Axactor Annual Report 2016

The preparation of cash flow estimates requires significant estimates to be made by management regarding future cash flows from portfolios. The estimated future portfolio cash flows are reviewed by management each quarter. The fair value is estimated to be approximately SEK 1 310m (2015:0m) and is based on net future estimated cash flows after tax, discounted with the estimated WACC. The corresponding carrying amount is SEK 1 224m. (2015:0m), which is based on IAS 39 using the estimated gross future cash flows, where the discount factor is the individual IRR for each portfolio. The future cash flow forecasts used to estimate the fair market value are the same as the cash flow forecast used in the accounting for loans and receivables at 31 December 2016. The fair value estimation is based on estimated annual net cash flows from portfolios. The estimated annual net cash flows from portfolios is the assumed annual future collection on portfolios per country, less assumed annual collection costs per portfolio before tax. Collection costs consist of operational costs in the portfolio segment, i.e. commission to Debt Collection, payroll expenses, premises, communication costs, depreciation and other costs directly attributable to the Debt Purchasing segment. The collection costs as a percentage of the portfolio collection differ from portfolio to portfolio, ranging from 15% to over 50%. In addition, the country specific marginal tax rate is applied. This individual collection cost and tax rate is applied to each portfolio’s estimated future cash flow, adding up to an estimated total net cash flow for the Group. The weighted average cost of capital after tax for the portfolio segment is estimated to 9.4% (2015:10.8%) as at 31 December 2016 (details of the calculation is shown below). Based on this rate, the discounted value of the estimated net cash flows indicates that the fair value of portfolios is approximately SEK 1 310m (2015:0m). To evaluate this calculation, a sensitivity analysis of the cash flow estimates is presented in the table below in order to see the effect of deviations to the cash flow estimates and variations in the cost of capital. Fair value sensitivity table Performance SEK million 90% 95% 100% 105% 110% WACC 8% 1,199 1,290 1,381 1,472 1,563 9% 1,137 1,224 1,310 1,397 1,483 10% 1,113 1,198 1,282 1,367 1,451 11% 1,074 1,156 1,238 1,319 1,401 12% 1,038 1,117 1,196 1,275 1,354 13% 1,005 1,081 1,158 1,234 1,311 14% 973 1,047 1,121 1,195 1,269 The cost of capital after tax for the Portfolio segment is calculated using the capital asset pricing model (CAPM) in combination with the weighted average cost of capital (WACC). Based on the variables from the table below, the estimated cost of capital after tax is approximately 13.4%. Cost of equity 2016 2015 Risk free rate 0.549 % 0.993 % 10-year Swedish government bond at 30/12/2016 (https://www.bloomberg.com/quote/GSPG10YR :IND) Market risk premium 6.3 % 6.3 % Damodaran 1st July 2016 Estimated Beta (equity) 1.09 0.60 Unlevered beta from peer group used, as the NIBD is 90.4 mSEK. Not used Axactor's own beta due to limited history in the market Company specific premium 6.0 % 6.0 % Ibbotson research 2014 Cost of equity after tax 13.4 % 10.8 % Tax rate 0.0 % 0.0 % Cost of equity before tax 13.4 % 10.8 % = WACC Axactor AB | Annual report 2016 39