Investment in Receivable Portfolios, Net

In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e. the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.

In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is a significant increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. Due to the discounting of future cashflows using monthly IRRs, an allowance charge could still result even if substantially higher collections occurring later in the collection curve offset lower collections in the near term.

The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.

If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered.

Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.

The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2018	$	3,773,171		$	253,035		$	4,026,206
Revenue from receivable portfolios	(285,255		)	(25,903		)	(311,158		)
Allowance (reversals) on receivable portfolios, net	900			(2,267		)	(1,367		)
Additions (reductions) on existing portfolios, net	38,512			(199		)	38,313
Additions for current purchases	285,637			—			285,637
Effect of foreign currency translation	26,244			217			26,461
Balance at March 31, 2019	$	3,839,209		$	224,883		$	4,064,092



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2017	$	3,695,069		$	369,632		$	4,064,701
Revenue from receivable portfolios	(249,821		)	(31,188		)	(281,009		)
Allowance reversals on receivable portfolios, net	(8,082		)	(1,729		)	(9,811		)
Reductions on existing portfolios, net	(24,945		)	(39,529		)	(64,474		)
Additions for current purchases	285,172			—			285,172
Effect of foreign currency translation	57,577			643			58,220
Balance at March 31, 2018	$	3,754,970		$	297,829		$	4,052,799

During the three months ended March 31, 2019, the Company purchased receivable portfolios with a face value of $1.7 billion for $262.3 million, or a purchase price of 15.1% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended March 31, 2019 amounted to $548.0 million. During the three months ended March 31, 2018, the Company purchased receivable portfolios with a face value of $1.8 billion for $276.8 million, or a purchase price of 15.4% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended March 31, 2018 amounted to $556.2 million.

All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended March 31, 2019 and 2018, Zero Basis Revenue was approximately $25.9 million and $31.2 million, respectively. During the three months ended March 31, 2019 and 2018, allowance reversals on Zero Basis Portfolios were $2.3 million and $1.7 million, respectively.

The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):



	Three Months Ended March 31, 2019
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	3,129,502		$	8,391		$	—		$	3,137,893
Purchases of receivable portfolios	262,335			—			—			262,335
Disposals or transfers to assets held for sale	(3,145		)	(444		)	—			(3,589		)
Gross collections⁽¹⁾	(485,598		)	(91		)	(28,164		)	(513,853		)
Put-Backs and Recalls⁽²⁾	(3,694		)	—			(6		)	(3,700		)
Foreign currency adjustments	20,137			(161		)	—			19,976
Revenue recognized	285,255			—			25,903			311,158
Portfolio (allowance) reversals, net	(900		)	—			2,267			1,367
Balance, end of period	$	3,203,892		$	7,695		$	—		$	3,211,587
Revenue as a percentage of collections⁽³⁾	58.7		%	—		%	92.0		%	60.6		%



	Three Months Ended March 31, 2018
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,879,170		$	11,443		$	—		$	2,890,613
Purchases of receivable portfolios	276,762			—			—			276,762
Disposals or transfers to assets held for sale	(3,072		)	—			—			(3,072		)
Gross collections⁽¹⁾	(455,143		)	(1,171		)	(32,788		)	(489,102		)
Put-Backs and Recalls⁽²⁾	(3,691		)	—			(129		)	(3,820		)
Foreign currency adjustments	61,590			350			—			61,940
Revenue recognized	249,821			—			31,188			281,009
Portfolio allowance reversals, net	8,082			—			1,729			9,811
Balance, end of period	$	3,013,519		$	10,622		$	—		$	3,024,141
Revenue as a percentage of collections⁽³⁾	54.9		%	—		%	95.1		%	57.5		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreements.


(3)	Revenue as a percentage of collections excludes the effect of net portfolio allowances or net portfolio allowance reversals.

The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):



	Valuation Allowance
	Three Months Ended March 31,
	2019			2018
Balance at beginning of period	$	60,631		$	102,576
Provision for portfolio allowances	2,626			940
Reversal of prior allowances	(3,993		)	(10,751		)
Effect of foreign currency translation	164			1,552
Balance at end of period	$	59,428		$	94,317