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:

	July 31, 2013			October 31, 2012

	In millions
Minimum lease payments receivable	$	7,460		$	8,133
Unguaranteed residual value		251			248
Unearned income		(625	)		(688	)

Financing receivables, gross		7,086			7,693
Allowance for doubtful accounts		(132	)		(149	)

Financing receivables, net		6,954			7,544
Less current portion		(3,113	)		(3,252	)

Amounts due after one year, net	$	3,841		$	4,292

Operating lease assets included in machinery and equipment were as follows:

	July 31, 2013			October 31, 2012

	In millions
Equipment leased to customers	$	3,671		$	3,865
Accumulated depreciation		(1,392	)		(1,499	)

Operating lease assets, net	$	2,279		$	2,366

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. HP evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. HP 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 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:

	July 31, 2013		October 31, 2012

	In millions
Risk Rating
Low	$	3,942	$	4,461
Moderate		3,026		3,151
High		118		81

Total	$	7,086	$	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 generally have the equivalent of BB+ or lower. HP classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes that there is a near-term risk of impairment.

The allowance for doubtful accounts is comprised of a general reserve and a specific reserve. HP 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. HP excludes accounts evaluated as part of the specific reserve from the general reserve analysis. HP establishes a specific reserve for leases with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. For individually evaluated receivables, HP 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 probable, HP records a specific reserve. HP generally records a write-off or specific reserve when an account reaches 180 days past due, or sooner if HP determines that the account is not collectible.

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

	Nine months ended July 31, 2013

	In millions
Allowance for doubtful accounts
Balance, beginning of period	$	149
Change in estimates		22
Deductions, net of recoveries		(39	)

Balance, end of period	$	132

	July 31, 2013		October 31, 2012

	In millions
Allowance for financing receivables collectively evaluated for loss	$	92	$	104
Allowance for financing receivables individually evaluated for loss		40		45

Total	$	132	$	149

Gross financing receivables collectively evaluated for loss	$	6,662	$	7,355
Gross financing receivables individually evaluated for loss		424		338

Total	$	7,086	$	7,693

Gross financing receivables on non-accrual status	$	251	$	225
Gross financing receivables 90 days past due and still accruing interest		173		113

Total	$	424	$	338

HP considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. HP generally places financing receivables on non-accrual status (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 contractually 90 days past due. Subsequently, HP may recognize revenue on non-accrual financing receivables as payments are received (i.e., on a cash basis) if HP deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, HP applies all cash receipts to reduce the carrying value of the financing receivable (i.e., the cost recovery method). In certain circumstances, such as when HP deems a delinquency to be of an administrative nature, financing receivables may accrue interest after they reach 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, HP may return the related financing receivable to accrual status.