of four Independent, Non-executive Directors, David Gray (Chair), David Liddy, Julie-Anne Schafer and Philip Hennessy. The re-appointment procedures for incumbent Directors are outlined in the Collection House Limited Constitution. In summary, subject to the specific matters described in the Constitution, an election of Directors must take place each year at which one third (excluding the Managing Director) of Directors must retire. Any Director who has To enable the Group’s Board to fulfil its role, each Director may obtain independent advice on relevant matters at the Group’s expense. In these circumstances, the Director must notify the Chair of the nature of the advice prior to obtaining that advice. This enables the Chair to take steps to ensure that the party from whom advice is sought has no material conflict of interest with the Group. The Chairman is also responsible for approving payment of invoices relating to the external advice. Further, all Directors have unrestricted and unfettered access to the Group’s records and information and receive regular detailed financial and operational reports from members of the Senior Executive that enable them to carry out their duties. matters delegated to the Committee. – Corporate Governance. The Group’s Committees To assist in carrying out its responsibilities, the Board has established the following Committees: • Audit and Risk Management Committee; and • Remuneration and Nomination Committee (10 July 2014 – previously from 5 December 2013 Remuneration Committee). Each Committee has adopted a formal Charter that outlines its duties and responsibilities. Departure from Recommendation 2.4: The Principles and Recommendations recommend that the Board should Principle 3 Promote ethical and responsible decision-making Codes of conduct The Group has established a Code of Conduct that outlines the standard of ethical behaviour that is expected of its Directors and Officers at all times. Together with the philosophy for all employees, these policies act as the guiding principles for acceptable behaviours, responsibilities and: • practices required by employees to maintain During the reporting year, taking into consideration confidence in Collection House’s integrity and ethical the nature, size and composition of the Board and the standards; allocation of scarce Director resources, the Board determined that: • it is ultimately responsible for the role, responsibilities and functions of the Nomination Committee; and • expectations regarding professionalism, respect for the law, conflicts of interest, confidentiality, environment and good corporate values; • legal obligations of employees and the reasonable • the full Board will carry out the functions and duties expectations of their stakeholders; and of the Committee in accordance with the Nomination Charter. • responsibility and accountability of individuals for reporting and investigating reports of unethical In addition, at the time of making the determination, the practices. Board resolved that: • the role, responsibilities and functions of the Nomination Committee be assumed by the Board as a whole; Policy concerning trading in the Group’s securities The Group has adopted a formal Securities Trading Policy, which details the Group’s policy concerning trading in the Group’s shares by Directors, members of the Senior • the Board considers that it is best placed to deal Executive and all employees. with the nomination, appointment and evaluation of Directors; • the members of the Board have sufficient industry experience, knowledge and technical expertise to The policy is reviewed annually by the Board and was last updated and disclosed to the ASX on 5 December 2013, in accordance with ASX Listing Rules. The policy addresses each of the ASX requirements, including provisions discharge the Nomination Committee’s mandate relating to the prohibition of trading by Directors and effectively; and members of the Senior Executive in the Group’s securities during defined blackout periods. 34 35 Corporate governance statement (cont’d) A copy of the Securities Trading Policy was given to The Group reviews annually the proportion of female The table below sets out these diversity objectives and the progress made towards achieving those objectives in 2014. ASX and released to the market and is available at employees in the Group, women in Senior Executive www.collectionhouse.com.au under the heading positions and women on the Board. Set out below is the Measurable objectives – 2013-2014 Investors – Corporate Governance. report for the year ending 30 June 2014. Policy concerning diversity The Group has established a policy concerning diversity and disclosed its policy on its website. The Diversity Policy recognises that diversity can take many forms: cultural background, race, ethnicity, experience, gender, age, impairment or disability, sexual preference, religion, political beliefs or any other area of potential difference. The Group values diversity and recognises the important benefits and contributions that people of diverse backgrounds make to the Group. Our diverse workforce is central to our continued growth and improved operational Position Number of women employees in the whole organisation Number 497 Number of women in senior executive positions* Number of women on the Board 2 1 % 63 33 12.5 * Executive includes members of the Executive Management Team and Company Secretary. performance as employees of diverse backgrounds and The Diversity Policy includes requirements for the Board experience are able to provide exceptional customer to establish measurable objectives for achieving gender service to our equally diverse customer base. diversity and for the Board to assess annually both the In order to attract and retain a diverse workforce, objectives and progress in achieving them. the Group is committed to providing an environment Women account for 63 percent of the Group’s non in which all employees are treated fairly and equitably, managerial positions and 43 percent of overall managers where diversity is embraced, and to maintain a workforce in the Group. The Board has established the 2014-2015 that reflects the diversity of the Australian population. measurable objectives in the context of a longer-term strategy which will enable better opportunities for women to move into more senior managerial roles in the future. progress ongoing • Analytic reviews of gender diversity within the organisation to determine priority actions and programs. • Develop leadership development (LEAD) program which will assist in creating a achieved gender diverse leadership pipeline. • Review recruitment practices so that when Senior Executive positions become achieved available at least one female applicant must be short listed (where possible) provided that they have the appropriate qualifications, skills and experience. • Maintain a workplace free from discrimination and harassment. • Continuing to ensure we maintain a workplace that supports staff with family, carer and cultural responsibilities. The table below sets out the diversity objectives as approved by the Board for 2015. Measurable objectives – 2014-2015 • At least one female candidate to be shortlisted for all Executive and Senior Management positions. • Increase women within the succession pipeline to 50 percent in each of the below categories: ongoing ongoing progress – Readiness to assume now; – Readiness to assume within 1-2 years; – Readiness to assume 3-5 years; – Beyond 5 years. • Encourage women to participate in the LEAD program with the aim to achieve 50 percent of participants being women. In accordance with the Diversity Policy, the Board assessed that the measurable objectives were substantially achieved. The exception is those objectives with a time frame that exceeds an individual reporting year. However, work is progressing and the Board considers that these objectives are achievable within the allocated time frames. More information Full copies of the Group’s Code of Conduct for Directors and Senior Executives, Diversity Policy and Securities Trading Policy are available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. 36 37 Corporate governance statement (cont’d) Principle 4 Safeguard integrity in financial reporting to be followed to enable accurate, timely, clear and adequate disclosure to the market and compliance with ASX Listing Rules requirements. The policy details Collection House Audit and Risk Management Committee and Charter The Board has established an Audit and Risk Management processes for: • ensuring material information is communicated to the Board, its MD and CEO or its Company Secretary; Committee to review the integrity of the Group’s financial • the assessment of information and for the disclosure reporting and to oversee the independence of the Group’s of material information to the market; and external auditors. • the broader publication of material information to the The current members of the Audit and Risk Management Group’s shareholders and the media. Committee are Kerry Daly (Chair), Tony Coutts, David Gray (from 1 July 2013 to 5 December 2013) and Philip Hennessy More information (appointed 5 December 2013). All members of the Committee are Non-executive Directors with the majority being independent. The Committee met six times during the reporting year. Information about each Committee member’s qualifications, skills, experience and their attendance at Audit and Risk Management Committee meetings are set out in the Directors’ Report. The Audit and Risk Management Committee has adopted a formal Charter that outlines its duties and responsibilities. The Charter includes information on the procedures for selection and appointment of the external auditor of the Group and for the rotation of external audit engagement partners. Annually, the Committee is responsible for evaluating and monitoring the external auditors’ A full copy of the Group’s Continuous Disclosure Policy is available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Principle 6 Respect the rights of shareholders Promotion of effective communication with shareholders The Group has an Investor Relations Guideline (formerly the Shareholder Communication Guideline) which seeks to promote effective communication with its shareholders. The Guideline explains how information concerning the Group will be communicated to shareholders. The communication channels include: • Collection House’s Annual Report; qualifications, independence, performance, capability and • Disclosures made to the ASX; and service provided by the external auditor. The Committee conducted its monitoring and evaluation of the external auditor and provided its findings to the Board. More information • Notices of Meeting and other Explanatory Memoranda. The Group has a dedicated corporate website which includes links to all ASX communications and other A full copy of the Group’s Audit and Risk Management Committee Charter is available at company information. Investors are able to make enquiries with the Group at any time via the Investor Enquiries page Principle 7 Recognise and manage risk Policy for the oversight and management of material business risks The Board is responsible for, and has established, policies for the oversight and management of material business risks and has adopted a formal Risk Management Policy and Framework. Risk management is an integral part of the industry in which the Group operates. Management of risk is overseen by the Board and the Audit and Risk Management Committee. The Senior Executives have the responsibility to design, implement and report on the adequacy and effectiveness of the risk management system and internal controls within the Group. Design and implementation of risk management and internal control systems More information Full copies of the Group’s Audit and Risk Management Committee Charter and Risk Management Policy are available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Principle 8 Remunerate fairly and responsibly Remuneration of Board members and Senior Executives Until 5 December 2013, the Board was solely responsible for determining and reviewing compensation arrangements for Directors and members of the Senior Executive pursuant to the Remuneration Charter previously endorsed by the Board. From 5 December 2013, the Board reinstated the Remuneration Committee to perform the role, responsibilities and functions of executive remuneration As required by the Board, the Senior Executives have under the Remuneration Committee Charter. devised and implemented risk management systems appropriate to the Group. The Risk Management Policy provides guidance to assist in the identification, assessment, monitoring and From 5 December 2013, the members of the Remuneration Committee include David Gray (Chair), David Liddy and Julie-Anne Schafer (from 28 January 2014). All members are Independent Non-executive management of risk for the Group and requires that the Directors. Since reestablishment, the Committee has results are reported to the Board via the Audit and Risk met on one occasion. Information about each Committee Management Committee. A formal Risk Management member’s qualifications, skills, experience and their Framework has been developed using the model outlined attendance at Remuneration Committee meetings are set in AS/NZS ISO 31000:2009 Risk Management – Principles out in the Directors’ Report. and Guidelines. The Framework identifies specific key risks at all levels of the business and provides for the reporting and monitoring of material risks across the Group. The Board receives periodic reports through the Audit and Risk Management Committee, which summarises the results of risk management initiatives of the Group. Departure from Recommendations 8.1 and 8.2 The Principles and Recommendations recommend that the Board should establish a Remuneration Committee. From 1 July 2013 until 5 December 2013, the Board assumed the role and functions of the Remuneration Committee as it believed that minimal benefit would accrue to the Group through a separate committee. During this reporting period, the Group subsequently became an entity that trades in the top 300 of the S&P/ www.collectionhouse.com.au under the heading Investors on our website at www.collectionhouse.com.au/contact. Managing Director and Chief Executive Officer and Chief – Corporate Governance. More information Financial Officer assurances A full copy of the Group’s Investor Relations Guideline is available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Principle 5 Make timely and balanced disclosure Policy to ensure compliance with ASX Listing Rule disclosure requirements The Group has a formal Continuous Disclosure Policy in place, which is available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. The purpose of this policy is to set out the procedures The Board receives regular reports about the Group’s ASX All Ordinaries Index. Accordingly, the Board reinstated financial and operational results. the Remuneration Committee on 5 December 2013. At each reporting period, the MD and CEO and CFO The role of the Board and Remuneration Committee certify to the Board that the Group’s financial reports are when considering remuneration includes the review and complete, and present a true and fair view, in all material recommendation of appropriate Directors’ fees to be paid respects, of the financial conditions and operational to Non-executive Directors. results of the Group (and its Controlled Entities) at that date and in compliance with the relevant Accounting Standards and section 295A of the Corporations Act 2001. 38 39 Corporate governance statement (cont’d) The Board and Management of Collection House Limited are committed to achieving and demonstrating the highest standard of corporate governance that is embedded into the culture of the Group. The Board and Remuneration Committee also considers The Board and Remuneration Committee is responsible how the remuneration policies are applied to Senior to develop and monitor the application of the Group’s Executives, including any equity-based remuneration plan Diversity Policy. that may be considered, subject to shareholder approval (where required). When considering the entitlement by members of the Senior Executives to short-term incentive (STI), and long-term incentive (LTI) payments and entitlements, the Board and Remuneration Committee exercises its discretion in relation to the payment of these benefits, having regard to the overall performance of individual Senior Executives against objectives set by the Board for the MD and CEO and members of the Senior Executive, and the overall performance of the Group. Details of STI and LTI schemes are set out in the Policy on entering into transactions in associated products which limit economic risk Group employees who hold Collection House shares (unvested or vested as the case may be) under the Executive Share Option Plan (ESOP) or Performance Rights Plan (PRP) are not permitted to hedge or create derivative arrangements in respect to those shares or any of their rights and interests in any of those shares. Non-executive Directors do not participate in any share option or performance rights plans. Remuneration Report section of the Director’s Report. The rules of the ESOP and PRP specifically provide that The objectives of the Group’s remuneration policies are to ensure that: • Senior Executives are motivated to pursue the long-term growth and success of the Group; and a participant must not grant or enter into any Security Interest in or over any Collection House shares that may be acquired under the Plan (Participant Shares) or otherwise deal with any Participant Shares or interest in them until the relevant Participant Shares are transferred • there is a clear relationship between performance to the participant in accordance with the Plan rules. and remuneration. Following the end of the financial year, the Board and Remuneration Committee reviewed and approved: • the MD and CEO performance against objectives set by the Board for the financial year ending 30 June 2014 and, consequently, the short-term bonus payments made to the MD and CEO and Senior Executives referable to the financial year ending 30 June 2014; Security Interests are defined to extend to any mortgage, charge, pledge or lien or other encumbrance of any nature, and include any derivative relating to or involving a Participant Share. Any Security Interest, disposal or dealing made by a participant in contravention of the Plan rules will not be recognised by the Group. A summary of current remuneration arrangements, including share options and performance rights are set out in more detail in the Remuneration Report section of the Directors’ Report. • the remuneration for the MD and CEO and members of the Senior Executive, which will apply during the More information financial year ending 30 June 2015; • the short-term incentives for the MD and CEO and members of the Senior Executive, which will apply during the financial year ending 30 June 2015; and • the long-term incentives for the MD and CEO and members of the Senior Executive. Full copies of the Group’s Remuneration Charter and Executive Share Option Plan and Performance Rights Plan are available at www.collectionhouse.com.au under the heading Investors – Corporate Governance. 40 41 Directors’ report The Directors present their report on the consolidated entity (referred to hereafter as the Company or the Group) consisting of Collection House Limited and the entities it controlled for the financial year ended 30 June 2014. Directors Dividends paid to members 30 June 30 June The following persons were Directors of the Group during during the financial year 2014 $’000 2013 $’000 the whole of the financial period and up to the date of this report, unless stated otherwise: • David Liddy • Dennis Punches • Matthew Thomas • Tony Coutts • Kerry Daly • David Gray • Philip Hennessy (appointed 22 August 2013) Final ordinary dividend for the 4,613 3,490 year ended 30 June 2013 of 3.6 cents fully franked (2012 – 3.2 cents fully franked) per fully paid share paid on 30 October 2013. Interim ordinary dividend for the 5,030 4,140 year ended 30 June 2014 of 3.9 cents fully franked (2013 – 3.6 cents fully franked) per fully paid • Julie-Anne Schafer (appointed 28 January 2014) share paid on 28 March 2014. • John Pearce (retired 22 August 2013) See pages 46 to 48 for profile information on the directors. Principal activities The principal activities of the Group during the financial year were the provision of debt collection services and receivables management throughout Australasia and the In addition to the above dividends, since the end of the financial year, the Directors have recommended the payment of a final fully franked ordinary dividend of 4.1 cents per fully paid share to be paid on 17 October 2014 out of retained profits and a positive net asset balance as at 30 June 2014. purchase of debt by its special purpose subsidiary Lion FY2014 highlights Finance Pty Ltd. There were no significant changes in the nature of the activities of the Group during the year. • Net profit after tax for the year was $18.7 million (2013: $15.6 million) Review of operations and financial results The consolidated net profit after tax (NPAT) of $18.7 million the Group was $107.3 million an increase of 10.3 percent. for the year ended 30 June 2014 increased 19.8 percent Basic earnings per share increased 8.0 percent to 14.7 from $15.6 million in the previous year. Total revenue for cents per share. Key financial results - by segment - audited ($’000) Collection services Purchased Debt Consolidated Ledgers (PDLs) 30 June 30 June 30 June 30 June 30 June 30 June 2014 $ ‘000 2013 $ ‘000 2014 $ ‘000 2013 $ ‘000 2014 $ ‘000 2013 $ ‘000 44,433 39,779 44,433 39,779 63,118 - 63,118 - - - 96,711 (38,780) - - 96,711 (38,780) Revenue Sales Interest income Collections from PDLs Fair value movement in PDLs Total segment revenue 44,433 39,779 63,118 57,931 107,551 97,710 Intersegment elimination (214) (404) Consolidated revenue 44,433 39,779 63,118 57,931 107,337 97,306 Results Segment result Interest expense and borrowing costs Unallocated revenue less unallocated expenses Profit before tax Taxation NPAT 8,140 7,161 27,593 25,145 35,733 (5,474) (3,299) 26,960 (8,255) 18,705 32,306 (6,164) (3,811) 22,331 (6,717) 15,614 Collection Services business Consolidated Collection Services revenue increased year on year by 12.2 percent. The segment result for the year of $8.1 million increased 13.7 percent from the previous year During the year, the continued use of analytics, scoring/ modelling and customer data validation yielded profitable growth as demonstrated by the increased collections coming from older portfolios. result of $7.2 million. The segment, through its improved Total repayment arrangements and litigated accounts productivity and profitability, contributed to the total net portfolio increased to $353 million from $300 million in • Earnings per share (EPS) were 14.7 cents (2013: 13.6 operating cash flow of the Group. the previous year. Total collections in the year from this cents) • Shareholder equity was $156 million (2013: $123 million) • Total dividends for the year of 8.0 cents (interim 3.9 cents paid 28 March 2014, final 4.1 cents to be paid 17 October 2014), fully franked, (up 11.1 percent from financial year 2013). PDLs business Total PDLs collections increased 10.2 percent to $106.5 million for the year ended 30 June 2014. The segment result for the year was $27.6 million, an increase of 9.7 percent. PDLs acquisitions at cost were $82.2 million compared to $52.3 million in 2013. portfolio was 71 percent of total PDLs collections. The availability of debt for sale was solid, with additional debt sellers entering the market and less activity seen from some competitors. Higher pricing was noticed on some specific PDLs transactions but pricing on mainstream purchases was within historical norms. 42 43 Directors’ report (cont’d) Review of financial position The Group’s net assets increased 26.5 percent to $156 million. Total net borrowings increased to In the long-term, we will seek to maintain the Group’s track record of increasing profitability and dividends for shareholders. Specific long-term strategies will include: $99.4 million in 2014, up from $87.0 million in 2013. • further organic growth of specialist subsidiaries: The Group’s net cash flow from operating activities was $65.9 million, an increase of 6.0 percent. During the year, the Group syndicated its banking facility with Westpac and Commonwealth Bank for three years. MCC Group and Reliance Legal Group (formerly Jones King Lawyers Pty Ltd); • product development of new debt solutions for both clients and customers; All covenants have been met with the loan to value ratio • ongoing investment in innovation and analytics; at 41 percent, compared to the covenant of 55 percent. • pioneering new debt purchase markets and models; The Board has confirmed its confidence in the Group’s and future prospects. The Directors have recommended the payment of a final fully franked dividend as stated on page 42. Business strategies and prospects for future financial years Enduring strategic themes of innovation, differentiation and people-focus will continue to underpin our overall growth strategy. Growth will be driven by leveraging our “one stop shop” diversified model, engaging in broader market sectors, and introducing leading edge financial solutions to both clients and customers. Improving growth will be achieved through strong existing client relationships and expanding into new market sectors with a focus on increasing government sector work – across the Group we now act nationally for 53 local government clients and 16 state • exploring acquisition or partnership opportunities in adjacent service areas. – The ability to service the needs of clients in a manner that generate profits for the Group. Meeting the needs of clients is critical to this business. Margins are under constant pressure from clients and there are many organisations prepared to undercut the Group to get business. The Group’s response to this is to provide pro-active and superior professional service to our clients and to meet their needs. Our clients require ethical and compliant collections, ongoing reporting of performance, and regular and timely remittance of funds collected on their behalf. Critical factors related to PDLs government departments or authorities. – The ability to accurately determine the price which Enhancing customer interactions through multiple the Group will pay for debts. channels will include more focus on web-based The price paid for a debt is a critical input to being able technologies and leveraging our new collection to make a profit on any debt purchase. The Group has platform C5. Strong prospects also being pursued in the early receivables outsourcing market. The Group guidance of its NPAT for the financial year ended 30 June 2015 is between $21 million and $22 million. PDL investment in financial year 2015 is not expected to exceed financial year 2014 levels – $53m of PDL investment already committed under contract. EBIT margins expected to remain steady over financial year 2015, with improving trend in second half. invested significant resources in being able to accurately price debts prior to submitting a bid to purchase. The ability to accurately price debts is reliant upon having access to reliable sources of information and skilled employees making the pricing determination. The Group has access to the complete history of its own debt collection activities and uses this information extensively, together with other publicly available information to understand a particular debt portfolio prior to purchase. Our employees are highly skilled and trained and are able to make accurate assessments of the correct price that Planning will commence for the further expansion of the should be paid for debts. Group’s Manila operations (Collection House International BPO, Inc.) in the medium-term. Higher pricing was noticed on some specific transactions but pricing on the mainstream purchases has been within long-term typical range. Critical factors related to collection services expensed consistently and in accordance with actual – The ability to accurately determine the value of the purchased debt portfolio at any point in time. As equally important as purchasing debts at the correct price is knowing the true value of the portfolio on an ongoing basis. With this knowledge, the Group is able to manage the portfolio on an ongoing basis and take appropriate action, if required. The same information systems and employee skills which enable the Group to accurately price debts also enables the Group to effectively manage the debt portfolio on a day-to-day basis. PDL collections, as a percentage of book value, has increased slightly, reflecting collections being Matters subsequent to the end of the financial year 1. Dividend The Directors have recommended the payment of a final fully franked ordinary dividend of 4.1 cents per fully paid share to be paid on 17 October 2014 out of retained profits and a positive net asset balance as at 30 June 2014. Other than the matters discussed above, no matter or circumstance has arisen since 30 June 2014 that has significantly affected, or may significantly affect: (a) the Group’s operations in future financial years, or (b) the results of those operations in future financial years, or achieved in line with pricing expectations and assets (c) the Group’s state of affairs in future financial years. Environmental regulation The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a state or territory. collections. – The ability to put debtors onto a payment plan. Converting as many of the debts in the portfolio as possible into regular paying arrangements is critical to the business success of the Group. Having a plan in place increases the recoverability of a debt, which increases the profitability of the portfolio and the Group. The Group applies significant resources to ensure purchased debts are placed on arrangement as expeditiously as possible. Significant changes in the state of affairs Significant changes in the state of affairs of the Group during the financial year were as follows: (a) The Group raised capital of $2.6 million from a Dividend Reinvestment Plan and $20 million from a Share Placement with sophisticated and institutional investors and Share Purchase Plan. (b) The Group purchased new debt ledger portfolios for A$82.2 million. 44 45 Directors’ report (cont’d) Information on Directors as at 30 June 2014 David Liddy Independent, Non-executive Chair. Age 63. Qualifications MBA. Experience Mr Liddy has over 42 years of banking experience, including appointments in Australia, Tony Coutts Experience Non-executive Director. Age 55. Mr Coutts has over 38 years of experience in the finance, insurance and debt collection industry, including 19 years at Collection House Limited. He was Collection House Limited’s General Manager from 1995 to 1998. In September 1998 he was appointed as an Executive Director of Collection House Limited with responsibilities for sales. He became London and Hong Kong. He was appointed as Collection House Limited’s Chair in March 2012. a Non-executive Director from 1 July 2006. Mr Liddy is also a Non-executive Director of Steadfast Group Limited and Emerchants Limited, and Chair of Financial Basics Foundation and Financial Basics Community Foundation. Previously, he was MD and CEO of Bank of Queensland Limited from 2001-2011. Mr Liddy holds an MBA, is a Senior Fellow of the Financial Services Institute of Australasia and a Fellow of the Australian Institute of Company Directors. Special responsibilities Chair of the Board. Member of the Remuneration Committee from 5 December 2013. Member of the Remuneration and Nomination Committee from 10 July 2014. Interest in shares 150,000 ordinary shares in CLH. Dennis Punches Non-executive Deputy Chairman. Age 78. Qualifications BS. Experience Mr Punches was first appointed to the Collection House Limited Board in July 1998. Special responsibilities Member of the Audit and Risk Management Committee. Interest in shares 4,829,059 ordinary shares in CLH. Kerry Daly Independent, Non-executive Director. Age 56. Qualifications BBus (Acc). Experience Mr Daly has over 30 years of experience in the financial services sector. Mr Daly was elected a Director of Collection House Limited on 30 October 2009. Mr Daly is currently a Non-executive Director of Trustees Australia Limited. During the period 1987 to December 2000, Mr Daly was MD and CEO of The Rock Building Society Limited where he initiated its demutualisation and was responsible for its ASX listing. From January 2001, he served as Executive Director of the fixed interest brokerage and investment banking business Grange Securities Limited. Special responsibilities Chair of the Audit and Risk Management Committee. Interest in shares 394,607 ordinary shares in CLH. In 2000 he was appointed as Chair of the Board. In 2009 he stepped down as Chair to David Gray Independent, Non-executive Director. Age 67. become the Group’s Deputy Chair. He is presently co-Chair of International Collectors Group and a Trustee for Wisconsin’s Carroll University. He is a former Director of Attention LLC Inc, Analysis and Technology Inc, and co-founder and former Chair of Payco American Corporation. Special responsibilities Deputy Chair of the Board. Interest in shares 10,502,535 ordinary shares in CLH. Matthew Thomas Managing Director and Chief Executive Officer. Age 43. Experience Mr Thomas has over 22 years of experience in the finance and collections industry and has been with Collection House Limited for the past 15 years. He was appointed to the Board in March 2013. Since starting with Collection House as a Customer Service Officer in 1999, Mr Thomas has been promoted to various positions, including IT Manager and Chief Information Officer. In 2007, Mr Thomas was promoted to Chief Operating Officer. In this role he had responsibility for all collection operations as well as Group IT strategy and business analysis. Mr Thomas was appointed as the Group’s Chief Executive Officer in July 2010. Mr Thomas is currently Deputy Chair of the Australian Collectors and Debt Buyers Association and a Graduate Member of the Australian Institute of Company Directors. Special responsibilities Managing Director and Chief Executive Officer. Interest in shares and 647,137 ordinary shares in CLH. 1,048,038* performance rights over ordinary shares in performance rights CLH. * 419, 919 performance rights are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. Qualifications BSc (UK), Honorary Doctorate. Experience Mr Gray has more than 20 years of experience in senior executive positions with large national and international companies. He is currently the Chair of Queensland Cyber Infrastructure, a position he has held since March 2008, Chair of Australian Urban Infrastructure Network, a position he has held since 2010 and is an adjunct professor at QUT. Previously, Mr Gray was Deputy Chair of the Civil Aviation Safety Authority (CASA) from 2009 to 2014, a Director of Brisbane Airport Corporation from 2010 to 2014, Chair of Queensland Motorways from 2006 to 2010, Chair of WaterSecure from 2008 to 2011, MD of Boeing Australia from 1995 to 2006, MD of GEC Marconi (Australia) from 1990 to 1995 and Divisional Chief Executive of GEC (Australia) Heavy Engineering from 1984 to 1990. Mr Gray was appointed to Collection House Limited’s Board on 28 June 2011 and elected a Director on 28 October 2011. Special responsibilities Chair of the Remuneration Committee from 5 December 2013. Chair of the Remuneration and Nomination Committee from 10 July 2014. Member of the Audit and Risk Management Committee to 5 December 2013. Interest in shares 183,098 ordinary shares in CLH. 46 47 Directors’ report (cont’d) Philip Hennessy Independent, Non-executive Director. Age 61. Experience Mr Hennessy was, until February 2013, Queensland Chair of KPMG, Chartered Accountants. After 12 years in that role and some 30 years being involved in all aspects of corporate insolvency and reconstruction, he retired from KPMG in July 2013. As Queensland Chair of KPMG, he was responsible for the leadership of KPMG in the Queensland market. This role included operational efficiency, strategic direction, go to market strategy, engagement of KPMG’s people, engagement with its clients and KPMG’s connection to the community. Mr Hennessy is currently a Member of the Infrastructure Australia Advisory Board, Chair of the Mater Hospital Foundation, Director of the Starlight Children’s Foundation National Board, Member of the University of Queensland Senate, the Chair of the University of Queensland Finance Committee and a Director of Blue Sky Alternatives Access Fund Limited. Mr Hennessy was appointed to the Board of Collection House Limited on 22 August 2013 and elected a Director on 25 October 2013. Special responsibilities Member of the Audit and Risk Management Committee from 5 December 2013. Member of the Remuneration and Nomination Committee from 10 July 2014. Interest in shares 50,000 ordinary shares in CLH. Julie-Anne Schafer Independent, Non-executive Director. Age 60. Qualifications LLB (Hons), GAICD Experience Ms Schafer is an accomplished Director with experience across a broad range of industries. She has worked in a number of Non-executive Director roles with a focus on business outcomes, customers, risk management and governance. She is currently a Non-executive Director of Territory Insurance Office, Catholic Church Insurance and Aviation Australia Pty Ltd. Ms Schafer was previously the Chair of RACQ and RACQ Insurance, also had former directorships including Queensland Rail and was a Commissioner of the National Transport Commission. Ms Schafer is a facilitator for the Australian Institute of Company Directors in Governance, Strategy and Risk Management. She is also a member of the Australian and New Zealand Institute of Insurance and Finance. Ms Schafer was appointed to the Board of Collection House Limited on 28 January 2014. Special responsibilities Member of the Remuneration Committee from 28 January 2014. Member of the Remuneration and Nomination Committee from 10 July 2014. Company Secretary The Company Secretary to 30 June 2014 was Julie Tealby and Michael Watkins to 25 October 2013. Julie Tealby was appointed Company Secretary on 31 January 2013. Mrs Tealby holds a Bachelor of Business (Accountancy), has been a member of CPA Australia for 15 years and is a professional member of the Institute of Internal Auditors. Mrs Tealby is near completion of her Graduate Diploma in Corporate Governance through the Governance Institute of Australia. Previously Mrs Tealby held Board and Company Secretary positions with the Financial Basics Foundation and the Financial Basics Michael Watkins was appointed to the position of Company Secretary from 21 December 2006 until his retirement on 25 October 2013. Before joining Collection House Limited, Mr Watkins was in practice as a commercial lawyer from 1978 and as a partner in his own Brisbane law firm from 1980 until accepting the appointment as General Counsel of the Group in 2000. Mr Watkins is a Fellow member of Chartered Secretaries Australia and undertook the combined roles of General Counsel and Company Secretary for the Group up until his retirement. Meetings of Directors Community Foundation. Prior to 2001, Mrs Tealby held the The number of meetings of the Group’s Board of Directors position of Financial Controller and Company Secretary and of each board committee held during the year ended with Collection House Limited. Since 2005, Mrs Tealby has also been the Company’s Internal Auditor. 30 June 2014, and the number of meetings attended by each director were: 2014 David Liddy Dennis Punches Matthew Thomas Tony Coutts Kerry Daly David Gray Philip Hennessy (appointed 22 August 2013) Julie-Anne Schafer (appointed 28 January 2014) John Pearce (retired 22 August 2013) A Number of meetings attended. Meetings of committees Directors Audit and Risk Management Remuneration* A 7 7 7 5 7 6 4 2 3 B 7 7 7 7 7 7 4 2 3 A ** ** ** 4 6 4 2 ** ** B ** ** ** 6 6 4 2 ** ** A B 1 ** ** ** ** 1 ** 1 ** 1 ** ** ** ** 1 ** 1 ** 49 Interest in shares 38,500 ordinary shares in CLH. B Number of meetings held during the time the director held office or was a member of the committee during the year. * The Remuneration Committee was re-established on 5 December 2013. ** Not a member of the relevant Board committee. 48 Directors’ report (cont’d) Remuneration Report G Service agreements B Remuneration governance Use of external consultants During the financial year to 30 June 2014 (FY14), Collection H Share-based compensation House Limited (the Group) engaged with its shareholders and their representatives so that the Group could improve the quality of its Remuneration Report and meet the expectations of all stakeholders. As a result, the I Equity instruments held by key management personnel J Additional information Group has enhanced its remuneration processes and The information provided in this Remuneration Report its disclosures in the FY14 Remuneration Report. These enhancements include: has been audited as required by Section 308(3C) of the Corporations Act 2001. • The re-establishment of the Remuneration Committee A Directors and other key management personnel on 5 December 2013. The Remuneration Committee disclosed in this report has three members, all of whom are Independent Directors. The Chair of the Remuneration Committee is not the Chair of the Board. The key management personnel include those who have the authority and responsibility to plan, direct and control the major activities of the Group. • The engagement of an external, independent remuneration company to provide recommendations The Group’s Directors and key management on remuneration for Non-executive Directors. • The Remuneration Committee engaged an external, independent remuneration company to review the Group’s remuneration policies and provide recommendations on remuneration packages for all personnel for FY14 Board of Directors David Liddy Chair (Non-executive) Dennis Punches Deputy Chair (Non-executive) key management personnel for the financial year Matthew Thomas Managing Director (MD) and Chief ended 30 June 2015 (FY15). Executive Officer (CEO) (Executive) • The implementation of a more transparent Tony Coutts Director (Non-executive) Remuneration Report and communication of remuneration policies to shareholders and their representatives. Remuneration Report – AUDITED This Remuneration Report outlines the overall remuneration strategy, framework and practices adopted by the Group for FY14 for Non-executive Directors, Kerry Daly Director (Non-executive) David Gray Director (Non-executive) Philip Hennessy Director (Non-executive) (appointed 22 August 2013) Julie-Anne Schafer Director (Non-executive) (appointed 28 January 2014) The Remuneration Report contains the following sections: A Directors and other key management personnel 22 August 2013) Executive Management Team (EMT) disclosed in this report Matthew Thomas MD and CEO B Remuneration governance Adrian Ralston Chief Financial Officer (CFO) C Executive remuneration policy and framework Paul Freer Chief Operating Officer (COO) On 5 December 2013 the Collection House Board In performing its role, the Board, and now the (the Board) re-formed the Remuneration Committee. Remuneration Committee, may directly commission and Prior to this, remuneration arrangements for Directors receive information, advice and recommendations from and the EMT were handled by the Board. independent, external advisers. This is done to ensure The Remuneration Committee primarily considers and makes recommendations to the Board regarding: • the appropriate fees for Non-executive Directors; • how the remuneration policies are applied to members of the EMT; and that the Group’s remuneration packages are appropriate, reflect industry standards and will help achieve the objectives of the Group’s remuneration strategy. During FY14 the Board engaged the services of Egan Associates Pty Limited to review its existing remuneration policies and to provide recommendations • the basis of short and long-term performance-based with respect to Non-executive Directors’ emoluments. incentive payments for members of the EMT. Egan Associates Pty Limited have stated that its review Fundamental to all arrangements is that all key management personnel must contribute to the achievement of short and long-term objectives, enhance shareholder value, avoid unnecessary or and recommendations were made free from undue influence by any member of the Group. Under the terms of the engagement, Egan was paid $5,670 (ex GST) for these services. excessive risk taking and discourage behaviour that is Also during the reporting period, the Chair of the contrary to the Group’s values. Remuneration Committee undertook a comprehensive Details of the short and long-term incentive schemes are set out below in the “Executive Remuneration Policy and Framework” section of the Remuneration Report. The objectives of the Group’s remuneration policies are to ensure that remuneration packages for key management personnel reflect their duties, responsibilities and level of performance - as well as to ensure that all key management personnel are motivated to pursue the long-term growth and success of the Group. In determining the remuneration of all key management personnel, the Board aims to ensure that the remuneration policies and framework: interests of the Group; review of a wide-range of possible independent, external consultants that could be appointed by the Group to review its remuneration policies and framework. As a result, in July 2014, the Remuneration Committee engaged an independent, external consultant, Mercer Consulting (Australia) Pty Ltd, to review the Group’s existing remuneration policies and to provide recommendations on the EMT’s remuneration packages – including base remuneration and short and long-term incentives for FY15. To ensure that the remuneration recommendations are free from undue influence the Remuneration Committee will ensure the following arrangements are made: • The remuneration company is engaged by, and reports directly to, the Chair of the Remuneration • incentivise all key management personnel to pursue Committee. Any agreements for the provision of the short and long-term growth and success of the remuneration consulting services will be executed Group within an appropriate risk control framework; by the Chair of the Remuneration Committee under • are competitive and reasonable, enabling the Group delegated authority on behalf of the Board. to attract and retain key talent, knowledge and • The report containing the remuneration Executive Director and other key management personnel. John Pearce Director (Non-executive) (retired • are fair and competitive and align with the long-term D Relationship between remuneration and the Group’s Kylie Lynam General Manager – Human experience; performance Resources and Corporate Services E Non-executive Director remuneration policy Marcus Barron Chief Information Officer (CIO) F Details of remuneration of Directors and key Michael Watkins General Counsel and Company management personnel Secretary (retired 31 October 2013) • are aligned to the Group’s strategic and business objectives and the creation of shareholder value; and • has a transparent reward structure with a risk proposition that is linked to achievement of pre-determined performance targets. recommendations will be provided by the external remuneration consultant directly to the Chair of the Remuneration Committee. 50 51 Directors’ report (cont’d) • The external remuneration consultant will be The combination of these components amount to the The STIs for other members of the EMT are recommended Objectives, once agreed, are identified as strategic permitted to speak to management throughout the total remuneration package or total employment cost by the MD and CEO to the Board based on the MD and projects or initiatives. These are tracked via the Strategic engagement to understand company processes, for members of the EMT. practices and other business issues and obtain management perspectives. However, the external Base pay remuneration consultant will not be permitted to provide any member of management with a copy of their draft or final report that contains the remunerable recommendations. Voting and comments made at the Group’s 2013 AGM Structured as a total employment cost package, the base pay may be delivered as a combination of cash and prescribed non-financial benefits at the discretion of the EMT member. Members of the EMT are offered a competitive base pay that comprises the cash salary and superannuation and non-monetary benefits. Base pay for The Group received an unanimous vote in favour, on a EMT members is reviewed annually to ensure the pay is in show of hands, of its Remuneration Report for FY13. line with role, experience and performance and remains Securities Trading Policy The trading of shares issued to eligible employees under any of the Group’s employee equity plans was subject to, and conditional upon, compliance with the Group’s Securities Trading Policy. Members of the EMT are prohibited from entering into any hedging arrangements over unvested performance rights under the Group’s Performance Rights Plan (PRP). The Group would consider a breach of this policy as misconduct, which may lead to disciplinary action and potentially dismissal. C Executive remuneration policy and framework The Board reviews the remuneration packages for members of the EMT annually by reference to individual performance against key individual objectives and competitive with the market. They are usually fixed for a 12-month period with any changes effective from 1 September each financial year. An EMT member’s pay is also reviewed on promotion. The Board approved an overall base pay increase of three percent for the majority of the EMT in FY14. The Board approved an increase of 28 percent for the COO during FY14. This was due to the completion of the COO’s six-month qualifying period and to better align the COO’s base salary with the market. Retirement benefits for EMT There are no retirement benefits made available to members of the EMT, other than as are required by statute or by law. the Group’s consolidated results. The performance Short-term incentives (STIs) review of the MD and CEO is undertaken by the Board. The performance review of the other members of the EMT is undertaken by the MD and CEO and approved by the Board. The Group aims to reward members of the EMT with a level of remuneration commensurate with their responsibilities and position within the Group, and their ability to influence shareholder value creation. The remuneration framework links rewards with the strategic objectives and performance of the Group. To ensure that remuneration for members of the EMT is aligned to the Group’s performance, a significant component of an EMT member’s remuneration package is performance based and, therefore, “at risk”. EMT members have the opportunity to earn an annual STI if pre-defined targets are achieved. The MD and CEO has a maximum target STI opportunity of 100 percent of base pay excluding superannuation and non-monetary benefits. EMT personnel have a maximum target STI opportunity of 25 percent of base pay excluding The EMT pay and reward framework has three components: superannuation and non-monetary benefits. • fixed base pay and benefits, including superannuation; STIs for the EMT in FY14 were based on scorecard • short-term incentives (STIs); and • long-term incentives (LTIs) through participation in the PRP, which has been approved by the Board. measures and weightings. The MD and CEO key performance objective targets were set by the Board at the beginning of the financial year and aligned to the Group’s strategic and business objectives, as outlined below. CEO’s financial and non-financial target performance Project Team, who provide updates on a monthly basis. objectives. The non-financial objectives vary with position, role and responsibility and include measures such as achieving strategic outcomes, developing people, growth, differentiation, innovation and other key initiatives during The process provides oversight for the Board on the progress of all agreed objectives. At the end of the financial year the Board reviews achievement of these key objectives and the weighted STIs are calculated based on the outcomes. the financial year. Different weighting between financial This structure ensures that STIs are only paid when an and non-financial performance is given to different individual member of the EMT delivers against their key members of the EMT based on their positions and objectives and the Group’s strategic goals. influence on the financial result of the business. MD and CEO STI targets for FY14 Performance category Metrics Weighting (%) Financial Net profit after tax (NPAT), return on equity, net debt / net debt plus equity, earnings before interest and taxes (EBIT) margin, and earnings per share (EPS). Strategic People Key strategic initiatives annually agreed by the Board. Employee engagement and other strategic HR initiatives. Technological Various strategic IT initiatives including Controller 5.0 deployment. 60 23 8 9 Based on the achievements of the Group this year, Long-term incentives (LTIs) the Remuneration Committee determined that the EMT had achieved between 96 and 98 percent of their target opportunity. In making this assessment, the Committee considered the following factors: LTIs are provided to the Group’s EMT via the PRP, which was unanimously approved by shareholders at the 2013 AGM. The LTI program has the objective of delivering long-term shareholder value by incentivising members of the EMT • Increase in net profit after tax from $15.6 million to achieve sustained financial performance over a to $18.7million three-year period. • Return on equity (average) remained at 13.4 percent Performance rights were awarded to various eligible • Net debt/Net debt plus equity reduced from 41 to 39 percent • EBIT margin increased from 29 to 30 percent employees on and from 1 July 2013 pursuant to the PRP, at a nil exercise price and subject to a three-year tenure hurdle and achieving certain financial performance hurdles, which were approved by the Board for the • EPS increase from 13.6 cents to 14.7 cents financial period ended 30 June 2016 (FY16). The Board • Increase of the employee engagement by 14 percent. has not set Total Return to Shareholders (TRS) as a base hurdle due to the absence of a deep set of listed peers and the belief that Management should focus on the four key strategic financial measurements below to achieve the best return for shareholders. 52 53 Directors’ report (cont’d) The performance rights will not vest unless the Group’s proportion of performance rights that will vest, as a D Relationship between remuneration and the Group’s of years, with greater emphasis given to the current and financial performance meet these hurdles as at 30 June percentage, if the target is achieved, the reason the Board performance Principles used to determine the nature and amount of remuneration: relationship between remuneration and Group performance The overall level of reward for members of the EMT takes into account the performance of the Group over a number previous year. Details of the relationship between the remuneration policy and Group’s performance over the last five years is detailed below. Net profit after tax ($m) 2010 $8.9 2011 $10.1 2012 $12.6 2013 $15.6 2014 $18.7 Dividends declared (franked) 5.8 cents 6.2 cents 6.4 cents 7.2 cents 8.0 cents Share price commenced Share price ended $0.47 $0.75 $0.76 $0.65 $0.69 $0.79 $0.80 $1.65 $1.65 $1.88 Basic EPS (including discontinued operations) 9.2 cents 10.4 cents 12.1 cents 13.6 cents 14.7 cents 2016. The Board set these hurdles to ensure that the established the hurdle and the Group’s progress towards EMT were focused on the short and long-term goals of achieving the hurdle. the Group. The table below outlines each hurdle, the Financial The Board’s reasoning for setting targets measurement Proportion of performance rights that vest (%) EPS base Earnings per share is regarded as an overriding measure of management 30 performance which aligns to shareholder interests, and is counter balanced by the below metrics which encourage earnings growth with prudent use of both equity and debt capital. EPS has grown 60 percent since FY10 and future EPS growth is guided by the Board’s intention to continue to deliver relatively consistent earnings growth over the long-term. EPS stretch Earnings per share stretch is to reward management for efforts in creating above expected shareholder value. However still within the parameters set below which requires the prudent use of both equity and debt capital. Average ROE Return on equity was regarded as being at an unsatisfactory level when the current CEO was appointed at the end of FY10. The Board saw benefit in incentivising improvement in this metric over the long-term, to achieve an ROE closer to comparable listed peers. Net Debt/Net The Board set a direction in FY12 to reduce balance sheet risks, and a Debt plus Equity component was to wind down gearing levels of the business over time. A general threshold limit of 40 percent (Net Debt / Net Debt plus Equity) was set at that time which has since been achieved. For FY16, this ratio must not exceed 38.3 percent . 30 25 15 839,830 unlisted performance rights over ordinary shares year period 2014 to 2017, based on performance conditions in the Company were granted during the current year to be recommended by the Remuneration and Nomination under the PRP to the EMT and other eligible employees Committee and approved by the Board. In relation to the for the period 1 July 2013 to 30 June 2016. 2014 to 2017 period, the Remuneration and Nomination The performance rights will vest (and therefore be Committee has recommended that the Board adjust capable of being exercised) depending on the Group the metrics so that a greater weighting is given to the achieving certain performance hurdles as at 30 June 2016, achievement of EPS stretch targets, which aligns with the as highlighted above. Any shares granted to the MD and creation of shareholder value. CEO are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. The Group will cancel or clawback any performance- based remuneration in the event of serious misconduct LTIs in the form of performance rights will be granted or a material misstatement of the Group’s financial annually to members of the EMT for a three-year period. statements. The next performance rights grant will relate to the three- 54 55 Directors’ report (cont’d) Details of remuneration: cash bonuses, options and performance rights For each cash bonus, grant of options and performance rights included in the table on pages 60 to 61 the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria, is set out below. No part of the bonus is payable in future years. No options or performance rights will vest unless the vesting conditions are met (see note 33 for details), hence the minimum value of the options or performance rights yet to vest is nil. The maximum value of the options or performance rights yet to be expensed has been determined as the amount of the grant date fair value of the options and performance rights that are yet to be expensed. Cash bonus 2014 Options or performance rights Paid Forfeited Financial Vested Forfeited Lapsed Financial years Minimum Maximum % % year % % $ in which options total value total value granted 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 - - - - - - - - - - - - or performance of options or of options or rights may vest performance performance (subject to certain rights yet to rights yet to qualifying hurdles) be expensed be expensed Refer to note 33 - - - - - - - - - - - - - - - - - - - - - - 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 - - - - - - - - - - - - 242,167 520,005 24,217 69,680 88,333 69,680 24,217 69,680 9,687 54,079 - 2 2 2 4 2 0 Matthew 98 Thomas Adrian Ralston Paul Freer Kylie Lynam Marcus Barron 98 98 96 98 Michael 100 Watkins (retired 31 October 2013) E Non-executive Director remuneration policy Payments are allowed for additional responsibilities for Non-executive Director’s fees are determined within an aggregate Directors’ fee pool limit, which is periodically recommended for approval by shareholders. Non- executive Directors do not receive share options or performance rights. The maximum annual aggregate Directors’ fee pool limit is $900,000 per annum and was approved by shareholders at the Group’s AGM on 25 October 2013. The aggregate total Director fees distribution is $690,540. the Board’s Chair, for membership of a Board Committee and for the Chair of each Board Committee. Fees and payments to Non-executive Directors reflect the demands that are made on, and the responsibilities of, the Directors. In accordance with advice from Egan Associates Pty Limited the following fees have been applied from 9 December 2013. Previous fees have been stated for comparison purposes. Fees Base fees Chair Other Non-executive Directors Additional fees Audit and Risk Management Committee Chair Audit and Risk Management Committee Member Remuneration and Nomination Committee Chair Remuneration and Nomination Committee Member From 9 December From 1 March 2013 2013 to 8 December 2013 $158,000* $58,000 $30,000 $15,000 $15,000 $15,000 $158,000* $70,000 $25,000 $10,000 $10,000 $5,000 * The Chair’s fee will cover his entire engagement on the Board. For further information in relation to Directors’ remuneration, refer to pages 58 to 59. Retirement allowances for Directors There are no retirement allowances paid to Non-executive Directors. 56 57 Directors’ report (cont’d) F Details of remuneration of Directors and key management personnel For recently appointed KMP, the remuneration information provided in the table below relates to the period from Amounts of remuneration Details of the remuneration of Directors and all other key management personnel (as defined in AASB 124 Related Party Disclosures) of the Group are set out below. Non-executive Directors Short-term benefits Post- employment Share- based benefits payments super options Total $ $ $ Salary Cash Non- Other and fees bonus monetary $ $ $ $ benefits David Liddy 2014 158,000 Chair Dennis Punches Deputy Chair Tony Coutts Non-executive Director Kerry Daly Non-executive Director David Gray Non-executive Director Philip Hennessy Non-executive Director (appointed 22 August 2013) 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 152,461 61,848 52,666 76,769 67,462 91,769 82,462 76,769 67,173 62,158 - Julie-Anne Schafer 2014 30,000 Non-executive Director (appointed 28 January 2014) John Pearce Non-executive Director (retired 22 August 2013) 2013 - 2014 2013 9,815 52,462 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 14,615 13,721 - - 7,101 6,072 8,489 7,422 7,101 6,046 5,750 - 2,775 - 908 4,722 - - - - - - - - - - - - - - - - 172,615 166,182 61,848 52,666 83,870 73,534 100,258 89,884 83,870 73,219 67,908 - 32,775 - 10,723 57,184 the date of appointment as KMP to FY14. Executive Director and other Short-term benefits Post- Share-based Total key management personnel employment payments benefits options and super performance $ rights $ $ Salary Cash Non- Other and fees bonus monetary $ $ $ $ benefits Matthew Thomas 2014 512,115 505,900 3,650 MD and CEO 2013 518,169 500,000 3,476 Adrian Ralston 2014 302,343 75,700 CFO 2013 295,169 73,000 3,650 3,476 Paul Freer 2014 293,135 78,400 3,650 (appointed 4 March 2013 76,923 17,000 - 2013) COO Kylie Lynam 2014 165,529 49,600 3,650 General Manager – Human Resources 2013 195,692 47,000 3,476 and Corporate Services Marcus Barron 2014 161,183 41,400 3,650 CIO (appointed KMP 1 July 2013) 2013 - - - Michael Watkins 2014 238,904* 22,253 1,230 General Counsel and Company Secretary (retired 31 October 2013) 2013 269,407 68,000 3,476 * Includes a payout of accrued annual and long service leave on retirement. - - - - - - - - - - - - 58,077 24,908 28,078 25,930 27,115 6,923 346,257 1,425,999 166,270 1,212,823 53,902 39,127 70,420 17,667 463,673 436,702 472,720 118,513 15,422 48,940 283,141 17,612 31,612 295,392 18,165 20,187 244,585 - - - 11,052 14,853 288,292 24,247 22,495 387,625 58 59 Directors’ report (cont’d) The relative proportions of remuneration referred to in the preceding table that are fixed and linked to performance and share based options are detailed below. Name Fixed remuneration (%) At risk – STIs (%) At risk – LTIs* (%) Matthew Thomas Adrian Ralston Paul Freer Kylie Lynam Marcus Barron Michael Watkins** (retired 31 October 2013) 2014 2013 2014 2013 2014 2013 40 72 68 65 75 87 45 74 71 73 - 76 36 16 17 18 17 8 41 17 14 16 - 18 24 12 15 17 8 5 14 9 15 11 - 6 * LTIs are provided by way of options and performance rights based on the value of options and performance rights expensed during the year. ** Fixed remuneration included payout on accrued annual and long service leave on retirement. G Service agreements Remuneration and other terms of employment for the MD and CEO and other key management personnel are also formalised in service agreements. Except as otherwise stated, all contracts with members of the EMT may be terminated early by either party with three months’ notice. Major provisions of the agreements relating to remuneration are set out below. Paul Freer Annual base salary $353,250 inclusive of superannuation for FY14. COO (appointed 4 March 2013) Performance cash bonus $80,000 exclusive of superannuation was the maximum STI opportunity in relation to FY14. Performance rights 100,000 at risk performance rights were issued in FY13. 56,269 at risk performance rights were issued during FY14. See note 33 for further details. Kylie Lynam Annual base salary $223,832 inclusive of superannuation for FY14. General Manager – Human Resources and Corporate Services Performance cash bonus $51,585 exclusive of superannuation was the maximum STI opportunity in relation to FY14. Options 443,000 options were granted in 2011. 100 percent of performance hurdles have been achieved and all remaining options were exercised in FY14. Performance rights 62,812 at risk performance rights were issued in FY13. 56,269 at risk performance rights were issued during FY14. See note 33 for further details. Marcus Barron Annual base salary $182,876 inclusive of superannuation for FY14. CIO (appointed 29 January 2013) Performance cash bonus $46,118 inclusive of superannuation was the maximum STI opportunity in relation to FY14. Performance rights 25,125 at risk performance rights were issued in FY13. 43,671 at risk performance rights were issued during FY14. See note 33 for further details. Matthew Thomas Annual base salary $566,288 inclusive of superannuation for FY14. Michael Watkins Annual base salary $295,028 inclusive of superannuation for FY14. MD and CEO Performance cash bonus $515,000 exclusive of superannuation was the maximum STI General Counsel Performance cash bonus $22,253 exclusive of superannuation was the maximum opportunity in relation to FY14. Options 1,479,000 options were granted in 2011. 100 percent of performance hurdles have been achieved and all remaining options were exercised in FY2014. Performance rights 628,119 at risk performance rights were issued in FY13. 419,919 at risk performance rights were granted during FY14 subject to shareholder approval. See note 33 for further details. Adrian Ralston Annual base salary $335,820 inclusive of superannuation for FY14. CFO Performance cash bonus $77,212 exclusive of superannuation was the maximum STI opportunity in relation to FY14. Options 591,000 options were granted in 2011. 100 percent of performance hurdles have been achieved and all remaining options were exercised in FY14. Performance rights 62,812 at risk performance rights were issued in FY13. 56,269 at risk performance rights were issued during FY14. See note 33 for further details. and Company Secretary (retired 31 October 2013) STI opportunity in relation to FY14. Options 443,000 options were granted in 2011. 100 percent of performance hurdles have been achieved and all remaining options were exercised in FY14. See note 33 for further details. 60 61 Directors’ report (cont’d) H Share-based compensation Options and performance rights granted under the Shares provided on exercise of remuneration options Options and performance rights Options and performance rights have been granted to certain eligible employees under the Collection House Executive Share Option Plan (ESOP) and Performance Rights Plan (PRP) respectively. The terms and conditions of all options and performance rights mentioned above affecting remuneration in the previous, current or future reporting periods are set out in note 33 of the financial statements. Refer to page 128. ESOP and PRP respectively carry no dividend or voting rights. When exercisable, each option and performance right is convertible into one ordinary share of Collection House Limited. Details of options and performance rights over ordinary shares in the Group provided as remuneration to members of the EMT are set out below. Further information on the options and performance rights are set out in note 33 of the financial statements. Refer to page 128. Name Number of options granted Number of options vested during the year during the year 2014 2013 1. Matthew Thomas 2. Adrian Ralston 3. Paul Freer 4. Kylie Lynam 5. Marcus Barron 6. Michael Watkins (retired 31 October 2013) - - - - - - - - - - - - 2014 295,800 118,200 - 88,600 - 88,600 2013 1,283,200 552,800 - 414,400 - 444,400 Name Number of performance rights granted/ Number of performance rights vested issued during the year during the year 1. Matthew Thomas 2. Adrian Ralston 3. Paul Freer 4. Kylie Lynam 5. Marcus Barron 2014 419,919* 56,269 56,269 56,269 43,671 2013 628,119 62,812 100,000 62,812 25,125 2014 2013 - - - - - - - - - - * Performance rights granted to the MD and CEO are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. The assessed fair value at the relevant date of options The assessed fair value at grant date of performance granted to the individuals is allocated over the period rights compensation granted to members of the EMT has from grant date to vesting date, and the amount is been independently determined and is calculated using included in the remuneration table in this report. Fair the five day volume weighted average price (VWAP). values at grant date are independently determined using The expense is recognised over the vesting period. The a modified binomial option pricing model that takes expense for each relevant financial year will require an into account the exercise price, the term of the option, assessment at each reporting date of the probability that the impact of dilution, the share price at grant date and each performance hurdle will be achieved. expected price volatility of the underlying share, the expected dividend yield, and the risk free interest rate for the term of the option. Details of ordinary shares in the Group provided as a result of the exercise of remuneration options to members of the EMT are set out below. Number of ordinary shares issued on Amounts paid per ordinary share Name exercise of options during the year 2014 2013 $ 2014 ESOP2008 1. Matthew Thomas 2. Adrian Ralston 3. Kylie Lynam 4. Michael Watkins (retired 31 October 2013) ESOP 2010 1. Matthew Thomas 2. Adrian Ralston 3. Kylie Lynam 4. Michael Watkins (retired 31 October 2013) - - - - 295,800 118,200 88,600 88,600 100,000 200,000 150,000 225,000 1,183,200 472,800 354,400 354,400 - - - - 0.6938 0.6938 0.6938 0.6938 $ 2013 0.4927 0.4927 0.4927 0.4927 0.6938 0.6938 0.6938 0.6938 I Equity instruments held by key management personnel Options The number of options over ordinary shares in the Company held during the financial year by each director of Collection House Limited and other key management personnel of the Group, are set out below. Balance Granted as Exercised Other Balance at Vested and Unvested at start of compensation (optional)/ changes end of the exercisable vested (rights) (295,800) (118,200) (88,600) (88,600) - - - - - - - - year - - - - - - - - - - - - 2014 Name Matthew Thomas Adrian Ralston the year 295,800 118,200 Kylie Lynam 88,600 88,600 Michael Watkins (retired 31 October 2013) 62 63 Directors’ report (cont’d) Performance rights 2014 Balance at start Received during Received on Other changes Balance at the Details of performance rights over ordinary shares in the Company provided as remuneration to each director of Executive Director of the year the year on vesting of rights during the year end of the year Collection House Limited and other key management personnel of the Group, are set out below. 2014 Name Matthew Thomas Adrian Ralston Balance at Granted as Exercised Other Balance at Vested and Unvested start of the compensation (optional)/ changes end of the exercisable year vested (rights) 628,119 419,919* 62,812 56,269 year 1,048,038* 119,081 156,269 119,081 68,796 - - - - - - - - - - 1,048,038 119,081 156,269 119,081 68,796 - - - - - Paul Freer 100,000 Kylie Lynam 62,812 Marcus Barron 25,125 56,269 56,269 43,671 * Performance rights granted to the MD and CEO are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. the exercise of to deferred options shares and other key management personnel Matthew Thomas Adrian Ralston Paul Freer Kylie Lynam 735,931 200,000 - 295,800 118,200 - 66,000 88,600 Marcus Barron - - Michael Watkins 175,000 88,600 (retired 31 October 2013) * as at 31 October 2013. J Additional information Loans to Directors and Executives - - - - - - (384,594) (293,200) 6,500 7,387 1,000 3,697 647,137 25,000 6,500 161,987 1,000 267,297* Share holdings There were no loans to Directors or members of the EMT during FY14. The number of shares in the Company held during the financial year by each director of Collection House Limited and Shares under option other key management personnel of the Group, including their personally related parties, are set out below. 2014 Balance at Received during Received on Other changes Balance at the Non-executive start of the the year on vesting of rights during the year end of the year Directors year the exercise of to deferred options shares David Liddy 100,000 Dennis Punches 14,452,535 Tony Coutts Kerry Daly David Gray Philip Hennessy (appointed 22 August 2013) Julie-Anne Schafer (appointed 28 January 2014) 4,821,665 380,000 168,000 - - John Pearce (retired 9,157,839 22 August 2013) * as at 22 August 2013 - - - - - - - - - - - - - - - - 50,000 150,000 (3,950,000) 10,502,535 7,394 14,607 27,999 50,000 4,829,059 394,607 195,999 50,000 38,500 38,500 - 9,157,839* LTIs are provided to certain eligible employees via the ESOP and PRP, see note 33 for further information. Un-issued ordinary shares of the Group under option at the date of this report are detail below. Options Date options Number Issue price of No of shares No of Expiry date granted of options shares issued 2014 unvested granted shares under options ESOP 1/3/11 2,956,000 $0.6938 591,200 Nil 23 December 2013 Performance Date rights Rights effective Number of rights Issue price of No of shares No of Expiry date shares issued 2014 unvested granted/to be issued 1/7/12 1,256,238 4/3/13 100,000 1/7/13 839,830* Nil Nil Nil PRP PRP PRP shares under rights 1,256,238 30 September 2015 100,000 30 September 2015 839,830 30 September 2016 Nil Nil Nil * Performance rights granted to the MD and CEO are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. 64 65 Directors’ report (cont’d) Additional information – Unaudited Proceedings on behalf of the Group Auditor’s independence declaration Insurance of officers During the financial year the Group has paid insurance premiums of $49,855 in respect of Directors’ and Officers’ liability and legal expenses’ insurance, for current and former Directors and Officers, including Senior Executives of the Group and Directors, Senior Executives and No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. secretaries of its controlled entities. No proceedings have been brought or intervened in on The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. that may be brought against the Directors or Officers in Non-audit services their capacity as Directors or Officers of entities in the Group, and any other payments arising from liabilities incurred by the Directors or Officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the Directors or Officers or the improper use by the Directors or Officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group. The Board of Directors, in accordance with advice from the Audit and Risk Management Committee, was satisfied that the provision of the non-audit services during the year was compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. During the year, the Group’s auditors have performed no other non-audit services in addition to their assurance duties. All other assurance services were subject to the corporate governance procedures adopted by the Group. Details of the amounts paid to the auditors of the Group, PKF Hacketts Audit, are set out below. Description 1. Audit services, PKF Hacketts Audit Audit and review of the financial reports and other audit work under the Corporations Act 2001. Total remuneration for audit services 2. Other assurance services, PKF Hacketts Audit Total remuneration for audit-related services Total remuneration Consolidated ($) 30 June 30 June 2014 2013 144,500 144,500 144,500 144,500 85,500 85,500 85,500 85,500 230,000 230,000 A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 68. Rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘’rounding off’’ of amounts in the directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor PKF Hacketts Audit continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Collection House Limited David Liddy Chair 21 August 2014 66 67 Auditor’s Independence declaration 68 69 Financial statements Income statement for the year ended 30 June 2014 Contents Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report 71 72 73 74 75 76 137 138 Revenue Revenue from continuing operations Depreciation and amortisation expense Other expenses Employee expenses Direct collection costs Operating lease rental expense Finance costs Profit before income tax Income tax expense Profit from continuing operations Profit for the year Profit is attributable to: Equity holders of Collection House Limited Notes 5 6 6 6 7 Consolidated 30 June 30 June 2014 $’000 107,337 107,337 (1,681) (5,928) (48,486) (14,115) (4,693) (5,474) 26,960 2013 $’000 97,306 97,306 (1,949) (5,722) (42,688) (14,066) (4,386) (6,164) 22,331 (8,255) 18,705 (6,717) 15,614 18,705 15,614 18,705 18,705 15,614 15,614 Cents Cents Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 32 32 14.7 14.5 13.6 13.5 The above income statement should be read in conjunction with the accompanying notes. 70 71 Statement Of Comprehensive Income for the year ended 30 June 2014 Balance Sheet as at 30 June 2014 Profit for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Consolidated 30 June 30 June 2014 $’000 18,705 2013 $’000 15,614 Notes Exchange differences on translation of foreign operations 25(a) Other comprehensive income for the year, net of income tax 725 725 (8) (8) Total comprehensive income for the year 19,430 15,606 Total comprehensive income for the year is attributable to: Equity holders of Collection House Limited 19,430 19,430 15,606 15,606 The above statement of comprehensive income should be read in conjunction with the accompanying notes. ASSETS Current assets Cash and cash equivalents Receivables Purchased debt ledgers Other current assets Total current assets Non-current assets Purchased debt ledgers Property, plant and equipment Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Borrowings Current tax liabilities Provisions Other financial liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Provisions Other financial liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Consolidated 30 June 30 June 2014 $’000 2013 $’000 Notes 8 9 10 11 10 12 14 15 16 17 18 19 20 21 23 704 9,574 51,669 1,044 62,991 2,400 7,693 46,611 721 57,425 182,581 149,196 5,436 34,222 4,705 28,252 222,239 182,153 285,230 239,578 13,628 11,513 323 7,071 2,906 1,600 - 7,396 2,850 276 25,528 22,035 99,800 89,400 1,331 356 2,226 4,221 361 294 103,713 94,276 129,241 116,311 155,989 123,267 24 25(a) 25(b) 102,285 80,095 1,959 51,745 155,989 489 42,683 123,267 72 73 The above balance sheet should be read in conjunction with the accompanying notes. Statement Of Changes In Equity for the year ended 30 June 2014 Statement Of Cash Flow for the year ended 30 June 2014 Consolidated Balance at 1 July 2012 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity net of transaction costs Employee share options - value of employee services Dividends provided for or paid Balance at 30 June 2013 Balance at 1 July 2013 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity net of transaction costs Employee share options - value of employee services Dividends provided for or paid Attributable to owners of Collection House Limited Contributed Retained equity Reserves earnings $’000 $’000 Total equity $’000 Notes $’000 74,324 - - - 5,771 - - 5,771 80,095 147 34,699 109,170 - (8) (8) - 350 - 350 489 15,614 15,614 - (8) 15,614 15,606 - - (7,630) (7,630) 5,771 350 (7,630) (1,509) 42,683 123,267 80,095 489 42,683 123,267 - - - 22,190 - - 22,190 - 18,705 18,705 725 725 - 745 - 745 - 725 18,705 19,430 - - (9,643) (9,643) 22,190 745 (9,643) 13,292 24 25 26 24 25 26 Balance at 30 June 2014 102,285 1,959 51,745 155,989 The above statement of changes in equity should be read in conjunction with the accompanying notes. Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Interest received Income taxes paid Net cash inflow (outflow) from operating activities 35 Cash flows from investing activities Payments for property, plant and equipment Payments for leasehold improvements Payments for purchased debt ledgers Proceeds from sale of purchased debt ledgers Payments for intangible assets Net cash (outflow) inflow from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Borrowing costs Interest paid Dividends paid to Company’s shareholders Proceeds from issues of shares and other equity securities Net cash (outflow) inflow from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Consolidated 30 June 30 June 2014 $’000 2013 $’000 Notes 151,861 138,803 (74,462) (67,615) 77,399 19 (11,470) 65,948 71,188 26 (9,010) 62,204 (203) (312) (395) (67) (81,270) (50,623) 23 (3,854) 2,205 (4,031) (85,616) (52,911) 30,321 (20,000) (1,782) (3,476) (9,643) 22,192 17,612 (2,056) 2,400 37 381 26 8 10,000 (5,700) (1,718) (4,625) (7,630) 5,246 (4,427) 4,866 (2,514) 48 2,400 The above statement of cash flows should be read in conjunction with the accompanying notes. 74 75 1 Summary of significant accounting policies 1 Summary of significant accounting policies (continued) The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. (v) Changes in presentation These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Collection House Limited and its subsidiaries (the Group). The financial statements were authorised for issue on 21 August 2014 by the directors of the Company. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Collection House Limited is a for‑profit entity for the purpose of preparing the financial statements. (i) Compliance with IFRS The consolidated financial statements of the Collection House Limited Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New and amended standards adopted by the Group The group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 July 2013: • AASB10 Consolidated Financial Statements, AASB 11: Joint Arrangements, AASB 12: Disclosure of Interests in Other Entities, AASB 127: Separate Financial Statements, AASB 128: Investments in Associates and Joint Ventures and AAS2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards; • AASB 119: Employee Benefits and AASB 2011–10: Amendments to Australian Accounting Standards arising from AASB 119. The Group has applied these Standards retrospectively in accordance with AASB 108: Accounting Policies Changes in Accounting Estimates and Errors and the transitional provisions of AASB 119; • AASB13: Fair Value Measurement and AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13. The adoption of these new standards did not materially affect any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. (iii) Early adoption of standards The Group has elected to apply the following pronouncements to the annual reporting period beginning 1 July 2013: • AASB 9 Financial Instruments As a result of the reclassification of its PDLs and a review of its financial statements, the Group has changed the presentation of revenue on the face of the income statement. In prior periods, each separate component of revenue including Commission, Other revenue, Collections of PDLs and Change in fair value of PDLs were presented on the face of the income statement. For the current period, and all future reporting periods, revenue will be presented as one line item on the face of the income statement. The separate components of revenue will be presented in note 5 of the financial statements. (vi) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available‑for‑sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss, and certain classes of property, plant and equipment. (vii) Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Collection House Limited (‘’Company’’ or ‘’parent entity’’) as at 30 June 2014 and the results of all subsidiaries for the year then ended. Collection House Limited and its subsidiaries together are referred to in these financial statements as the Group or the consolidated entity. Subsidiaries are all entities (including special purpose entities) over which the Group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. This includes applying the revised pronouncement to the comparatives in accordance with AASB 108 Accounting Policies, Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Changes in Accounting Estimates and Errors. None of the items in the financial statements had to be restated as a result of Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted applying these standards. (iv) Changes in accounting policies by the Group. There are currently no non-controlling interests in the Group. From 1 July 2013, as a result of a change in the Group’s business model for managing its financial assets, the Purchased (c) Segment reporting Debt Ledgers (PDLs) have been reclassified as financial assets that are subsequently measured at amortised cost. The change is recognised prospectively and there was no impact on the balance sheet at 1 July 2013, and prior periods are not required to be restated. There was no change to the values recognised in relation to the carrying value of the PDLs at the date of reclassification. Please refer to note 1(l) for the accounting policy with respect to the PDLs under the amortised cost model which is applicable from 1 July 2013. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. 76 77 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (d) Foreign currency translation (i) Functional and presentation currency 1 Summary of significant accounting policies (continued) (e) Revenue recognition (continued) Revenue is recognised for the major business activities as follows: Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary (i) Interest income – PDL’s economic environment in which it operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Collection House Limited’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment Interest income is recognised using the effective interest method under AASB 9 Financial Instruments. Interest is shown net of any adjustments to the carrying amount of purchased debt ledgers as a result of changes in estimated cash flows. (ii) Rendering of services – commission revenue Revenue from rendering services is recognised to the extent that it is probable that the revenue benefits will flow to the Group and the revenue can be reliably measured. (iii) Sale of non-current assets hedges or are attributable to part of the net investment in a foreign operation. The net gain or loss on disposal is included as either a revenue or an expense at the date control of the asset passes to the Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the buyer, usually when an unconditional contract of sale is signed. date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of as part of the fair value gain or loss. (iii) Group companies disposal and the net proceeds on disposal. (iv) Dividends The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) Revenue from dividends and distributions from controlled entities is recognised by the Parent Entity when they are that have a functional currency different from the presentation currency are translated into the presentation currency declared by the controlled entities. as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and • all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other Revenue from dividends from other investments is recognised when received. (f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, paid to the tax authorities. the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities the foreign operation and translated at the closing rate. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. 78 79 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (f) Income tax (continued) 1 Summary of significant accounting policies (continued) (h) Business combinations (continued) Collection House Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group entities are set off in the consolidated financial statements. recognises any non-controlling interests in the acquiree either at fair value or at the non-controlling interests’ proportionate Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other share of the acquiree’s net identifiable assets. comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or The excess of the consideration transferred, the amount of any non-controlling interests in the acquiree and the directly in equity, respectively. Taxation of Financial Arrangements legislation The Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA legislation) was passed in 2009. The TOFA legislation provides a framework for the taxation of financial arrangements, potentially providing closer alignment between acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. tax and accounting requirements. The regime also includes comprehensive tax hedging rules that would allow the tax Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their recognition of gains and losses on many hedging instruments to be matched to the accounting recognition of gains and present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate losses of the underlying hedged items. at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. TOFA became mandatory for the Group for the tax year beginning 1 July 2010. There are specific transitional provisions in (i) Impairment of assets relation to the taxation of existing financial arrangements outstanding at the transition date (i.e. there is a choice to bring pre‑commencement financial arrangements into the new regime subject to a balancing adjustment being calculated on transition to be returned over the next succeeding four tax years). Based on analysis conducted by the Group, the Group has elected to bring pre‑commencement financial arrangements into the TOFA regime. Further, the Group has performed a review in relation to whether to adopt certain tax-timing methodologies under the TOFA regime. As a result of this review, the Group has elected to adopt the reliance on financial reports methodology. Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable This election, together with the transitional election, has the effect of bringing to account deferred tax balances on financial cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash‑generating arrangements that existed at 30 June 2010, over a four year period. Further, there will be a closer alignment between tax units). and accounting recognition and measure of financial arrangements and consequently less deferred taxes associated with these financial arrangements in future years. (g) Leases (j) Cash and cash equivalents For the purpose of presentation in the cash flow statement, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short‑term, highly liquid investments with original maturities of three months or Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, ownership are classified as finance leases (notes 18 and 23). Finance leases are capitalised at the lease’s inception at the and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the consolidated balance sheet. fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other current financial liabilities and other non‑current financial liabilities. Each lease payment is allocated between the liability and finance costs. The finance cost is charged to the profit or loss 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 is depreciated over the asset’s useful life or (k) Trade receivables Trade receivables are recognised initially at fair value less provision for impairment. Trade receivables are due for settlement no more than 30 days from the date of recognition, and are presented as current assets unless collection is not expected for more than 12 months after the reporting date. over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the Group will obtain Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written ownership at the end of the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 29). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight‑line basis over the period of the lease. (h) Business combinations off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows The acquisition method of accounting is used to account for all business combinations, regardless of whether equity relating to short‑term receivables are not discounted if the effect of discounting is immaterial. instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. The amount of the impairment loss is recognised in profit or loss within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss. 80 81 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (l) Other financial assets Classification The Group classifies financial assets as subsequently measured at either amortised costs or fair value on the basis of both the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re‑evaluates this designation at each reporting date. Until 30 June 2013 PDLs were classified as financial assets at fair value through profit or loss. From 1 July 2013, and for all future reporting periods, the PDLs are classified as financial assets that are subsequently measured at amortised cost. (i) Financial assets subsequently measured at amortised cost - Purchased debt ledgers (PDLs) from 1 July 2013 Classification Purchased debt ledgers have been included in this category of financial assets from 1 July 2013 as the Group’s business model for managing the PDLs and the characteristics of the contractual cash flows of the financial asset are consistent with this measurement approach. PDLs are included as non-current assets, except for the amount of the ledger that is expected to be realised within 12 months of the balance sheet date, which is classified as a current asset. Subsequent Measurement PDLs are initially recognised at cost, as cost reflects fair value plus any incidental costs of acquisition and thereafter measured at amortised cost using the effective interest method, less any impairment losses. Net gains on financial assets are disclosed in the income statement as interest income net of any change in value of the ledgers. Impairment The carrying amount of the PDLs is continuously reviewed to ensure that the carrying amount is not impaired. PDLs are collectively assessed for impairment as they are not considered to be individually significant within the portfolio and they have similar credit risk characteristics. A PDL is considered to be impaired if the carrying amount exceeds the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Impairment losses are recognised in the income statement. When a subsequent change in estimated future cash flows causes the amount of impairment loss to reverse, the reversal in 1 Summary of significant accounting policies (continued) (l) Other financial assets (continued) Purchased debt ledgers are included as non-current assets, except for the amount of the ledger that is expected to be realised within 12 months of the balance sheet date, which is classified as a current asset. (iii) Loans and receivables Loans and receivables and held to maturity investments are subsequently carried at amortised cost using the effective interest method. Recognition and derecognition Regular way purchases and sales of financial assets are recognised on trade‑date i.e. the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available‑for‑sale are sold, the accumulated fair value adjustments recognised in other comprehensive income are reclassified to profit or loss as gains and losses from investment securities. Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Details on how the fair value of financial instruments is determined are disclosed in note 2. (iv) Impairment The group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be readily estimated. (m) Fair value estimation of financial assets and liabilities The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. impairment is recognised in the income statement to the initial amount of the original impairment loss. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. (ii) Financial assets at fair value through profit or loss ‑ Purchased debt ledgers (PDLs) prior to 1 July 2013 Purchased debt ledgers were previously included in this category of financial assets as they were managed and their performance evaluated on a fair value basis. The Group uses estimated discounted cash flows to determine fair value. Refer to note 2 for further details of fair value determination. (n) Other current assets Purchased debt ledgers were initially recorded at cost (including incidental costs of acquisition) and thereafter at fair value (i) Legal and court costs capitalised in the balance sheet. In the absence of an active market the fair value of a particular ledger was determined based on a valuation technique. The valuation was based on the present value of expected future cash flows. Significant legal and court costs associated with purchased debt and incurred subsequent to acquisition have been capitalised in recognition that it is expected beyond reasonable doubt future economic benefits will flow to the Group When the carrying value of a ledger was greater than the present value of its expected future cashflows the carrying as a result of the expenditure being incurred. amount was reduced to its recoverable amount (fair value), being the anticipated future cash flows discounted to present value. Net gains on financial assets were disclosed in the income statement as collections of purchased debt ledgers net of any change in fair value of the ledgers. These costs are amortised on a straight line basis over the period of their expected benefit, which is not expected to exceed twelve months. (o) Property, plant and equipment All assets acquired including property, plant and equipment and intangibles other than goodwill are initially recorded at their cost of acquisition at the date of acquisition, being the fair value of the consideration provided plus incidental costs directly attributable to the acquisition. When equity instruments are issued as consideration, their market price at the date of acquisition is used as fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity subject to the extent of proceeds received, otherwise these costs are expensed. 82 83 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (o) Property, plant and equipment (continued) Where settlement of any part of cash consideration is deferred, the amounts payable are recorded at their present value, discounted at the rate applicable to the Company if similar borrowings were obtained from an independent financier under comparable terms and conditions. The costs of assets constructed or internally generated by the Group, other than goodwill, include the cost of materials and direct labour. Directly attributable overheads and other incidental costs are also capitalised to the asset. Borrowing costs are capitalised to qualifying assets as set out in note 1(s). Expenditure, including that on internally generated assets, is only recognised as an asset when the Group controls future economic benefits as a result of the costs incurred, it is probable that those future economic benefits will eventuate, and the costs can be measured reliably. Costs attributable to feasibility and alternative approach assessments are expensed as incurred. All assets, including intangibles other than goodwill, are depreciated / amortised using the straight-line method over their estimated useful lives taking into account estimated residual values with the exception of purchased debt which subject to fair value adjustments based upon the benefits to be derived from the asset. Assets are depreciated or amortised from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. Depreciation and amortisation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are reflected prospectively in current and future periods only. - Plant and equipment - Computer equipment 4-12 years 3-5 years - Leased plant and equipment Term of Lease + expected renewal The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to retained earnings. (p) Intangible assets (i) Goodwill Goodwill is measured as described in note 1(h). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but it is tested for impairment every six months, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash‑generating units or groups of cash‑generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments (note 4). (ii) IT development and software Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and service and direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straight-line basis over periods generally ranging from 2 to 12 years. 1 Summary of significant accounting policies (continued) (p) Intangible assets (continued) IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset. (iii) Customer contracts The customer contracts were acquired as part of a business combination (see note 31 for details). They are recognised at their fair value at the date of acquisition and are subsequently amortised on a straight-line basis over periods ranging from 2 to 10 years. (iv) Other intangible assets Licences and intellectual property are considered to have a definite useful life and are carried at cost less accumulated amortisation. All costs associated with the maintenance and protection of these assets are expensed in the period consumed. (q) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. (r) Borrowings All borrowings are recognised at their principal amounts subject to set off arrangements which represent the present value of future cash flows associated with servicing the debt. Where interest is payable in arrears the interest expense is accrued over the period it becomes due and it is recorded at the contracted rate as part of “Other payables”. Where interest is paid in advance, the interest expense is recorded as a part of “Prepayments” and released over the period to maturity. Borrowings are removed from the consolidated balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (s) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs incurred in connection with arrangement of borrowings, foreign exchange losses net of any hedged amounts on borrowings, including trade creditors and lease finance charges. Ancillary costs incurred in connection with the arrangement of borrowings are capitalised and amortised over the life of the borrowings. (t) Provisions Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 84 85 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (t) Provisions (continued) 1 Summary of significant accounting policies (continued) (u) Employee benefits (continued) Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the Performance Rights compensation benefits are provided to key employees via the Collection House Performance Rights present obligation at the end of each reporting period. The discount rate used to determine the present value is a pre-tax Plan (PRP). The fair value of the performance rights granted under the PRP was independently determined. The fair value rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase at grant date has been calculated using the five day volume weighted average price (VWAP). in the provision due to the passage of time is recognised as interest expense. (u) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non‑monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short‑term employee benefit obligations are presented as payables. (ii) Other long‑term employee benefit obligations The expense is recognised over the vesting period. The expense for each relevant financial year will require an assessment at each reporting date of the probability that each performance hurdle will be achieved. This probability factor will then be multiplied by the total number of rights apportioned to each performance hurdle to determine the number used in calculating the charge to profit and loss. Further details are set out in note 33. (v) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees (v) Contributed equity Ordinary shares are classified as equity. up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the employee departures and periods of service. Expected future payments are discounted using market yields at the end of proceeds. the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the consolidated balance sheet if the entity does not have an Where any group company purchases the Company’s equity instruments, for example as the result of a share buy-back or a share-based payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the equity holders of Collection House Limited as treasury shares until the unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, settlement is expected to occur. (iii) Superannuation Plans The Company and other controlled entities make statutory contributions to several superannuation funds in accordance with the directions of its employees. Contributions are expensed in the period to which they relate. (iv) Share-based payments net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the equity holders of Collection House Limited. (w) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. Share‑based compensation benefits are provided to the Chief Executive Officer via the employment agreement between the Company and the Chief Executive Officer. (x) Earnings per share (i) Basic earnings per share Share‑based compensation benefits are provided to employees other than the Chief Executive Officer via the Collection Basic earnings per share is calculated by dividing: House Limited Executive Share Option Plan. Further details are set out in note 33. The fair value of options granted under the Executive Share Option Plan and the CEO employment agreement is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date is independently determined using a Monte Carlo option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares (note 32). (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and dividend yield and the risk-free interest rate for the term of the option. • the weighted average number of additional ordinary shares that would have been outstanding assuming the The fair value of the options granted is adjusted to reflect market vesting conditions, but excludes the impact of any conversion of all dilutive potential ordinary shares. non‑market vesting conditions (for example, profitability and sales growth targets). Non‑market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. 86 87 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 1 Summary of significant accounting policies (continued) (y) Goods and Services Tax (GST) 1 Summary of significant accounting policies (continued) (ab) Parent entity financial information (continued) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not (ii) Tax consolidation legislation recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. Collection House Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Collection House Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Collection House Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled (z) Rounding of amounts entities in the tax consolidated group. The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have Collection House Limited for any current tax payable assumed and are compensated by Collection House Limited for any been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to dollar. (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2014 reporting period and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. At the date of authorisation of the financial report, the following relevant Standards and Interpretations were issued but not yet effective: i. AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities (effective 1 January 2014); ii. Interpretation 21: Levies (effective 1 January 2014); iii. AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets (effective 1 January 2014); iv. AASB 2013-4 Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (effective 1 January 2014); v. AASB 2013-5 Amendments to Australian Accounting Standards – Investment Entities (effective 1 January 2014). Collection House Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly‑owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (iii) Financial guarantees The parent entity has provided no financial guarantees in relation to loans and payables of subsidiaries. 2 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group The Group does not expect to adopt the new standards before their operative date. They would therefore be first applied in uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis the financial statements for the annual reporting period ending 30 June 2015. The Group is currently evaluating the impact in the case of interest rate, foreign exchange and other price risks, aging analysis for credit risk and cashflow analysis to of the new standards, however they are not expected to have a material impact on the Group. determine the risk associated with the Purchased Debt Ledger portfolio. There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the Risk management is carried out by the finance department under policies approved by the Audit and Risk Management current or future reporting periods and on foreseeable future transactions. (ab) Parent entity financial information The financial information for the parent entity, Collection House Limited, disclosed in note 36 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of Collection House Limited. Dividends received from associates are recognised in the parent entity’s profit or loss, rather than being deducted from the carrying amount of these investments. Committee of the Board. Under the authority of the Board of Directors the Audit and Risk Management Committee ensures that the total risk exposure of the Group is consistent with the Business Strategy and within the risk tolerance of the Group. Regular risk reports are tabled before the Audit and Risk Management Committee. Within this framework, the Finance team identifies, evaluates and manages financial risks in close co‑operation with the Group’s operating units. (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the NZ Dollar and the Philippine Peso. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. 88 89 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 2 Financial risk management (continued) (a) Market risk (continued) 2 Financial risk management (continued) (a) Market risk (continued) Sensitivity At 30 June 2014, had the Australian Dollar weakened/strengthened by 10% against the NZ Dollar or the Philippine Peso Investment interest rate risk In addition the Group is exposed to Investment interest rate risk which arises from the significant investment in Purchased with all other variables held constant, the impact for the year would have been immaterial to both profit for the year and Debt Ledgers. A number of different types of risk arise from the PDL investments. All PDL risks are managed together as equity. (ii) Price risk The Group is not exposed to price risk, as there are no subsidiary company investments in the consolidated results. (iii) Cash flow and fair value interest rate risk described below. Interest rate risk Group sensitivity At 30 June 2014, if interest rates had changed by +/- 25 basis points from the year end rates with all other variables held constant, post tax profit for the year would have been $23,000 lower/higher (2013 ‑ change of 25 bps: $15,000 lower/ The Group is exposed to interest rate risk from two sources – Trade interest rate risk and Investment interest rate risk. higher), mainly as a result of higher/lower interest expense from net borrowings. Other components of equity would have Trade interest rate risk As the Group has no significant interest bearing assets, the Group’s income and operating cash flows are not materially exposed to changes in market interest rates. The Group’s main trade interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the been $23,000 lower/higher (2013 - $15,000 lower/higher) mainly as a result of an increase/decrease in cash not required for interest payments. Other financial assets and liabilities are not interest bearing and therefore are not subject to interest rate risk. (iv) Summarised sensitivity analysis Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk, if the The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk. borrowings are carried at fair value. During 2014 and 2013, the Group borrowings at variable rates were denominated in Australian Dollars only. The Group analyses trade interest rate exposure in the context of current economic conditions. Management is aware of the impact on profits of specific interest rate increases, and annual budgets and ongoing forecasts are framed based upon group and market expectations of interest rate levels for the coming year. Interest rate hedges and swaps are an available tool for managing interest rate risk within the Group. The Board has authorised their use and if it is determined that it would be profitable and / or advantageous to the Group, these tools will be used. On 17 September 2012, the Company confirmed an interest rate swap transaction for an amount of $15m at a fixed rate of 3.02% per annum effective as at 7 September 2012 and continuing until 7 September 2015. On 21 September 2012, the Company confirmed an interest rate swap transaction for an amount of $14.5m at a fixed rate of 2.86% per annum effective as at 21 September 2012 and continuing until 21 September 2015. On 29 January 2014, the Company confirmed an interest rate swap transaction for an amount of $12.6m at a fixed rate of 2.895% per annum effective as at 30 January 2014 and continuing until 1 February 2016. On 16 May 2014, the Company confirmed an interest rate swap transaction for an amount of $46m at a fixed rate of 3.05% per annum effective as at 28 July 2014 and continuing until 27 January 2017. As at the reporting date, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: Consolidated Bank overdrafts and bank loans Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 30 June 2014 30 June 2013 Weighted average interest rate % 3.6% 4.0% Weighted average interest rate % 4.3% 4.7% Balance $’000 100,123 (88,100) 12,023 Balance $’000 89,400 (81,400) 8,000 Consolidated 30 June 2014 Financial liabilities Borrowings Total increase / (decrease) in financial liabilities Total increase / (decrease) Consolidated 30 June 2013 Financial liabilities Borrowings Total increase / (decrease) in financial liabilities Total increase / (decrease) Carrying amount $’000 1,280 12,023 Carrying amount $’000 570 8,000 Interest rate risk -25 bps +25 bps Profit $’000 Equity $’000 Profit $’000 Equity $’000 2 21 23 23 2 21 23 23 (2) (21) (23) (23) (2) (21) (23) (23) Interest rate risk -25 bps +25 bps Profit $’000 Equity $’000 Profit $’000 Equity $’000 1 14 15 15 1 14 15 15 (1) (14) (15) (15) (1) (14) (15) (15) 90 91 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 2 Financial risk management (continued) (b) Credit risk The Group is exposed to credit risk from two sources – Trade credit risk and Investment credit risk. Trade credit risk Trade credit risk is managed on a Group basis. Trade credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to clients, including outstanding receivables and committed transactions. 2 Financial risk management (continued) (c) Liquidity risk (continued) The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Between Between contractual amount Total Carrying The Group has no significant concentrations of trade credit risk. The Group has policies in place to ensure that services are Contractual maturities of Less than 6 - 12 1 and 2 2 and 5 made to customers with an appropriate credit history. financial liabilities 6 months months $’000 $’000 years $’000 years $’000 Over 5 years $’000 cash (assets) / flows liabilities $’000 $’000 Investment credit risk In addition the Group is exposed to Investment credit risk which arises from the significant investment in Purchased Debt Ledgers. A number of different types of risk arise from the PDL investments. All PDL risks are managed together as described below. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Finance Team aims to maintain flexibility in funding by keeping committed credit lines available. Management monitors rolling forecasts of the Group’s liquidity reserve on the basis of expected cash flow. Cashflows are forecast on a day‑to‑day basis across the Group to ensure that sufficient funds are available to meet requirements on the basis of expected cash flows. This is generally carried out at local level in the operating companies of the Group in accordance with practice and limits set by the Group. These limits vary by location to take into account the liquidity of the market in which the entity operates. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans. Financing arrangements The Group had access to a $115,000,000 Multiple Option Facility throughout the year (2013: $115,000,000). The facility, which was syndicated in January 2014, was subject to meeting a number of financial undertakings. The undertakings were comfortably met at all times during both the current and prior years. The facility is made up of a Cash Advance option, a Commercial Bill option, an Overdraft option, and a Set‑off option. The cash advance option or the commercial bill option can be drawn upon with 2 days notice to the finance provider, and the overdraft option or the set‑off option may be drawn upon at any time. The allocation between the various options is at the discretion of the Group subject to the total not exceeding the $115,000,000 commitment from the finance providers. The overdraft and set‑off options are repayable on demand, and the Commercial Bill and cash advance options are repayable at the end of the term. The undertakings are reviewed by the Audit and Risk Management Committee each month, and are reported on to the finance provider bi‑annually. All companies within the Group are required to notify the finance provider of any event of default as soon as it becomes aware of them. In addition to the above the Group is required to keep the finance provider fully informed of relevant details of the Group as they arise. Further details of the banking facility and interest rate swaps entered into during the year are set out in note 19. At 30 June 2014 Non-derivatives Non-interest bearing Variable rate Total non-derivatives At 30 June 2013 Non-derivatives Non-interest bearing Variable rate Total non-derivatives (d) Fair value measurements 13,628 323 13,951 - - - - 1,280 1,280 - 99,800 99,800 - - - 13,628 101,403 115,031 - - - Between Between contractual amount Less than 6 - 12 1 and 2 2 and 5 6 months months years years Over 5 years cash (assets) / flows liabilities Total Carrying 11,513 - 11,513 - - - - 570 570 - 89,400 89,400 - - - 11,513 89,970 101,483 - - - The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments that are not traded in an active market (eg purchased debt portfolios in the Group) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are also used to determine fair value for the financial instruments. The key assumption which underpins the valuation of Financial Instruments in the Group is the recovery rate. Assumptions are made about the recovery rate based on experience and market conditions. Sensitivity of profit and equity to changes in the actual recovery rate achieved is set out in the sensitivity analysis below. The carrying value less doubtful debts provision of trade receivables and payables is a reasonable approximation of their fair values due to the short‑term nature of trade receivables. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 92 93 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 2 Financial risk management (continued) (d) Fair value measurements (continued) 2 Financial risk management (continued) (d) Fair value measurements (continued) Purchased Debt Ledgers (prior to 1 July 2013) To manage the interest rate and credit risks arising from investments in debt portfolios, the Group analyses the price to be The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible paid for each tranche before it is purchased. Debt prices paid are determined by a bidding process in the market place, on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is with each bidder determining the prices which they are prepared to pay based on their own analysis. included in level 2. The Group has no level 2 financial instruments. The price offered by the Group for any particular tranche of debt is determined based upon existing in‑house knowledge If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is of the tranche, macro-economic and micro-economic factors and the experience of senior management. In-house the case for purchased debt ledgers which comprise all of the financial instruments held by the Group. knowledge of a tranche exists if the tranche has been previously worked by the Group on a commission basis. Due to contractual restrictions on the Group’s ability to subsequently deal with the purchased debt portfolio, it is considered that there is not an active market in debt portfolios in which the Group can participate. Initial recognition value The factors that determine the price paid for a particular tranche of debt are: 1. The Face Value of the debt being purchased. Purchased Debt Ledgers (after 1 July 2013) The changes in level 3 instruments for the year ended 30 June 2014 are set out in note 10. Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets at fair value through profit or loss to the achieved recovery rate. Following the change in classification of the PDLs to financial assets subsequently carried at amortised cost, this is not applicable for the current year. The face value of debt is dependent upon the value of debt that the vendor is prepared to sell. Other than as set out in the following table, there are no other reasonably possible alternative assumptions that would have 2. The expected Recovery Rate of the debt being purchased. The expected recovery rate is the percentage of the face value of a debt that is expected to be recovered as a result of collection activity, and is based upon the Group’s historical experience with the particular tranche being purchased. Historical experience can vary from a detailed knowledge of the tranche if it has been previously worked by the Group on a commission basis, to a general knowledge of the type of debt being purchased from a new vendor, and specific knowledge discovered as part of a pre-purchase due diligence process. 3. The Price Multiple which can be obtained. The price multiple is the discount factor between the recoverable amount of the debt and the price which is paid for it. The discount factor is determined by the amount that the vendor is prepared to accept in exchange for the debt, and the amount that the company is able to pay to acquire the debt and achieve an acceptable profit margin. Subsequent measurement of carrying value After a tranche has been purchased, fair value adjustments are made against the carrying value in line with revenue collected against it. The carrying value is continuously reviewed to ensure that it is not in excess of fair value based upon a discounted cash flow (DCF) model. The inputs to the DCF model are the same as are used in the original purchase price calculation with actual results substituted for expected estimates. In this context the only variable is the recovery rate, as neither the face value nor the price multiple can change as a result of working a debt. AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value hierarchy: a material impact on fair value. Consolidated 30 June 2013 Financial assets Recoverability -2.79% +2.79% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Financial assets at FVTPL 195,807 Total increase/(decrease) in financial assets Total increase/ (decrease) (1,031) (1,031) (1,031) (1,031) (1,031) (1,031) 1,031 1,031 1,031 1,031 1,031 1,031 (e) Cash flow and fair value interest rate risk The Group’s interest-rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest‑rate risk. Group finance facilities are a combination of overdraft and short‑term commercial bill facilities, all of which are on a variable interest rate basis. In the current interest rate environment, this approach maximises available cash with minimal exposure to interest rate movements. All aspects of the financing arrangements, including interest rate structuring can be reviewed as required during the life of the facility. The Board of Directors has authorised the use of interest rate swaps as a tool to manage interest rate risk. At 30 June 2014, the Group has entered into four interest rate (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) swaps as per note 2(a). (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The purchased debt ledger assets of the Group are classified as Level 3 in the fair value measurement hierarchy. Details of the Group’s assets and liabilities measured and recognised at fair value are set out in note 10. The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets of this nature is the current bid price. These instruments are included in level 1. The Group has no level 1 financial instruments. 94 95 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, 4 Segment information (a) Description of segments Individual business segments are identified on the basis of grouping individual products or services subject to similar risks and returns. The business segments reported are: Collection Services and Purchased Debt Ledgers. The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors (chief operating decision makers) in assessing performance and determining the allocation of resources. seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material The consolidated entity is organised on a global basis into the following divisions by product and service type. adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill Collection Services The earning of commissions on the collection of debts for clients. Each six months the Group tests whether goodwill has suffered any impairment, in accordance with the accounting policy Purchased Debt Ledgers stated in note 1(p). The recoverable amounts of cash-generating units have been determined based on value-in-use The collection of debts from client ledgers acquired by the Group. calculations. These calculations require the use of assumptions. Refer to note 14 for details of these assumptions and the potential impact of changes to the assumptions. (ii) Estimated impairment of non‑financial assets and intangible assets other than goodwill Each six months the Group tests whether the non‑financial assets or intangible assets of the Group (other than goodwill) have suffered any impairment, in accordance with the accounting policy stated in note 1(i). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. (iii) Estimated fair value of other financial assets At each reporting date the Group determines the fair value of financial assets in accordance with the accounting policy stated at note 1(m). The calculation of fair value requires the use of assumptions. (iv) Performance rights The Group determines the amount to be posted to the share based payments reserve based on management’s best estimate of employees meeting their performance hurdles. The value of performance rights could change if the number of employees that meet their performance hurdles differs significantly from managements estimate. (b) Critical judgements in applying the entity’s accounting policies (i) Employee benefits Management judgement is applied in determining the key assumptions used in the calculation of long service leave at balance date: - future increases in wages and salaries - future on-cost rates - experience of employee departures and period of service (ii) Useful lives of property, plant and equipment The Group’s management determines the estimated useful lives and related depreciation charges for property, plant and equipment at the time of acquisition. As described in note 1(o) useful lives are reviewed regularly throughout the year for appropriateness. 96 97 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 4 Segment information (continued) (b) Segment information provided to the Board 4 Segment information (continued) (b) Segment information provided to the Board (continued) Purchased Intersegment Total Collection debt eliminations/ continuing Discontinued services ledgers unallocated operations operations Consolidated $’000 $’000 $’000 $’000 $’000 $’000 Purchased Intersegment Total Collection debt eliminations/ continuing Discontinued services ledgers unallocated operations operations Consolidated $’000 $’000 $’000 $’000 $’000 $’000 2014 Segment revenue Sales to external customers Intersegment sales Total sales revenue Interest income Total segment revenue Intersegment elimination Consolidated revenue Segment result Segment result Interest expense and borrowing costs Unallocated revenue less unallocated expenses Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Total acquisitions Depreciation and amortisation expense Total depreciation and amortisation 43,785 648 44,433 - 44,433 - - - 63,118 63,118 8,140 27,593 - - - - - - 43,785 648 44,433 63,118 107,551 (214) 107,337 35,733 (5,474) (3,299) 26,960 (8,255) 18,705 173,573 233,678 (122,021) 285,230 19,553 127,109 (125,944) 5,092 82,833 - - 285,230 20,718 108,522 129,240 87,925 87,925 1,005 783 (107) 1,681 1,681 44,695 Other non-cash expenses 104 43,664 927 98 - - - - - - - - - - - - - - - - - - - - - - - - 43,785 648 44,433 63,118 107,551 (214) 107,337 35,733 (5,474) (3,299) 26,960 (8,255) 18,705 285,230 - 285,230 20,718 108,522 129,240 87,925 87,925 1,681 1,681 44,695 Total segment revenue 39,779 2013 Segment revenue Sales to external customers Intersegment sales Total sales revenue Collections of Purchased Debt Ledgers Fair Value movement on Purchased Debt ledgers Net gain on financial assets Intersegment elimination Consolidated revenue Segment result Segment result Interest expense and borrowing costs Unallocated revenue less unallocated expenses Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Total acquisitions Depreciation and amortisation expense Total depreciation and amortisation 39,035 744 39,779 - - - - - - 96,711 (38,780) 57,931 57,931 - - - - - - - 39,035 744 39,779 96,711 (38,780) 57,931 97,710 (404) 97,306 7,161 25,145 - 32,306 (6,164) (3,811) 22,331 (6,717) 15,614 140,142 202,533 (103,097) 239,578 14,986 107,197 (106,888) 4,668 52,528 - - 239,578 15,295 101,016 116,311 57,196 57,196 1,049 466 212 1,727 Other non-cash expenses 249 39,303 507 1,727 40,059 - - - - - - - - - - - - - - - - - - - - - - - - - - 39,035 744 39,779 96,711 (38,780) 57,931 97,710 (404) 97,306 32,306 (6,164) (3,811) 22,331 (6,717) 15,614 239,578 - 239,578 15,295 101,016 116,311 57,196 57,196 1,727 1,727 40,059 99 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 5 Revenue Interest income Commission Other revenue Collections of purchased debt ledgers Change in fair value of purchased debt ledgers Net gain on other financial assets ‑ purchased debt ledgers Consolidated 30 June 30 June 2014 $’000 63,118 43,903 316 2013 $’000 - 39,131 244 - - - 96,711 (38,780) 57,931 Revenue from continuing operations 107,337 97,306 From 1 July 2013, purchased debt ledgers are classified as financial assets subsequently measured at amortised cost. Interest income represents revenue from PDLs subsequently measured at amortised cost, through the application of the effective interest method under AASB 9 Financial Instruments. Refer to note 1(a) (iv) for details regarding the change in accounting policy. Adjustments to the carrying amount of purchased debt ledgers as a result of changes in estimated cash flows were not significant during the year. These have been included in interest revenue above. Total collections of purchased debt ledgers for the year ended 30 June 2014 were $106.5m (2013: $96.7m). 4 Segment information (continued) (c) Geographical information The consolidated entity operates in two main geographical areas, Australia and New Zealand. Segment revenues from Acquisitions of property, plant and equipment, intangibles and other non-current segment sales to external customers Segment assets assets 30 June 30 June 30 June 30 June 30 June 30 June 2014 $’000 101,089 5,814 2013 $’000 92,457 4,509 - - 2014 $’000 2013 $’000 273,172 228,270 11,437 621 11,204 104 2014 $’000 87,071 854 - 2013 $’000 55,911 1,285 - 106,903 96,966 285,230 239,578 87,925 57,196 Australia New Zealand Philippines Segment revenues are allocated based on the country in which the customer is located. Segment assets and capital expenditure are allocated based on where the assets are located. (i) Accounting policies Segment information is prepared in conformity with the accounting policies of the entity as disclosed in note 1 (c) and AASB 8 Operating Segments. Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of operating cash, receivables, property, plant and equipment and goodwill and other intangible assets, net of related provisions. While most of these assets can be directly attributable to individual segments, the carrying amounts of certain assets used jointly by segments are allocated based on reasonable estimates of usage. Segment liabilities consist primarily of trade and other payables, employee benefits and interest bearing liabilities. Segment assets and liabilities do not include income taxes. Unallocated items mainly comprise interest or dividend-earning assets and revenue, interest bearing loans, borrowing costs and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. (ii) Segment margins Margin on segment revenue (d) Other segment information Collection services Purchased debt ledgers 30 June 30 June 30 June 30 June 2014 2013 2014 % 18 % 18 % 44 2013 % 43 Sales between segments are carried out at arms length and are eliminated on consolidation. The revenue from external parties reported to the chief operating decision maker is consistent with that in the income statement. 100 101 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 6 Expenses 7 Income tax expense Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements, plant and equipment Total depreciation Amortisation Computer software Customer contracts Business formation costs Stamp Duty Total amortisation Consolidated 30 June 30 June 2014 $’000 2013 $’000 1,120 1,120 1,168 1,168 42 148 19 352 561 500 - - 281 781 Total depreciation and amortisation 1,681 1,949 Finance expenses Interest and finance charges paid/payable Amount capitalised (a) Finance costs expensed Fair value losses on other financial assets Rental expense relating to operating leases Minimum lease payments Total rental expense relating to operating leases (a) Capitalised borrowing costs 5,753 (279) 5,474 - - 4,693 4,693 6,400 (236) 6,164 38,780 38,780 4,386 4,386 The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity’s outstanding borrowings during the year, in this case 4.1% (2013 – 4.9%). (a) Income tax expense Income tax expense ‑ Profit from continuing operations 8,255 6,717 Consolidated 30 June 30 June 2014 $’000 2013 $’000 Income tax expense is attributable to: Current tax Deferred tax Under (over) provided in previous years Aggregate income tax expense Deferred income tax (revenue) expense included in income tax expense comprises: Decrease (increase) in deferred tax assets (note 13) (Decrease) increase in deferred tax liabilities (note 20) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2013 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible expenses Effect of tax rates in foreign jurisdictions Tax exempt (income) / loss Adjustments for current tax of prior periods Income tax expense 11,983 (2,890) (838) 8,255 (261) (2,629) (2,890) 11,057 (3,655) (685) 6,717 50 (3,705) (3,655) 26,960 8,088 22,331 6,699 390 14 (91) 145 11 11 8,401 6,866 (146) (146) (149) (149) 8,255 6,717 102 103 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 8 Current assets - Cash and cash equivalents Cash at bank and in hand Consolidated 30 June 30 June 2014 $’000 704 704 2013 $’000 2,400 2,400 9 Current assets - Trade and other receivables (continued) (a) Impaired trade receivables As at 30 June 2014 current trade receivables of the Group with a nominal value of $218,000 (2013 - $261,000) were assessed as potentially impaired. The amount of the provision was $49,000 (2013 - $102,000). The individually impaired receivables mainly relate to debtors which have been outstanding for more than 90 days. It has been assessed that a portion of these receivables are expected to be recovered. The ageing of these receivables is as follows: (a) Reconciliation of cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: Balances as above Bank overdrafts (note 16) Balances per statement of cash flows (b) Risk exposure Consolidated 30 June 30 June 2014 $’000 704 (323) 381 2013 $’000 2,400 - 2,400 The Group’s and the parent entity’s exposure to interest rate risk is discussed in note 2. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. (c) Bank overdraft right of set-off With effect from 1 July 2004, the Company holds a contractual right of set‑off between the current overdraft balance and the cash at bank balances. 9 Current assets - Trade and other receivables Consolidated 30 June 30 June 2014 $’000 2013 $’000 5,065 (49) 5,016 3,295 1,263 9,574 4,157 (102) 4,055 2,561 1,077 7,693 Net trade receivables Trade receivables Provision for impairment of receivables (a) Other receivables (c) Prepaid expenses 104 1 to 3 months Over 3 months Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectible Unused amount reversed Consolidated 30 June 30 June 2014 $’000 - 218 218 2013 $’000 - 261 261 Consolidated 30 June 30 June 2014 $’000 102 49 - (102) 49 2013 $’000 93 181 (70) (102) 102 The creation and release of the provision for impaired receivables has been included in ‘other expenses’ in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. The Group does not hold any collateral in relation to these receivables. (b) Past due but not impaired As at 30 June 2014, trade receivables of the Group of $2,357,000 (2013 - $1,851,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Up to 3 months Over 3 months Consolidated 30 June 30 June 2014 $’000 1,589 768 2,357 2013 $’000 1,805 46 1,851 105 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 9 Current assets - Trade and other receivables (continued) (c) Other receivables These amounts relate to accrued revenue, rental bonds and other assets. (d) Foreign exchange and interest rate risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 2. (e) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. (f) Risk exposure The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. Refer to note 2 for more information on the risk management policy of the Group and the credit quality of the entity’s trade receivables. 10 Purchased debt ledgers (a) Other financial assets subsequently measured at amortised cost Current Non-current Total other financial assets subsequently measured at amortised cost Consolidated 30 June 30 June 2014 $’000 51,669 182,581 234,250 2013 $’000 - - - From 1 July 2013, PDLs are measured at amortised cost using the effective interest method in accordance with AASB 9 Financial Instruments. The effective interest rate is the implicit interest rate based on forecast collections determined in the period of acquisition of an individual PDL and equates to the Internal Rate of Return (IRR) of the forecast cash flows without any consideration of collection costs. (b) Other financial assets at fair value through profit or loss Prior to 1 July 2013, PDLs were recorded as financial assets measured at fair value through profit or loss. Current Non-current Total other financial assets at fair value through profit or loss Consolidated 30 June 30 June 2014 $’000 - - - 2013 $’000 46,611 149,196 195,807 10 Purchased debt ledgers (continued) (b) Other financial assets at fair value through profit or loss (continued) The following table presents the Group’s assets which are measured and recognised at fair value at 30 June 2014. The assets below are financial instruments which are classified as level 3 under the hierarchy set out in AASB 7 Financial Instruments: Disclosures. Further details are set out in note 2. Current and Non-current At beginning of year Net additions* Collections disclosed in profit Fair value gain / (loss) disclosed in profit At end of year Current and Non-current Other financial assets at fair value through profit or loss Consolidated 30 June 30 June 2014 $’000 2013 $’000 - - - - - - - 184,523 50,064 (96,711) 57,931 195,807 195,807 195,807 Gains / (losses) in fair values of other financial assets at fair value through profit or loss are recorded in the income statement. * Net additions for the year ended 30 June 2013 are represented by total additions of $52,269,000, less $2,205,000 in relation to incidental disposals of other financial assets. (c) Risk exposure Information about the Group’s exposure to credit risk, foreign exchange and price risk are provided in note 2. 11 Current assets - Other current assets Other deposits Legal and court costs capitalised - net Consolidated 30 June 30 June 2014 $’000 103 941 1,044 2013 $’000 42 679 721 106 107 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 12 Non‑current assets ‑ Property, plant and equipment 13 Non-current assets - Deferred tax assets At 1 July 2012 Cost or fair value Accumulated depreciation Net book amount Year 30 June 2013 Opening net book amount Additions Disposals Depreciation charge Transfers Closing net book amount At 30 June 2013 Cost or fair value Accumulated depreciation Net book amount Year 30 June 2014 Opening net book amount Additions Disposals Depreciation charge Transfers Closing net book amount At 30 June 2014 Cost or fair value Accumulated depreciation Net book amount Plant and Leasehold Leased plant equipment improvements and equipment $’000 $’000 $’000 Work-in- progress $’000 6,837 (4,293) 2,544 2,544 53 (13) (821) 56 1,819 6,962 (5,143) 1,819 3,656 (1,167) 2,489 2,489 65 (52) (347) 218 2,373 3,892 (1,519) 2,373 - - - - - - - - - - - - 165 - 165 165 622 - - (274) 513 513 - 513 Plant and Leasehold Leased plant equipment improvements and equipment $’000 $’000 $’000 Work-in- progress $’000 1,819 624 (1) (708) 66 1,800 7,682 (5,882) 1,800 2,373 157 - (398) 465 2,597 4,520 (1,923) 2,597 - - - - - - - - - 513 1,057 - - (531) 1,039 1,039 - 1,039 Total $’000 10,658 (5,460) 5,198 5,198 740 (65) (1,168) - 4,705 11,367 (6,662) 4,705 Total $’000 4,705 1,838 (1) (1,106) - 5,436 13,241 (7,805) 5,436 (a) Non-current assets pledged as security Refer to note 19 for information on non-current assets pledged as security by the Group. 108 The balance comprises temporary differences attributable to: Tax losses Provisions and employee benefits Accruals Doubtful debts Future deductible windup costs Other Set‑off of deferred tax liabilities pursuant to set‑off provisions (note 20) Net deferred tax assets Movements: Opening balance at 1 July Change in tax rate Credited / (charged) to the income statement (note 7) Closing balance at 30 June Provisions and employee Movements – Consolidated $’000 $’000 $’000 Tax losses benefits Accruals At 30 June 2012 ‑ to profit or loss At 30 June 2013 362 (85) 277 274 (82) 192 867 160 1,027 Provisions and employee Movements – Consolidated $’000 $’000 $’000 Tax losses benefits Accruals Future deductible Doubtful windup debts $’000 costs $’000 Other $’000 28 3 31 48 (32) 16 Future deductible 29 (14) 15 Doubtful windup debts $’000 costs $’000 Other $’000 At 30 June 2013 ‑ to profit or loss At 30 June 2014 192 105 297 1,027 230 1,257 277 (53) 224 31 (16) 15 16 (7) 9 15 2 17 Consolidated 30 June 30 June 2014 $’000 2013 $’000 297 1,257 224 15 9 17 192 1,027 277 31 16 15 1,819 1,558 (1,819) (1,558) - - 1,558 1,608 - 261 1,819 - (50) 1,558 Total $’000 1,608 (50) 1,558 Total $’000 1,558 261 1,819 109 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 14 Non-current assets - Intangible assets Computer Customer intangible progress Other Work-in- Goodwill software contracts $’000 $’000 $’000 assets $’000 – cost * $’000 Total $’000 14 Non-current assets - Intangible assets (continued) (a) Impairment tests for goodwill Goodwill is allocated to the Company’s cash‑generating units (CGUs) identified according to business segment. A segment-level summary of the goodwill allocation is presented below. 4,058 34,652 - (10,754) 4,058 23,898 4,058 23,898 - - 3,835 - - (223) 7,670 12 915 3,927 (500) - - 28,252 7,670 - 38,963 (10,711) 7,670 28,252 At 1 July 2012 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2013 22,304 (3,763) 8,290 (6,991) 18,541 1,299 Opening net book amount 18,541 1,299 Exchange differences Acquisition of business Additions – internal development Amortisation charge Disposals Transfers 12 915 - - - - Closing net book amount 19,468 - - 92 (500) - 223 1,114 At 30 June 2013 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2014 23,231 (3,763) 8,062 (6,948) 19,468 1,114 Opening net book amount 19,468 1,114 Exchange differences Acquisition of business Additions – internal development Amortisation charge Disposals Transfers 13 240 - - - - - - 128 (42) - - - - - - - - - - - - - - - - - - 2,487 - (148) - - Closing net book amount 19,721 1,200 2,339 At 30 June 2014 Cost Accumulated amortisation and impairment Net book amount 23,484 (3,763) 8,190 (6,990) 2,487 (148) 19,721 1,200 2,339 - - - - - - - - - - - - - - - - - - (19) - 184 165 184 (19) 165 2014 Goodwill 2013 Goodwill Collection Purchased services debt ledgers $’000 19,721 19,721 $’000 - - Collection Purchased services debt ledgers $’000 19,468 19,468 $’000 - - Total $’000 19,721 19,721 Total $’000 19,468 19,468 The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five‑year period. Cash flows are not extrapolated beyond five years. The growth rate does not exceed the long‑term average growth rate for the business in which the CGU operates. There are no intangible assets associated with the purchased debt ledgers CGU, therefore no further analysis of this segment is required. (b) Key assumptions used for value-in-use calculations CGU Growth rate (revenue)* Growth rate (expenses) ** Discount rate *** 30 June 30 June 30 June 30 June 30 June 30 June 2014 % 5.00 2013 % 5.00 2014 % 3.00 2013 % 3.00 2014 % 12.50 2013 % 12.50 7,670 28,252 Collection services - - 3,311 - - (184) 10,797 13 2,727 3,439 (209) - - 34,222 10,797 45,142 - (10,920) 10,797 34,222 * Revenue growth has been set at 5% for the period of the calculation. ** Expense growth rate has been set at the current inflation rate for the period of the calculation. *** In performing the value-in-use calculation, the Group has applied the pre-tax discount weighted average cost of capital to discount the forecast future attributable pre‑tax cash flows. (c) Impairment charge As a result of the impairment evaluation, the Group has determined that the carrying value of intangible assets does not exceed their value-in-use, and no impairment charge was required (2013: Nil). * Work-in-progress includes capitalised development costs of an internally generated intangible asset which is under development. 110 111 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 14 Non-current assets - Intangible assets (continued) (d) Impact of possible changes in key assumptions Collection services There is a substantial margin between the calculated value-in-use and the carrying value of all assets within the CGU. If the risk-free rate used in the value-in-use calculation had been 22.5% at 30 June 2014 rather than 12.5%, there would have been no impact on the resulting impairment evaluation (2013: Nil). Because of the large excess of fair value over carrying value, at no reasonable risk free rate is there an impairment issue for the CGU. If the estimated revenue growth is increased to 10.00% and expenses growth held at 3.00%, there is no impact on the resulting impairment evaluation. If the revenue growth rate is decreased to -2.00% (i.e. declining revenue) and expense growth is set at 3.00%, there is no impact on the resulting impairment evaluation. To reflect the Company’s current practice of managing revenue and expenses simultaneously, growth in revenue and growth in expenses has been considered together rather than in isolation. 15 Current liabilities - Trade and other payables Trade payables Accrued expenses Other payables (a) Risk exposure Information about the Group’s exposure to foreign exchange risk is provided in note 2. 16 Current liabilities - Borrowings Secured Bank overdraft Total secured current borrowings Total current borrowings Further information relating to Borrowings is set out in note 19. Consolidated 30 June 30 June 2014 $’000 3,254 8,619 1,755 13,628 2013 $’000 2,854 7,680 979 11,513 Consolidated 30 June 30 June 2014 $’000 2013 $’000 323 323 323 - - - 112 17 Current liabilities - Provisions Employee benefits Other (a) Movements in provisions Consolidated 30 June 30 June 2014 $’000 2,865 41 2,906 2013 $’000 2,814 36 2,850 Movements in each class of provision during the financial year, other than employee benefits, are set out below: 2014 Current Carrying amount at start of year - additional provisions recognised ‑ payments / other sacrifices of economic benefits Carrying amount at end of year 2013 Current Carrying amount at start of year - additional provisions recognised ‑ payments / other sacrifices of economic benefits Carrying amount at end of year 18 Current liabilities – Other financial liabilities Contingent consideration (note 31 (a)) Finance lease liabilities Other current financial liabilities Other $’000 36 183 (178) 41 Other $’000 25 134 (123) 36 Consolidated 30 June 30 June 2014 $’000 810 635 155 1,600 2013 $’000 - 276 - 276 113 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 19 Non-current liabilities - Borrowings Secured Bank loans Total secured non-current borrowings Unsecured Total unsecured non-current borrowings Total non-current borrowings (a) Secured liabilities and assets pledged as security The total secured liabilities (current and non-current) are as follows: Bank overdrafts and bank loans Total secured liabilities Consolidated 30 June 30 June 2014 $’000 2013 $’000 99,800 99,800 89,400 89,400 - - 99,800 89,400 Consolidated 30 June 30 June 2014 $’000 2013 $’000 100,123 100,123 89,400 89,400 All bank loans and overdrafts are denominated in Australian dollars and are secured by a fixed and floating charge over all of the assets and uncalled capital of the parent entity and certain of its controlled entities. The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Receivables Purchased debt ledgers Total current assets pledged as security Non-current Floating charge Purchased debt ledgers Plant and equipment Total non-current assets pledged as security Total assets pledged as security 114 Consolidated 30 June 30 June 2014 $’000 2013 $’000 Notes 8 9 10 10 12 704 9,574 51,669 61,947 2,400 7,693 46,611 56,704 182,581 149,196 5,436 4,705 188,017 153,901 249,964 210,605 19 Non-current liabilities - Borrowings (continued) (b) Fair value The carrying amounts and fair values of borrowings at the end of reporting period are: Group On-balance sheet (i) Non‑traded financial liabilities Bank overdrafts Bank loans 30 June 2014 30 June 2013 Carrying Fair value Carrying Fair value amount $’000 $’000 amount $’000 $’000 323 99,800 100,123 323 99,800 100,123 - - 89,400 89,400 89,400 89,400 As noted, none of the classes of liabilities are readily traded on organised markets in standardised form. (i) On-balance sheet The fair value of current borrowings equals their carrying amount. The facility is structured as a series of loan instruments which are renewed on a regular basis with terms of less than six months, and the impact of discounting on such instruments is not material. The rolling nature of the loan instruments is designed to provide the Group with maximum flexibility within the overall facility, however the overall facility is classified as non‑current. (c) Risk exposures Information about the Group’s exposure to interest rate and foreign currency changes is provided in note 2. For an analysis of the sensitivity of borrowings to interest rate risk and foreign exchange risk refer to note 2. On 17 September 2012, the Company confirmed an interest rate swap transaction for an amount of $15m at a fixed rate of 3.02% per annum effective as at 7 September 2012 and continuing until 7 September 2015. On 21 September 2012, the Company confirmed an interest rate swap transaction for an amount of $14.5m at a fixed rate of 2.86% per annum effective as at 21 September 2012 and continuing until 21 September 2015. On 29 January 2014, the Company confirmed an interest rate swap transaction for an amount of $12.6m at a fixed rate of 2.895% per annum effective as at 30 January 2014 and continuing until 1 February 2016. On 16 May 2014, the Company confirmed an interest rate swap transaction for an amount of $46m at a fixed rate of 3.05% per annum effective as at 28 July 2014 and continuing until 27 January 2017. A financial asset or financial liability has not been recognised in relation to the arrangement, as it is not considered to have a material impact on the results. 115 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 20 Non-current liabilities - Deferred tax liabilities 21 Non-current liabilities - Provisions The balance comprises temporary differences attributable to: Property, plant and equipment Purchased debt Prepayments Other Total deferred tax liabilities Set‑off of deferred tax liabilities pursuant to set‑off provisions (note 13) Net deferred tax liabilities Movements: Opening balance at 1 July Change in tax rate Charged / (credited) to the income statement (note 7) Closing balance at 30 June Movements - Consolidated At 1 July 2012 ‑ to profit or loss At 30 June 2013 Movements - Consolidated At 30 June 2013 ‑ to profit or loss At 30 June 2014 Property, plant and Purchased equipment debt Prepayments $’000 1,214 204 1,418 $’000 8,185 (3,832) 4,353 $’000 7 (4) 3 Property, plant and Purchased equipment debt Prepayments $’000 1,418 837 2,255 $’000 4,353 (3,471) 882 $’000 3 (1) 2 Consolidated 30 June 30 June 2014 $’000 2013 $’000 2,255 882 2 11 1,418 4,353 3 5 3,150 5,779 3,150 (1,819) 1,331 5,779 (1,558) 4,221 Consolidated 30 June 30 June 2014 $’000 2013 $’000 5,779 9,484 - - (2,629) 3,150 (3,705) 5,779 Other $’000 78 (73) 5 Other $’000 5 6 11 Total $’000 9,484 (3,705) 5,779 Total $’000 5,779 (2,629) 3,150 Employee benefits 22 Employee benefits (a) Superannuation plans Consolidated 30 June 30 June 2014 $’000 356 356 2013 $’000 361 361 All employees are entitled to varying levels of benefits on retirement, disability or death. The superannuation plans provide accumulated benefits. Employees contribute to the plans at various percentages of their wages and salaries. Where there is a legal requirement the Company contributes the appropriate statutory percentage of employees’ salaries and wages. 23 Non‑current liabilities – Other financial liabilities Contingent consideration (note 31 (a)) Finance lease liabilities Other non‑current financial liabilities 24 Contributed equity (a) Share capital Ordinary shares Fully paid Total contributed equity Consolidated 30 June 30 June 2014 $’000 1,516 579 131 2,226 2013 $’000 - 294 - 294 Company Company 2014 Shares 2013 Shares 2014 $’000 2013 $’000 129,717,785 115,437,740 129,717,785 115,437,740 102,285 102,285 102,285 80,095 80,095 80,095 116 117 24 Contributed equity (continued) (b) Movements in ordinary share capital: Issues of ordinary shares during the year Date Details 1 July 2012 Opening balance 27 July 2012 Employee options exercised 28 August 2012 Employee options exercised 31 August 2012 Employee options exercised 31 August 2012 Employee options exercised 10 September 2012 Employee options exercised 10 September 2012 Employee options exercised 18 September 2012 Employee options exercised 24 September 2012 Employee options exercised 19 October 2012 Dividend reinvestment plan issues 19 October 2012 Share issue 1 November 2012 Employee options exercised Less: Transaction costs arising on share issue 16 January 2013 Employee options exercised 12 February 2013 Employee options exercised 14 February 2013 Share Issue 18 February 2013 Employee options exercised 22 February 2013 Employee options exercised 22 February 2013 Employee options exercised 26 February 2013 Employee options exercised 26 February 2013 Employee options exercised 1 March 2013 Employee options exercised 4 March 2013 Employee options exercised 14 March 2013 Employee options exercised 5 April 2013 Dividend reinvestment plan issues 19 June 2013 Employee options exercised Less: Transaction costs arising on share issue 30 June 2013 Closing balance 1 July 2013 Opening balance 30 August 2013 Employee options exercised 3 September 2013 Share Issue 4 September 2013 Employee options exercised 1 October 2013 Share Issue 30 October 2013 Dividend reinvestment plan issues 28 March 2014 Dividend reinvestment plan issues Less: Transaction costs arising on share issues Number of shares 108,159,097 $’000 74,324 7,500 135,000 120,000 90,000 90,000 45,000 400,000 30,000 747,046 1,676,153 5,000 - 25,000 400,000 371,024 133,600 40,000 40,000 4 66 59 44 45 22 197 15 695 1,559 2 (125) 12 197 525 84 20 20 2,276,200 1,579 75,000 67,500 60,000 25,000 407,120 12,500 - 37 33 30 12 642 6 (9) 115,437,740 115,437,740 414,000 80,095 80,095 287 7,878,780 13,000 177,200 4,242,478 818,950 748,637 - 123 7,000 1,323 1,305 (848) 30 June 2014 Closing balance 129,717,785 102,285 24 Contributed equity (continued) (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (d) Dividend reinvestment plan The Company has established a dividend reinvestment plan under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied by the issue of new ordinary shares rather than by being paid in cash. Shares are issued under the plan at a 5% discount to the market price. (e) Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in note 33. (f) Options and performance rights Information relating to options provided as part of the MD/CEO remuneration package and options provided under the Collection House Executive Share Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in note 33. Information relating to the performance rights plan adopted as a means of rewarding and incentivising key employees, including details of rights issued during the financial year, is set out in note 33. (g) Capital risk management The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, and to provide adequate returns for shareholders and benefits for other stakeholders. “Capital” includes all funding provided under the Group’s funding facility (net of cash balances for which a right of offset is held) plus equity as shown in the balance sheet. In order to maintain or adjust the capital structure, the Group may: • draw down or repay debt funding; • adjust the amount of dividends paid to shareholders; • negotiate new or additional facilities or cancel existing ones; • return capital to shareholders or issue new shares or • sell assets to reduce debt. The Group manages capital to ensure that the goals of continuing as a going concern and the provision of acceptable stakeholder returns are met. Arrangements with the Group’s financiers are in place to ensure that there is sufficient undrawn credit available to meet unforeseen circumstances should they arise. Financing facilities are renegotiated on a regular basis to ensure that they are sufficient for the Group’s projected growth plus a buffer. As far as possible, asset purchases are funded from operational cashflow, allowing undrawn balances to be maintained. Cash is monitored on a daily basis to ensure that immediate and short term requirements can be met. By maintaining a buffer of undrawn funds, the Company reduces the risk of liquidity and going concern issues. Management of the mix between debt and equity impacts the Group’s Cost of Capital and hence ability to provide returns to stakeholders, primarily the funding institutions and shareholders. The Group maintains its debt-to-equity mix in accordance with its immediate needs and forecasts at any point in time. Effective management of the capital structure maximises profit and hence franked dividend returns to shareholders. When additional funding is required, it is sourced from either debt or equity, depending upon management’s evaluation as to which is the most appropriate at that point in time. 118 119 Notes to the Financial Statements 30 June 2014Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 24 Contributed equity (continued) (g) Capital risk management (continued) 25 Reserves and retained earnings (continued) (b) Retained earnings The financing facility includes all funding provided by the Group’s main bankers. Details of financing facilities are set out in Movements in retained earnings were as follows: note 2. Quantitative analyses are conducted by management using contributed equity balances shown above together with the drawn and undrawn loan balances disclosed in note 2. As part of the financing facility, the Company is required to monitor a number of financial indicators as specified by the financiers. The Group monitors the indicators on a monthly basis and reports to the funding providers every six months. The Group has comfortably met these covenants at all times during the year. This strategy was followed during both the 2014 and 2013 financial years. 25 Reserves and retained earnings (a) Reserves Share-based payments reserve Foreign currency translation reserve Movements: Share-based payments reserve Balance 1 July Option expense Balance 30 June Movements: Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Balance 30 June 120 Consolidated 30 June 30 June 2014 $’000 2,516 (557) 1,959 2013 $’000 1,771 (1,282) 489 Consolidated 30 June 30 June 2014 $’000 2013 $’000 1,771 745 2,516 1,421 350 1,771 Consolidated 30 June 30 June 2014 $’000 2013 $’000 (1,282) 725 (557) (1,274) (8) (1,282) Balance 1 July Net profit for the year Dividends Balance 30 June (c) Nature and purpose of reserves (i) Share-based payments reserve Consolidated 30 June 30 June 2014 $’000 42,683 18,705 (9,643) 51,745 2013 $’000 34,699 15,614 (7,630) 42,683 The share based payments reserve is used to recognise the fair value of options issued to employees but not exercised and performance rights issued to employees that have not yet vested. (ii) Foreign currency translation reserve Exchange differences arising on translation of the foreign operations are recognised in other comprehensive income as described in note 1(d) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 26 Dividends (a) Ordinary shares Consolidated 30 June 30 June 2014 $’000 2013 $’000 Fully franked final dividend for the year ended 30 June 2013 – 3.6 cents per share 4,613 3,490 (2012 - 3.2 cents) Fully franked interim dividend for the year ended 30 June 2014 – 3.9 cents per share 5,030 4,140 (2013: 3.6 cents) Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 30 June 2014 and 2013 were as follows: Paid in cash Satisfied under the Dividend Reinvestment Plan 9,643 7,630 Consolidated 30 June 30 June 2014 $’000 2013 $’000 7,016 2,627 9,643 6,293 1,337 7,630 121 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 26 Dividends (continued) (b) Dividends not recognised at the end of the reporting period In addition to the above dividends, since year end the directors have recommended the payment of a fully franked final dividend of 4.1 cents per fully paid ordinary share (2013 ‑ 3.6 cents, fully franked). The aggregate amount of the proposed dividend expected to be paid on 17 October 2014 out of retained profits and a positive net balance sheet at 30 June 2014, but not recognised as a liability at year end, is Consolidated 30 June 30 June 2014 $’000 2013 $’000 5,318 5,318 4,156 4,156 (c) Franked dividends The franked portions of the final dividends recommended after 30 June 2014 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2015. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2014 and will be recognised in subsequent financial reports. Consolidated 30 June 30 June 2014 $’000 2013 $’000 27 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non‑related audit firms: (a) PKF Hacketts Audit Audit services Audit and review of financial reports Audit-related services Total auditors’ remuneration (b) Non PKF Hacketts Audit audit firms Audit services Audit and review of financial reports Total auditors’ remuneration 28 Contingencies (a) Contingent liabilities Consolidated 30 June 30 June 2014 $ 2013 $ 144,500 144,500 85,500 85,500 230,000 230,000 1,497 1,497 1,209 1,209 Franking credits available for subsequent financial years based on a tax rate of 30% 26,204 19,068 The Group had contingent liabilities at 30 June 2014 in respect of: (2013 - 30%) 26,204 19,068 There were no claims of a material nature during the relevant period. Claims The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date; and (d) franking credits that may be prevented from being distributed in subsequent financial years. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. Guarantees (a) Bank Guarantees (secured) exist in respect of satisfactory contract performance in the normal course of business for the Group amounting to $1,991,592 (2013: $1,568,888). During the period, the Group replaced Bank Guarantees to secure our continued performance in the normal course of business resulting in the increase. (b) Guarantees and Indemnities (secured) given by the Company and certain of its subsidiaries in support of the existing Multiple Option Facility provided by Westpac Banking Corporation and Commonwealth Bank of Australia, are currently in place. Paragraphs (a) and (b) above are secured by a Fixed and Floating charge over the assets of the Company and certain of its subsidiaries of the Group and may give rise to liabilities in the Group, if the associates do not meet their respective obligations under the terms of the contracts, subject to the guarantees. No material losses are anticipated in respect of any of the above contingent liabilities. 122 123 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 29 Commitments (a) Capital commitments 30 Related party transactions (a) Group companies Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Details of the parent company, the ultimate parent company and interests in subsidiaries are set out in note 31. Purchased debt ledgers Consolidated 30 June 30 June 2014 $’000 53,305 53,305 2013 $’000 39,416 39,416 (b) Non-cancellable operating leases The Group leases its offices under non‑cancellable operating leases expiring at various times during the next five years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years Consolidated 30 June 30 June 2014 $’000 2013 $’000 4,861 7,496 - 4,175 10,927 594 12,357 15,696 (b) Key management personnel compensation Short‑term employee benefits Post‑employment benefits Share-based payments Consolidated 30 June 30 June 2014 $ 2013 $ 3,033,070 2,548,948 204,648 554,559 137,603 277,171 3,792,277 2,963,722 Detailed remuneration disclosures are provided in sections A-J of the remuneration report on pages 50 to 66. (c) Other transactions with key management personnel or entities related to them No other transactions were made to key management personnel or entities related to them other than as appropriate payments for performance of their duties. (d) Transactions with other related parties The classes of non director-related parties are: > wholly owned controlled entities; > directors of related parties and their director-related entities. Transactions There were no transactions with non-wholly owned related parties. Transactions with wholly owned related parties are (c) Non-cancellable finance leases eliminated on consolidation. During the year, the Group leased five items of plant and equipment and intangibles with a carrying amount of $1,140,000 (2013 – $808,000) under finance leases expiring within three years. Commitments for minimum lease payments in relation to non‑cancellable finance leases are payable as follows: Within one year Later than one year but not later than five years Later than five years Minimum lease payments Less: Future finance charges Recognised as a liability Consolidated 30 June 30 June 2014 $’000 2013 $’000 687 610 - 1,297 (83) 1,214 302 302 - 604 (34) 570 124 125 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 31 Subsidiaries 32 Earnings per share The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Parent and Ultimate Parent company: Collection House Limited Controlled entities - incorporated in Australia Cashflow Accelerator Pty Ltd CashFlow Financial Advantage Pty Ltd * Collective Learning and Development Pty Ltd Reliance Legal Group Pty Ltd (formerly Jones King Lawyers Pty Ltd) Lion Finance Pty Ltd Midstate CreditCollect Pty Ltd (formerly Midstate Credit Management Services Pty Ltd) PH Collections (Australasia) Pty Ltd Controlled entities - incorporated in New Zealand Collection House (NZ) Limited Lion Finance Limited Controlled entities - incorporated in Philippines 2014 % 2013 % 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 * CashFlow Financial Advantage Pty Ltd was incorporated on 13 September 2013. ** Collection House International BPO, Inc started up on 10 May 2012 and commenced business operations on 1 April 2013. While Collection House Limited holds legal and beneficial ownership of 9,995 issued shares in the subsidiary, it has beneficial ownership of 5 issued shares in the subsidiary, held on trust for Collection House Limited by each of the five appointed directors of the subsidiary, in accordance with Philippines law, representing all of the issued shares in the subsidiary currently. (a) Other acquisitions Collection House acquired the commercial agency business of CreditCollect on 14 February 2013, via its subsidiary Midstate CreditCollect Pty Ltd (formerly Midstate Credit Management Services Pty Ltd). The agreement for the sale of the business calculates a possible aggregate purchase price of $4,077,500 including a contingent consideration component of $3,323,500 of which $997,888 has been paid at 30 June 2014. The remaining consideration of $2,325,612 which is contingent on achieving EBIT targets has been recorded as a liability in relation to this acquisition. Total goodwill of $836,500 was recognised in relation to the business acquisition, in addition to customer contracts intangible assets of $2,487,000, as outlined in note 14. (a) Basic earnings per share From continuing operations attributable to the ordinary equity holders of the Company Total basic earnings per share attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From continuing operations attributable to the ordinary equity holders of the Company Total diluted earnings per share attributable to the ordinary equity holders of the Company (c) Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic 18,705 15,614 earnings per share Diluted earnings per share 18,705 15,614 Profit attributable to the ordinary equity holders of the Company used in calculating 18,705 15,614 diluted earnings per share Consolidated 30 June 30 June 2014 Cents 2013 Cents 14.7 14.7 14.5 14.5 13.6 13.6 13.5 13.5 18,705 15,614 Consolidated 30 June 30 June 2014 2013 Number Number Weighted average number of ordinary shares used as the denominator in calculating 127,159,372 114,467,012 basic earnings per share Adjustments for calculation of diluted earnings per share: Options Performance Rights - 287,117 1,420,777 739,462 Weighted average number of ordinary shares and potential ordinary shares used as 128,580,149 115,493,591 the denominator in calculating diluted earnings per share Collection House International BPO, Inc ** 100 100 (d) Weighted average number of shares used as the denominator 126 127 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 32 Earnings per share (continued) (e) Information concerning the classification of securities (i) Options Options granted to employees under the Collection House Ltd Executive Share Option Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 33. (ii) Performance rights Performance rights issued to employees under the Performance Rights Plan (PRP) are considered to be potential ordinary shares and have been included at the probability rate of 70% in the determination of diluted earnings per share to the extent to which they are dilutive. The performance rights have not been included in the determination of basic earnings per share. Details relating to the performance rights are set out in note 33. 33 Share-based payments (a) Executive Share Option Plan On 15 June 2007, 1,250,000 options were issued to a number of eligible employees pursuant to ESOP1. On 26 October 2007, at an Annual General Meeting, the shareholders approved ESOP1 and ratified the prior issue of options. Those options expired on 28 February 2011. On 26 June 2008, the Board resolved that the then MD/CEO be authorised, at his discretion, to offer certain options on suitable terms and conditions to eligible employees under ESOP1. On 18 July 2008, the then MD/CEO issued 1,437,500 options to a number of eligible employees pursuant to ESOP1. A summary of these options is identified below as EXEC2. On 2 December 2010, the Board approved a new Executive Share Option Plan (ESOP2). The Board also authorised that its Chairman be authorised to offer certain options in the case of the CEO and/or that Matthew Thomas, CEO was authorised, in the case of the other eligible employees, to offer Options to those eligible employees under ESOP2, at his discretion respectively. On 1 March 2011, the Chairman issued or caused to be issued 2,956,000 options to a number of eligible employees pursuant to ESOP2. A summary of these options is identified below as EXEC3. Future options may be issued pursuant to ESOP2 subject to not only individual performance being considered, but also Company performance hurdles being achieved before options may vest and be exercised. EXEC2 options EXEC3 options Grant date 18 July 2008 Earliest possible vesting date 25 June 2011 1 March 2011 23 December 2012 Performance hurdles Tranche # of options Hurdle Price Tranche # of options Hurdle Price 1 2 3 4 5 287,500 287,500 287,500 287,500 287,500 0.60 0.70 0.80 0.90 1.00 1 2 3 4 591,200 591,200 1,182,400 591,200 1.00 1.25 1.50 1.75 33 Share-based payments (continued) (a) Executive Share Option Plan (continued) EXEC2 options EXEC3 options Exercise The options vested on the later of: The options will vested on the later of: conditions and Vesting Date (a) 25 June 2011; and (a) 23 December 2012; and (b) for each tranche of options, as follows: (b) for each tranche of options, as follows: A. In respect of the first tranche options,the date that A. In respect of the first tranche options, the the weighted average closing price shares over a date that the weighted average closing 10 business day period (Qualifying Price) for the price shares over a 10 business day period first tranche options (namely $0.60) was satisfied; (Qualifying Price) for the first tranche options B. In respect of the second tranche options, the (namely $1.00) was satisfied; Qualifying Price for the second tranche options B. In respect of the second tranche options, (namely $0.70) was satisfied; the Qualifying Price for the second tranche C. In respect of the third tranche options, the options (namely $1.25) was satisfied; Qualifying Price for the third tranche options C. In respect of the third tranche options, the (namely $0.80) was satisfied; Qualifying Price for the third tranche options D. In respect of the fourth tranche options, the (namely $1.50) was satisfied; and Qualifying Price for the fourth tranche options D. In respect of the fourth tranche options, the (namely $0.90) was satisfied; and Qualifying Price for the fourth tranche options E. In respect of the fifth tranche options, the Qualifying Price for the fifth tranche options (namely $1.00) was satisfied. (namely $1.75) is satisfied. Exercise price $0.4927 per option $0.6938 per option Expiry date 25 June 2013, subject to the following, The options will expire on: in the event that: (a) the business day after the expiration of three (a) the eligible employee’s employment ceases (3) months, or any longer period determined due to death, disablement, sickness or if the by the Company after the eligible employee employment is terminated without cause, then ceases to be employed by the Company or an the eligible employee shall be entitled to options associated body corporate of the Company; or granted prior to the date of cessation and for which the vesting date has occurred or which subsequently occurs, prior to the expiry date. (b) the eligible employee ceasing to be employed by the Company or an associated body corporate of the Company due to fraud (b) the Company terminates the eligible employee’s or dishonesty; or (c) 23 December 2013. employment for poor performance (in the reasonable opinion of the Company), the eligible employee may only exercise within 12 months after the date of termination those options which have vested prior to the date of termination. All other options shall immediately lapse. (c) the eligible employee resigns or has employment terminated for cause, the eligible employee may only exercise within 1 month of the date of termination those options which have vested prior to the date of termination or resignation. All other options shall immediately lapse. Share price $0.48 at grant date $0.72 128 129 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 EXEC2 options EXEC3 options The weighted average share price during the year ended 30 June 2014 was $1.76 (2013 – $1.34). 33 Share-based payments (continued) (a) Executive Share Option Plan (continued) The weighted average remaining contractual life of share options outstanding at the end of the period was 0 years (2013 – 0.48 years). Fair value of options granted The assessed fair value at grant date of all options granted is set out above. The fair value at grant date is independently determined using a Monte Carlo option pricing model in relation to the EXEC3 options and a combination of Bermudan and Barrier – style option pricing model in relation to the MD/CEO options and the EXEC2 options that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the respective options. (b) Performance Rights Plan In line with the executive remuneration framework, the Board approved and adopted the Performance Rights Plan (PRP), effective on and from 1 July 2012, as a means of rewarding and incentivising its key employees. The PRP was extended to the then Chief Executive Officer (CEO), now Managing Director and CEO and, at his discretion, to eligible employees. During the reporting period ending 30 June 2014, 839,828 unlisted performance rights were issued to a number of eligible employees pursuant to the PRP. A summary of these performance rights is identified below as PR2014. 33 Share-based payments (continued) (a) Executive Share Option Plan (continued) Expected price volatility Expected dividend yield Risk free interest rate 55.6% 9% 6.64% 50.0% 8.29% 5.198% The expected price volatility was usually based on the historic volatility (for the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. The resulting valuation per option was/is as follows: Tranche 1 2 3 4 5 Exec 2 options Exec 3 options $0.1530 $0.1520 $0.1510 $0.1480 $0.1460 $0.1522 $0.1522 $0.1522 $0.1522 Set out below are summaries of options granted under the plan: Balance Granted Exercised Expired Balance exercisable Exercise at start of during during the during at end of at end of Vested and Grant Date Expiry date price the year the year year the year the year the year Number Number Number Number Number Number Company - 2014 1 March 2011 As stated above $0.69 591,200 Total Weighted Average exercise price 591,200 $0.69 - - - 591,200 591,200 $0.69 - - - - - - - - - Balance Granted Exercised Expired at end exercisable Exercise at start of during during the during of the at end of Balance Vested and Grant Date Expiry date price the year the year year the year year the year Number Number Number Number Number Number Company – 2013 1 March 2011 As stated above $0.69 2,956,000 31 October As stated above $0.49 800,000 2008 18 July 2008 As stated above $0.49 912,500 Total Weighted Average exercise price 4,668,500 $0.62 - - - - - 2,364,800 800,000 912,500 4,077,300 $0.61 - - - - - 591,200 - - 591,200 $0.69 - - - - - 130 131 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 33 Share-based payments (continued) (b) Performance Rights Plan (continued) Effective date PR2014 1 July 2013 33 Share-based payments (continued) (b) Performance Rights Plan (continued) Effective date PR2013 1 July 2012 (2) Earliest possible The performance rights cannot vest earlier than the Test Date(1) Earliest possible The performance rights cannot vest earlier than the Test Date(3) Vesting date Vesting date Performance hurdles Performance Conditions % off Pool Performance hurdles Performance Conditions % off Pool based on the satisfactory achievement of confidential performance conditions approved by the Board Average ROE Debt/Debt + Equity EPS Base EPS Stretch Total 25% 15% 30% 30% 100% based on the satisfactory achievement of confidential performance conditions approved by the Board Average ROE Debt/Debt + Equity EPS Base EPS Stretch Total 25% 25% 25% 25% 100% Exercise conditions and The Performance Rights Test Date will be 30 June 2016 (Test Date) after which, the Board Exercise conditions and The Performance Rights Test Date will be 30 June 2015 (Test Date) after which, the Board Vesting Date will determine whether or not the Performance Hurdles have been achieved. Vesting Date will determine whether or not the Performance Hurdles have been achieved. As soon as reasonably practicable after each Test Date applicable to any Performance Period, the Board shall determine in respect of each eligible employee, as at that Test Date: As soon as reasonably practicable after each Test Date applicable to any Performance Period, the Board shall determine in respect of each eligible employee, as at that Test Date: (a) whether, and to what extent, the Performance Hurdles applicable as at the Test Date (a) whether, and to what extent, the Performance Hurdles applicable as at the Test Date have been satisfied; have been satisfied; (b) the number of Performance Rights (if any) that will become Vested Performance (b) the number of Performance Rights (if any) that will become Vested Performance Rights as at the Test Date; and (c) the number of Performance Rights (if any) that will lapse as a result of the non-satisfaction of Performance Hurdles as at the Test Date, Rights as at the Test Date; and (c) the number of Performance Rights (if any) that will lapse as a result of the non-satisfaction of Performance Hurdles as at the Test Date, and shall provide written notification to each eligible employee as to that determination. and shall provide written notification to each eligible employee as to that determination. Exercise price Expiry date Nil 30 September 2016 Exercise price Expiry date Nil 30 September 2015 A Performance Right lapses, to the extent it has not been exercised, on the earlier to occur of: A Performance Right lapses, to the extent it has not been exercised, on the earlier to (a) where Performance Hurdles have not been satisfied as at the relevant Test Date; (b) if an eligible employee’s employment with the Company or Related Body Corporate ceases before the Vesting Date; (c) the day the Board makes a determination that the Performance Rights lapses because of breach, fraud or dishonesty; and (d) 30 September 2016. 5 Day volume weighted $1.5479 average Share price (1) Test Date: the date at which assessment against the Performance Conditions are made by the Board. For PR2014, the Test Date will be 30 June 2016. During the reporting period ending 30 June 2013, 1,356,238 unlisted performance rights were issued to a number of eligible employees pursuant to the PRP. A summary of these performance rights is identified below as PR2013. Future performance rights may be issued by the Board pursuant to the PRP. Such future performance rights will be subject to not only individual performance being considered, but also, Company performance hurdles being achieved before performance rights may vest at the discretion of the Board. occur of: (a) where Performance Hurdles have not been satisfied as at the relevant Test Date; (b) if an eligible employee’s employment with the Company or Related Body Corporate ceases before the Vesting Date; (c) the day the Board makes a determination that the Performance Rights lapses because of breach, fraud or dishonesty; and (d) 30 September 2015. 5 Day volume weighted average Share price (2) $0.7960 (2) Except for Paul Freer, whose Performance Rights commenced 4 March 2013, and five day volume weighted average share price is $1.5950. (3) Test Date: the date at which assessment against the Performance Conditions are made by the Board. For PR2013, the Test Date will be 30 June 2015. 132 133 Notes to the Financial Statements 30 June 2014 Notes to the Financial Statements 30 June 2014 33 Share-based payments (continued) (b) Performance Rights Plan (continued) Set out below are summaries of rights issued under the plan: Vested and provision has been raised in these accounts for this amount. A fully franked final dividend of 4.1 cents, totalling $5.3 million, has been declared, payable on 17 October 2014. No 34 Events occurring after the reporting period (a) Dividend Effective Date Expiry date price the year the year year the year the year the year Balance Granted Exercised Expired Balance exercisable Exercise at start of during during the during at end of at end of Number Number Number Number Number Number Company - 2014 1 July 2012 30 September Nil 1,256,238 2015 4 March 2013 30 September 2015 1 July 2013 30 September 2016 Nil Nil - - 100,000 - 839,828 Total 1,356,238 839,828 - - - - 25,124 1,231,114 - 100,000 8,398 831,430 33,522 2,162,544 - - - - Balance Granted Exercised Expired Balance exercisable Exercise at start of during during the during at end of at end of Vested and Effective Date price the year the year year the year the year the year Number Number Number Number Number Number Company - 2013 1 July 2012 30 September 2015 4 March 2013 30 September Nil Nil 2015 Total Fair Value of Performance Rights Issued - 1,256,238 - 100,000 - 1,356,238 - - - - 1,256,238 - 100,000 - 1,356,238 - - - The assessed fair value at issue date of all performance rights is set out above. The fair value at issue date is determined based on the five day volume weighted average share price prior to issue date. (c) Expenses arising from share-based payment transactions Total expenses arising from share‑based payment transactions recognised during the period as part of employee benefit expense were as follows: Consolidated 30 June 30 June 2014 $’000 99 646 745 2013 $’000 150 200 350 Employee share options Employee performance rights Total expenses arising from share-based payment transactions 134 35 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Fair value losses on purchased debt ledgers Amortisation of purchased debt ledgers Non‑cash employee benefits expense ‑ share‑based payments Provision for doubtful debts Assets written off Other non-cash expenses Borrowing costs Interest paid Change in operating assets and liabilities (Increase) / decrease in trade debtors and bills of exchange (Increase) / decrease in sundry debtors (Increase) / decrease in other non-current assets Increase / (decrease) in trade creditors Increase / (decrease) in sundry creditors and accruals Increase / (decrease) in current tax liability Increase / (decrease) in deferred tax liabilities Net cash inflow (outflow) from operating activities Consolidated 30 June 30 June 2014 $’000 18,705 3,644 2013 $’000 15,614 3,793 - 38,780 43,417 745 (53) - 297 1,782 3,693 646 (2,048) (2,283) 400 218 (325) (2,890) 65,948 - 350 9 70 497 1,718 4,446 277 (168) (1,871) 195 788 1,361 (3,655) 62,204 135 Notes to the Financial Statements 30 June 2014 Director’s declaration 30 June 2014 36 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Contributed equity Reserves Retained earnings Company 30 June 30 June 2014 $’000 2013 $’000 4,993 252,014 257,007 24,978 115,779 140,757 4,694 207,507 212,201 23,369 100,181 123,550 102,283 80,095 2,517 11,450 1,771 6,785 Capital and reserves attributable to owners of Collection House Limited 116,250 88,651 Profit or loss for the year Total comprehensive income 14,308 14,308 10,687 10,687 (b) Guarantees entered into by the parent entity The parent entity has entered into guarantees with certain of its subsidiaries as set out in note 28. No liability was recognised by the parent entity or the consolidated entity in relation to this guarantee, as the fair value is immaterial. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2014 or 30 June 2013. For information about guarantees given by the parent entity, please see above. In the directors’ opinion: (a) the financial statements and notes set out on pages 71 to 136 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the financial year ended on that date, (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable, and Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. David Liddy Chairman Brisbane 21 August 2014 136 137 Independent Auditor’s report Independent Auditor’s report Independent Auditor’s Report to the members of Collection House Limited Report on the Financial Report We have audited the accompanying financial report of Collection House Limited, which comprises the consolidated balance sheet as at 30 June 2014, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the Directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ Responsibility for the Financial Report The Directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the Directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. Opinion In our opinion: a) the financial report of Collection House Limited is in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included on pages 50 to 66 of the Directors’ Report for the year ended 30 June 2014. The Directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of Collection House Limited for the year ended 30 June 2014 complies with section 300A of the Corporations Act 2001. Matters Relating to the Electronic Presentation of the Financial Report This auditor’s report relates to the financial report of the consolidated entity for the year ended 30 June 2014 included on the website of the Collection House Limited. The directors of the Company are responsible for the integrity of the website and we have not been engaged to report on its integrity. This audit report refers only to the financial report identified above and it does not provide an opinion on any other information which may have been hyperlinked to or from the financial report. If users of this report are concerned with the inherent risks arising from electronic data communications, they are advised to refer to the hard copy of the audited financial report to confirm the information included in the audited financial report presented on the Company’s website. PKF HACKETTS AUDIT Shaun Lindemann Partner Brisbane, 21 August 2014 138 139 Shareholder information The shareholder information set out below was applicable as at 25 August 2014. Unquoted equity securities A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Class of equity security Ordinary shares Holders 1,671 3,388 1,361 1,123 79 7,622 Shares 969,707 9,397,877 10,046,931 25,842,673 83,460,597 129,717,785 There were 215 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Name Units % of issued capital 1. HSBC Custody Nominees (Australia) Limited 2. Ankla Pty Ltd 3. JP Morgan Nominees Australia Limited 4. Mr Dennis George Punches (D G Punches Revocable Account) 5. Tombenet Pty Ltd (Coutts Superannuation A/C) 6. National Nominees Limited 7. Citicorp Nominees Pty Limited 8. Mr Dennis George Punches (D G Punches Revocable Account) 12,656,678 11,098,805 10,414,109 6,302,535 4,829,059 4,552,632 3,528,137 3,000,000 9. Mr John Marshall Pearce & Mrs Sandra Anne Pearce (Collection House S/Fund A/C) 2,500,000 10. BNP Paribas Noms Pty Ltd (DRP) 11. AMP Life Limited 12. Garrett Smythe Limited 13. Mr William Walter Kagel 14. Mr Dennis George Punches (Grantor Ret Annuity No. 2 Account) 15. Mr Anthony Robin Aveling 1,931,063 1,684,150 1,093,922 1,000,000 1,000,000 975,627 16. Mr Lev Mizikovsky and Mrs Emily Dorothy Mizikovsky (Superfun Superfund Account) 967,505 17. Mr Frederick Benjamin Warmbrand (FB & LJ Warmbrand Super A/C) 18. Nowcastle Pty Ltd 19. Ripeland Pty Ltd 20. Durbin Superannuation Pty Ltd (Durbin Family S Fund A/C) 809,123 780,532 739,142 670,000 9.76 8.56 8.03 4.86 3.72 3.51 2.72 2.31 1.93 1.49 1.30 0.84 0.77 0.77 0.75 0.75 0.62 0.60 0.57 0.52 Total 140 70,533,019 54.37 Details of these Options and Performance Rights are set out at note 33 of the financial statements. Grant date Balance at 1 July 2013 Granted Exercised Expired Balance at the during the year during the year during the year end of the year Performance rights 1 July 2012 1,256,238 4 March 2013 100,000 - - 1 July 2013 - 839,828* - - - 25,124 - 8,398 1,231,114 100,000 831,430 * Performance rights granted to the MD and CEO are subject to shareholder approval at the Group’s AGM being held on 31 October 2014. Restricted securities All issued shares in Collection House Limited are quoted on the ASX and there are no shares subject to escrow or other regulated restrictions other than as follows: Voluntary restrictions on securities There is a restriction of a relevant interest in the 3,000,000 shares held by Mr Dennis George Punches as Trustee for the DG Punches Revocable A/C (No. 2) under section 608(1)(c) of the Corporations Act 2001. There is a restriction on the relevant interest in the 371,024 shares held by Mark G Answerth & Associates Pty Ltd under section 608(1) of the Corporations Act 2001. C substantial holders Substantial shareholders of ordinary shares in the Company are set out below: Holder Units % of issued capital Mr Lev Mizikovsky, Ankla Pty Ltd, Sunstar Australia Pty Ltd, Ripeland Pty Ltd, 14,118,966 10.9 Rollee Pty Ltd and Nowcastle Pty Ltd (combined shareholdings) HSBC Custody Nominees (Australia) Limited Dennis George Punches (combined shareholdings) JP Morgan Nominees Australia Limited 12,656,678 10,502,535 10,414,109 9.8 8.1 8.0 D. Voting rights The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights. 141 Corporate directory Directors Principal registered office in Australia David Liddy – Chair (Non-executive) Dennis Punches – Deputy Chair (Non-executive) Matthew Thomas – Managing Director and Chief Executive Officer (Executive) Tony Coutts – Director (Non-executive) Kerry Daly – Director (Non-executive) David Gray – Director (Non-executive) Philip Hennessy – Director (Non-executive) (appointed 22 August 2013) Julie-Anne Schafer – Director (Non-executive) (appointed 28 January 2014) Executive Management Team Matthew Thomas – Managing Director and Chief Executive Officer Adrian Ralston – Chief Financial Officer (CFO) Paul Freer – Chief Operating Officer (COO) Kylie Lynam – General Manager – Human Resources and Corporate Services Marcus Barron – Chief Information Officer (CIO) Company Secretary Julie Tealby Main contact Level 7, 515 St Paul’s Terrace Fortitude Valley, Qld 4006 T +61 7 3292 1000 F +61 7 3832 0222 W www.collectionhouse.com.au Postal address PO Box 2247 Fortitude Valley BC, Qld 4006 Share register Computershare Investor Services Pty Ltd GPO Box 2975 Melbourne, Vic 3000 T 1300 850 505 F +61 7 3237 2152 W www.computershare.com.au Auditor PKF Hacketts Audit Level 3, 549 Queen Street Brisbane, Qld 4000 Stock exchange listing Collection House Limited shares are listed on the Australian Securities Exchange (ASX). The home exchange is Sydney. Matthew Thomas Managing Director and Chief Executive Officer T +61 7 3100 1245 E matthew.thomas@collectionhouse.com.au ASX code CLH Investor and client presentation The Group’s latest investor and client presentation is available at www.collectionhouse.com.au. 142 Notice of Annual General Meeting The AGM of Collection House Limited will be held on 31 October 2014 at 11am at the Emporium Hotel, 1000 Ann Street, Fortitude Valley, Brisbane, Queensland.