Annual Report 2018 Annual Report 2018 Collection House Limited ABN 74 010 230 716 Contents 1 Our Brands 2 Chairman’s Report 4 Managing Director and Chief Executive Officer’s Report 6 FY18 Financial Results 7 Board of Directors 8 Executive Management Team 9 Corporate Governance 10 Our Purpose Statement 11 Directors’ Report 30 Auditor’s Independence Declaration 31 32 Statement of Comprehensive Income 33 Balance Sheet 34 Statement of Changes in Equity 35 Statement of Cash Flows 36 Notes to the Financial Statements 79 Directors’ Declaration 80 Independent Auditor’s Report 85 Shareholder Information 87 Corporate Directory Income Statement Collection House Limited (ASX: CLH) is Australia’s leading end-to-end receivables management company. We provide solutions to organisations and individuals that span the entire credit management lifecycle and beyond. We enjoy strong business relationships with major Australian and international banks, financial institutions, large corporations, local Councils, public utilities, SMEs, and Government agencies. With more than 800 staff in offices across Brisbane, Sydney, Victoria, Adelaide, New Zealand and the Philippines, the Collection House Group offers stakeholders a range of professional, ethical and effective products and services. Our ongoing success is a result of the breadth of our service offering, our deeply ingrained approach to ethical debt recovery, and our commitment to technology to continually evolve our service and capabilities. Our Brands 1 Founded in 1994 and listed on the Australian Securities Exchange in 2000, the Group is made up of a number of brands offering a range of professional, ethical and effective products and services: Debt collection and receivables management for third parties Debt purchasing and recovery Legal services including insolvency administration Tailored debt collection services, specialising in Local Government Nationally recognised training provider in financial services and leadership Customer service outsourcing for third parties Licensed specialist finance broker for the provision of credit Provision of financial hardship services for third parties Overview Corporate Governance Financial Report Additional Information Collection House Limited Annual Report 2018 2 Chairman’s Report “ One of the key strengths of the Company is our ability to see around corners to identify the emerging trends in our industry” Leigh Berkley Chairman Collection House took decisive action as part of its ongoing transformation programme in FY18, investing in new people and technology, and focusing on employee productivity. These actions have been designed to reposition the Company for the future and to deliver superior returns for our shareholders. The business made good progress in its financial performance, investing more than $80 million in purchased debt ledgers, and posting a 50% increase in net profit for the year as we continued to focus on building the right team and FinTech platform for the future. The business is now well positioned to capitalise on the opportunities the Board and management team have identified, and our performance in FY18 has provided confidence in achieving future growth in FY19 and beyond. Industry first mover advantage One of the key strengths of the Company is our ability to see around corners to identify the emerging trends in our industry, which has enabled us to gain first mover advantage in a number of exciting areas: Comprehensive Credit Reporting (CCR): We were first in our industry to obtain CCR information within the Lion Finance Segment. CCR gives us access to a more complete picture of the customer’s credit profile, so we can work with them to improve their credit profile. I have promoted the use of CCR in other geographies, and am excited that we now have this opportunity in Australia. AASB9: Collection House was first to work with some of the Australian Banks to consider the consequences of AASB9. The strategic steps we have taken to leverage this opportunity have enabled us to achieve significant Purchased Debt Ledger (PDL) growth during the year, and we are ready to accommodate additional volumes in FY19. Portfolio Enhancement Programme (PEP): We further activated PEP this year by means of a first transaction with Balbec Capital LP (Balbec) and other smaller deals. PEP allows us to free up capital on older PDL purchases and buy new, higher yielding PDLs with the proceeds. This efficient use of capital will continue in FY19. Portal: We also launched our Interactive Debt Collection Portal this year. This highly user friendly Portal rewards interaction and allows our customers to engage with us online 24/7. The Portal is already generating significant cash collections each month at a reduced cost, and is now being used in conjunction with our C5 software by some of our major clients. This is another area for growth in FY19 as the Portal matures. ThinkMe: Our lending business took an exciting step forward in FY18, with our wholly-owned ThinkMe Finance obtaining from ASIC a full Australian Credit Licence enabling it to provide consumer loans. ThinkMe was already a licenced finance broker and we will now be able to provide consumers with our own ethical tailored loans consumers with our own ethical tailored loans. We see this as a growing and evolving part of our business. We are proud to be able to offer our customers this new service as it aligns with our values of assisting customers regain control of their finances. Enhanced analytics, technology and the right people A key priority for Collection House over the past 12 months has been our investment in technology. Some of you may be surprised with the Company’s ongoing transformation into a fully-fledged FinTech company, and today the reality is we are very much a data analytics-driven business. As part of our focus on data analytics we have moved to strengthen our analytics team, and in July 2017 we appointed a highly experienced Chief Data Scientist, Anand Adusumilli, who brings more than 15 years’ experience in data science and predictive analytics within the PDL sector. A high level of confidence in our analytics has enabled us to be a more aggressive acquirer of PDLs, and in the past 12 months the Company has purchased 39% more PDLs than in the prior year. We have also seen impressive productivity gains of 42% in collections per staff hour. With technology adoption, improved data analytics and improvements in efficiencies, we expect to generate higher returns from our PDL acquisitions in the coming 12 months. New board appointments While the past 12 months have demonstrated how much can be achieved by a small Board, working closely with a skilled and experienced management team, we have been searching for the right candidates to strengthen the Board for the future. Collection House Limited Annual Report 2018 Chairman’s Report (continued) Following a rigorous recruitment process, I was delighted to recently announce that Sandra Birkensleigh and Catherine McDowell have been appointed as Non-Executive Directors to the Board. They bring a wealth of experience from the accountancy, banking, financial services and investment industries. Sandra has extensive experience in financial services, particularly in the areas of risk management, corporate governance and compliance. She is the former Global Lead for Governance Risk and Compliance at PricewaterhouseCoopers (PwC) and is currently a Non-Executive Director of a number of ASX companies where she is Chair of the Board Audit Committee. Sandra is therefore perfectly placed to chair the Collection House Audit and Risk Committee. Catherine also has broad experience in the banking, financial services and investment industries, in both senior executive and advisory roles, and will chair the reconstituted Remuneration and Nominations Committee. Her international banking experience includes her role with Barclays International, where as Managing Director she led a substantial international wealth business. In New Zealand, Catherine was the Managing Director at ANZ and The National Bank Private Banking and Wealth business (New Zealand) and was responsible for integrating these two businesses and creating a significant wealth business. We are encouraged by the commitment of both Sandra and Catherine to the company’s corporate strategy, which is delivering innovation and sustainable results, and therefore provides a level of certainty to our valued shareholders. The Board welcomes Sandra and Catherine and we look forward to their contribution. Other board news I have been privileged to be Chairman of Collection House since November last year, and it’s been such a positive experience that I’ve now decided to move from the UK to Australia on a permanent basis. I have a home here and I am already spending around one third of my time in Australia. With all the exciting plans ahead for Collection House, I felt the time was right to make the move permanent. It will be a good opportunity to work even more closely with the new Board and our very talented management team, who are doing a really great job. 3 In addition, following the year end, the Board was delighted to advise the market that our CEO and Managing Director, Anthony Rivas, has confirmed he wishes to stay with the company for longer than his three-year term. Anthony has also offered to forgo two million of his three million entitlements to performance rights due next year, currently valued at $2.6 million, as part of his commitment to shareholders and the Company over the longer term. The Board has welcomed Anthony’s commitment, and his proposal is a central part of a remuneration review we have commissioned to ensure our management team and Board are appropriately rewarded for success, while providing excellent value to shareholders. Outlook Our outlook for FY19 remains positive. Our team and infrastructure to facilitate our future growth are now in place, and the results for the second half of FY18 give us a high level of confidence that further growth will be achieved in the year ahead. It is our intention to remain early adopters of technology, and to be innovative in our utilisation of data and capital. In FY19 we expect to further improve the business, enhance customer outcomes and increase shareholder value. On behalf of the Board, I would like to thank our shareholders, clients and customers for their ongoing support during FY18. I would also like to thank my fellow Board members, senior management team and all our employees for their hard work and dedication over the past twelve months. I am proud of what we’ve achieved in FY18 - we have shown what we can achieve by working closely as an experienced team, and I look forward to continuing our work together as we strive to deliver enhanced shareholder value in FY19. Leigh Berkley Chairman Overview Corporate Governance Financial Report Additional Information Collection House Limited Annual Report 2018 4 Managing Director and Chief Executive Officer’s Report market we have gained a first mover advantage, and this has contributed significantly to the 39% increase in Purchased Debt Ledgers (PDLs) over the previous year. As a first mover in our industry in relation to Comprehensive Credit Reporting (CCR) information, we will be reporting on-time payments for consumers previously considered not creditworthy, which will help them rehabilitate their credit record more rapidly. In this way, we are fostering deeper and lasting relationships with our customers and building a stronger business for our shareholders. This approach aligns strongly with our values and we are proud of our achievement to be voted second place out of 13 similar companies in the Financial Counselling Australia’s annual, Rank the Bank survey. This survey, which included our industry for the first time in 2017, rated how well our industry dealt with customers in financial hardship. FY18 in review Purchased Debt Ledger segment The Purchased Debt Ledger segment performed well during the year. A key factor contributing to the success of the segment during FY18 was the Balbec transaction, which has significantly enhanced our ability to recycle capital and invest in strategic portfolios during a period of healthy supply, particularly with the impact of AASB9. Our approach to PDL purchasing, enhanced by superior analytics, saw us acquire $81.3 million worth of PDLs during the year. In FY18, the Company turned around the previous trend in payment arrangements, reporting $335 million face value of active arrangements, up from $317 million at the end of FY17. We expect this improvement to continue. Another pleasing aspect of our FY18 performance was the contribution of our Interactive Debt Collection Portal, which reached $8 million in annualised cash collections just six months after launch, and is now generating approximately $700,000 in cash collections per month. In recent months, cash collections have risen as high as $850,000. We are continuing to enhance our Portal strategies as customers have displayed a willingness to leverage self- selected, analytics driven payment plans. Collection House has serviced more than 500,000 consumers, representing a significant proportion of the adult population. With our ThinkMe subsidiary obtaining its credit licence during the year we will now be able to offer innovative loan products to consumers, and in the future other services which are currently in development. ThinkMe has already developed a digital portal for applications and has a robust approval process in place. Collection Services segment We continue to broaden the services we offer and our customer relationships through extending our Collection Services platform. Our ongoing commitments to a rigorous compliance regime, and to building strong relationships with our clients and customers, is contributing to our success. We have expanded our relationships with the “big four banks” and continue to build on our relationships with our key partners through training initiatives and regulatory refreshers. “ Collection House’s reputation as an insight leader continued to serve us well during the past year.” Anthony Rivas Managing Director & CEO I am delighted to present Collection House’s results for the 2018 financial year. We have produced a solid performance across the business as the improvements we have made as part of our transformation programme gathered momentum during the year. Throughout we have remained steadfast in our commitment to delivering enhanced shareholder value, through our investment in our technology and our people. The momentum we have created was evidenced by a particularly pleasing second half performance, which gives us confidence that further growth will be achieved in the year ahead. The FY18 financial results showed continued progress, demonstrated by the growth in our Net Profit After Tax (NPAT) which increased 50% to $26.1 million which included the profit on our first Balbec transaction as part of our Portfolio Enhancement Programme (PEP). Collection House’s reputation as an insight leader continued to serve us well during the past year. As the first Company in our industry to share with the banks how the new financial instruments standard AASB9 would become a major factor in debt distributed in the Australian Collection House Limited Annual Report 2018 Managing Director and Chief Executive Officer’s Report (continued) 5 We continue to have success winning new clients for our C5 software product and in FY18, a major regional bank and an ASX-listed financial services company became users of our software. Following the year end we have also signed a major insurance company as a new client for our C5 software. Other key areas we are developing include Safe Horizons, a specialist business assisting consumers and businesses navigating financial hardship, Business Services both in Customer Care and Process Optimisation, and expanding our offshore presence in New Zealand and Manila. Technology Over the past two years, Collection House has rolled out leading-edge technology which has helped us achieve productivity gains, deepen our engagement with our customers and provide training opportunities within our team. Our technology platform has also enabled us to expand our reach into new markets. As a direct result of these developments we have seen the average collection rate per staff hour increase a further 42% in FY18, on top of an improvement captured in FY17. FY19 and beyond In FY18, Collection House built the foundations to position the Company for success in FY19 and beyond. Our Board and management team is focused on continuing to build on the momentum of the current year to deliver performance improvement across both segments of our operations. We will also further develop new business opportunities as regulatory change and market dynamics drive a greater demand for our innovative solutions and services. Our current priorities include: – Investing in FinTech tools to drive productivity and collections effectiveness, such as gamification and call monitoring to text – Further developing the IDCP Customer Portal and marketing it and our C5 software product to current and new clients to create new revenue streams – Fully implementing predictive analytics into the business – Investing in regulatory technology to navigate the changing finance landscape and drive best practice in compliance and customer advocacy – Continuing to refine the capital management strategy and strengthening ROE. Much of the infrastructure to facilitate our future growth is in place, including superior analytics to more accurately assess and bid for PDL books and the right people in place with better systems to support them. We have increased our access to capital to fund our purchasing and we now manage accounts for all major banks. This means the outlook for PDL purchasing remains attractive, with the expectation that we will meet or beat our FY18 performance. Overall we have a positive outlook for both segments of our business. In conclusion I would like to offer my personal thanks to all of the people who have a stake in Collection House’s continued success – our skilled teams, our loyal clients, our customers and of course, our shareholders. Many thanks also to the Board of Directors for their wise counsel and collaboration. Chairman Leigh Berkley’s 30 years’ of industry and regulatory experience in our sector has proved invaluable over the past 12 months. In particular, Leigh has played a pivotal role, working closely with me and the management team on the Portfolio Enhancement Programme, scrutinising our new pricing and valuation models, and numerous operational ideas to improve our performance as a Company. I would also like to thank the Executive Leadership Team for their insight, hard work and dedication over the year. I am encouraged by our progress and solid results in 2018, as we continue building on the strong foundations that are in place, and I look forward to updating you on our progress throughout 2019. Anthony Rivas Managing Director & CEO Overview Corporate Governance Financial Report Additional Information Collection House Limited Annual Report 2018 6 FY18 Financial Results 7.8c Dividend Per Share (cents) 19.2c Earnings Per Share (cents) $26.1m $206.5m Net Profit After Tax ($million) Shareholder Equity ($million) 10 8 6 4 2 0 1 . 9 0 8 . 8 7 . 8 7 . FY14 FY15 FY16 FY17 20 15 8 7 . 10 5 0 FY18 . 2 7 1 . 7 4 1 . 0 4 1 . 8 2 1 FY14 FY15 FY16 FY17 30 . 2 9 25 1 20 15 10 5 0 FY18 250 1 200 . 6 2 150 100 50 0 FY18 . 5 2 2 . 7 8 1 . 6 8 1 . 4 7 1 FY14 FY15 FY16 FY17 . 5 6 0 2 . 6 8 8 1 . 3 0 8 1 . 7 0 7 1 . 0 6 5 1 FY14 FY15 FY16 FY17 FY18 $195.7m PDL Cash Collections & Commissions ($million) 39.4% Net Debt/ Net Debt + Equity (%) 13.1% Average Return on Equity (%) 200 150 100 50 0 1 . 6 7 1 3 . 1 8 1 . 0 3 7 1 . 8 0 5 1 FY14 FY15 FY16 FY17 40 . 7 5 9 1 35 30 25 20 15 10 5 0 FY18 . 9 8 3 . 6 9 3 . 3 9 3 . 7 7 3 FY14 FY15 FY16 FY17 15 . 4 9 3 12 9 6 3 0 FY18 . 4 3 1 . 8 3 1 1 . 3 1 . 6 0 1 3 9 . FY14 FY15 FY16 FY17 FY18 Collection House Limited Annual Report 2018 7 Board of Directors The Collection House Board of Directors is committed to strong corporate governance policies and practices. The Board’s priority is to guide the business and the activities of the Company on behalf of all shareholders. Board members have a diversity of skills, experience, and knowledge that enables them to lead the management of the company’s affairs and to ensure there are appropriate controls in place to enable the Company to meet performance standards required by our shareholders, clients and other community stakeholders. Mr Leigh Berkley Chairman Mr Michael Knox Non-executive Director Mr Anthony Rivas Managing Director & CEO Appointed: July 2016 Appointed: March 2017 Appointed: November 2017 Qualifications: BBus (Econ), MBA Skills and experience: Mr Knox has extensive experience in financial markets and the financial services industry with a successful 30-year career at Morgans Financial Limited where he is currently Chief Economist and Director of Strategy. At Morgans, he has previously held senior roles including Chief Institutional Options Dealer and as a Director of Morgans Stockbroking. Mr Knox has also served on several government advisory committees. Skills and experience: Mr Rivas brings more than 25 years’ experience in the collections and receivables industry across three continents. Mr Rivas was most recently Managing Director of Australian Receivables Limited (ARL), a wholly owned subsidiary of global customer service leaders Alorica. Prior to this role, Mr Rivas led the Mexican operations of NCO/EGS as Vice President of Operations. In this role he was responsible for five facilities, including collection agents, visitor agents, field attorneys and legal services. Prior to joining NCO/EGS, Mr Rivas worked and consulted in India, Australia, the UK, and the USA. Qualifications: BA (Hons) in Accounting and Business Finance, and Chartered Accountant (ICAEW) Skills and experience: Mr Berkley has 30 years’ experience in the collections and debt purchase industry, and is a Board member and immediate past President of the Credit Services Association (CSA) in the UK. Mr Berkley is currently the Director of External Affairs and Development of Arrow Global Group Plc, one of the UK’s largest consumer debt purchasers and providers of receivables management solutions. Prior to this, he was the CEO and main shareholder of Tessera Credit Group, a debt purchaser and collection agency, which he led for more than 16 years. Mr Berkley is presently responsible for Public Affairs at the CSA, and is also Vice President of the European trade body FENCA. Mr Berkley has also served on a number of government and industry advisory bodies. See pages 15 to 16 for further information on the Board of Directors. Overview Corporate Governance Financial Report Additional Information Collection House Limited Annual Report 2018 8 Executive Management Team Appointed: July 2016 Kristine has been with the Group for more than 14 years. She has extensive financial and general management experience gained in her tenure with the Group, along with previous public company experience with Allied Mining & Processing Ltd as the Financial Controller and Company Secretary. She is responsible for all aspects of the Group’s financial management including reporting, planning and analysis, taxation, and investor relations. Kristine holds a Bachelor of Business (Accounting, Banking & Finance) from QUT, is a Chartered Accountant, and is a member of the Australian Institute of Company Directors. Kristine May CFO and Company Secretary Appointed: July 2017 Anand joined the Group on 26 July 2017, bringing over 15 years’ experience in the field of data science and predictive analytics for the financial services domain, primarily focussed on accounts receivables and debt collection. Working with the US market leader in the debt collection industry for the last 12 years, he has vast experience in building pricing models, forecasting models, and optimisation models for operations in the financial services sector. He has a proven track record in bridging strong symbiotic relationships between analytics and operations that are quintessential to be successful in our business. Appointed: September 2017 Jonathon joined Collection House Group on 6 September 2017, bringing over 15 years’ experience as a solicitor in Sydney and London including most recently being the Chief Legal Officer for Australian Receivables Limited and Forbes Dowling Lawyers (FDL). As Chief Legal Officer he successfully acquired Turnbull Bowles Lawyers, strengthening FDL’s position and expanding legal services, client engagement and productivity. As a solicitor in the United Kingdom his focus was helping clients navigate successfully through the global financial crisis, acting on large scale litigation and pursuing cross boarder insolvency matters. Appointed: July 2015 Denica joined the group in July 2015, following an extensive career in the financial services industry and operational management. Denica has worked in senior roles leading large- scale change programs specialising in business transformation, contact centre optimisation for global organisations, industry, peak bodies, Local and Federal Government agencies. Denica leads our operational teams across Australia, New Zealand and the Philippines. Drawing on over 15 years leadership experience at both the operational and executive level, Denica is instrumental in shaping and executing CLH’s operational strategy, delivering best- in-class solutions for our clients and customers. Anand Adusumilli Chief Data Scientist Jonathon Idas Chief Legal Officer Denica Saunders Chief Operating Officer Collection House Limited Annual Report 2018 Corporate Governance 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, and fostering a culture that values ethical behaviour and integrity. The Board keeps the governance system under regular review to ensure that it reflects changes in law and keeps pace with best practice developments in corporate governance. Board Composition As at 30 June 2018, the Board comprised three Directors (including the Chair), two of whom are Independent Non- Executive Directors. On 1 July 2017, the Board comprised of four Directors (including the Chair), all of whom were Non-Executive Directors. On 24 November 2017, Anthony Rivas was appointed as Managing Director and Chief Executive Officer of the Company. 9 During the reporting period, at the Annual General Meeting on 28 November 2017, both Kerry Daly (Chair) and Philip Hennessy were not returned as Directors. Further on 29 November 2017, the Company appointed Leigh Berkley as Chair of the Company. The Board considers its current members to have an appropriate mix of skills that enable the Board to discharge its responsibilities, and deliver the Company’s strategy and corporate objectives. Board Committees On 28 November 2017, two Committees, each with its own Charter, were disbanded, with the functions, powers and delegations of these Committees absorbed by the full Board. – Audit and Risk Management Committee – PDL Investment Committee Communication with Shareholders Collection House Limited uses a range of methods to communicate with shareholders, including written and electronic communications. Shareholders are able to make enquiries with the Group at any time through the Investor Enquiries page on the Group’s website. The Corporate Governance Statement is available online The Company’s listing on the Australian Securities Exchange means it must comply with the Corporations Act 2001, the ASX Listing Rules and other Australian laws. As part of this Compliance, Collection House Limited (the Group) is required to disclose how it has applied the recommendations contained in the ASX Corporate Governance Council’s Principles and Recommendations – 3rd Edition (the Principles and Recommendations) during the financial year ending 30 June 2018, explaining any departures from them. The Group has, unless otherwise stated, followed the Principles and Recommendations throughout the year. More information about Collection House Limited’s Board and Management, corporate governance policies, procedures and practices is in the Corporate Governance Statement available on the website at www.collectionhouse.com.au under the heading Investors – Corporate Governance. Collection House Limited Annual Report 2018 Overview Corporate Governance Financial Report Additional Information 10 Our Purpose Statement To attain excellence delivering client and consumer solutions whilst enhancing shareholder value Collection House Limited Annual Report 2018 11 Principal activities The Company has two reportable segments: Purchased Debt Ledgers (PDLs), and Collection Services. The principal activities of the Group were the provision of debt collection services and the purchase of consumer debt. There were no significant changes in the nature of the activities of the Group during the year. 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 2018. Directors The following persons were Directors of the Group during the whole of the financial period and up to the date of this report, unless stated otherwise: – Kerry Daly (Resigned: 28 November 2017) – Philip Hennessy (Resigned: 28 November 2017) – Leigh Berkley (Appointed Chairman: 29 November 2017) – Michael Knox – Anthony Rivas (Appointed Managing Director: 24 November 2017) See pages 15 to 16 for profile information on the Directors. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 12 FY2018 highlights Key Information Revenue Net Profit after tax for the year Earnings per share (EPS) Dividends for the year * 30 June 2018 $’000 30 June 2017 $’000 Change % 143,863 26,123 19.2 3.9 133,419 17,386 12.8 3.9 8% 50% 50% – * Total dividends for the year of 3.9 cents (interim 3.9 paid 27 March 2018, final 3.9 cents to be paid 26 October 2018), fully franked. Overview of Group operations and financial results The directors of the Group report the following highlights for the 2018 financial year: – 8 per cent increase in Revenue from $133.4m to $143.9m. – 50 per cent increase in Net Profit After Tax (NPAT) from $17.4m to $26.1m – 50 per cent increase in Earnings per share (EPS) from 12.8 to 19.2. These results reflect strong performances, which resulted in substantial increase in NPAT of $8.7m from Collection Services and Purchased Debt Ledgers (PDLS). Key financial results – by segment – Audited ($’000) Collection Services Purchased Debt Ledgers (PDLs) Consolidated 30 June 2018 $ ‘000 30 June 2017 $ ‘000 30 June 2018 $ ‘000 30 June 2017 $ ‘000 30 June 2018 $ ‘000 30 June 2017 $ ‘000 Revenue Sales Interest and other income Total segment revenue Intersegment elimination Consolidated revenue Results Segment result Interest expense and borrowing costs Unallocated revenue less unallocated expenses Profit before tax Taxation NPAT 69,038 68,226 69,038 68,226 75,002 75,002 65,044 65,004 69,038 75,002 144,040 (177) 68,226 65,044 133,270 149 69,038 68,226 75,002 65,004 143,863 133,419 12,564 12,895 36,695 26,723 49,259 (5,778) (5,887) 37,594 (11,471) 26,123 39,618 (5,362) (8,505) 25,751 (8,365) 17,386 Collection House Limited Annual Report 2018 Directors’ Report 13 Review of financial position The Group’s net assets increased 9.5 percent to $206.6 million (30 June 2017: $188.6 million), reflecting the increased PDL purchases during the year. Total net borrowings were $134.5 million (30 June 2017: $122.0 million). Gearing was 39.9% (30 June 2017: 39.3%). The Group’s net cash outflow from investing activities was $82.7 million (30 June 2017: $60.1 million) which includes $81.3 million PDL purchases (30 June 2017: $58.3 million). Business strategies and prospects for future financial years Our core business strategy is to grow the business by: – Continuing to invest in our existing business – Continuing to expand into new business segments within Collection Services – Creating and building complementary business model adjacencies. Key Risks Our key risks are: – Overpaying on PDL investments – Failing to collect PDLs in accordance with our pricing models – Changes to regulations governing our activities – Breaching of regulatory compliance obligations – Failure to retain existing and acquire new agency clients. The Audit and Risk Management Committee provides board oversight to the management of risk mitigation strategies that are implemented for the Group. Collection Services Segment Collection Services (third party servicing) revenue increased year on year by 2 percent. The segment result of $12.6 million decreased 3 percent from the previous year result of $12.9 million. Growth was achieved in FY18 across this sector through: – Continued efficiency gains leveraging our industry leading Call Centre Technology and our digital omni‑channel strategies – Client recognised collections performance in our Business Services Division earning additional market share and contract extensions – White labelled versions of our CLH Interactive Debt Portal customised for each Client delivering successful results – Sales initiatives into new markets in Australia, New Zealand and The Philippines. The ThinkMe Finance and Safe Horizons (financial hardship services) business have been reclassified from Collection Services to the Purchase Debt Ledger segment during the period as most business for these divisions is originated from Lion Finance. PDL Segment PDL collections were $126.5 million (30 June 2017: $104.4 million.) PDL acquisitions were $81.3 million (30 June 2017: $58.3 million). The segment result for the year was $36.7 million (30 June 2017: $26.7 million). The improved operational performance signified improved execution in agent performance and a Portfolio Enhancement Programme (PEP) which provided a new source of capital that was immediately reinvested at higher returns. The growth of the Arrangement Bank and further segment cost reductions led by the implementation of the CLH Interactive Debt Portal are indicative of the Group’s focus to extract maximum value from new and existing ledger purchases. Once again 46 percent of recoveries were derived from PDLs exceeding a 3 year purchase vintage (30 June 2017: 46%). This outcome is a key factor in determining the value attributed to PDLs. The PDLs now comprise of ledgers acquired from the four Major Banks, other Financial Institutions, Auto Finance, and selected Telco and Utility purchases. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 14 Dividends Dividends paid or declared by the Company to members since the end of the previous financial year were: Declared and paid during the year 2017 Final 2017 ordinary Interim 2018 ordinary Cents per share Total amount $’000 Date of payment 3.9 3.9 5,300 5,300 27 October 2017 27 March 2018 After the balance date the following dividends were proposed by the Directors. The dividends have not been provided for, and there are no income tax consequences: Declared after end of year Final 2018 ordinary Cents per share Total amount $’000 Date of payment 3.9 5,349 26 October 2018 Significant changes in the state of affairs There were no significant changes in the state of affairs of the Group during the financial year. 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 3.9 cents per fully paid share to be paid on 26 October 2018 out of retained profits and a positive net asset balance as at 30 June 2018. Other than the matters discussed above, no matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect: (a) (b) (c) the Group’s operations in future financial years, or the results of those operations in future financial years, or 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. Collection House Limited Annual Report 2018 Directors’ Report 15 Information on directors Leigh Berkley Experience Special responsibilities Independent, Chairman Mr Berkley has more than 25 years’ experience in the collections and debt purchase industry, and is a Board member and immediate past President of the Credit Services Association (CSA) in the UK. He is a regular visitor to Australia, and assisted the Australian Collectors & Debt Buyers Association (ACDBA) develop the ‘Code of Practice’. Mr Berkley is currently the Director of External Affairs and Development of Arrow Global Group Plc, one of the UK’s largest consumer debt purchasers and providers of receivables management solutions. Prior to this, he was the CEO and main shareholder of Tessera Credit Group, a debt purchaser and collection agency, which he led for over 16 years before successfully negotiating a sale of its assets to Arrow Global in December 2014. Mr Berkley is responsible for Public Affairs at the Credit Services Association (CSA), and is also Vice President of the European trade body FENCA where he is leading the development of a Code of Conduct for GDPR for the Collections industry across Europe. He sits on a number of Government and industry advisory bodies, and regularly presents at conferences and trade body forums around the world. Leigh is also the 2019 President of the International Collectors Group and a Trustee of the FairLife Charity and a Director of the Money Advice Liaison Group in the UK. Mr Berkley was appointed to the Board of Collection House Limited on 1 July 2016. Mr Berkley was appointed Chairman of Collection House Limited on 29 November 2017. Member of the Remuneration and Nomination Committee from 27 July 2016 to 23 December 2016. Chair of the PDL Investment Committee from 1 November 2016. Interest in shares 3,700 ordinary shares in CLH. Michael Knox Experience Independent, Non-executive Director Mr Knox was an Australian Trade Commissioner serving in Saudi Arabia and Indonesia. He joined Morgans (now Morgans Financial Limited) in Sydney in 1988. He was Chief Institutional Options Dealer until moving to Brisbane in 1990 as Economist and Strategist. He joined the Board of Morgan Stockbroking in 1996. He became Director of Strategy and Chief Economist in 1998. Michael remained on the Board of Morgans until 2012. Michael has served on many Queensland Government advisory committees. He was Chairman of the Queensland Food Industry Strategy Committee in 1992, a Member of the Consultative Committee of the Ipswich Development Board in 1993, a Member of the Queensland Tourism Strategy Committee in 1994 and a Member of the Ministerial Advisory Committee on Economic Development in 1997. From 2003 to 2012, he was Chairman of the Advisory Committee of School of Economics and Finance at the Queensland University of Technology. He has been a Governor of the American Chamber of Commerce from 1997 to 2007. In 2008, Michael joined the Board of The City of Brisbane Investment Corporation Pty Ltd. Michael remained on the Board until 2016. Michael was the President of the Economic Society of Australia (Qld) Inc from 2009 to 2013. Mr Knox was appointed to the Board of Collection House Limited on 24 March 2017. Special responsibilities Nil Interest in shares No ordinary shares in CLH. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 16 Anthony Rivas Experience Managing Director Anthony Rivas has over 25 years’ experience in the area of Credit and Collections, and extensive international experience in three continents. Anthony has served as Managing Director of Australian Receivables Limited until July 2016, after joining the company in 2013. With an initial mandate to optimise costs, Anthony successfully led the team to achieve EBITDA targets each year under his leadership and improved staff turnover rates. Anthony joined NCO/EGS in 2011, and led the Mexican operations for the company as Vice President of Operations. Here he was responsible for five facilities across Mexico, including collection agents, visitor agents, field attorneys and legal services. During his tenure, Anthony and his team nearly doubled “per collector” recoveries, whilst reducing operating waste and achieving double digit EBITDA. Prior to joining NCO/EGS, Anthony worked and consulted in India, Australia, UK, and the USA. His accomplishments included: Assisting companies to bring purchased debt portfolios to India for the first time Vice President of Operations/Training for Global Vantedge (an OSI company) in the USA and India VP Operations at a 1000+ FTE facility, and surpassing US benchmarks for various clients in Bankcard and Telecommunications Anthony has managed debt portfolios for a major international debt purchaser and successfully participated in the sale and transition of the portfolios to International investors. His technical developments include building automated skip waterfall systems, leveraging fetch technology to the internet with no agent involvement; system upgrades to enhance collector and reporting efficiency, enabling real time reporting; and helping lead Performance Management System training for OSI’s markets in the USA. Mr Rivas was appointed Managing Director on 24 November 2017. Special responsibilities Nil Interest in shares 3,690 ordinary shares in CLH. 71,409 FY17 indeterminate rights in CLH 77,584 FY18 indeterminate rights in CLH Company Secretary The Company Secretary is Kristine May. Ms May has been with the Group for more than 15 years providing extensive financial and general management across the Group. Ms May undertakes the combined roles of Chief Financial Offer and Company Secretary for the Group. Prior to 2001, Ms May held the position of Financial Controller and Company Secretary with Allied Mining & Processing Ltd. Collection House Limited Annual Report 2018 Directors’ Report 17 Meetings of Directors The number of meetings of the Group’s Board of Directors and of each board committee held during the year ended 30 June 2018, and the number of meetings attended by each Director were: 2018 Kerry Daly (Resigned: 28 November 2017) Philip Hennessy (Resigned: 28 November 2017) Leigh Berkley (Appointed Chairman on 29 November 2017) Michael Knox Anthony Rivas (Appointed Managing Director on 24 November 2017) Meetings of committees Audit and Risk Management Directors PDL Investment Attended Held Attended Held Attended Held 5 5 9 10 5 5 5 10 10 5 5 5 10 10 5 5 5 10 10 5 2 2 7 6 5 2 2 7 7 5 Remuneration Report – AUDITED This Remuneration Report outlines the overall remuneration strategy, framework and practices adopted by the Group for FY18 for Non‑Executive Directors (NEDs), the Chief Executive Officer and other Key Management Personnel (KMP). It has been prepared in accordance with the requirements of the Corporations Act 2001 (Cth), as amended (the Act) and its regulations. The information provided in this Remuneration Report has been audited as required by Section 308(3C) of the Act. The Remuneration Report contains the following sections: A B C D E F G H I J Directors and other key management personnel disclosed in this report Remuneration governance Executive remuneration policy and framework Relationship between remuneration and the Group’s performance Non‑executive Director remuneration policy Details of remuneration of Directors and key management personnel Service agreements Share‑based compensation Equity instruments held by key management personnel Additional information Director and Executive Remuneration At our Annual General Meeting for FY17 the resolution to adopt the Remuneration Report was not passed by shareholders. The Board has listened to the concerns raised by shareholders which contributed to this first strike and has made changes to ensure alignment with shareholders. In FY18 the Group has taken the following measures: (a) (b) Internally reviewed the overall remuneration strategy, framework and practices adopted by the Group; Revised Short Term Incentives (STI), targets and weighting with particular focus on financial metrics of Earnings Per Share (EPS) together with compliance, innovation and improvements to corporate culture; (c) Engaged Heidrick & Struggles to undertake a recruitment process to source high calibre non‑executive directors; and (d) Continued to apply rigorous controls in relation to capitalising costs relating to IT development and software. Additionally, the Group has sought external advice to independently review Directors and Executives remuneration. The Board will consider any recommendations as part of its ongoing review process. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 18 A Directors and other key management personnel disclosed in this report The key management personnel include those who have the authority and responsibility, directly or indirectly, to plan, direct and control the major activities of the Group. The Group’s Directors and key management personnel for FY18 Board of Directors Kerry Daly Chair (Non‑Executive) (resigned 28 November 2017) Philip Hennessy Director (Non‑Executive) (resigned 28 November 2017) Leigh Berkley Michael Knox Director (Chairman) (appointed 29 November 2017) Director (Non‑Executive) Anthony Rivas Managing Director (appointed 24 November 2017) Executive Management Team (EMT) Anthony Rivas Chief Executive Officer (CEO) Kristine May Chief Financial Officer (CFO) Company Secretary Marcus Barron Chief Information Officer (CIO) (resigned 3 July 2017) Chief Operating Officer (COO) (resigned 3 July 2017) Anand Adusumilli Chief Data Scientist (appointed 26 July 2017) Jonathan Idas Chief Legal Officer (appointed 6 September 2017) B Remuneration governance Overall remuneration strategy, framework and practices adopted by the Group are governed by the Board. These functions include consideration of the following: – How the remuneration policies are applied to members of the EMT – The basis of short and long‑term performance‑based incentive payments for members of the EMT – The appropriate fees for NEDs. Fundamental to all arrangements is that all KMP must contribute to the achievement of short and long‑term objectives, enhance shareholder value, avoid unnecessary or excessive risk taking and discourage behaviour that is contrary to the Group’s values. 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 remuneration packages for KMP reflect their duties, responsibilities and level of performance – as well as to ensure all KMP are motivated to pursue the long‑term growth and success of the Group. In determining the remuneration of all KMP, the Board aims to ensure that the remuneration policies and framework: – Are fair and competitive and align with the long‑term interests of the Group – Incentivise all KMP to pursue the short and long‑term growth and success of the Group within an appropriate risk control framework – Are competitive and reasonable, enabling the Group to attract and retain key talent, knowledge and experience – Are aligned to the Group’s strategic and business objectives and the creation of shareholder value – Have a transparent reward structure with a risk proposition that is linked to the achievement of pre‑determined performance targets. Use of external consultants In performing its role, the Committee may directly commission and receive information, advice and recommendations from independent, external advisers. This is done to ensure the Group’s remuneration packages are appropriate, reflect industry standards and will help achieve the objectives of the Group’s remuneration strategy. No remuneration recommendations were received by any external remuneration consultant during the period. Collection House Limited Annual Report 2018 Directors’ Report 19 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 Group’s executive remuneration strategy is designed to attract, motivate and retain high performing individuals and align the interests of executives with shareholders. The Board reviews the remuneration packages for members of the EMT annually by reference to individual performance against key individual objectives, the Group’s consolidated results and market data. The performance review of the CEO is undertaken by the Chair of the Board who then makes a recommendation to the Board. The performance review of the other members of the EMT is undertaken by the 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. The EMT pay and reward framework has three components: – Total fixed remuneration (TFR) including superannuation and benefits – Short‑term incentives (STIs), paid in cash or shares – Long‑term incentives (LTIs) through participation in the Performance Rights Plan (PRP), which has been approved by the Board. The combination of these components amount to the total remuneration package or total employment cost for members of the EMT. The following summarises the target remuneration mix of the EMT: CEO Other EMT TFR 10% 67% At Risk STI 8% 17% LTI 82% 16% Total fixed remuneration Structured as a total employment cost package, the total fixed remuneration (TFR) 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 TFR that comprises the cash salary, superannuation and non‑monetary benefits. TFR for EMT members is reviewed annually to ensure the pay is in line with the role, experience and performance and remains competitive with the market. Group and individual performance are considered during the annual remuneration review. TFR is usually fixed for a 12‑month period with any changes effective from 1 September each financial year. An EMT member’s remuneration is also reviewed upon any change of duties. Retirement benefits for EMT There are no additional retirement benefits made available to members of the EMT, other than those required by statute or by law and under the shareholder approved performance rights plans. Short-term incentives (STIs) To ensure that remuneration for members of the EMT are aligned to the Group’s performance, a portion of their remuneration, in line with their ability to influence results, is performance based and, therefore, ‘at risk’. EMT members have the opportunity to earn an annual STI if pre‑defined targets are achieved. The CEO had a target STI opportunity of 75 percent of TFR, with 60 percent of the determined amount to be paid in cash and 40 percent deferred payment to be provided in shares at the end of the contract period. Other EMT personnel each have a cash‑based STI opportunity of 30 percent of TFR. STIs for the EMT in FY18 were based on scorecard measures and weightings. The 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. The STIs for other members of the EMT are recommended by the CEO to the Board based on the CEO’s financial and non‑ financial target performance objectives. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 20 There is a high degree of alignment between the Company strategy and the EMT’s STI performance objective targets. The relative weights of financial versus non‑financial performance targets for each executive are detailed below and are based on their position and influence on the financial results. The weightings strive to provide a balance between the Company’s overall financial goals and the ability of the individual executives to influence these and other strategic outcomes. Position Chief Executive Officer Chief Financial Officer/Company Secretary Chief Data Scientist (appointed 26 July 2017) Chief Legal Officer (appointed 6 September 2017) Financial Performance Objectives Non- Financial Performance Objectives 80% 80% 80% 80% 20% 20% 20% 20% The financial performance objectives are the same for all Senior Executives, providing a common objective for the EMT (weighting are different as highlighted above). The non‑financial EMTs have a high degree of variability between technology projects, people and culture, and processes that reflect the individual roles, and include measures such as achieving strategic outcomes, developing people and culture, growth, business development, differentiation, innovation, digital development and other key initiatives during the financial year. Each executive has a high degree of clarity on their individual performance objectives and priorities, as established by their scorecard. They also have an understanding of the inter‑relationship of their individual performance objectives to the objectives of the other members of the EMT. CEO STI targets for FY18 Payment of the STI is discretionary and subject to the requirement to achieve a minimum of 5% growth in EPS in a financial year, as well as the achievement of the individual personal objectives outlined below: Performance category Metrics Weighting (%) Financial Non‑Financial – Earnings per share (EPS) – Compliance – – Innovative Solutions implemented Improvement of Corporate Culture 80 10 5 5 A summary of the actual STI Financial outcomes achieved is included in Section D. CEO STI targets for FY17 Payment of the STI is discretionary and subject to the requirement to achieve a minimum of 5% growth in EPS in a financial year, as well as the achievement of the individual personal objectives outlined below: Performance category Metrics Weighting (%) Financial – Net profit after tax (NPAT) – Earnings per share (EPS) Financial Support – Growth of the ThinkMe business line – Introduction of a sales force – Growth in RTO income – Organic arrangement improvement – Establish system for mortgage referrals Other – Introduction of Interactive Intelligence technology – Migration on to C5 platform – Implementation of comprehensive marketing campaign A summary of the actual STI Financial outcomes achieved is included in Section D. 20 40 5 5 5 2.5 2.5 5 10 5 Collection House Limited Annual Report 2018 Directors’ Report 21 Cessation of employment For resignation or termination for cause, any STI is forfeited, unless otherwise determined by the Board. For any other reason, the Board may award STI on a pro‑rata basis taking into account time and the current level of performance against performance hurdles. Long-term incentives (LTIs) LTIs are awarded to the Group’s EMT by way of performance rights via the Performance Rights Plan (PRP). The LTI program has the objective of delivering long‑term shareholder value by incentivising members of the EMT to achieve sustained financial performance over a three‑year period (with no opportunity to retest). Annual grants of performance rights are proposed to be made to the Group’s EMT under the PRP. The number of performance rights granted is calculated based on the weighted average share price over the five trading days before the grant date. Sections H and I provide details of performance rights granted, vested, exercised and lapsed during the year. Performance rights were awarded to various eligible employees pursuant to the PRP, at a nil exercise price and subject to a three‑year tenure hurdle. This is contingent on the achievement of certain financial performance hurdles, which are approved by the Board each financial period. The performance rights will not vest unless the Group’s financial performance meet these hurdles. The Board set these hurdles to ensure that the EMT were focused on the delivery of increased shareholder value through the achievement of the short and long‑term goals of the Group. Participants in the PRP do not receive distributions or dividends on unvested LTI grants. FY18 Performance Rights Awarded For the FY18 performance rights the Board chose Earnings Per Share (EPS) as the key financial measurement, as EPS growth will ensure that long‑term shareholder value is achieved. The hurdles and the proportion of performance rights that will vest as a percentage if the target is achieved, are outlined below: Performance Hurdles – Compound EPS Growth 0% – 5.00% 5.01% – 7.50% 7.51% – 10.00% More than 10.01% % of Pool Nil 33.33% 66.66% 100% For the period 1 July 2017 to 30 June 2020, 341,071 unlisted performance rights over ordinary shares in the Company were granted during the current year under the PRP to the EMT and other eligible employees. The performance rights will vest (and therefore be capable of being exercised) depending on the Group achieving certain performance hurdles as at 30 June 2020 as highlighted above. FY17 Performance Rights Awarded In line with the terms of his contract, the CEO was granted 3,000,000 performance rights in FY17. Other EMT personnel were granted performance rights in FY17 representing 30 percent of TFR. For the FY17 performance rights the Board chose Earnings Per Share (EPS) as the key financial measurement, as EPS growth will ensure that long‑term shareholder value is achieved. The hurdles and the proportion of performance rights that will vest as a percentage if the target is achieved, are outlined below: Performance Hurdles – Compound EPS Growth 0% – 5.00% 5.01% – 7.50% 7.51% – 10.00% More than 10.01% % of Pool Nil 33.33% 66.66% 100% For the period 1 July 2016 to 30 June 2019, 3,747,550 unlisted performance rights over ordinary shares in the Company were granted during the current year under the PRP to the EMT and other eligible employees. The performance rights will vest (and therefore be capable of being exercised) depending on the Group achieving certain performance hurdles as at 30 June 2019 as highlighted above. A summary of the actual LTI Financial outcomes achieved is included in Section D. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 22 Cessation of employment For ‘uncontrollable events’ (including death, serious injury and disability and forced early retirement, retrenchment or redundancy), any LTI that are capable of becoming exercisable if performance hurdles are met at the next test date will become vested performance rights. The Board, at its discretion, may determine the extent to which any other unvested performance rights, that have not lapsed, will become vested performance rights. For any other reason, all unvested LTI awards will lapse immediately, unless otherwise determined by the Board. Change of control Where a proposal is publicly announced in relation to the Group which the Board reasonably believes may lead to a change in control event, all unvested LTI awards, that have not lapsed, will vest and become exercisable. Clawback The Group will reduce, cancel or clawback any performance‑based remuneration in the event of serious misconduct or a material misstatement of the Group’s financial statements. Discretion The Board has absolute discretion in relation to payments under both the STI and LTI schemes. D Relationship between remuneration and the Group’s performance Group performance and its link to STI Based on the achievements of the Group this year, the Board determined that the EMT had generally performed well against their financial and non‑financial targets. The Board considered that an overall STI level of 80% was appropriate, and will review the STI structure and key performance targets for FY19. The table below shows the actual STI Financial outcomes achieved for FY18. Performance category Metrics Financial Non‑Financial – Earnings per share (EPS) – Compliance – – Innovative Solutions implemented Improvement of Corporate Culture Total Maximum Potential (%) Actual Achieved (%) 80 10 5 5 100 60 10 5 5 80 Group performance and its link to LTI The overall level of reward for members of the EMT takes into account the performance of the Group over a number of years, with greater emphasis given to the current and 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) Dividends declared (franked) Share price commenced Share price ended 2014 $18.7 2015 $22.5 2016 $18.6 2017 $17.4 2018 $26.1 8.0 cents 9.1 cents 7.8 cents 7.8 cents 7.8 cents $1.65 $1.88 $1.88 $2.23 $2.23 $1.10 $1.10 $1.16 $1.16 $1.49 Basic EPS (including discontinued operations) 14.7 cents 17.2 cents 14.0 cents 12.8 cents 19.2 cents There is no vesting of LTI awards for the year ended 30 June 2018 as all performance rights have lapsed. Collection House Limited Annual Report 2018 Directors’ Report 23 Details of remuneration: cash bonuses and performance rights For each cash bonus and grant of performance rights included in the table on page 26 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. Other than the deferred payment shares, no part of the STI is payable in future years. No performance rights will vest unless the vesting conditions are met, hence the minimum value of the performance rights yet to vest is nil. The maximum value of the performance rights yet to be expensed has been determined as the amount of the grant date fair value of the performance rights that are yet to be expensed. Cash bonus 2018 Deferred Payment Shares 2018* Performance rights Awarded % Forfeited % Awarded % Forfeited % Financial year granted Vested % Forfeited % Lapsed % Financial years in which performance rights may be issued (subject to certain qualifying hurdles) Maximum total value of performance rights yet to be expensed Anthony Rivas Kristine May Marcus Barron (resigned 3 July 2017) Anand Adusumilli (appointed 26 July 2017) Jonathan Idas (appointed 6 September 2017) 80% 80% 80% 80% 20% 20% 20% 20% – 100% 80% 20% 80% 20% 80% 80% – – – – – 20% 20% – – – 2018 2017 2018 2017 2015 2016 2017 – 2018 – 2018 – – – – – – – – – – – – – – – – – – – – – – 100% 100% 100% – – – 2020 2021 2020 2018 2019 2020 – 3,883,411 77,443 92,420 – – – 2021 27,047 2021 27,375 * Under the terms of the CEO’s employment agreement, 40% of the FY18 STI is payable in shares at the end of the employment contract, and is contingent upon the CEO being employed by the Company at the end of the contract period. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 24 E Non-Executive Director remuneration policy Non‑Executive Director’s (NEDs) 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 aggregate fee pool and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board considers advice from external advisors when undertaking the annual review process. 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 FY18 aggregate total Non‑Executive Director fees distribution is $406,944 (including superannuation). The Board will not seek any increase to the annual aggregate NED fee pool limit at the 2018 AGM. Payments are allowed for additional responsibilities 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. The table below summarises the NED fees for FY18 (exclusive of superannuation): 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 PDL Investment Committee Chair PDL Investment Committee Member * The Chair’s fee covers his entire engagement on the Board. FY18 FY17 $165,000* $165,000* $90,000 $90,000 $15,000 $15,000 $Nil $Nil $Nil $Nil $15,000 $Nil $15,000 $15,000 $Nil $Nil For further information in relation to Directors’ remuneration, including fees paid in accordance with statutory rules and applicable accounting standards, refer to Section F below. Note that the changes in the NED fee structure do not require an increase in the Directors’ fee pool limit. Retirement allowances for Directors There are no retirement allowances paid to Non‑Executive Directors. Collection House Limited Annual Report 2018 Directors’ Report 25 F Details of remuneration of Directors and key management personnel 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. Short-term Post- employment Other long term Share-based payments Salary and fees STI Cash bonus Non- monetary benefits Super- annuation benefits Total Annual and long service leave Termination benefits Rights Total Proportion of remuneration performance related In Dollars Non-Executive Directors Kerry Daly Chair (resigned 28 November 2017) Philip Hennessy Non-Executive Director (resigned 28 November 2017) 2018 67,904 2017 144,635 2018 43,212 2017 100,154 Leigh Berkley Chair (appointed Chair 29 November 2017) 2018 182,326 2017 106,650 Michael Knox Non-Executive Director 2018 90,000 2017 24,557 – – – – – – – – – – – – 67,904 6,451 144,635 13,740 43,212 100,154 4,105 9,515 – 182,326 4,396 – 106,650 2,850 – – 90,000 8,550 24,557 2,302 – – – – – – – – – – – – – – – – – – – – 74,355 158,375 47,317 109,669 186,722 109,500 98,550 – 26,879 Short-term Post- employment Other long term Share-based payments In Dollars Salary and fees STI Cash bonus Non- monetary benefits Super- annuation benefits Annual and long service leave Total Termination benefits Rights Deferred Shares* Total Proportion of remuneration performance related Executive Director and other Key Management Personnel 2018 433,418 173,400 32,126 638,944 38,788 31,284 – 431,490 115,600 1,256,106 2017 421,731 159,600 51,536 632,867 40,064 22,237 – 431,490 106,400 1,233,058 2018 234,556 63,000 4,549 302,105 22,283 13,844 2017 158,276 62,000 2,938 223,214 15,036 5,876 2018 – 2017 268,846 – – – – – – 4,344 273,190 31,715 17,499 65,000 – – – 56,214 8,542 – – – – – – 394,446 252,668 – 387,404 57% 57% 30% 28% – – 2018 248,124 49,000 – 297,124 23,572 1,445 – 1,066 – 323,207 15% 2018 205,721 50,000 – 255,721 19,543 11,802 – 1,079 – 288,145 18% Anthony Rivas Managing Director/ Chief Executive Officer Kristine May Chief Financial Officer/Company Secretary Marcus Barron Chief Operating Officer (resigned 3 July 2017) Chief Information Officer (resigned 3 July 2017) Anand Adusumilli Chief Data Scientist (appointed 26 July 2017) Jonathan Idas Chief Legal Officer (appointed 6 September 2017) ‑ For recently appointed EMT, the remuneration information provided in the table below relates to the period from the date of appointment as EMT to FY18, unless otherwise stated. * Deferred share represent 40 percent of FY18 STI, payable to the CEO at the end of his contract term. Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 26 G Service agreements Remuneration and other terms of employment for the CEO and other key management personnel are also formalised in service agreements. Except for the CEO who has a six month notice period, all contracts with members of the EMT may be terminated early by either party with three months’ notice. Collection House, at its full discretion, may make a payment in lieu of the notice period, either partially or in full. Major provisions of the agreements relating to remuneration are set out below. Anthony Rivas CEO & Managing Director Annual fixed remuneration Performance bonus Performance rights $481,558 inclusive of superannuation and non‑monetary benefits for FY18. $361,169 was the maximum STI opportunity in relation to FY18 (60% cash, 40% deferred payment in shares at the end of the contract period, provided the CEO remains employed by the Company at the end of the contract period). 3,000,000 at risk performance rights were granted during FY17. Contract period Three years, to 30 June 2019 Kristine May CFO & Company Secretary Annual fixed remuneration $262,695 inclusive of superannuation and non‑monetary benefits for FY18. Marcus Barron CIO & COO (resigned 3 July 2017) Performance cash bonus $78,809 was the maximum STI opportunity in relation to FY18. Performance rights 62,286 at risk performance rights were granted during FY18 59,387 at risk performance rights were granted during FY17. Annual fixed remuneration $289,071 inclusive of superannuation and non‑monetary benefits for FY18. Performance rights 44,391 at risk performance rights were granted during FY15. 36,080 at risk performance rights were granted during FY16. 80,548 at risk performance rights were granted during FY17. Anand Adusumilli Chief Data Scientist (appointed 26 July 2017) Annual fixed remuneration $271,013 inclusive of superannuation and non‑monetary benefits for FY18 Performance cash bonus $61,750 was the maximum STI opportunity in relation to FY18. Performance right 17,559 at risk performance rights were granted during FY18. Jonathan Idas Chief Legal Officer (appointed 6 September 2017) Annual fixed remuneration $273,750 inclusive of superannuation and non‑monetary benefits for FY18 Performance cash bonus $62,500 was the maximum STI opportunity in relation to FY18. Performance right 17,772 at risk performance rights were granted during FY18. Collection House Limited Annual Report 2018 Directors’ Report 27 H Share-based compensation Performance rights Performance rights have been granted to certain eligible employees under the Collection House Performance Rights Plan (PRP). Performance rights granted under the PRP respectively carry no dividend or voting rights. When exercisable, each performance right is convertible into one ordinary share of Collection House Limited. Details of performance rights over ordinary shares in the Group provided as remuneration to members of the EMT are set out below. Name Anthony Rivas Kristine May Marcus Barron (resigned 3 July 2017) Anand Adusumilli Jonathan Idas Number of performance rights granted/issued during the year Number of performance rights vested/ issuable during the year 2018 2017 2018 2017 – 3,000,000 62,286 59,387 – 80,548 17,599 17,772 – – – – – – – – – – – – The assessed fair value at grant date of performance rights compensation granted to members of the EMT has been calculated using the five day volume weighted average price (VWAP) of one ordinary share over the five days preceding the grant. 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. Equity instruments held by key management personnel I Performance rights Details of performance rights over ordinary shares in the Company provided as remuneration to each Director of Collection House Limited and other key management personnel of the Group, are set out below. 2018 Name Balance at start of the year Granted as compensation Vested Lapsed Anthony Rivas 3,000,000 – Kristine May 59,387 62,286 Marcus Barron (resigned 3 July 2017) Anand Adusumilli Jonathan Idas – – – – 17,599 17,722 – – – – – – – – – – Balance at end of the year 3,000,000 121,673 – 17,599 17,722 Vested and issuable – – – – – Un-vested 3,000,000 121,673 – 17,599 17,722 Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 28 Share holdings The number of shares in the Company held during the financial year by each Director of Collection House Limited and other key management personnel of the Group, including their personally related parties, are set out below. 2018 Non-Executive Directors Category Kerry Daly (resigned 28 November 2017) Philip Hennessy (resigned 28 November 2017) Leigh Berkley Michael Knox 2018 Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Executive Director and other key management personnel Category Anthony Rivas Kristine May Marcus Barron (resigned 3 July 2017) Anand Adusumilli Jonathan Idas Ordinary Shares Indeterminate Rights Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Balance at start of the year, or on appointment Other changes during the year Balance at the end of the year 394,607 (394,607) 50,000 (50,000) – – 3,700 – – – 3,700 – Balance at start of the year – – – – – – Other changes during the year 3,690 71,409 Balance at the end of the year 3,690 71,409 – – – – – – – – J Additional information Loans to Directors and Executives There were no loans to Directors or members of the EMT during FY18. Shares under performance rights LTIs are provided to certain eligible employees via the PRP. Total un‑issued ordinary shares of the Group under performance rights at the date of this report are detailed below. Number of rights granted/to be issued (restated) Date rights effective Issue price of shares No of shares issued 2017 No of unvested shares and vested but not yet issued shares under rights (restated) Expiry date 1/7/16 3,747,550 29/6/18 341,071 Nil Nil Nil Nil 3,213,133 30 September 2019 341,071 30 September 2020 Performance rights PRP PRP Additional information – Unaudited Insurance of officers During the financial year the Group paid premiums of $231,969 in respect of Directors’ and Officers’ liability and legal expenses’ and insurance. This was for current and former Directors and Officers, including senior executives of the Group and Directors, Senior Executives and Secretaries of its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the Directors or Officers in 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. Collection House Limited Annual Report 2018 Directors’ Report 29 Proceedings on behalf of the Group 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. No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services During the year KPMG, the Group’s auditor, has performed certain other services in addition to the audit and review of financial statements. The Board has considered the non‑audit services provided during the year by the auditor, and the Audit and Risk Management Committee is satisfied that the provision of those non‑audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: – all non‑audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Audit and Risk Management Committee to ensure they do not impact the integrity and objectivity of the auditor – the non‑audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Processional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards. Details of the amounts paid and payable to the auditors of the Group, KPMG, are set out below. Services other than audit and review of financial statements: Other regulatory audit services Trust account audits Loan covenant compliance Other services Taxation compliance services Accounting advice Audit and review of financial statements Total paid or payable to KPMG 2018 $ 65,420 3,050 200,393 62,962 331,825 263,465 595,290 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 30. Rounding of amounts The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191, 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 Corporations Instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of Directors. Collection House Limited Leigh Berkley Chairman Collection House Limited Annual Report 2018 Directors’ ReportOverview Corporate Governance Financial Report Additional Information 30 Auditor’s Independence Declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Collection House Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Collection House Limited for the financial year ended 30 June 2018 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Scott Guse Partner Brisbane 23 August 2018 26 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Collection House Limited Annual Report 2018 Income Statement Revenue Revenue from continuing operations Direct collection costs Employee expenses Depreciation and amortisation expense Operating lease rental expense Restructuring expenses Other expenses Finance costs Profit before income tax Income tax expense Profit from continuing operations Profit for the year attributable to equity holders of Collection House Limited Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share The above income statement should be read in conjunction with the accompanying notes. 31 Consolidated Notes 30 June 2018 $’000 30 June 2017 $’000 5 6 6 6 6 7 143,863 133,419 143,863 (24,793) (52,115) (4,820) (7,666) (1,082) (10,015) (5,778) 37,594 (11,471) 26,123 26,123 133,419 (25,751) (54,214) (4,309) (8,273) (196) (9,563) (5,362) 25,751 (8,365) 17,386 17,386 Cents Cents 28 28 19.2 18.8 12.8 12.6 Collection House Limited Annual Report 2018 for the year ended 30 June 2018Overview Corporate Governance Financial Report Additional Information 32 Statement of Comprehensive Income Profit for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Consolidated Notes 30 June 2018 $’000 30 June 2017 $’000 26,123 17,386 Exchange differences on translation of foreign operations 20(a) Other comprehensive income for the year, net of income tax Total comprehensive income for the year attributable to equity holders of Collection House Limited (77) (77) (168) (168) 26,046 17,218 The above statement of comprehensive income should be read in conjunction with the accompanying notes. Collection House Limited Annual Report 2018 for the year ended 30 June 2018 Balance Sheet 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 Receivables Total non‑current assets Total assets LIABILITIES Current liabilities Bank Overdraft Payables 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 The above balance sheet should be read in conjunction with the accompanying notes. 33 Consolidated Notes 30 June 2018 $’000 30 June 2017 $’000 8 9 10 11 10 12 13 9 8 14 15 16 17 18 15 16 509 20,382 52,663 1,594 75,148 1,151 11,188 47,334 1,225 60,898 259,192 236,319 2,084 34,041 498 295,815 370,963 2,601 14,404 2,714 3,290 2,660 25,669 3,062 36,336 1,378 277,095 337,993 – 10,937 498 3,431 2,406 17,272 131,900 123,200 616 190 6,011 138,717 164,386 206,577 1,139 224 7,525 132,088 149,360 188,633 19 20(a) 20(b) 113,727 112,079 157 92,693 206,577 (615) 77,169 188,633 Collection House Limited Annual Report 2018 as at 30 June 2018Overview Corporate Governance Financial Report Additional Information 34 Statement of Changes in Equity Consolidated Balance at 1 July 2016 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 Acquisition of treasury shares Employee share rights – value of employee services Dividends provided for or paid Balance at 30 June 2016 Balance at 1 July 2017 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 Withdrawal of treasury shares Employee share rights – value of employee services Dividends provided for or paid Balance at 30 June 2018 19 20 21 19 20 21 Attributable to owners of Collection House Limited Contributed equity $’000 Reserves $’000 Retained earnings $’000 Notes 111,006 (1,029) – – – 1,608 (535) – – 1,073 112,079 112,079 – – – 1,581 67 – – 1,648 113,727 – (168) (168) – – 582 – 582 (615) (615) – (77) (77) – – 849 – 849 157 Total equity $’000 180,305 17,386 (168) 17,218 1,608 (535) 582 (10,545) (8,890) 188,633 188,633 26,123 (77) 70,328 17,386 – 17,386 – – – (10,545) (10,545) 77,169 77,169 26,123 – 26,123 26,046 – – – (10,599) (10,599) 1,581 67 849 (10,599) (8,102) 92,693 206,577 The above statement of changes in equity should be read in conjunction with the accompanying notes. Collection House Limited Annual Report 2018 for the year ended 30 June 2018 Statement of Cash Flows 35 Consolidated Notes 30 June 2018 $’000 30 June 2017 $’000 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) Income taxes paid Net cash inflow (outflow) from operating activities 30 Cash flows from investing activities Payments for property, plant and equipment Proceeds for leasehold improvements Payments for purchased debt ledgers Payments for intangible assets 191,304 174,888 (95,663) (102,419) 95,641 (9,778) 85,863 (431) 5 (81,324) (966) 72,469 (10,444) 62,025 (259) (21) (58,315) (1,490) Net cash (outflow) inflow from investing activities (82,716) (60,085) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Borrowing costs Interest paid 8,700 (139) (1,452) (4,550) 5,000 (44) (1,323) (3,758) Dividends paid to Company's shareholders 21 (10,599) (10,545) Proceeds from issues of shares and other equity securities Purchase of treasury shares 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 8 Cash at bank and on hand Bank Overdraft Cash and cash equivalent at end of year The above statement of cash flows should be read in conjunction with the accompanying notes. 1,581 – (6,459) (3,312) 1,151 69 (2,092) 509 (2,601) (2,092) 1,606 (565) (9,629) (7,689) 8,938 (98) 1,151 1,151 – 1,151 Collection House Limited Annual Report 2018 for the year ended 30 June 2018Overview Corporate Governance Financial Report Additional Information 36 Notes to the Financial Statements for the year ended 30 June 2018 These financial statements are for the consolidated entity consisting of Collection House Limited (the Company) and its subsidiaries (the Group). Collection House Limited is a public company incorporated and domiciled in Australia. The financial statements were authorised for issue on 23 August 2018 by the directors of the Company. 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (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 new standards and amendments to standards mandatory for the first time in the annual reporting period commencing 1 July 2017 do not impact amounts recognised in the current or prior period, and are not likely to affect future periods. (iii) Early adoption of standards The Group has elected to continue to early adopt the following pronouncements: – AASB 9 Financial Instruments (December 2014) and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018) This includes applying the revised pronouncement to the comparatives in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. None of the items in the financial statements had to be restated as a result of applying these standards. (iv) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss, and certain classes of property, plant and equipment. (v) 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 Subsidiaries are all 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. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. There are currently no non‑controlling interests in the Group. (c) Segment reporting 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. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary 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 hedges or are attributable to part of the net investment in a foreign operation. Non‑monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Collection House Limited Annual Report 2018 37 1 Summary of significant accounting policies (continued) (d) Foreign currency translation (continued) (iii) Group companies The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency 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 comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of 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. Revenue is recognised for the major business activities as follows: (i) Interest income – Purchased Debt Ledgers (PDL’s) 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) Call option income – reflects the revenue the company earns by selling the right to purchase future collections of an eligible portfolio of PDLs to a third party. Revenue is recognised for accounting purposes when a call option contract is signed, as from the date the third party receives a substantial portion of the cash flows. (iii) 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. (iv) Sale of non-current assets The net gain or loss on disposal of non‑current assets is included as either income or an expense at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal. (v) Dividends Revenue from dividends and distributions from controlled entities is recognised by the Parent Entity when they are declared by the controlled entities. Revenue from dividends from other investments is recognised when received. Income tax (f) 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 paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 38 1 Summary of significant accounting policies (continued) Income tax (continued) (f) 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. Collection House Limited and its wholly‑owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated financial statements. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (g) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases (Note 16). Finance leases are capitalised at the lease’s inception at the 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 over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the Group will obtain 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 24). 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 The acquisition method of accounting is used to account for all business combinations, regardless of whether equity 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. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If this amount is 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. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Impairment of assets (i) Goodwill is not subject to amortisation and is tested semi‑ annually for impairment, or more frequently if events or changes in circumstances indicate that it 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 (refer to Note 13). For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash‑generating units). (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 less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and where applicable bank overdrafts. Where applicable, bank overdrafts are shown within borrowings in current liabilities in the consolidated balance sheet. (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. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written 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 estimated future cash flows. Cash flows relating to short‑term receivables are not discounted if the effect of discounting is immaterial. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 39 1 Summary of significant accounting policies (continued) (k) Trade receivables (continued) 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. (l) Other financial assets Classification The Group classifies financial assets as subsequently measured at either amortised cost 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. (i) Financial assets subsequently measured at amortised cost – PDLs Classification Purchased debt ledgers have been included in this category of financial assets 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. (ii) Trade receivables Trade receivables 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. 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. (iii) 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. 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. (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. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses estimated discounted cash flows to determine fair value. (n) Other current assets (i) Legal and court costs capitalised 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 as a result of the expenditure being incurred. These costs are amortised on a straight line basis over the period of their expected benefit, which is not expected to exceed twelve months. 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 impairment is recognised in the income statement to the initial amount of the original impairment loss. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 40 1 Summary of significant accounting policies (continued) (o) Property, plant and equipment All items of property, plant and equipment are initially recorded at cost at the date of acquisition, being the fair value of the consideration provided plus incidental costs directly attributable to the acquisition. Subsequent costs are included in the assets carrying amount, or recognised as a separate asset as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. 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 are depreciated using the straight‑line method over their estimated useful lives taking into account estimated residual values, with the exception of leased assets, which are depreciated over the shorter of the lease term and their useful lives. 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. The estimated useful lives of property, plant and equipment for current and comparative periods are as follows: – Plant and equipment – Computer equipment – Leased plant and equipment Term of Lease 4‑12 years 3‑5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. When changes are made, adjustments are reflected prospectively in current and future periods only. 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. (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 annually, 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). IT development and software (ii) 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 commences from the point at which the asset is ready for use, and is calculated on a straight‑line basis over periods generally ranging from 2 to 10 years. Useful lives are reviewed at each reporting date and adjusted if appropriate. 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. 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 41 (iii) Recognition and measurement Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of each reporting period. The discount rate used to determine the present value is a pre‑tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase 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) Long-term employee benefit obligations 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 up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of 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 unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual 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 Share‑based compensation benefits are provided to the Chief Executive Officer via the employment agreement between the Company and the Chief Executive Officer. Share‑based compensation benefits are provided to employees other than the Chief Executive Officer via the Collection House Limited Performance Rights Plan. Further details are set out in Note 29. 1 Summary of significant accounting policies (continued) (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 (i) Make good The Group is required to restore the leased premises for a number of its premises to their original condition at the end of the respective lease terms. A provision has been recognised for the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. (ii) Legal 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 42 1 Summary of significant accounting policies (continued) (u) Employee benefits (continued) The fair value of the performance rights granted under the PRP was independently determined. The fair value at grant date has been calculated using the five day volume weighted average price (VWAP). 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 29. (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. (v) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. 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 shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, 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. (x) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: – 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 28). (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: – the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and – the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (y) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not 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. (z) Rounding of amounts The Company is of a kind referred to in ASIC Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2018 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 9 Financial Instruments (December 2014) and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018) AASB 9 addresses the classification, measurement and derecognition of financial assets and liabilities, introduces new rules for hedge accounting, and a new impairment model for financial assets. Financial assets The Group does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 43 1 Summary of significant accounting policies (continued) (aa) New accounting standards and interpretations (continued) Financial liabilities AASB 9 retains materially all of the existing requirements in AASB 139 on subsequent measurement of financial liabilities with the exception of the treatment of own credit risk relating to financial liabilities designated at fair value through profit or loss. It is anticipated, based on the current composition of the Group’s Balance sheet, that there will be no impact on the Group’s accounting for financial liabilities, as the Group has no financial liabilities designated at fair value through profit or loss. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. Impairment The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139. Specifically, AASB 9 requires the Group to account for the expected credit losses from when the financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under AASB 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. The Group has undertaken a detailed assessment of how its impairment provisions would be affected by the new model, it is concluded that the impact would be minimal and the change to the expected loss model is not expected to have a significant impact. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments, particularly in the year of adoption of the new standard. (ii) AASB 15 Revenue from Contracts with Customers (applicable to annual reporting periods commencing on or after 1 January 2018) The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118, which covers revenue arising from the sale of goods and the rendering of services, and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. Management has performed an assessment on the effects of applying the new standard on the Group’s financial statements and it is concluded that there is no significant impact to the financial statements. (iii) AASB 16 Leases (applicable to annual reporting periods commencing on or after 1 January 2019) AASB 16 will result in the majority of leases being recognised on balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, a lessee initially recognises and measures a right‑of‑use asset representing its right to use the underlying asset, and a lease liability representing its obligation to make lease payments on a present value basis taking into consideration the contractual lease period and likely periods subject to optional extension. Subsequently, a leasee measures a right‑of‑use asset similarly to other non‑financial assets and lease liabilities similarly to other financial liabilities. The only exceptions are short‑term and low‑value leases. The Group is undergoing an assessment of the potential impact of the new standard on its consolidated financial statements. As at the reporting date, the Group has non‑ cancellable operating lease commitments of $53,138,000 (see Note 24). Subject to the impact of certain transitional elections with respect to the depreciation of the right‑of‑use asset and amortisation of lease liability still to be quantified, the Group’s operating lease commitments of $53,138,000 is materially expected to represent the impact on adoption of the new standard. The impact to net assets is expected to be immaterial. To date, the most significant impact identified is that the Group will recognise new assets and liabilities for the operating lease agreements in place for its office premises. In addition, the nature of expenses related to those leases will now change, as AASB 16 replaces the straight‑line operating lease expense with a depreciation charge for right‑of‑use assets and interest expense on lease liabilities. The full extent of the impact is unable to be reliably determined until closer to application date, once the mix and maturity of leases held by the Group at that point is able to be determined. The Group does not expect to adopt the new standards before their operative date. There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the 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 26 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. (ii) Tax consolidation legislation 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 44 1 Summary of significant accounting policies (continued) (ab) Parent entity financial information (continued) 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 entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly‑owned entities fully compensate Collection House Limited for any current tax payable assumed and are compensated by Collection House Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to 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. 2 Financial risk management The Group’s financial assets and liabilities consist mainly of PDLs, deposits with banks, trade and other receivables, payables and borrowings. The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate 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 uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks, and aging analysis for credit risk. Risk management is carried out by the finance department under policies approved by the Audit and Risk Management 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 Market risk is the risk that changes in market prices such as foreign exchange rates and interest rates will affect the Group’s income. (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 New Zealand (NZ) Dollar and the Philippine Peso. Fluctuations in either of these currencies may impact the Group’s results. 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. Sensitivity At 30 June 2018, had the Australian Dollar weakened/ strengthened by 10% against the NZ Dollar or the Philippine Peso with all other variables held constant, the impact for the year would have been immaterial to both profit for the year and equity. (ii) Cash flow and fair value 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 interest rate risk arises from long‑term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. During 2018 and 2017, the Group borrowings at variable rates were denominated in Australian Dollars only. 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 Group analyses interest rate exposure in the context of current economic conditions. Management monitors 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. The Board of Directors have authorised the use of interest rate swaps as a tool for managing interest rate risk within the Group. At 30 June 2018, the Group has no remaining interest rate swap arrangement, as outlined below. On 9 February 2015, the Company confirmed an interest rate swap transaction for a notional amount of $20m at a fixed rate of 1.86% per annum effective as at 9 February 2015 and terminated as at 9 February 2018. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 45 2 Financial risk management (continued) (a) Market risk (continued) As at the reporting date, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: Consolidated Borrowings Bank overdraft Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 30 June 2018 30 June 2017 Weighted average interest rate % 3.4% 6.7% – Weighted average interest rate % 2.7% – 3.3% Balance $’000 131,900 2,601 – 134,501 Balance $’000 123,200 – (20,000) 103,200 Sensitivity At 30 June 2018, 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 $236,000 lower/higher (2017 – change of 25 bps: $181,000 lower/higher), mainly as a result of higher/lower interest expense from net borrowings. Other components of equity would have been $236,000 lower/higher (2017 – $181,000 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. The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk. Consolidated 30 June 2018 Financial liabilities Borrowings Bank Overdraft Total increase / (decrease) in financial liabilities Consolidated 30 June 2017 Financial liabilities Borrowings Bank Overdraft Total increase / (decrease) in financial liabilities Carrying amount $’000 6 131,900 2,601 Carrying amount $’000 180 103,200 – Interest rate risk –25 bps +25 bps Profit $’000 – 231 5 236 Equity $’000 – 231 5 236 Profit $’000 (–) (231) (5) (236) Equity $’000 (–) (231) (5) (236) Interest rate risk –25 bps +25 bps Profit $’000 Equity $’000 Profit $’000 Equity $’000 – 181 – 181 – 181 – 181 (–) (181) – (181) (–) (181) – (181) Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 46 2 Financial risk management (continued) (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from cash and cash equivalents, as well as credit exposures to clients, including outstanding receivables and committed transactions. The carrying amount of financial assets represents the maximum credit exposure. Cash and cash equivalents Receivables Purchased debt ledgers Other current assets Total financial assets 30 June 2018 $’000 509 20,880 311,855 1,594 30 June 2017 $’000 1,151 12,566 283,653 1,225 334,838 298,595 Credit risk in relation to PDLs is managed via managements’ approach in determining the initial purchase price to pay for a portfolio of debt. At acquisition, the PDL is initially recognised at fair value at a portfolio level, being the transaction price and thereafter at amortised cost, less any impairment losses. Most PDLs, by their nature are impaired on acquisition which is reflected in the fair value at acquisition. Amortised cost is measured as the present value of forecast future of cash flows using the effective interest rate method. The effective interest rate is calculated on initial recognition and reflects a constant periodic return on the carrying value of the loans. Management continuously monitor cash flows and the carrying value of the PDLs. An impairment is assessed on a regular basis by management and is identified on a portfolio basis following evidence that the PDL is impaired. An impairment is recognised where actual performance and re‑forecast future cash flows deviate to below the initial effective interest rate. During the year ended 30 June 2018, no impairment charge was recognised (30 June 2017: nil) as future cash flows remain at a rate above the initial effective interest rate. All income from the recovery of PDLs has been recognised as interest. Ongoing credit risk is managed through the application of a valuation model, which forecasts recoverability based on the historical experience of the company based on metrics such as debt type, age, and customer status. The Group has no significant concentrations of trade credit risk. The Group has policies in place to ensure that services are made to customers with an appropriate credit history. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. Refer to Note 9 for further details. (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due. 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 (comprising the undrawn borrowing facilities below) and cash and cash equivalents on the basis of expected cash flow. Cash flows 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 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 2 Financial risk management (continued) (c) Liquidity risk (continued) Financing arrangements The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Term debt facility Group set off 47 Consolidated 30 June 2018 $’000 43,100 10,408 30 June 2017 $’000 1,800 12,500 The group set off can be drawn upon at any time and the term debt option can be drawn upon within 2 days. The group set off is repayable on demand, and the term debt is repayable at the end of the term. The facility, which was syndicated in January 2014 and December 2017, was subject to meeting a number of financial undertakings. 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 are set out in Note 17. Maturities of financial liabilities 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. Contractual maturities of financial liabilities At 30 June 2018 Non-derivatives Non‑interest bearing Fixed rate Variable rate Total non-derivatives At 30 June 2017 Non-derivatives Non‑interest bearing Variable rate Total non-derivatives Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 14,404 2,601 – 17,005 – – – – – – 6 6 – – 131,900 131,900 Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 – – – – 14,404 2,601 131,906 148,911 Over 5 years $’000 Total contractual cash flows $’000 10,937 – 10,937 – 180 180 – – – – 123,200 123,200 – – – 10,937 123,380 134,317 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information (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 judgment is applied in determining the key assumptions used in the calculation of long service leave at balance date, including future increases in wages and salaries, future on‑cost rates, discount rates, and experience of employee departures and period of service. (ii) Useful lives of property, plant and equipment, and intangible assets other than goodwill The Group’s management determines the estimated useful lives and related depreciation and amortisation 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. 48 Critical accounting estimates and judgements 3 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, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill Annually the Group tests whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 1(p). The recoverable amounts of cash‑generating units have been determined based on value‑in‑use calculations. These calculations require the use of assumptions. Refer to Note 13 for details of these assumptions and the potential impact of changes to the assumptions. (ii) PDLs PDLs are initially recognised at fair value plus any directly attributable acquisition costs. Subsequent to initial recognition, PDLs are measured at amortised cost using the effective interest method, less any impairment losses. Management continue to monitor the performance and key estimates used in determining whether any objective evidence exists that a PDL may be impaired. This includes: – re‑forecasting expected future cash flows every six months. An impairment is recognised where actual performance and re‑forecast future cash flows deviate to below the initial effective interest rate. Refer to Note 10 for further details. – regular assessment of the estimated forecast amortisation rate applied to PDLs. For the year ended 30 June 2018, the company has estimated that PDLs amortise at a rate of 46 percent per annum (30 June 2017: 43%). (iii) Estimated impairment of non-financial assets and intangible assets other than goodwill Annually 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 49 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. The consolidated entity is organised on a global basis into the following divisions by product and service type. Collection Services The earning of commissions on the collection of debts for clients. Purchased Debt Ledgers The collection of debts from client ledgers acquired by the Group. All other segments All other segments includes unallocated revenue and expenses, intersegment eliminations, interest, borrowings, and income tax expenses. (b) Segment information provided to the Board 2018 Segment revenue Sales to external customers Intersegment sales Total sales revenue Interest and other income Total segment revenue Segment result Segment result Interest expense and borrowing costs Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets Segment liabilities Other segment information Collection services $’000 Purchased debt ledgers $’000 All other segments $’000 Consolidated $’000 68,652 386 69,038 – 69,038 106 – 106 74,896 75,002 12,564 36,695 – (177) (177) – 68,758 209 68,967 74,896 (177) 143,863 (5,887) (5,778) (11,471) 43,372 (5,778) 37,594 (11,471) 26,123 198,673 28,468 319,828 151,356 (146,410) 372,091 (14,311) 165,513 Acquisitions of property, plant and equipment, intangibles and other non‑current segment assets 1,208 83,047 – Total acquisitions Depreciation and amortisation expense Total depreciation and amortisation Other non‑cash expenses 3,162 1,383 275 451 51,920 1,071 53,442 84,255 84,255 4,820 4,820 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 50 4 Segment information (continued) (b) Segment information provided to the Board (continued) 2017 Segment revenue Sales to external customers Intersegment sales Total sales revenue Interest and other income Total segment revenue Segment result Segment result Interest expense and borrowing costs Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets Segment liabilities Other segment information Collection services (restated) $’000 Purchased debt ledgers (restated) $’000 All other segments $’000 Consolidated $’000 67,879 347 68,226 – 68,226 250 – 250 64,794 65,044 12,895 26,723 – 149 149 – 149 (8,505) (5,362) (8,365) 68,129 496 68,625 64,794 133,419 31,113 (5,362) 25,751 (8,365) 17,386 186,993 285,984 (133,998) 27,670 134,776 (12,101) 338,979 150,345 Acquisitions of property, plant and equipment, intangibles and other non‑current segment assets 3,912 60,914 – Total acquisitions Depreciation and amortisation expense Total depreciation and amortisation Other non‑cash expenses 2,379 988 942 212 39,539 2,389 64,826 64,826 4,309 4,309 42,140 The ThinkMe Finance (financing broking) and Safe Horizons (financial hardship services) business have been reclassified from Collection Services to the Purchase Debt Ledger segment during the period, with comparatives re‑stated above. (c) Geographical information The consolidated entity operates in two main geographical areas, Australia and New Zealand. Segment revenues from sales to external customers Segment assets Acquisitions of property, plant and equipment, intangibles and other non-current segment assets 30 June 2018 $’000 30 June 2017 $’000 30 June 2018 $’000 30 June 2017 $’000 138,484 128,534 360,092 327,681 5,037 209 4,375 15 9,822 2,177 9,450 1,847 30 June 2018 $’000 81,796 2,459 – 30 June 2017 $’000 64,786 40 – 143,730 132,924 372,091 338,978 84,255 64,826 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 51 4 Segment information (continued) (c) Geographical information (continued) (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 Collection services Purchased debt ledgers 30 June 2018 % 30 June 2017 % (restated) 30 June 2018 % 30 June 2017 % (restated) Margin on segment revenue 18 19 49 41 (d) Other segment information Sales between segments are carried out at arm’s 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. 5 Revenue Interest income Commission Gain on sale of PDLs Call option income Other revenue Consolidated 30 June 2018 $’000 58,935 68,637 10,119 5,645 527 30 June 2017 $’000 62,831 68,246 – 1,963 379 Revenue from continuing operations 143,863 133,419 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 52 6 Expenses 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 Total depreciation and amortisation Write off of assets (included in other expenses) Intangible assets Plant and equipment Leasehold improvements Total write off of assets Finance expenses Interest and finance charges paid/payable Amount capitalised (a) Finance costs expensed Rental expense relating to operating leases Minimum lease payments Total rental expense relating to operating leases Restructuring expenses Restructure costs Total restructuring expenses Consolidated 30 June 2018 $’000 30 June 2017 $’000 897 897 861 861 3,018 2,674 497 38 370 3,923 4,820 211 – – 211 5,798 (20) 5,778 7,666 7,666 1,082 1,082 338 38 398 3,448 4,309 1,810 (18) – 1,792 5,459 (97) 5,362 8,273 8,273 196 196 (a) Capitalised borrowing costs 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 3.0% (2017 – 4.0%). Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 7 Income tax expense 53 Consolidated 30 June 2018 $’000 30 June 2017 $’000 (a) Income tax expense Income tax expense – Profit from continuing operations 11,471 8,365 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 18) (Decrease) increase in deferred tax liabilities (Note 18) (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% (2017 – 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 11,815 (523) 179 11,471 (277) (246) (523) 8,288 761 (684) 8,365 435 326 761 37,594 11,278 25,751 7,725 228 (10) (51) 11,445 26 11,471 11,471 31 (7) – 7,749 616 616 8,365 8 Cash and cash equivalents (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: Bank Overdraft Cash at bank and on hand Balances per statement of cash flows Consolidated 30 June 2018 $’000 (2,601) 509 (2,092) 30 June 2017 $’000 – 1,151 1,151 (b) 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 54 9 Trade and other receivables Current Net trade receivables Trade receivables Provision for impairment of receivables (a) Accrued revenue Other assets Prepaid expenses Non-current Prepaid expenses Consolidated 30 June 2018 $’000 30 June 2017 $’000 12,253 (163) 12,090 4,752 869 2,671 20,382 498 20,880 5,804 (81) 5,723 3,512 414 1,539 11,188 1,378 1,378 Impaired trade receivables (a) As at 30 June 2018 current trade receivables of the Group with a value of $241,000 (2017 – $212,000) were assessed as potentially impaired. The amount of the provision was $163,000 (2017 – $81,000). 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: 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 2018 $’000 30 June 2017 $’000 241 241 212 212 Consolidated 30 June 2018 $’000 30 June 2017 $’000 81 449 (95) (272) 163 93 81 – (93) 81 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 55 9 Trade and other receivables (continued) (b) Past due but not impaired As at 30 June 2018, trade receivables of the Group of $2,109,000 (2017 – $1,786,000) 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 10 Purchased debt ledgers Current Non‑current Consolidated 30 June 2018 $’000 1,383 726 2,109 30 June 2017 $’000 1,557 229 1,786 Consolidated 30 June 2018 $’000 52,663 259,192 311,855 30 June 2017 $’000 47,334 236,319 283,653 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. 11 Other current assets Other deposits Legal and court costs capitalised – net Consolidated 30 June 2018 $’000 42 1,552 1,594 30 June 2017 $’000 21 1,204 1,225 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 56 12 Property, plant and equipment At 1 July 2016 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2017 Opening net book amount Additions Disposals Depreciation charge Transfers Closing net book amount At 30 June 2017 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2018 Opening net book amount Additions Disposals Depreciation charge Transfers Closing net book amount At 30 June 2018 Cost or fair value Accumulated depreciation Net book amount Plant and equipment $’000 Leasehold improvements $’000 Leased plant and equipment $’000 Work-in- progress $’000 9,450 (7,121) 2,329 5,161 (3,774) 1,387 2,329 1,387 291 (696) (505) 57 1,476 9,115 (7,639) 1,476 12 – (356) 10 1,053 5,183 (4,130) 1,053 – – – – – – – – – – – – 561 – 561 561 122 – – (150) 533 533 – 533 Plant and equipment $’000 Leasehold improvements $’000 Leased plant and equipment $’000 Work-in- progress $’000 Total $’000 15,172 (10,895) 4,277 4,277 425 (696) (861) (83) 3,062 14,831 (11,769) 3,062 Total $’000 1,476 1,053 44 (1) (571) – 948 9,158 (8,210) 948 2 (8) (325) – 722 5,177 (4,455) 722 – – – – – – – – – 533 3,062 – – – (119) 414 414 – 414 51 (9) (901) (119) 2,084 14,754 (12,670) 2,084 (a) Non-current assets pledged as security Refer to Note 17 for information on non‑current assets pledged as security by the Group. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 57 Goodwill $’000 Computer software $’000 Customer contracts $’000 Other intangible assets $’000 Work-in- progress – cost* $’000 Total $’000 13 Intangible assets At 1 July 2016 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2017 Opening net book amount Exchange differences Additions – internal development Amortisation charge Impairment charge Disposals Transfers 23,490 22,060 2,487 (3,763) 19,727 (8,635) 13,425 (842) 1,645 19,727 13,425 1,645 – 1,880 (2,674) (393) (10) 1,375 13,603 – – (338) – – – 1,307 Closing net book amount 19,727 At 30 June 2017 Cost Accumulated amortisation and impairment Net book amount 23,490 25,305 2,487 (3,763) 19,727 (11,702) 13,603 (1,180) 1,307 Year ended 30 June 2018 Opening net book amount Exchange differences Additions – internal development Amortisation charge Impairment charge Disposals Transfers 19,727 13,603 1,307 – 125 – – (3,018) (497) – – 2,096 12,806 – – – 810 Closing net book amount 19,722 At 30 June 2018 Cost Accumulated amortisation and impairment Net book amount 23,490 27,526 2.487 (3,768) 19,722 (14,720) 12,806 (1,677) 810 – – – – – – (5) – – – – – 184 (95) 89 89 – – (38) – – – 51 184 (133) 51 2,478 50,699 – 2,478 2,478 – 1,998 – (1,417) – (1,411) 1,648 (13,335) 37,364 37,364 – 3,878 (3,050) (1,810) (10) (36) 36,336 1,648 53,114 – 1,648 (16,778) 36,336 Total $’000 36,336 (5) 1,281 (3,553) (124) (13) 119 34,041 1,648 – 1,156 – (124) – (1,977) 703 827 54,501 (124) 703 (20,460) 34,041 51 – – (38) – (13) – 0 171 (171) – Goodwill $’000 Computer software $’000 Customer contracts $’000 Other intangible assets $’000 Work-in- progress – cost* $’000 * Work‑in‑progress includes capitalised development costs of an internally generated intangible asset which is under development. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 58 13 Intangible assets (continued) (a) Impairment tests for goodwill All goodwill is allocated to the Company’s Collection Services cash‑generating unit (CGU). The recoverable amount of the 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, and include a terminal value calculation. The growth rate does not exceed the long‑term average growth rate for the business in which the CGU operates. (b) Key assumptions used for value-in-use calculations CGU Growth rate (revenue) Growth rate (expenses) Discount rate * 30 June 2018 % 30 June 2017 % 30 June 2018 % 30 June 2017 % 30 June 2018 % 30 June 2017 % Collection services 5.00 5.00 3.00 3.00 12.70 12.70 * In performing the value‑in‑use calculation, the Group has applied the post‑tax (2017: pre‑tax) discount weighted average cost of capital to discount the forecast future attributable post tax (2017: pre‑tax) cash flows. Impairment charge (c) 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 (2017: Nil). (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, and as such there is no reasonably possible change in key assumptions that would give rise to an impairment. 14 Trade and other payables Trade payables Accrued expenses Other payables Consolidated 30 June 2018 $’000 6,623 5,944 1,837 14,404 30 June 2017 $’000 3,928 5,259 1,750 10,937 Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 15 Provisions Current Employee benefits Make good Fringe benefits tax Non-current Employee benefits 59 Consolidated 30 June 2018 $’000 30 June 2017 $’000 2,715 570 5 3,290 190 190 2,814 570 47 3,431 224 224 (a) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: 2018 Current Carrying amount at start of year – additional provisions recognised – payments / other sacrifices of economic benefits Carrying amount at end of year 2017 Current Carrying amount at start of year – additional provisions recognised – payments / other sacrifices of economic benefits Carrying amount at end of year Make good $’000 Fringe benefits tax $’000 570 – – 570 1,105 – (535) 570 47 149 (191) 5 66 217 (236) 47 (b) Superannuation plans 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 60 16 Other financial liabilities Current Contingent consideration Finance lease liabilities Lease incentive liabilities Other current financial liabilities Non-current Finance lease liabilities Lease incentive liabilities Other non‑current financial liabilities 17 Borrowings Secured Bank loans Total secured non‑current borrowings (a) Secured liabilities and assets pledged as security The total secured liabilities are as follows: Bank loans Total secured liabilities Consolidated 30 June 2018 $’000 30 June 2017 $’000 – 6 572 2,082 2,660 – 5,197 814 6,011 – 175 572 1,659 2,406 5 4,459 3,061 7,525 Consolidated 30 June 2018 $’000 30 June 2017 $’000 131,900 131,900 123,200 123,200 Consolidated 30 June 2018 $’000 30 June 2017 $’000 131,900 131,900 123,200 123,200 All bank loans are denominated in Australian dollars and are secured by a fixed and floating charge over all of the assets and any uncalled capital of the parent entity and of its Australian‑owned entities. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 17 Borrowings (continued) (a) Secured liabilities and assets pledged as security (continued) The carrying amounts of assets pledged as security for borrowings are: Current Floating charge Cash and cash equivalents Receivables Purchased debt ledgers Total current assets pledged as security Non-current Floating charge Receivables Purchased debt ledgers Plant and equipment Total non‑current assets pledged as security Total assets pledged as security 61 Consolidated 30 June 2018 $’000 30 June 2017 $’000 Notes 8 9 10 9 10 12 509 20,382 52,293 73,184 1,151 11,188 47,334 59,673 498 1,378 259,562 236,319 2,203 262,263 335,447 3,062 240,759 300,432 (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 loans 30 June 2018 30 June 2017 Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 131,900 131,900 131,900 131,900 123,200 123,200 123,200 123,200 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 repriced 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, as it is not due for renewal until January 2020. (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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 62 18 Deferred tax balances (a) Deferred tax assets The balance comprises temporary differences attributable to: Tax losses Provisions and employee benefits Lease incentives Accruals Unearned revenue Doubtful debts Future deductible windup costs Other Set‑off of deferred tax liabilities pursuant to set‑off provisions (b) Net deferred tax assets Movements: Opening balance at 1 July Credited / (charged) to the income statement (Note 7) Closing balance at 30 June Movements – Consolidated At 30 June 2016 – to profit or loss At 30 June 2017 Movements – Consolidated At 30 June 2017 – to profit or loss At 30 June 2018 Tax losses $’000 506 (316) 190 Tax losses $’000 190 (117) 73 Provisions and employee benefits $’000 Lease incentive $’000 Accruals $’000 Unearned revenue $’000 Doubtful debts $’000 Future deductible windup costs $’000 1,403 (218) 1,185 1,214 295 1,509 88 (41) 47 29 (29) – 28 (4) 24 3 (1) 2 Provisions and employee benefits $’000 Lease incentive $’000 Accruals $’000 Unearned revenue $’000 Doubtful debts $’000 Future deductible windup costs $’000 1,185 171 1,356 1,509 222 1,731 47 33 80 – – – 24 25 49 2 (2) – Other $’000 19 (5) 14 Other $’000 14 (55) (41) Consolidated 30 June 2018 $’000 30 June 2017 $’000 73 1,356 1,731 80 – 49 – (41) 3,248 (3,248) – 2,971 277 3,248 190 1,185 1,509 47 – 24 2 14 2,971 (2,971) – 3,290 (319) 2,971 Total $’000 3,290 (319) 2,971 Total $’000 2,971 277 3,248 Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 18 Deferred tax balances (continued) (b) Deferred tax liabilities 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 (a) Net deferred tax liabilities 63 Consolidated 30 June 2018 $’000 30 June 2017 $’000 3,115 743 6 – 3,864 3,864 (3,248) 616 3,451 653 6 – 4,110 4,110 (2,971) 1,139 Consolidated 30 June 2018 $’000 30 June 2017 $’000 Movements: Opening balance at 1 July Charged / (credited) to the income statement (Note 7) Closing balance at 30 June 4,110 (246) 3,864 Movements – Consolidated At 30 June 2016 – to profit or loss At 30 June 2017 Movements – Consolidated At 30 June 2017 – to profit or loss At 30 June 2018 Property, plant and equipment $’000 Purchased debt $’000 3,044 407 3,451 605 48 653 Property, plant and equipment $’000 Purchased debt $’000 3,451 (336) 3,115 653 90 743 Prepayments $’000 Other $’000 6 – 6 13 (13) – Prepayments $’000 Other $’000 6 – 6 – – – 3,668 442 4,110 Total $’000 3,668 442 4,110 Total $’000 4,110 (246) 3,864 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 64 19 Contributed equity (a) Share capital Ordinary shares – fully paid Treasury shares Total contributed equity Company Company 2018 Shares 2017 Shares 2018 $’000 2017 $’000 137,152,058 135,889,764 114,195 (354,286) (412,833) (468) 136,797,772 135,476,931 113,727 112,614 (535) 112,079 (b) Movements in ordinary share capital Issues of ordinary shares during the year Date 1 July 2016 Details Opening balance 21 October 2016 Dividend reinvestment plan issues Less: Transaction costs arising on share issues 30 June 2017 1 July 2017 Closing balance Opening balance 21 October 2017 Dividend reinvestment plan issues Less: Transaction costs arising on share issues Number of shares $’000 134,489,172 111,006 1,400,592 – 135,889,764 135,889,764 1,262,294 – 1,617 (9) 112,614 112,614 1,589 (8) 30 June 2018 Closing balance 137,152,058 114,195 (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) Treasury shares When share capital recognised as equity is repurchased or held by employee share plans and subject to vesting conditions, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity. (e) 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 2.5% discount to the market price. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 65 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. The financing facility includes all funding provided by the Group’s main bankers. Details of financing facilities are set out in 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 2018 and 2017 financial years. 19 Contributed equity (continued) (f) Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in Note 29. (g) Performance rights 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 29. (h) 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 cash flow, 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 66 20 Reserves and retained earnings (a) Reserves Share‑based payments reserve Foreign currency translation reserve Movements: Share-based payments reserve Balance 1 July Rights expense Balance 30 June Movements: Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Balance 30 June (b) Retained earnings Movements in retained earnings were as follows: Balance 1 July Net profit for the year Dividends Balance 30 June (c) Nature and purpose of reserves Consolidated 30 June 2018 $’000 1,622 (1,465) 157 30 June 2017 $’000 773 (1,388) (615) Consolidated 30 June 2018 $’000 30 June 2017 $’000 773 849 1,622 191 582 773 Consolidated 30 June 2018 $’000 30 June 2017 $’000 (1,388) (77) (1,465) (1,220) (168) (1,388) Consolidated 30 June 2018 $’000 77,169 26,123 (10,599) 92,693 30 June 2017 $’000 70,328 17,386 (10,545) 77,169 (i) Share-based payments reserve The share based payments reserve is used to recognise the fair value of performance rights issued to employees that have not yet vested, or those that have vested at year end but not yet been issued as shares. (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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 21 Dividends (a) Ordinary shares Fully franked final dividend for the year ended 30 June 2017 – 3.9 cents per share (2016 – 3.9 cents) Fully franked interim dividend for the year ended 30 June 2018 – 3.9 cents per share (2017 – 3.9 cents) Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 30 June 2017 and 2016 were as follows: Paid in cash Satisfied under the Dividend Reinvestment Plan (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 3.9 cents per fully paid ordinary share (2017 – 3.9 cents, fully franked). The aggregate amount of the proposed dividend expected to be paid on 26 October 2018 out of retained profits and a positive net balance sheet at 30 June 2018, but not recognised as a liability at year end, is 67 Consolidated 30 June 2018 $’000 30 June 2017 $’000 5,300 5,245 5,299 10,599 5,300 10,545 9,018 1,581 10,599 8,928 1,617 10,545 5,349 5,349 5,300 5,300 (c) Franked dividends The franked portions of the final dividends recommended after 30 June 2018 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 2018. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2018 and will be recognised in subsequent financial reports. Franking credits available for subsequent financial years based on a tax rate of 30% (2017 – 30%) Consolidated 30 June 2018 $’000 42,083 42,083 30 June 2017 $’000 37,375 37,375 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) (b) (c) (d) franking credits that will arise from the payment of the amount of the provision for income tax; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date; and 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. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 68 22 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: Audit and review services (a) Auditors of the Company – KPMG Audit and review of the financial statements Other regulatory audit services Total auditors’ remuneration (b) Other auditors Audit and review of the financial statements Total auditors’ remuneration Other services Auditors of the Company – KPMG In relation to accounting advice In relation to taxation services Consolidated 30 June 2018 $ 30 June 2017 $ 263,465 68,470 331,935 212,400 70,700 283,100 3,898 3,898 3,794 3,794 62,962 200,393 263,355 32,800 145,500 178,300 23 Contingencies (a) Contingent liabilities The Group had contingent liabilities at 30 June 2018 in respect of: Claims There were no claims of a material nature during the relevant period. Purchase Agreement with Put & Call Option with Insolve Capital Australia Pty Ltd (Balbec Capital LP) (a) The Group had assigned five years’ cash flow to Insolve Capital Australia Pty Ltd (Balbec Capital LP) through a put and call option agreement. (b) The Group has the option to repurchase the residual rights to collect the remaining arrangements at the end of the five‑year agreement, at a market price determined by the performance of the accounts during the term of the agreement. (c) Either party must exercise their option between 1 May 2023 to 3 November 2023. Guarantees (a) Bank Guarantees (secured) exist in respect of satisfactory contract performance in the normal course of business for the Group amounting to $6,032,045 (2017: $6,203,295). During the period, the Group replaced Bank Guarantees and obtained additional Bank Guarantees to secure our continued performance in the normal course of business resulting in the decrease. (b) Guarantees and Indemnities (secured) given by the Company and certain of its subsidiaries in support of the existing Syndicated Loan 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. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 69 24 Commitments (a) Capital commitments Capital expenditure contracted for in relation to purchased debt commitments at the reporting date but not recognised as liabilities is as follows: Within one year Later than one year, but not later than five years Consolidated 30 June 2018 $’000 32,040 210 32,250 30 June 2017 $’000 36,347 5,000 41,347 (b) Non-cancellable operating leases The Group leases its offices under non‑cancellable operating leases expiring at various times during the next eleven 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 2018 $’000 30 June 2017 $’000 6,684 25,906 20,548 53,138 7,087 25,468 26,192 58,747 (c) Non-cancellable finance leases The Group leases items of plant and equipment and intangibles 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 2018 $’000 30 June 2017 $’000 6 – – – – 6 179 6 – 185 (5) 180 Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 70 25 Related party transactions (a) Group companies Details of the parent company, the ultimate parent company and interests in subsidiaries are set out in Note 27. (b) Key management personnel compensation Short‑term employee benefits Post‑employment benefits Other long‑term benefits Termination benefits Share‑based payments Consolidated 30 June 2018 $’000 30 June 2017 $’000 1,877,336 2,114,386 127,687 58,375 – 173,986 510,573 181,402 605,450 546,432 2,668,848 3,526,779 Detailed remuneration disclosures are provided in sections A‑J of the remuneration report on pages 17 to 28. (c) Other transactions with key management personnel or entities related to them No other transactions were made with 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; and – directors of related parties and their director‑related entities. Transactions There were no transactions with directors of related parties and their director‑related entities. Transactions with wholly owned related parties are eliminated on consolidation. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 26 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 Capital and reserves attributable to owners of Collection House Limited Profit or loss for the year Total comprehensive income 71 Company 30 June 2018 $’000 30 June 2017 $’000 9,334 323,554 332,888 21,552 175,320 196,872 113,727 1,625 20,664 136,016 5,221 5,221 6,962 312,596 319,558 18,393 162,267 180,660 112,079 773 26,045 138,897 17,804 17,804 (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 23. 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 Refer to Note 23 for contingent liabilities entered into by the Group. For information about guarantees given by the parent entity, please see above. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 72 27 Subsidiaries 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 Safe Horizons Pty Ltd (formerly Cashflow Accelerator Pty Ltd) ThinkMe Finance Pty Ltd Collective Learning and Development Pty Ltd CLH Legal Group Pty Ltd Lion Finance Pty Ltd Midstate CreditCollect Pty Ltd CLH Business Services Pty Ltd Collection House Limited Employee Share Plan Trust Controlled entities – incorporated in New Zealand Collection House (NZ) Limited Lion Finance Limited Controlled entities – incorporated in Philippines Collection House International BPO, Inc * 2018 % 2017 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 * 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. 28 Earnings per share (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 Consolidated 30 June 2018 Cents 30 June 2017 Cents 19.2 19.2 18.8 18.8 12.8 12.8 12.6 12.6 Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 28 Earnings per share (continued) (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 earnings per share Diluted earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share (d) Weighted average number of shares used as the denominator 73 Consolidated 30 June 2018 $’000 30 June 2017 $’000 26,123 26,123 26,123 26,123 17,386 17,386 17,386 17,386 Consolidated 30 June 2018 Number 30 June 2017 Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 135,831,985 135,339,625 Adjustments for calculation of diluted earnings per share: Performance Rights Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share (e) Information concerning the classification of securities 3,281,896 2,443,598 139,113,881 137,783,223 (i) 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 100% 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 29. 29 Share-based payments (a) 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), and to eligible employees. Future performance rights may be issued by the Board pursuant to the PRP. The board determines the value of shares granted based on the individual’s performance. Future performance rights may vest at the discretion of the Board, subject to not only individual service conditions being met, but also, Company performance hurdles being achieved. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 74 29 Share-based payments (continued) (a) Performance Rights Plan (continued) During the reporting period ending 30 June 2018, 341,071 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 PR2018. Effective date PR2018 1 July 2017 Earliest possible Vesting date The performance rights cannot vest earlier than the Test Date(1) Performance hurdles based on the satisfactory achievement of performance conditions approved by the Board Performance Conditions % off Pool Compound EPS growth over performance period of: 0% to 5.00% 5.01% to 7.50% 7.51% to 10% More than 10.01% Nil 33.33% 66.66% 100% Performance between 5% to 10% will be assessed on a sliding scale basis up to a maximum of 341,071 shares. Exercise conditions and Vesting Date The Performance Rights Test Date will be 30 June 2020 (Test Date) after which, the Board 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: (a) (b) (c) whether, and to what extent, the Performance Hurdles applicable as at the Test Date have been satisfied; the number of Performance Rights (if any) that will become Vested Performance Rights as at the Test Date; and 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. Exercise price Expiry date Nil 30 September 2020 A Performance Right lapses, to the extent it has not been exercised, on the earlier to 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 2020. 5 Day volume weighted average Share price $1.5404 (1) Test Date: the date at which assessment against the Performance Conditions are made by the Board. For PR2018, the Test Date will be 30 June 2020. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 75 29 Share-based payments (continued) (a) Performance Rights Plan (continued) During the reporting period ending 30 June 2017, 3,747,550 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 PR2017. Effective date PR2017 1 July 2016 Earliest possible Vesting date The performance rights cannot vest earlier than the Test Date(1) Performance hurdles based on the satisfactory achievement of performance conditions approved by the Board Performance Conditions % off Pool Compound EPS growth over performance period of: 0% to 5.00% 5.01% to 7.50% 7.51% to 10% More than 10.01% Nil 33.33% 66.66% 100% Performance between 5% to 10% will be assessed on a sliding scale basis up to a maximum of 3,747,550 shares. Exercise conditions and Vesting Date The Performance Rights Test Date will be 30 June 2019 (Test Date) after which, the Board 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: (d) (e) (f) whether, and to what extent, the Performance Hurdles applicable as at the Test Date have been satisfied; the number of Performance Rights (if any) that will become Vested Performance Rights as at the Test Date; and 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. Exercise price Expiry date Nil 30 September 2019 A Performance Right lapses, to the extent it has not been exercised, on the earlier to occur of: (e) (f) (g) where Performance Hurdles have not been satisfied as at the relevant Test Date; if an eligible employee’s employment with the Company or Related Body Corporate ceases before the Vesting Date; the day the Board makes a determination that the Performance Rights lapses because of breach, fraud or dishonesty; and 5 Day volume weighted average Share price $1.2945 (h) 30 September 2019. (1) Test Date: the date at which assessment against the Performance Conditions are made by the Board. For PR2017, the Test Date will be 30 June 2019. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 76 29 Share-based payments (continued) (a) Performance Rights Plan (continued) During the reporting period ending 30 June 2016, 467,365 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 PR2016. Effective date PR2016 1 July 2015 Earliest possible Vesting date The performance rights cannot vest earlier than the Test Date(1) Performance hurdles based on the satisfactory achievement of performance conditions approved by the Board Performance Conditions % off Pool Average compound EPS growth over performance period of at least 5% Additional amount capable of vesting on a sliding scale capped at 10% average compound EPS growth Total 50% 50% 100% Exercise conditions and Vesting Date The Performance Rights Test Date will be 30 June 2018 (Test Date) after which, the Board 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: (g) (h) (i) whether, and to what extent, the Performance Hurdles applicable as at the Test Date have been satisfied; the number of Performance Rights (if any) that will become Vested Performance Rights as at the Test Date; and 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. Exercise price Expiry date Nil 30 September 2018 A Performance Right lapses, to the extent it has not been exercised, on the earlier to occur of: (i) ( j) (k) where Performance Hurdles have not been satisfied as at the relevant Test Date; if an eligible employee’s employment with the Company or Related Body Corporate ceases before the Vesting Date; the day the Board makes a determination that the Performance Rights lapses because of breach, fraud or dishonesty; and (l) 30 September 2018. 5 Day volume weighted average Share price $2.2152 (1) Test Date: the date at which assessment against the Performance Conditions are made by the Board. For PR2016, the Test Date will be 30 June 2018. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued 77 29 Share-based payments (continued) (a) Performance Rights Plan (continued) Set out below are summaries of rights issued under the plan: Effective Date Expiry date Company – 2018 Exercise price Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Vested and issuable at end of the year Number Number Number Number Number Number 1 July 2016 30 September 2019 1 July 2017 30 September 2020 Nil Nil 3,260,657 – – 341,071 Total 3,260,657 341,071 – – – 47,524 3,213,133 – 341,071 47,524 3,554,204 – – Effective Date Expiry date Exercise price Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Vested and issuable at end of the year Number Number Number Number Number Number Company – 2017 1 July 2014 30 September 2017 1 July 2015 30 September 2018 1 July 2016 30 September 2019 Nil Nil Nil Total 556,010 380,452 – – – 3,621,810 936,462 3,621,810 – – – – 556,010 380,452 – – 361,153 3,260,657 1,297,615 3,260,657 – – – – Fair Value of Performance Rights Issued 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. (b) Deferred Shares – CEO short-term incentive scheme Under the Group’s short‑term incentive (STI) scheme, the CEO is entitled to receive 60% of his annual STI achieved in cash, and 40% in the form of rights to deferred shares of Collection House Limited, issuable at the end of his contract period, subject to him being employed by the Group at the end of the contract period. The rights will automatically convert into one ordinary share each on vesting, at an exercise price of nil. The CEO will not receive dividends, or be entitled to vote in relation to the deferred shares during the vesting period. IF the CEO ceases to be employed by the Group within this period, the rights will be forfeited, except in limited circumstances that may be approved by the Board at their discretion. The number of rights to be granted is determined based on the amount of the STI awarded divided by the weighted average price at which the Company’s shares are traded on the Australian Securities Exchange over the five trading days preceding the date of issue. The maximum value of deferred shares issuable in relation to 30 June 2018 was $144,468. The Board has determined that the CEO is entitled to 80% of the maximum value, and shares to the value of $115,574 will be issuable at the end of the CEO’s employment contract. (c) Employee Share Plan Last year, the Group introduced the Collection House Limited Exempt Employee Share Plan, providing eligible employees with an opportunity to acquire a beneficial ownership of shares in the Company. The Plan is administered by CPU Share Plans Pty Limited. This Trust is consolidated in accordance with Note 1 (b) and Note 27. All Australian and New Zealand resident employees were entitled to participate in the Plan subject to meeting certain eligibility criteria. Employees eligible to participate in the Group’s Performance Rights Plans detailed at (a) above where not eligible to participate in the Plan. Eligible employees may elect not to participate in the Plan. Shares issued by the Trust to employees are acquired on‑market prior to issue. Shares held by the Trust and not yet issued to employees at the end of the reporting period are shown as treasury shares in the financial statements (refer Note 19). Under the Plan, eligible employees may be granted up to $1,000 worth of fully paid ordinary shares in Collection House Limited annually for no cash consideration. The number of shares issued to participants is the offer amount divided by the average price of the shares acquired on the Australian Securities Exchange during the on‑market purchase period. The shares are recognised at the closing share price on the grant date, as an issue of treasury shares, and as part of employee benefit costs in the period the shares are granted. Collection House Limited Annual Report 2018 Notes to the Financial StatementscontinuedOverview Corporate Governance Financial Report Additional Information 78 29 Share-based payments (continued) (c) Employee Share Plan (continued) Shares issued under the scheme may not be sold until the earlier of three years after issue, or cessation of employment by the Group. In all other respects, shares rank equally with other fully paid ordinary shares on issue. The total number of shares granted to participating employees on 26 September 2017 was 177,832. The average market price of the shares issued was $1.20, and the shares had a grant date fair value of $1.33. (d) 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: Performance rights plan Deferred shares – CEO short‑term incentive Employee share plan Total expenses arising from share‑based payment transactions 30 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Amortisation of purchased debt ledgers Asset write offs Non‑cash employee benefits expense – share‑based payments Provision for doubtful debts 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 2018 $’000 30 June 2017 $’000 599 80 237 916 313 106 194 613 Consolidated 30 June 2018 $’000 26,123 7,439 51,807 211 916 83 124 1,452 4,326 (1,913) (6,638) (2,988) 2,695 533 2,211 (518) 30 June 2017 $’000 17,386 6,759 39,576 1,800 613 (12) 1,649 1,323 4,039 (1,002) 480 (2,567) (3,126) (2,815) (2,839) 761 85,863 62,025 31 Events occurring after the reporting period (a) Dividend A fully franked final dividend of 3.9 cents, totalling $5,349 million, has been declared, payable on 26 October 2018. No provision has been raised in these accounts for this amount. Collection House Limited Annual Report 2018 Notes to the Financial Statementscontinued Directors’ Declaration 79 In the directors’ opinion: (a) the financial statements and notes set out on pages 31 to 78 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 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. Leigh Berkley Chairman Brisbane 23 August 2018 Collection House Limited Annual Report 2018 for the year ended 30 June 2018Overview Corporate Governance Financial Report Additional Information 80 Independent Auditor’s Report to the Members Independent Auditor’s Report To the shareholders of Collection House Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Collection House Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Group's financial position as at 30 June 2018 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Consolidated Balance Sheet as at 30 June 2018; • Consolidated Income statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, and Consolidated Statement of Cash Flows for the year then ended; • Notes including a summary of significant accounting policies; and • Directors' Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: • • Value of the Purchased Debt Ledger portfolio Value of intangible computer software Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 81 Liability limited by a scheme approved under Professional Standards Legislation. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Collection House Limited Annual Report 2018 81 Value of the Purchased Debt Ledger portfolio ($311,855,000) Refer to Note 10 – Purchased Debt Ledgers The key audit matter How the matter was addressed in our audit Working with our valuation and modelling specialists, our audit procedures included: • Challenging assumptions used by the Group in – – determining the value of the PDL portfolio, with a view to identifying areas of management bias. Our challenge of key assumptions was based on: – the accuracy of previous estimates applied by the Group in the PDL model, including debt collection forecasting, effective interest rate, amortisation rate, and estimated PDL life, when compared to actual historical data; identify unusual ratios and trends in key estimates when compared to historical, current and forecast economic conditions; analysing the effective interest rate applied by the Group through reassessing the effective interest rate of a selection of PDLs; assessing the amortisation rate and forecast collection estimates by performing ratio analysis and stress testing. validating, where appropriate, key assumptions to industry peers For a sample of PDLs, compared their classification type to the underlying account history and characteristics. Testing key internal controls in the debt collection process, including the collection call centre process and related information technology system controls. – – • • The Purchased Debt Ledgers (PDLs) portfolio recognised by the Group consists of a portfolio of credit impaired receivables. We consider this a key audit matter given the: • significance of the PDLs to the Company’s financial position; • • valuation of PDLs is a complex area and we are required to exercise a high level of judgement in considering the recoverability of the carrying value of PDLs; and the company has invested considerable time and effort in developing a new PDL impairment model during the year. The Group utilises a PDL impairment model for the purpose of calculating the present value of the PDLs. Under AASB 139 Financial Instruments: Recognition and Measurement a PDL is considered to be impaired if the carrying value of the PDL exceeds the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. The PDL impairment model incorporates a number of judgements such as the following specific recoverability characteristics of PDLs: • age and type of debt (i.e utilities, credit card, personal loan); • • • payment history and current status of customers; historical debt collection statistics, effective interest rate and amortisation rate; future collection estimates generated using a combination of both internal and external information; and estimated term to maturity. • We focused on the significant forward-looking assumptions applied in the impairment model, including the Group’s assumptions at which expected cash flows will be recovered from customers, the “amortisation rate” and implicit interest rate (“effective interest rate”). We involved our specialists in the areas of valuation, model development and integrity and senior audit team members with the assessment of this Key Audit Matter. 82 Collection House Limited Annual Report 2018 Independent Auditor’s ReportcontinuedOverview Corporate Governance Financial Report Additional Information 82 Value of intangible computer software ($12,806,000) Refer to Note 13 – Intangible Assets The key audit matter How the matter was addressed in our audit Our audit procedures included: • • Evaluating the Group’s accounting policy to recognise and capitalise software development costs using the criteria in accounting standard. Testing key internal controls to assess the Group’s compliance with the accounting policy. This included testing the Group’s review and authorisation of internal and external costs to be capitalised to an in-house software development project. • Assessing the Group’s compliance with the accounting policy for a sample of the costs capitalised during the period. For this sample we also challenged the Group on the nature and appropriateness of the costs capitalised. This included testing costs capitalised back to underlying documentation, such as payroll records for employee wages and invoices for external costs. • Challenging the reasonableness of the remaining useful lives of software developments through enquiry and assessment of the Group’s strategies to determine their future application and usage. • Assessing the adequacy of the Group’s disclosures in relation to Software costs and the current year amortisation and write-offs. • Including the value of Intangible computer Software in the ‘value in use’ impairment testing performed. The valuation of Software is a key audit matter due to the: • • significance of Software carried on the balance sheet; and nature of Software carried on the balance sheet which comprises predominantly in-house developed Software. Auditing in-house developed software requires a greater level of audit effort to evaluate the Group’s application of the requirements of accounting standard AASB 138 Intangible Assets. We considered compliance with the accounting standards for the following significant assumptions made by the Group: • Capitalisation of relevant costs – The Group’s estimation of the value of intangible computer software is based on actual costs incurred which comprise both external costs and internal staff salary costs. In capitalising these costs, the Group has performed an analysis to determine that the resulting computer software meets the definition of an Intangible asset in accordance with the accounting standards. This assessment is subjective in nature. We specifically focused on the realisation of future economic benefits and the assumptions and methodologies used in recording and capitalising of staff salaries. • Assessment of the software’s expected useful life – After development, the computer software is ‘in-use’, the Group estimates the useful life of the computer software and amortises it over this period. This assessment is based on the intended use of the asset. This can be judgemental and dependent upon future events, including advances in technology. We focused on the evidence for the intended use. We looked for consistency of this with the application of the useful life period, the utilisation of the computer software, and the analysis of impairment indicators performed by the Group 83 Collection House Limited Annual Report 2018 Independent Auditor’s Reportcontinued 83 Other Information Other Information is financial and non-financial information in Collection House Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ Report, including the Remuneration Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • • • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group and Company's ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar1.pdf. This description forms part of our Auditor’s Report. 84 Collection House Limited Annual Report 2018 Independent Auditor’s ReportcontinuedOverview Corporate Governance Financial Report Additional Information 84 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Collection House Limited for the year ended 30 June 2018, complies with Section 300A of the Corporations Act 2001. 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 responsibilities We have audited Sections A to J of the Remuneration Report which is contained in the Directors’ report for the year ended 30 June 2018. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Scott Guse Partner Brisbane 23 August 2018 85 Collection House Limited Annual Report 2018 Independent Auditor’s Reportcontinued Shareholder Information The shareholder information set out below was applicable as at 15 October 2018. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Class of equity security Ordinary shares 1 ‑ 1,000 1,001 ‑ 5,000 5,001 ‑ 10,000 10,001 ‑ 100,000 100,001 and over Total There were 740 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 1. 2. 3. 4. 5. 6. 7. 8. 9. Ankla Pty Ltd HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited Citicorp Nominees Pty Limited National Nominees Limited (DB A/C) Bainpro Nominees Pty Limited BNP Paribas Nominees Pty Ltd (DRP) Ecapital Nominees Pty Limited Skylevi Pty Ltd (Superfun Super Fund A/C) 10. Mr Frederick Benjamin Warmbrand (FB & LJ Warmbrand Super A/C) 11. Bond Street Custodians Ltd (Macquarie Smaller Co’s A/C) 12. Poltick Pty Ltd 13. Sunstar Australia Pty Ltd 14. Durbin Superannuation Pty Ltd (Durbin Family S Fund A/C) 15. Kemp SMSF Pty Ltd (Kemp Super Fund A/C) 16. HSBC Custody Nominees (Australia) Limited – A/C 2 17. BNP Paribas Nominees Pty Ltd (IB AU Noms Retail Client DRP) 18. Rollee Pty Ltd 19. Brispot Nominees Pty Ltd (House Head Nominee A/C) 20. National Nominees Limited (DB A/C) 85 Holders Shares 3,726 7,031 2,357 1,939 2,215,478 19,141,719 17,443,743 44,151,167 79 54,199,951 15,132 137,152,058 Units % of issued capital 1 2 , 7 1 1 , 1 3 4 6,090,000 5,505,511 4,510,693 2,074,903 1,844,665 1,288,885 1,200,000 1,033,951 1,027,632 963,815 932,896 731,777 642,325 600,000 541,050 539,320 500,000 495,602 474,938 9.27 4.44 4.01 3.29 1.51 1.34 0.94 0.87 0.75 0.75 0.70 0.68 0.53 0.47 0.44 0.39 0.39 0.36 0.36 0.35 Total 43,709,097 31.84 Collection House Limited Annual Report 2018 Overview Corporate Governance Financial Report Additional Information 86 B. Equity security holders (continued) Unquoted equity securities Details of these Performance Rights are set out at Note 29 of the financial statements. Effective Date Expiry date Company – 2018 Exercise price Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Vested and issuable at end of the year Number Number Number Number Number Number 1 July 2016 1 July 2017 Total 30 September 2019 30 September 2020 Nil Nil 3,260,657 – – 341,071 3,260,657 341,071 – – – 47,524 3,213,133 – 341,071 47,524 3,554,204 – – – Details of the Indeterminate Rights are set out in page 16 of the financial statements. Mr Anthony Rivas FY2017 FY2018 Total Indeterminate Rights Number held Number of holders 71,409 77,584 148,993 1 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. C. Substantial holders Substantial shareholders of ordinary shares in the Company are set out below: Holder 1. Ankla Pty Ltd, Poltick Pty Ltd, Nowcastle Pty Ltd, Skylevi Pty Ltd (Superfun Superfund), Sunstar Australia Pty Ltd, Mr Lev Mizikovsky, Miss Manlika Winothai, Mr Joseph Kevin Mizikovsky and Izmo Pty Ltd (The Simiz a/c) (combined shareholdings) 2. HSBC Custody Nominees (Australia) Limited Units % of issued capital 15,929,541 6,090,000 11.61 4.44 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) Performance rights No voting rights. Indeterminate rights (c) No voting rights. Collection House Limited Annual Report 2018 Shareholder Information Corporate Directory 87 Directors Leigh Berkley Michael Knox Anthony Rivas Chair (Non‑Executive) (appointed 29 November 2017) Director (Non‑Executive) Managing Director and Chief Executive Officer (Executive) (appointed 24 November 2017) Company Secretary Kristine May Executive Management Team Managing Director and Chief Executive Officer Anthony Rivas Kristine May Chief Financial Officer & Company Secretary Anand Adusumilli Chief Data Scientist (appointed 26 July 2017) Jonathan Idas Chief Legal Officer (appointed 6 September 2017) Main contact Kristine May Company Secretary T: +61 7 3292 1015 E: Kristine.May@collectionhouse.com.au Principal registered office in Australia Level 12, 100 Skyring Terrace Newstead 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 1300 850 505 T: F: +61 7 3237 2152 W: www.computershare.com.au Auditor KPMG 71 Eagle Street Brisbane Qld 4000 Stock exchange listing Collection House Limited shares are listed on the Australian Securities Exchange (ASX). The home exchange is Sydney. ASX code CLH Investor and client presentation The Group’s latest investor and client presentation is available at www.collectionhouse.com.au. Collection House Limited Annual Report 2018 Overview Corporate Governance Financial Report Additional Information HEAD OFFICE: Level 12, 100 Skyring Terrace, Newstead QLD 4006 T: +61 7 3292 1000 | F: +61 7 3832 0222 www.collectionhouse.com.au