B. Credit Quality of Financing Receivables and Allowance for Credit Losses

We apply a systematic methodology to determine the Allowance for credit losses for finance receivables. Based upon our analysis of credit losses and risk factors, our portfolio segments are as follows:


•	Customer - Finance receivables with retail customers.


•	Dealer - Finance receivables with Caterpillar dealers.


•	Caterpillar Purchased Receivables - Trade receivables purchased from Caterpillar entities.

We further evaluate our portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Typically, our finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Our classes, which align with management reporting for credit losses, are as follows:


•	North America - Finance receivables originated in the United States or Canada.


•	Europe - Finance receivables originated in Europe, Africa, Middle East and the Commonwealth of Independent

States.


•	Asia/Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, South Korea and Southeast

Asia.


•	Mining - Finance receivables related to large mining customers worldwide.


•	Latin America - Finance receivables originated in Central and South American countries and Mexico.


•	Caterpillar Power Finance - Finance receivables related to marine vessels with Caterpillar engines worldwide and

Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment

that is powered by these systems worldwide.

Impaired loans and finance leases

For all classes, a loan or finance lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or finance lease. Loans and finance leases reviewed for impairment include loans and finance leases that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans or finance leases are recorded against the receivable and then to any unrecognized income.

There were no impaired loans or finance leases as of December 31, 2012, 2011 and 2010, for the Dealer and Caterpillar Purchased Receivables portfolio segments. The average recorded investment for impaired loans and finance leases for the Caterpillar Purchased Receivables portfolio segment was zero during 2012, 2011 and 2010. The average recorded investment for impaired loans and finance leases for the Dealer portfolio segment was zero during 2012 and 2011 and $19 million during 2010, all of which was in the Europe finance receivable class.

Individually impaired loans and finance leases for customers were as follows:



(Millions of dollars)
	As of December 31, 2012						As of December 31, 2011
Impaired Loans and Finance Leases With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment⁽¹⁾		Unpaid Principal Balance⁽¹⁾		Related Allowance
Customer
North America	$	28	$	27	$	—	$	83	$	80	$	—
Europe	45		45		—		47		46		—
Asia/Pacific	2		2		—		4		4		—
Mining	1		1		—		8		8		—
Latin America	7		7		—		9		9		—
Caterpillar Power Finance	295		295		—		175		170		—
Total	$	378	$	377	$	—	$	326	$	317	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	47	$	43	$	10	$	69	$	64	$	15
Europe	40		37		14		36		33		12
Asia/Pacific	35		35		8		13		13		3
Mining	23		23		5		13		13		4
Latin America	43		43		12		25		25		6
Caterpillar Power Finance	116		112		24		93		92		16
Total	$	304	$	293	$	73	$	249	$	240	$	56
Total Impaired Loans and Finance Leases
Customer
North America	$	75	$	70	$	10	$	152	$	144	$	15
Europe	85		82		14		83		79		12
Asia/Pacific	37		37		8		17		17		3
Mining	24		24		5		21		21		4
Latin America	50		50		12		34		34		6
Caterpillar Power Finance	411		407		24		268		262		16
Total	$	682	$	670	$	73	$	575	$	557	$	56

⁽¹⁾Amounts previously disclosed have been revised due to immaterial errors.



(Millions of dollars)
	As of December 31, 2010
Impaired Loans and Finance Leases With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance
Customer
North America	$	87	$	87	$	—
Europe	6		4		—
Asia/Pacific	5		5		—
Mining	8		8		—
Latin America	3		3		—
Caterpillar Power Finance	174		174		—
Total	$	283	$	281	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	191	$	185	$	44
Europe	62		57		15
Asia/Pacific	27		27		7
Mining	—		—		—
Latin America	44		43		9
Caterpillar Power Finance	34		33		4
Total	$	358	$	345	$	79
Total Impaired Loans and Finance Leases
Customer
North America	$	278	$	272	$	44
Europe	68		61		15
Asia/Pacific	32		32		7
Mining	8		8		—
Latin America	47		46		9
Caterpillar Power Finance	208		207		4
Total	$	641	$	626	$	79



(Millions of dollars)
	Year Ended December 31, 2012				Year Ended December 31, 2011				Year Ended December 31, 2010
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment⁽¹⁾		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	50	$	3	$	91	$	4	$	39	$	2
Europe	45		1		11		—		7		—
Asia/Pacific	3		—		5		—		6		—
Mining	8		—		8		1		3		—
Latin America	6		—		9		1		5		—
Caterpillar Power Finance	220		2		221		6		92		—
Total	$	332	$	6	$	345	$	12	$	152	$	2

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	58	$	1	$	142	$	5	$	271	$	11
Europe	43		2		50		2		85		4
Asia/Pacific	27		2		17		1		34		3
Mining	38		2		6		—		6		—
Latin America	43		2		39		2		39		3
Caterpillar Power Finance	99		—		83		—		17		—
Total	$	308	$	9	$	337	$	10	$	452	$	21

Total Impaired Loans and Finance Leases
Customer
North America	$	108	$	4	$	233	$	9	$	310	$	13
Europe	88		3		61		2		92		4
Asia/Pacific	30		2		22		1		40		3
Mining	46		2		14		1		9		—
Latin America	49		2		48		3		44		3
Caterpillar Power Finance	319		2		304		6		109		—
Total	$	640	$	15	$	682	$	22	$	604	$	23

⁽¹⁾Amounts previously disclosed have been revised due to immaterial errors.

Non-accrual and past due loans and finance leases

For all classes, we consider a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed.

As of December 31, 2012, 2011 and 2010, there were no loans or finance leases on non-accrual status for the Dealer or Caterpillar Purchased Receivables portfolio segments.

The investment in customer loans and finance leases on non-accrual status as of December 31, was as follows:



(Millions of dollars)
	2012		2011		2010
Customer
North America	$	59	$	112	$	217
Europe	38		58		89
Asia/Pacific	36		24		24
Mining	12		12		7
Latin America	148		108		139
Caterpillar Power Finance	220		158		163
Total	$	513	$	472	$	639

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	December 31, 2012
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	35	$	8	$	52	$	95	$	5,889	$	5,984	$	—
Europe	23		9		36		68		2,487		2,555		6
Asia/Pacific	53		19		54		126		3,354		3,480		18
Mining	—		1		12		13		1,960		1,973		—
Latin America	62		19		138		219		2,500		2,719		—
Caterpillar Power Finance	15		14		126		155		3,017		3,172		4
Dealer
North America	—		—		—		—		2,931		2,931		—
Europe	—		—		—		—		652		652		—
Asia/Pacific	—		—		—		—		945		945		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		1,057		1,057		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	17		3		2		22		1,334		1,356		2
Europe	1		—		—		1		331		332		—
Asia/Pacific	—		—		—		—		868		868		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		547		547		—
Caterpillar Power Finance	—		—		1		1		10		11		1
Total	$	206	$	73	$	421	$	700	$	27,883	$	28,583	$	31



(Millions of dollars)
	December 31, 2011
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	75	$	39	$	111	$	225	$	5,448	$	5,673	$	9
Europe	27		11		57		95		2,129		2,224		10
Asia/Pacific	48		23		38		109		3,102		3,211		14
Mining	—		—		12		12		1,473		1,485		—
Latin America	32		15		99		146		2,339		2,485		—
Caterpillar Power Finance	14		16		125		155		2,765		2,920		25
Dealer
North America	—		—		2		2		2,412		2,414		2
Europe	—		—		—		—		334		334		—
Asia/Pacific	—		—		—		—		516		516		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		709		709		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	25		4		6		35		1,801		1,836		6
Europe	3		—		—		3		399		402		—
Asia/Pacific	—		—		—		—		465		465		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		422		422		—
Caterpillar Power Finance	—		—		—		—		29		29		—
Total	$	224	$	108	$	450	$	782	$	24,343	$	25,125	$	66



(Millions of dollars)
	December 31, 2010
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	139	$	44	$	228	$	411	$	6,037	$	6,448	$	27
Europe	27		12		106		145		2,365		2,510		26
Asia/Pacific	63		17		37		117		2,537		2,654		12
Mining	—		—		—		—		875		875		—
Latin America	44		16		144		204		2,222		2,426		1
Caterpillar Power Finance	18		17		54		89		2,978		3,067		25
Dealer
North America	—		—		—		—		1,993		1,993		—
Europe	—		—		—		—		344		344		—
Asia/Pacific	—		—		—		—		296		296		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		659		659		—
Caterpillar Power Finance	—		—		—		—		19		19		—
Caterpillar Purchased Receivables
North America	3		1		1		5		1,285		1,290		1
Europe	1		—		—		1		109		110		—
Asia/Pacific	—		—		—		—		204		204		—
Mining	—		—		—		—		11		11		—
Latin America	—		—		—		—		173		173		—
Caterpillar Power Finance	3		—		—		3		24		27		—
Total	$	298	$	107	$	570	$	975	$	22,131	$	23,106	$	92

Allowance for credit losses

In estimating the Allowance for credit losses, we review loans and finance leases that are past due, non-performing or in bankruptcy. An analysis of the Allowance for credit losses was as follows:



(Millions of dollars)
	December 31, 2012
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	360		$	6	$	3	$	369
Receivables written off	(149		)	—		—		(149		)
Recoveries on receivables previously written off	47			—		—		47
Provision for credit losses	157			3		—		160
Adjustment due to sale of receivables	(2		)	—		—		(2		)
Foreign currency translation adjustment	1			—		—		1
Balance at end of year	$	414		$	9	$	3	$	426

Individually evaluated for impairment	$	73		$	—	$	—	$	73
Collectively evaluated for impairment	341			9		3		353
Ending Balance	$	414		$	9	$	3	$	426

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	682		$	—	$	—	$	682
Collectively evaluated for impairment	19,201			5,586		3,114		27,901
Ending Balance	$	19,883		$	5,586	$	3,114	$	28,583



(Millions of dollars)
	December 31, 2011
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	357		$	5	$	1	$	363
Receivables written off	(210		)	—		—		(210		)
Recoveries on receivables previously written off	52			—		—		52
Provision for credit losses	167			1		2		170
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(3		)	—		—		(3		)
Balance at end of year	$	360		$	6	$	3	$	369

Individually evaluated for impairment	$	56		$	—	$	—	$	56
Collectively evaluated for impairment	304			6		3		313
Ending Balance	$	360		$	6	$	3	$	369

Recorded Investment in Finance Receivables⁽¹⁾:
Individually evaluated for impairment	$	575		$	—	$	—	$	575
Collectively evaluated for impairment	17,423			3,973		3,154		24,550
Ending Balance	$	17,998		$	3,973	$	3,154	$	25,125

⁽¹⁾ Amounts previously disclosed for the customer segment have been revised due to immaterial errors.



(Millions of dollars)
Allowance for Credit Losses:					December 31, 2010
Balance at beginning of year					$	377
Adjustment to adopt consolidation of variable-interest entities					18
Receivables written off					(288		)
Recoveries on receivables previously written off					51
Provision for credit losses					205
Adjustment due to sale of receivables					—
Foreign currency translation adjustment					—
Balance at end of year					$	363

Allowance for credit losses as a percent of finance receivables, net of unearned income					1.57		%

	December 31, 2010
	Customer		Dealer		Caterpillar Purchased Receivables			Total
Individually evaluated for impairment	$	79	$	—	$	—		$	79
Collectively evaluated for impairment	278		5		1			284
Ending Balance	$	357	$	5	$	1		$	363

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	641	$	—	$	—		$	641
Collectively evaluated for impairment	17,339		3,311		1,815			22,465
Ending Balance	$	17,980	$	3,311	$	1,815		$	23,106

Credit quality of finance receivables

The credit quality of finance receivables is reviewed on a monthly basis. Credit quality indicators include performing and non-performing. Non-performing is defined as finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy. Finance receivables not meeting the criteria listed above are considered performing. Non-performing receivables have the highest probability for credit loss. The Allowance for credit losses attributable to non-performing receivables is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral. In addition, consideration is given to credit enhancements such as additional collateral and contractual third-party guarantees in determining the Allowance for credit losses attributable to non-performing receivables.

The recorded investment in performing and non-performing finance receivables was as follows:



(Millions of dollars)
	December 31, 2012
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	5,925	$	2,931	$	1,356	$	10,212
Europe	2,517		652		332		3,501
Asia/Pacific	3,444		945		868		5,257
Mining	1,961		1		—		1,962
Latin America	2,571		1,057		547		4,175
Caterpillar Power Finance	2,952		—		11		2,963
Total Performing	$	19,370	$	5,586	$	3,114	$	28,070
Non-Performing
North America	$	59	$	—	$	—	$	59
Europe	38		—		—		38
Asia/Pacific	36		—		—		36
Mining	12		—		—		12
Latin America	148		—		—		148
Caterpillar Power Finance	220		—		—		220
Total Non-Performing	$	513	$	—	$	—	$	513
Total Performing and Non-Performing
North America	$	5,984	$	2,931	$	1,356	$	10,271
Europe	2,555		652		332		3,539
Asia/Pacific	3,480		945		868		5,293
Mining	1,973		1		—		1,974
Latin America	2,719		1,057		547		4,323
Caterpillar Power Finance	3,172		—		11		3,183
Total	$	19,883	$	5,586	$	3,114	$	28,583



(Millions of dollars)
	December 31, 2011
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	5,561	$	2,414	$	1,836	$	9,811
Europe	2,166		334		402		2,902
Asia/Pacific	3,187		516		465		4,168
Mining	1,473		—		—		1,473
Latin America	2,377		709		422		3,508
Caterpillar Power Finance	2,762		—		29		2,791
Total Performing	$	17,526	$	3,973	$	3,154	$	24,653
Non-Performing
North America	$	112	$	—	$	—	$	112
Europe	58		—		—		58
Asia/Pacific	24		—		—		24
Mining	12		—		—		12
Latin America	108		—		—		108
Caterpillar Power Finance	158		—		—		158
Total Non-Performing	$	472	$	—	$	—	$	472
Total Performing and Non-Performing
North America	$	5,673	$	2,414	$	1,836	$	9,923
Europe	2,224		334		402		2,960
Asia/Pacific	3,211		516		465		4,192
Mining	1,485		—		—		1,485
Latin America	2,485		709		422		3,616
Caterpillar Power Finance	2,920		—		29		2,949
Total	$	17,998	$	3,973	$	3,154	$	25,125



(Millions of dollars)
	December 31, 2010
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,231	$	1,993	$	1,290	$	9,514
Europe	2,421		344		110		2,875
Asia/Pacific	2,630		296		204		3,130
Mining	868		—		11		879
Latin America	2,287		659		173		3,119
Caterpillar Power Finance	2,904		19		27		2,950
Total Performing	$	17,341	$	3,311	$	1,815	$	22,467
Non-Performing
North America	$	217	$	—	$	—	$	217
Europe	89		—		—		89
Asia/Pacific	24		—		—		24
Mining	7		—		—		7
Latin America	139		—		—		139
Caterpillar Power Finance	163		—		—		163
Total Non-Performing	$	639	$	—	$	—	$	639
Total Performing and Non-Performing
North America	$	6,448	$	1,993	$	1,290	$	9,731
Europe	2,510		344		110		2,964
Asia/Pacific	2,654		296		204		3,154
Mining	875		—		11		886
Latin America	2,426		659		173		3,258
Caterpillar Power Finance	3,067		19		27		3,113
Total	$	17,980	$	3,311	$	1,815	$	23,106

Troubled Debt Restructurings

A restructuring of a loan or finance lease receivable constitutes a troubled debt restructuring (TDR) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs are reviewed along with other receivables as part of management’s ongoing evaluation of the adequacy of the Allowance for credit losses. The Allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral. In addition, consideration is given to credit enhancements such as additional collateral and contractual third-party guarantees in determining the Allowance for credit losses attributable to TDRs.

There were no loans or finance lease receivables modified as TDRs during the years ended December 31, 2012 and 2011 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

Loan and finance lease receivables in the customer portfolio segment modified as TDRs during the years ended December 31, 2012 and 2011, were as follows:



(Dollars in millions)
	Year Ended December 31, 2012					Year Ended December 31, 2011
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
Customer
North America	98	$	15	$	15	71	$	13	$	13
Europe⁽¹⁾	21	8		8		7	44		44
Asia/Pacific	12	3		3		—	—		—
Mining	—	—		—		—	—		—
Latin America	41	5		5		12	10		10
Caterpillar Power Finance⁽²⁾⁽³⁾	27	253		253		35	117		117
Total⁽⁴⁾	199	$	284	$	284	125	$	184	$	184

⁽¹⁾One customer comprises $43 million of the $44 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2011.

⁽²⁾Ten customers comprise $248 million of the $253 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2012. Three customers comprise $104 million of the $117 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2011.

⁽³⁾During the years ended December 31, 2012 and 2011, $24 million and $15 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $24 million and $15 million of additional funds are not reflected in the tables above as no incremental modifications have been made with the borrower during the periods presented. At December 31, 2012, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $1 million.

⁽⁴⁾Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs in the customer portfolio segment with a payment default during the years ended December 31, 2012 and 2011, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)
	Year Ended December 31, 2012			Year Ended December 31, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	49	$	4	48	$	26
Europe	—	—		1	1
Asia/Pacific	2	1		—	—
Mining	—	—		—	—
Latin America	—	—		7	4
Caterpillar Power Finance⁽¹⁾	16	21		14	70
Total	67	$	26	70	$	101

⁽¹⁾Two customers comprise $19 million of the $21 million post-TDR recorded investment for the year ended December 31, 2012. Two customers comprise $65 million of the $70 million post-TDR recorded investment for the year ended December 31, 2011.