Financing Receivables and Operating Leases

12 Months Ended

Oct. 31, 2019

Financing Receivables and Operating Leases

Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:



	As of October 31,
	2019			2018
	In millions
Minimum lease payments receivable	$	9,070		$	8,691
Unguaranteed residual value	336			297
Unearned income	(754		)	(732		)
Financing receivables, gross	8,652			8,256
Allowance for doubtful accounts	(131		)	(120		)
Financing receivables, net	8,521			8,136
Less: current portion⁽¹⁾	(3,572		)	(3,396		)
Amounts due after one year, net⁽¹⁾	$	4,949		$	4,740


(1)	The Company includes the current portion in Financing receivables, and amounts due after one year, net, in Long-term financing receivables and other assets in the accompanying Consolidated Balance Sheets.

As of October 31, 2019, scheduled maturities of the Company's minimum lease payments receivable were as follows:



	2020		2021		2022		2023		2024		Thereafter		Total
	In millions
Scheduled maturities of minimum lease payments receivable	$	3,939	$	2,449	$	1,555	$	752	$	306	$	69	$	9,070

Sale of Financing Receivables

During the fiscal years ended October 31, 2019 and 2018, the Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions, which are accounted for as sales in accordance with Accounting Standards Codification ("ASC") 860 - Transfers and Servicing. The Company derecognizes the carrying value of the receivable transferred and recognizes a net gain or loss on the sale. During the fiscal years ended October 31, 2019 and 2018, the Company sold $185 million and $174 million, respectively, of financing receivables. The gains recognized on the sales of financing receivables were not material for the periods presented.

Credit Quality Indicators

Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.

The credit risk profile of gross financing receivables, based on internal risk ratings, was as follows:



	As of October 31,
	2019		2018
	In millions
Risk Rating:
Low	$	4,432	$	4,238
Moderate	3,933		3,805
High	287		213
Total	$	8,652	$	8,256

Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.

Allowance for Doubtful Accounts

The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. The Company maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. The Company establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely the Company will recover its investment. For individually evaluated receivables, the Company determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, the Company records a specific reserve. The Company generally writes off a receivable or records a specific reserve when a receivable becomes 180 days past due, or sooner if the Company determines that the receivable is not collectible.

The allowance for doubtful accounts related to financing receivables and changes therein were as follows:



	As of October 31,
	2019			2018			2017
	In millions
Balance at beginning of year	$	120		$	86		$	89
Provision for doubtful accounts	33			49			23
Write-offs	(22		)	(15		)	(26		)
Balance at end of year	$	131		$	120		$	86

The gross financing receivables and related allowance evaluated for loss were as follows:



	As of October 31,
	2019		2018
	In millions
Gross financing receivables collectively evaluated for loss	$	8,255	$	7,917
Gross financing receivables individually evaluated for loss⁽¹⁾	397		339
Total	$	8,652	$	8,256
Allowance for financing receivables collectively evaluated for loss	$	84	$	78
Allowance for financing receivables individually evaluated for loss	47		42
Total	$	131	$	120


(1)	Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

Non-Accrual and Past-Due Financing Receivables

The Company considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. The Company generally places financing receivables on non-accrual status, which is the suspension of interest accrual, and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes 90 days past due. Subsequently, the Company may recognize revenue on non-accrual financing receivables as payments are received, which is on a cash basis, if the Company deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, all cash receipts are applied to the carrying amount of the financing receivable, which is the cost recovery method. In certain circumstances, such as when the Company deems a delinquency to be of an administrative nature, financing receivables may accrue interest after becoming 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, the Company may return the related financing receivable to accrual status.

The following table summarizes the aging and non-accrual status of gross financing receivables:



	As of October 31,
	2019		2018
	In millions
Billed:⁽¹⁾
Current 1-30 days	$	301	$	275
Past due 31-60 days	62		42
Past due 61-90 days	15		13
Past due >90 days	88		74
Unbilled sales-type and direct-financing lease receivables	8,186		7,852
Total gross financing receivables	$	8,652	$	8,256
Gross financing receivables on non-accrual status⁽²⁾	$	276	$	226
Gross financing receivables 90 days past due and still accruing interest⁽²⁾	$	121	$	113


(1)	Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.


(2)	Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

Variable Interest Entities

In September 2019, the Company issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity (“SPE”). The SPE meets the definition of a Variable Interest Entity and is consolidated, along with the associated debt, into the Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.

The Company’s risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.

The following table presents the assets and liabilities held by the consolidated VIE as of October 31, 2019, which are included in the Consolidated Balance Sheets. The assets in the table below includes those that can be used to settle the obligations of the VIE. Additionally, general Creditors do not have recourse to the assets of the VIE.



	As of October 31, 2019
Assets held by VIE	In millions
Other current assets	$	76
Financing receivables
Short-term	$	194
Long-term	$	229
Property, plant and equipment	$	303
Liabilities held by VIE
Notes payable and short-term borrowings, net of unamortized debt issuance costs	$	385
Long-term debt, net of unamortized debt issuance costs	$	370

Financing receivables transferred via securitization through the SPE was $465 million for the fiscal year ended October 31, 2019. Leased equipment transferred via securitization through the SPE was $327 million for the fiscal year ended October 31, 2019.

Operating Leases

Operating lease assets included in Property, plant and equipment in the Consolidated Balance Sheets were as follows:



	As of October 31,
	2019			2018
	In millions
Equipment leased to customers	$	7,185		$	7,290
Accumulated depreciation	(3,101		)	(3,078		)
Total	$	4,084		$	4,212

As of October 31, 2019, minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:



	2020		2021		2022		2023		2024		Thereafter		Total
	In millions
Minimum future rentals on non-cancelable operating leases	$	1,847	$	1,162	$	437	$	91	$	27	$	2	$	3,566