Note 3. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)		December 31, 2016		January 2, 2016
Commercial	$	797	$	841
U.S. Government contracts		294		239

		1,091		1,080
Allowance for doubtful accounts		(27)		(33)

Total	$	1,064	$	1,047

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $178 million at December 31, 2016 and $135 million at January 2, 2016.

Finance Receivables

Finance receivables are presented in the following table:

(In millions)		December 31, 2016		January 2, 2016
Finance receivables*	$	976	$	1,135
Allowance for losses		(41)		(48)

Total finance receivables, net	$	935	$	1,087

* Includes finance receivables held for sale of $30 million at both December 31, 2016 and January 2, 2016.

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. These loans typically have initial terms ranging from five to ten years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at December 31, 2016. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

Our finance receivables are diversified across geographic region and borrower industry. At December 31, 2016, 61% of our finance receivables were distributed internationally and 39% throughout the U.S., compared with 62% and 38%, respectively, at the end of 2015. At December 31, 2016 and January 2, 2016, finance receivables of $411 million and $493 million, respectively, have been pledged as collateral for TFC’s debt of $244 million and $352 million, respectively.

Finance Receivable Portfolio Quality

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

Delinquency

We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

Finance receivables categorized based on the credit quality indicators and by delinquency aging category are summarized as follows:

(Dollars in millions)		December 31, 2016		January 2, 2016
Performing	$	758	$	891
Watchlist		101		130
Nonaccrual		87		84

Nonaccrual as a percentage of finance receivables		9.20%		7.60%

Less than 31 days past due	$	857	$	950
31-60 days past due		49		86
61-90 days past due		18		42
Over 90 days past due		22		27

60+ days contractual delinquency as a percentage of finance receivables		4.23%		6.24%

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. Interest income recognized on impaired loans was not significant in 2016 or 2015.

A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:

(In millions)		December 31, 2016		January 2, 2016
Recorded investment:
Impaired loans with related allowance for losses	$	55	$	62
Impaired loans with no related allowance for losses		65		42

Total	$	120	$	104

Unpaid principal balance	$	125	$	113
Allowance for losses on impaired loans		11		17
Average recorded investment		101		102

Allowance for Losses

A rollforward of the allowance for losses on finance receivables and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude $99 million and $118 million of leveraged leases at December 31, 2016 and January 2, 2016, respectively, in accordance with U.S. generally accepted accounting principles.

(In millions)		December 31, 2016		January 2, 2016
Balance at beginning of year	$	48	$	51
Provision for losses		(1)		(2)
Charge-offs		(16)		(14)
Recoveries		10		13

Balance at end of year	$	41	$	48

Allowance based on collective evaluation	$	30	$	31
Allowance based on individual evaluation		11		17
Finance receivables evaluated collectively		727		883
Finance receivables evaluated individually		120		104