Financing Receivables and Operating Leases

12 Months Ended

Oct. 31, 2011

Financing Receivables and Operating Leases

Financing Receivables and Operating Leases

Note 11: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP and third-party products. These receivables typically have terms 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 net financing receivables, which are included in financing receivables and long-term financing receivables and other assets, were as follows for the following fiscal years ended October 31:

	2011			2010
	In millions
Minimum lease payments receivable	$	7,721		$	7,094
Unguaranteed residual value		233			212
Unearned income		(647	)		(596	)
Financing receivables, gross		7,307			6,710
Allowance for doubtful accounts		(130	)		(140	)
Financing receivables, net		7,177			6,570
Less current portion		(3,162	)		(2,986	)
Amounts due after one year, net	$	4,015		$	3,584

        As of October 31, 2011, scheduled maturities of HP's minimum lease payments receivable were as follows for the following fiscal years ended October 31:

	2012		2013		2014		2015		Thereafter		Total
Scheduled maturities of minimum lease payments receivable	$	3,518	$	2,256	$	1,257	$	517	$	173	$	7,721

        Equipment leased to customers under operating leases was $4.0 billion at October 31, 2011 and $3.5 billion at October 31, 2010 and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.3 billion at October 31, 2011 and $1.0 billion at October 31, 2010. As of October 31, 2011, minimum future rentals on non-cancelable operating leases related to leased equipment were as follows for the following fiscal years ended October 31:

	2012		2013		2014		2015		Thereafter		Total
Minimum future rentals on non-cancelable operating leases	$	1,273	$	801	$	414	$	152	$	42	$	2,682

        Due to the homogenous nature of the leasing transactions, HP 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 HP's customer base and their dispersion across many different industries and geographical regions. The credit quality of an obligor is evaluated at lease inception and monitored over the term of a transaction. Risk ratings are assigned to each lease based on the creditworthiness of the obligor and other variables that augment or diminish 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 guarantees, letters of credit, security deposits or other credit enhancements.

        The credit risk profile of the gross financing receivables, based on internally assigned ratings, was as follows for the following fiscal years ended October 31:

Risk Rating	2011		2010
	In millions
Low	$	4,261	$	3,793
Moderate		2,989		2,829
High		57		88
Total	$	7,307	$	6,710

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk would generally be the equivalent of BB+ or lower. HP closely monitors accounts rated high risk and based upon impairment analysis, specific reserves may have been established against a portion of these leases.

        The allowance for doubtful accounts balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain leases with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. The general reserve percentages are maintained on a regional basis and are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, and information derived from competitive benchmarking.

        The allowance for doubtful accounts and the related financing receivables were as follows for the following fiscal years ended October 31:

Allowance for doubtful accounts	2011
	In millions
Balance, beginning of period	$	140
Additions to allowance		58
Deductions, net of recoveries		(68	)
Balance, end of period	$	130

		2011		2010
		In millions
Allowance for financing receivables individually evaluated for loss		$	35	$	53
Allowance for financing receivables collectively evaluated for loss			95		87
	Total	$	130	$	140
Gross financing receivables individually evaluated for loss		$	157	$	271
Gross financing receivables collectively evaluated for loss			7,150		6,439
	Total	$	7,307	$	6,710

        Accounts are generally put on non-accrual status (cessation of interest accrual) when they reach 90 days past due. In certain circumstances, such as when the delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 90 days past due. A write-off or specific reserve is generally recorded when an account reaches 180 days past due. Total financing receivables on non-accrual status were $157 million and $271 million at October 31, 2011 and 2010, respectively. Total financing receivables greater than 90 days past due and still accruing interest were $71 million and $83 million at October 31, 2011 and 2010, respectively.