Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as Client Financing receivables) and Commercial Financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Systems products and are for terms ranging generally from two to six years. Commercial Financing receivables relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.

The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company also purchases interests in certain of IBM’s short-term receivables. These receivables are included within the Commercial Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

Effective January 1, 2020, the company adopted the new accounting standard related to credit losses, using the transition option whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements. Refer to note 2, “Accounting Changes,” for additional information. Under this new guidance, the amortized cost basis of a financial asset represents the original amount of the financing receivable (including residual value) adjusted for unearned income, deferred initial direct costs, cash collected, write-offs and any foreign exchange adjustments. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. Prior to the effective date, financing receivables were measured at recorded investment, which does not include residual value. As a result of the company’s transition option, all prior periods are presented at recorded investment, while current period information is presented at amortized cost.

A summary of the components of the company’s financing receivables is presented as follows:

* Includes guaranteed and unguaranteed residual value


					Client Loan and
					Installment
			Commercial		Payment
(Dollars in millions)	Investment in		Financing		Receivables
At December 31, 2019:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,626	$	3,400	$	9,566	$	17,592
Unearned income		(384)		(4)		(373)		(761)
Deferred initial direct costs		32		—		71		103
Recorded investment	$	4,274	$	3,396	$	9,264	$	16,934
Allowance for credit losses		(56)		(9)		(82)		(148)
Unguaranteed residual value		531		—		—		531
Guaranteed residual value		47		—		—		47
Total financing receivables, net	$	4,796	$	3,387	$	9,181	$	17,365

Purchased and participated receivables from IBM


	At March 31,		At December 31,
(Dollars in millions)	2020		2019
Short-term purchased receivables from IBM	$	72	$	56
Allowance for credit losses		0		0
Total short-term purchased receivables from IBM, net	$	72	$	56

Long-term participated receivables from IBM	$	4,206	$	4,310
Allowance for credit losses		(21)		(7)
Total long-term participated receivables from IBM, net	$	4,186	$	4,303

Total purchased and participated receivables from IBM, net	$	4,258	$	4,359

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $914 million and $1,062 million at March 31, 2020 and December 31, 2019, respectively.

The company did not have any financing receivables held for sale at March 31, 2020 and December 31, 2019.

Allowance for Credit Losses - Financing Receivables

Refer to note A, “Significant Accounting Policies,” in the company’s 2019 Annual Report for a full description of its accounting policies for financing receivables and related allowances. The descriptions below include any changes to those policies due to the new standard.

Effective with the adoption of the new credit losses standard, the company’s estimates of its allowances for expected credit losses include consideration of: past events, including any historical default, historical concessions and resulting troubled debt restructurings, current economic conditions, taking into account any non-freestanding mitigating credit enhancements, and certain forward-looking information, including reasonable and supportable forecasts.

Collectively Evaluated Financing Receivables

The company determines its allowance for credit losses based on two portfolio segments: Client Financing receivables and Commercial Financing receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

For Client Financing receivables, the company uses a credit loss model to calculate allowances based on its internal loss experience and current conditions and forecasts by class of financing receivable. The company records an unallocated reserve that is calculated by applying a reserve rate to its portfolio, excluding accounts that have been individually evaluated and specifically reserved. This reserve rate is based upon credit rating, probability of default, term and loss history. The allowance is adjusted quarterly for expected recoveries of amounts that were previously written off or are expected to be written off. Recoveries cannot exceed the aggregated amount of the previous write-off or expected write-off.

Macroeconomic variables attributed to the expected credit losses for Client Financing receivables may vary by class of financing receivables based on historical experiences, portfolio composition, and current environment. In addition to a qualitative review of credit risk factors across the portfolio, the company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its Client Financing receivables expected allowance for credit losses. The company also considers the impact of current conditions and economic forecasts relating to specific industries, geographical areas, and client-specific exposures on the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. With evolving global impacts from the COVID-19 pandemic, external economic models have been revised with increased frequency and with alternative scenarios. The company’s allowances at March 31, 2020, reflect the qualitative process described above. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

The allowance for Commercial Financing receivables is estimated based on a combination of write-off history and current economic conditions, excluding any individually evaluated accounts.

At January 1, 2020, upon adoption of the new standard on credit losses, the company recorded an additional allowance for Client and Commercial Financing receivables (including related off-balance sheet commitments) of $56 million. This was primarily driven by an increase in the Client Financing receivables allowance. Refer to note 9, “Commitments,” for additional information regarding off-balance sheet commitments.

Client Financing Receivables

The following tables present the amortized cost basis or recorded investment for the Client Financing receivables portfolio segment at March 31, 2020 and December 31, 2019, respectively, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The Commercial Financing receivables portfolio segment is excluded from this presentation as it is short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results is not material.


(Dollars in millions)
At March 31, 2020:	Americas		EMEA		Asia Pacific		Total
Amortized cost
Lease receivables	$	3,338	$	601	$	376	$	4,314
Loan receivables		5,657		2,219		600		8,476
Participated receivables from IBM		631		1,715		1,860		4,206
Ending balance	$	9,626	$	4,534	$	2,836	$	16,997

Allowance for credit losses
Beginning balance at December 31, 2019	$	98	$	36	$	11	$	146
Adjustment for adoption of new standard		21		13		4		39
Beginning balance at January 1, 2020
Lease receivables	$	38	$	22	$	9	$	69
Loan receivables		78		18		3		98
Participated receivables from IBM		4		10		4		18
Total	$	120	$	50	$	16	$	185
Write-offs	$	(14)	$	(1)	$	(1)	$	(16)
Recoveries		0		—		0		0
Provision		5		8		1		14
Other*		(12)		(1)		0		(13)
Ending balance at March 31, 2020	$	99	$	56	$	15	$	170
Lease receivables	$	37	$	20	$	7	$	64
Loan receivables	$	57	$	24	$	4	$	85
Participated receivables from IBM	$	4	$	12	$	4	$	21

* Primarily represents translation adjustments.


(Dollars in millions)
At December 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,160	$	710	$	404	$	4,274
Loan receivables		6,173		2,415		676		9,264
Participated receivables from IBM		717		1,671		1,922		4,310
Ending balance	$	10,049	$	4,796	$	3,003	$	17,848
Recorded investment collectively evaluated for impairment	$	9,957	$	4,770	$	2,993	$	17,720
Recorded investment individually evaluated for impairment	$	92	$	26	$	10	$	128

Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(14)	$	(10)	$	(4)	$	(29)
Recoveries		0		0		0		1
Provision		7		(6)		(2)		(2)
Foreign currency translation adjustment		(1)		0		0		(1)
Other		0		0		0		0
Ending balance at December 31, 2019	$	98	$	36	$	11	$	146
Lease receivables	$	27	$	21	$	8	$	56
Loan receivables	$	68	$	12	$	2	$	82
Participated receivables from IBM	$	3	$	3	$	1	$	7

Related allowance, collectively evaluated for impairment	$	23	$	11	$	3	$	36
Related allowance, individually evaluated for impairment	$	75	$	26	$	9	$	110

Write-offs of lease receivables and loan receivables were $17 million and $11 million, respectively, for the year ended December 31, 2019. Provisions for credit losses recorded for lease receivables and participated receivables from IBM were an addition of $5 million and a release of $6 million, respectively, for the year ended December 31, 2019.

Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following tables summarize information about the amortized cost basis or recorded investment in lease and loan financing receivables and participated receivables from IBM, including amortized cost or recorded investment aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost or recorded investment not accruing.


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,338	$	136	$	106	$	7	$	35
EMEA		601		19		6		0		15
Asia Pacific		376		9		3		0		6
Total lease receivables	$	4,314	$	164	$	115	$	7	$	56

Americas	$	5,657	$	97	$	60	$	10	$	38
EMEA		2,219		55		7		3		50
Asia Pacific		600		7		5		0		1
Total loan receivables	$	8,476	$	158	$	72	$	14	$	90

Americas	$	631	$	7	$	5	$	1	$	3
EMEA		1,715		1		0		0		1
Asia Pacific		1,860		4		4		1		0
Total participated receivables from IBM	$	4,206	$	12	$	9	$	2	$	4

Total	$	16,997	$	333	$	195	$	23	$	149

(1)	At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)	Of the amortized cost not accruing, there was a related allowance of $95 million. Financing income recognized on these receivables was immaterial for the three months ended March 31, 2020.


					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,160	$	179	$	143	$	10	$	37
EMEA		710		24		11		1		16
Asia Pacific		404		9		2		0		7
Total lease receivables	$	4,274	$	213	$	156	$	11	$	59

Americas	$	6,173	$	107	$	66	$	10	$	56
EMEA		2,415		51		3		1		51
Asia Pacific		676		3		1		0		2
Total loan receivables	$	9,264	$	161	$	69	$	11	$	110

Americas	$	717	$	8	$	8	$	1	$	0
EMEA		1,671		7		7		1		1
Asia Pacific		1,922		6		5		1		1
Total participated receivables from IBM	$	4,310	$	21	$	20	$	3	$	2

Total	$	17,848	$	394	$	245	$	25	$	171

(1)	At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)	Of the recorded investment not accruing, $128 million was individually evaluated for impairment with a related allowance of $110 million.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided annually by Moody’s, where available, as one of many inputs in its determination of customer

credit ratings. The credit quality of the customer is evaluated based on these indicators and would be assigned the same risk rating whether the receivable is a lease, loan or participated from IBM.

The following tables present the amortized cost basis or recorded investment for financing receivables, excluding the Commercial Financing receivables portfolio segment, by credit quality indicator at March 31, 2020 and December 31, 2019, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. Effective January 1, 2020, under the new guidance for credit losses, the company discloses its credit quality by year of origination. Additionally, under the new guidance, the amortized cost is presented on a gross basis, whereas under the prior guidance, the company presented the recorded investment net of allowance for credit losses. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.


(Dollars in millions)	Americas				EMEA				Asia Pacific
At March 31, 2020:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2020	$	1,406	$	871	$	609	$	766	$	228	$	134
2019		2,182		1,587		919		988		1,485		585
2018		1,136		732		371		342		193		50
2017		709		382		140		183		61		30
2016		289		300		86		55		34		11
2015 and prior		17		17		40		35		19		7
Total	$	5,738	$	3,888	$	2,164	$	2,370	$	2,020	$	817


	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At December 31, 2019	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	305	$	55	$	31	$	732	$	89	$	89	$	440	$	88	$	89
A1 – A3		700		88		124		1,166		178		237		71		271		934
Baa1 – Baa3		949		153		83		1,756		907		107		104		762		500
Ba1 – Ba2		733		206		61		1,461		532		159		49		442		245
Ba3 – B1		196		137		62		444		455		46		43		88		126
B2 – B3		236		45		32		513		228		33		4		18		26
Caa – D		13		5		2		32		15		3		2		0		2
Total	$	3,133	$	689	$	396	$	6,105	$	2,403	$	674	$	714	$	1,668	$	1,921

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the three months ended March 31, 2020 or for the year ended December 31, 2019.