Allowance for Credit Losses

The allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions.

Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based either on the present value of expected future cash flows discounted at the receivables' effective interest rate or the fair value of the collateral for collateral-dependent receivables. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default. In addition, qualitative factors not able to be fully captured in our loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

Our allowance for credit losses is segregated into three portfolio segments:


•	Customer - Finance receivables with retail customers.


•	Dealer - Finance receivables with Caterpillar dealers.


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

A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses.

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.

Our allowance for credit losses as of December 31, 2015 was $338 million or 1.22 percent of net finance receivables compared with $401 million or 1.36 percent as of December 31, 2014, which is a decrease of $63 million. The decrease in allowance rate is primarily a result of changes in our estimate of the loss emergence period and loss given default. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	December 31, 2015
Allowance for Credit Losses:	Customer			Dealer			Caterpillar Purchased Receivables			Total
Balance at beginning of year	$	388		$	10		$	3		$	401
Receivables written off	(196		)	—			—			(196		)
Recoveries on receivables previously written off	41			—			—			41
Provision for credit losses	119			(1		)	(1		)	117
Adjustment due to sale of receivables	(2		)	—			—			(2		)
Foreign currency translation adjustment	(23		)	—			—			(23		)
Balance at end of year	$	327		$	9		$	2		$	338

Individually evaluated for impairment	$	65		$	—		$	—		$	65
Collectively evaluated for impairment	262			9			2			273
Ending Balance	$	327		$	9		$	2		$	338

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	601		$	—		$	—		$	601
Collectively evaluated for impairment	19,431			5,093			2,601			27,125
Ending Balance	$	20,032		$	5,093		$	2,601		$	27,726



(Millions of dollars)
	December 31, 2014
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	374		$	10	$	3	$	387
Receivables written off	(146		)	—		—		(146		)
Recoveries on receivables previously written off	47			—		—		47
Provision for credit losses	136			—		—		136
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(20		)	—		—		(20		)
Balance at end of year	$	388		$	10	$	3	$	401

Individually evaluated for impairment	$	75		$	—	$	—	$	75
Collectively evaluated for impairment	313			10		3		326
Ending Balance	$	388		$	10	$	3	$	401

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	614		$	—	$	—	$	614
Collectively evaluated for impairment	20,454			5,169		3,238		28,861
Ending Balance	$	21,068		$	5,169	$	3,238	$	29,475

Credit quality of finance receivables

At origination, we evaluate credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, we monitor credit quality based on past-due status and collection experience as there is a meaningful correlation between the past-due status of customers and the risk of loss.

In determining past-due status, we consider the entire finance receivable balance past due when any installment is over 30 days past due. The tables below summarize our recorded investment of finance receivables by aging category.



(Millions of dollars)
	December 31, 2015
	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	$	45	$	12	$	30	$	87	$	8,031	$	8,118	$	4
Europe	18		7		44		69		2,358		2,427		9
Asia/Pacific	22		12		21		55		2,108		2,163		6
Mining	6		1		68		75		1,793		1,868		1
Latin America	45		31		199		275		1,998		2,273		—
Caterpillar Power Finance	—		1		35		36		3,147		3,183		2
Dealer
North America	—		—		—		—		3,387		3,387		—
Europe	—		—		—		—		330		330		—
Asia/Pacific	—		—		—		—		611		611		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		—		—		758		758		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Caterpillar Purchased Receivables
North America	16		5		1		22		1,386		1,408		1
Europe	4		—		4		8		307		315		3
Asia/Pacific	—		—		—		—		407		407		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		454		454		—
Caterpillar Power Finance	—		1		—		1		16		17		—
Total	$	156	$	70	$	402	$	628	$	27,098	$	27,726	$	26



(Millions of dollars)
	December 31, 2014
	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	$	46	$	8	$	27	$	81	$	7,291	$	7,372	$	4
Europe	16		23		29		68		2,607		2,675		6
Asia/Pacific	29		22		69		120		2,773		2,893		16
Mining	28		—		11		39		2,084		2,123		—
Latin America	55		23		196		274		2,583		2,857		8
Caterpillar Power Finance	1		4		64		69		3,079		3,148		1
Dealer
North America	—		—		—		—		3,209		3,209		—
Europe	—		—		—		—		467		467		—
Asia/Pacific	—		—		—		—		637		637		—
Mining	—		—		—		—		3		3		—
Latin America	—		—		—		—		853		853		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	23		5		1		29		1,916		1,945		1
Europe	4		1		5		10		429		439		1
Asia/Pacific	—		—		—		—		401		401		—
Mining	—		—		—		—		—		—		—
Latin America	6		5		—		11		420		431		—
Caterpillar Power Finance	—		—		1		1		21		22		1
Total	$	208	$	91	$	403	$	702	$	28,773	$	29,475	$	38

Impaired finance receivables

For all classes, a finance receivable 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. Impaired finance receivables include finance receivables that have been restructured and are considered to be Troubled Debt Restructures.

There were no impaired finance receivables as of December 31, 2015, 2014 and 2013, for the Dealer and Caterpillar Purchased Receivables portfolio segments. Our recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:



(Millions of dollars)
	As of December 31, 2015						As of December 31, 2014
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	12	$	12	$	—	$	14	$	14	$	—
Europe	41		41		—		44		43		—
Asia/Pacific	1		1		—		2		2		—
Mining	84		84		—		29		29		—
Latin America	28		28		—		34		34		—
Caterpillar Power Finance	242		241		—		129		128		—
Total	$	408	$	407	$	—	$	252	$	250	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	14	$	13	$	4	$	6	$	6	$	1
Europe	11		10		5		12		12		4
Asia/Pacific	34		34		4		29		29		8
Mining	11		11		3		138		137		9
Latin America	53		53		21		42		42		12
Caterpillar Power Finance	70		70		28		135		134		41
Total	$	193	$	191	$	65	$	362	$	360	$	75
Total Impaired Finance Receivables
North America	$	26	$	25	$	4	$	20	$	20	$	1
Europe	52		51		5		56		55		4
Asia/Pacific	35		35		4		31		31		8
Mining	95		95		3		167		166		9
Latin America	81		81		21		76		76		12
Caterpillar Power Finance	312		311		28		264		262		41
Total	$	601	$	598	$	65	$	614	$	610	$	75



(Millions of dollars)
	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	12	$	1	$	20	$	1	$	25	$	3
Europe	42		1		47		1		49		1
Asia/Pacific	2		—		3		—		4		—
Mining	75		3		69		3		61		3
Latin America	31		—		30		—		11		—
Caterpillar Power Finance	170		5		164		6		271		5
Total	$	332	$	10	$	333	$	11	$	421	$	12
Impaired Finance Receivables With An Allowance Recorded
North America	$	9	$	—	$	9	$	—	$	18	$	1
Europe	14		1		21		1		22		1
Asia/Pacific	44		2		23		1		18		1
Mining	39		1		90		7		1		—
Latin America	56		3		36		1		52		2
Caterpillar Power Finance	115		3		96		2		135		1
Total	$	277	$	10	$	275	$	12	$	246	$	6
Total Impaired Finance Receivables
North America	$	21	$	1	$	29	$	1	$	43	$	4
Europe	56		2		68		2		71		2
Asia/Pacific	46		2		26		1		22		1
Mining	114		4		159		10		62		3
Latin America	87		3		66		1		63		2
Caterpillar Power Finance	285		8		260		8		406		6
Total	$	609	$	20	$	608	$	23	$	667	$	18

Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). Recognition is resumed and previously suspended income is recognized when the finance receivable becomes current and collection of remaining amounts is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.

As of December 31, 2015 and 2014, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of December 31, 2015 and 2014, there was $1 million and $4 million, respectively, in finance receivables on non-accrual status for the Caterpillar Purchased Receivables portfolio segment, all of which was in the Europe finance receivable class. The investment in Customer finance receivables on non-accrual status as of December 31, was as follows:



(Millions of dollars)
	2015		2014
North America	$	31	$	27
Europe	39		28
Asia/Pacific	15		54
Mining	106		62
Latin America	217		201
Caterpillar Power Finance	77		96
Total	$	485	$	468

Troubled debt restructurings

A restructuring of a finance 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, extended skip payment periods and reduction of principal and/or accrued interest.

As of December 31, 2015, there were $3 million of additional funds committed to lend to a borrower whose terms have been modified in a TDR. There were no remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR as of December 31, 2014 and 2013.

There were no finance receivables modified as TDRs during the years ended December 31, 2015, 2014 and 2013 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Finance receivables in the Customer portfolio segment modified as TDRs during the years ended December 31, 2015, 2014 and 2013, were as follows:



(Dollars in millions)	Year Ended December 31, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	14	$	1	$	1
Europe	23	2		2
Asia/Pacific	21	26		26
Mining	4	65		65
Latin America	11	1		2
Caterpillar Power Finance	21	259		242
Total	94	$	354	$	338

	Year Ended December 31, 2014
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	34	$	12	$	7
Europe	8	7		7
Asia/Pacific	2	—		—
Mining	51	185		176
Latin America	35	31		30
Caterpillar Power Finance	18	137		139
Total	148	$	372	$	359

	Year Ended December 31, 2013
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	62	$	9	$	9
Europe	51	7		7
Asia/Pacific	3	1		1
Mining	45	123		123
Latin America	32	3		3
Caterpillar Power Finance	17	153		157
Total	210	$	296	$	300

During the years ended December 31, 2015 and 2013, $4 million and $25 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $4 million and $25 million of additional funds are not reflected in the tables above as no incremental modifications have been made with those borrowers during the periods presented. During the year ended December 31, 2014, no additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR.

TDRs in the Customer portfolio segment with a payment default during the years ended December 31, 2015, 2014 and 2013, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Year Ended December 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
North America	12	$	1	11	$	1	19	$	4
Europe	—	—		46	2		5	—
Latin America	12	1		11	1		—	—
Caterpillar Power Finance	—	—		—	—		2	3
Total	24	$	2	68	$	4	26	$	7