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models. Intrum Justitia therefore feels that it has the expertise needed to
evaluate these types of receivables.
Risks are also managed through limits on the scope and structure of purchased
portfolios:
• The Group’s total assets in purchased portfolios may not exceed SEK 1,200 M.
• No single portfolio may account for more than 25 percent of the total value of
the portfolios.
• A maximum of 50 percent of total book value of the portfolios may originate
from any one country.
To facilitate the purchase of larger portfolios at attractive risk levels, Intrum
Justitia cooperates with other companies and shares in the equity investment
and profi ts. To date two such cooperations have been established, with Calyon
Corporate & Investment Bank in 2002 and with Goldman Sachs in 2003.
Guarantees in conjunction with the screening
of credit card applications in Switzerland
As part of its service offering in Switzerland, Intrum Justitia screens new credit
card applications on behalf of card issuers and guarantees payment to the
issuers of the face value of the cardholder’s debt in the event of nonpayment.
The total value of the guaranteed debt amounted to SEK 945.9 M (833.4) at
year-end. The principal risk is associated with credit card debt due for more
than 30 days, which at year-end totaled SEK 12.3 M (9.8).
Intrum Justitia manages risk in this business through the implementation of
strict credit limits on new cards and by an analysis of the credit status of card
applicants. As of December 31, 2005 Intrum Justitia has allocated a provision of
SEK 30.6 M (28.1) in its balance sheet to cover payments that may be required
under the guarantees.
Currency fl uctuations
Intrum Justitia operates in 22 countries. The results and fi nancial position of
subsidiaries are reported in the relevant foreign currencies and later translated
into SEK for inclusion in the consolidated fi nancial statements. Consequently,
fl uctuations in exchange rates affect the Group’s earnings, shareholders’ equity
and other items in its accounts.
In each country purchased debt portfolio investments, all revenues and most
operating expenses are denominated in local currency, due to which currency
fl uctuations have a limited impact on the company’s operating earnings in that
currency. Thus, revenues and expenses in the national currency are matched in
a natural manner, limiting transaction exposure.
The translation of the balance sheets of foreign subsidiaries to SEK results
in a balance sheet exposure that affects the size of the Group’s shareholders’
equity. Intrum Justitia has an exposure mainly through its net assets in euro,
though also in UK Sterling and Swiss francs, and to a lesser extent in other
currencies. The effect on shareholders’ equity can be reduced by matching the
assets valued in each local currency with the liabilities in the same currency, or
through fi nancial hedging. The Group’s current policy is to not actively hedge
its translation exposure. Refer also to Note 32.
Interest rate fl uctuations
Intrum Justitia’s net debt amounted to SEK 1,192.7 M (480.2) on December 31,
2005. Lending rates are tied to market interest rates. Maturities are short, generally
three months. As a result, changes in market interest rates quickly impact
the Group’s fi nancial net.
Sensitivity analysis
The following table illustrates the estimated effects on the Group of changes
in several variables. The calculations should not be seen as an indication that
these particular variables are more or less likely to change. Also, the calculations
assume that all other factors that can affect the Group remain unchanged.
Payroll costs (incl. social security
contributions)
+ 1 percent
Value of Swedish krona vs.
other currencies
+ 1 percent
Interest rate on Intrum Justitia’s
net borrowings
+ 1 percentage point
EBIT
SEK –12.1 M
EBIT
SEK –3.8 M
Earnings before tax
SEK –11.9 M
TAX
The tax rate of 29.4 percent in the annual accounts is somewhat higher than
the 25.0 percent previously estimated for the year.
The increase is due to a revaluation of a tax dispute in Norway, where SEK
8.1 M has been allocated for possible additional expenses, as well as to losses
in England that do not have a corresponding positive tax effect. The tax expense
in 2004 was positively affected by SEK 15.6 M for the reversal of a previously
reported tax expense in the English company.
The Group’s English company has tax loss carryforwards corresponding to
SEK 297.5 M for which no deferred tax receivables are reported. The tax loss
carryforwards can be offset against taxable earnings in the future without time
constraints. There is no reason to believe other than that the tax loss carry forwards
will eventually be utilized, but because the company reported a loss for the year
no deferred tax receivables are reported in the accounts for reasons of prudence.
The Group’s tax expense is dependent in part on how earnings are distributed
between subsidiaries in different countries with different tax rates. For 2006
and forward, the tax expense is estimated at 25 percent of pre-tax earnings.
Subsequent to tax audits in Sweden, Norway and Finland, these respective
tax authorities questioned the company’s deduction of certain costs for the period
1998–2003. The company has appealed and considers that the tax authorities’
claims will not result in any signifi cant expenses for the company.
On December 22, 2005 the County Administrative Court in Stockholm ruled
in favor of the Swedish subsidiary Intrum Justitia Sverige AB and against the tax
authority on a dispute regarding the deductibility of intra-Group licensing fees.
The ruling gained legal force in February 2006. Thereby, the company will avoid a
tax reassessment of SEK 104.8 M, corresponding to a tax expense of SEK 29.3 M.
Intrum Justitia had not allocated any provisions for additional tax expenses
potentially resulting from this tax dispute, and the judgment therefore does not
affect earnings in the annual accounts for 2005. The tax dispute is still continuing
with regard to SEK 3.8 M in interest, among other items.
In October 2005 the subsidiary in Norway was reassessed for licensing fees
for the years 1998–2002, corresponding to an additional tax expense of SEK
13.4 M, of which SEK 8.1 M was expensed in 2005. The company appealed to
the tax authority in early January 2006.
The Finnish Tax Board ruled in favor of the subsidiary in Finland in 2004 in a
dispute concerning the deductibility of certain interest expenses and liquidation
results. The state’s tax agent has appealed to the courts. The additional tax expense,
if the tax authority should eventually win the dispute, amounts to SEK 21.8 M.
Fees and interest may be additional.
ACQUISITIONS
Following the ruling by the Irish High Court, the acquisition of Legal & Trade
Collections (Ireland) Ltd (now named Intrum Justitia Collections (Ireland) Ltd)
was fi nalized in 2005. During the year Intrum Justitia also acquired all the shares
in the Slovakian company Creditexpress Slovakia s.r.o. (now Intrum Justitia
Slovakia s.r.o.).
GOODWILL
Consolidated goodwill amounted to SEK 1,573.4 M, compared to SEK 1,505.8 M
at year-end 2004. The change during the year is due to fl uctuating exchange
rates. All goodwill in the Group was tested for impairment at year-end 2005 with
the results showing no need for writedowns.
Intangible fi xed assets reported in the balance sheet as a result of an adjustment
to the fair value of the net assets in acquired companies amount to SEK
19.6 M (0.0) and were amortized by SEK 4.9 M (0.0) during the year. This expense
includes amortization in Ireland of SEK 4.3 M and in Slovakia of SEK 0.6 M.
HUMAN RESOURCES
The average number of employees during the year was 2,863 (2,945). The number
of employees decreased mainly in the English subsidiary, while further staff
were recruited in Spain to handle previously outsourced operations and to work
with purchased debt portfolios.