Financing Receivables and Operating Leases

6 Months Ended

Apr. 30, 2013

Financing Receivables and Operating Leases

Financing Receivables and Operating Leases

Note 9: 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 financing receivables, which are included in Financing receivables, net and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:

	April 30, 2013			October 31, 2012
	In millions
Minimum lease payments receivable		$7,725			$8,133
Unguaranteed residual value		255			248
Unearned income		(651	)		(688	)
Financing receivables, gross		7,329			7,693
Allowance for doubtful accounts		(149	)		(149	)
Financing receivables, net		7,180			7,544
Less current portion		(3,212	)		(3,252	)
Amounts due after one year, net		$3,968			$4,292

        Equipment leased to customers under operating leases was $3.7 billion and $3.9 billion at April 30, 2013 and October 31, 2012, respectively, and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.4 billion and $1.5 billion at April 30, 2013 and at October 31, 2012, respectively.

        Due to the homogenous nature of its 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 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 guarantees, letters of credit, security deposits or other credit enhancements.

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

	April 30, 2013		October 31, 2012
	In millions
Risk Rating
Low	$	4,128	$	4,461
Moderate		3,100		3,151
High		101		81
Total	$	7,329	$	7,693

        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. Based upon impairment analyses performed periodically, HP identifies and monitors accounts rated high risk and may establish a specific reserve against a portion of these receivables.

        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, current economic conditions and information derived from competitive benchmarking.

        The allowance for doubtful accounts and the related financing receivables were as follows:

	Six months ended April 30, 2013
	In millions
Allowance for doubtful accounts
Balance, beginning of period	$	149
Change in estimates		14
Deductions, net of recoveries		(14	)
Balance, end of period	$	149

	April 30, 2013		October 31, 2012
	In millions
Allowance for financing receivables collectively evaluated for loss	$	100	$	104
Allowance for financing receivables individually evaluated for loss		49		45
Total	$	149	$	149
Gross financing receivables collectively evaluated for loss	$	6,956	$	7,355
Gross financing receivables individually evaluated for loss		373		338
Total	$	7,329	$	7,693
Gross financing receivables on non-accrual status	$	208	$	225
Gross financing receivables 90 days past due and still accruing interest		165		113
Total	$	373	$	338

        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. The non-accrual status may not impact a customer's risk rating. A write-off or specific reserve is generally recorded when an account reaches 180 days past due.