5. Receivables

Accounts Receivable—In its role as auctioneer, Sotheby's represents sellers of artworks by accepting property on consignment and by matching sellers to buyers through the auction process. Sotheby's invoices the buyer for the purchase price of the property (including the commission owed by the buyer), collects payment from the buyer and remits to the seller the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby's commissions include those paid by the buyer ("buyer's premium") and those paid by the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of the hammer price of the property sold at auction.

Under Sotheby's standard payment terms, payments from buyers are due no more than 30 days from the sale date and consignor payments are made 35 days from the sale date. However, extended payment terms are sometimes provided to buyers in order to support and market a sale. Such terms typically extend the payment due date from 30 days to a date that is no greater than one year from the sale date. When providing extended payment terms, Sotheby's attempts to match the timing of receipt from the buyer with payment to the consignor, but is not always successful in doing so.

Under the standard terms and conditions of its auction sales, Sotheby's is not obligated to pay consignors for property that has not been paid for by buyers. If a buyer defaults on payment, the sale may be cancelled and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future auction or negotiate a private sale. However, in certain limited instances and subject to approval under Sotheby's policy, the consignor may be paid before payment is collected from the buyer and/or the buyer is allowed to take possession of the property before payment is received. In situations when the buyer takes possession of the property before payment is received, Sotheby's is liable to the seller for the net sale proceeds whether or not the buyer makes payment. As of June 30, 2011, net Accounts Receivable of approximately $1 billion includes $83.4 million related to situations in which buyers have taken possession of the property before making payment to Sotheby's. Management believes that adequate allowances have been established to provide for potential losses on any uncollected amounts.

Notes Receivable—Through its Finance segment, Sotheby's provides certain collectors and art dealers with financing secured by works of art that it either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a "consignor advance"); and (2) general purpose term loans secured by property not presently intended for sale (a "term loan"). A consignor advance allows a seller to receive funds upon consignment for an auction that will typically occur up to one year in the future, while preserving for the benefit of the seller the potential of the auction process. Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and are intended to generate future auction consignments, although such loans do not always result in consignments. Secured loans are typically made with full recourse against the borrower.

The collection of secured loans can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby's ability to realize on its collateral may be limited or delayed.

Sotheby's target loan-to-value ratio ("LTV"), which is defined as the principal loan amount divided by the low auction estimate of the collateral, is 50% or lower. However, loans are sometimes made at an initial LTV higher than 50%. In addition, as a result of the periodic revaluation of loan collateral, the LTV of certain loans may increase above the 50% target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby's specialists on an annual basis or more frequently if there is a material change in circumstances related to the loan or the disposal plans for the collateral. Management believes that the LTV ratio is the critical credit quality indicator for Finance segment secured loans. As of June 30, 2011 and 2010, the aggregate LTV of Finance segment secured loans was 37%. As of June 30, 2011, Finance segment secured loans with an LTV above 50% totaled $90 million and represented 46% of net Notes Receivable. The collateral related to these loans had a low auction estimate of $156.9 million. As of June 30, 2010, Finance segment secured loans with an LTV above 50% totaled $60.5 million, and the collateral related to these loans had a low auction estimate of $102.2 million.

From 2008 through June 30, 2011, Sotheby's recognized $0.1 million of cumulative losses related to specific impaired Finance segment secured loans. The tables below provide other credit quality information regarding Finance segment secured loans as of June 30, 2011 and 2010 (in thousands of dollars):


	June 30, 2011		December 31, 2010		June 30, 2010
Total secured loans	$	192,717	$	241,631	$	144,425
Loans past due	$	20,183	$	23,888	$	31,209
Loans more than 90 days past due accruing interest	$	17,290	$	19,663	$	21,550
Non-accrual loans	$	893	$	1,028	$	1,142
Impaired loans	$	0	$	137	$	100

	June 30, 2011		December 31, 2010		June 30, 2010
Allowance for credit losses - impaired loans	$	0	$	137	$	100
Allowance for credit losses based on historical data		834		834		1,048

Total allowance for credit losses - secured loans	$	834	$	971	$	1,148

Management considers a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of June 30, 2011, $18.2 million of the net Notes Receivable balance was considered to be past due, of which almost the entire balance was more than 90 days past due and still accruing interest. The collateral related to these secured loans has a low auction estimate of approximately $57.4 million. In consideration of the value of the collateral related to these loans, current collateral disposal plans and negotiations with the borrowers, management believes that the principal and interest amounts due for these loans will be collected.

If a loan is considered to be impaired, it is placed on non-accrual status, and Finance Revenue is no longer recognized. The recognition of Finance Revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower. If sufficient additional collateral is not provided by the borrower, any cash receipts subsequently received thereafter on impaired loans are directly applied to reduce the recorded investment in the loan.

During the period January 1, 2010 to June 30, 2011, activity related to the allowance for credit losses is as follows (in thousands of dollars):


Allowance for credit losses as of January 1, 2010	$	1,028
Change in loan loss provision		(57	)

Allowance for credit losses at December 31, 2010		971
Change in loan loss provision		—
Write-offs		(137	)

Allowance for credit losses as of June 30, 2011	$	834

Sotheby's is obligated under the terms of certain auction guarantees (see Note 10) to advance a portion of the guaranteed amount prior to auction. Such Auction segment advances are recorded on Sotheby's balance sheet within Notes Receivable. As of June 30, 2011 and 2010, there were no such advances outstanding. On rare occasions, in order to attract future consignments, Sotheby's also makes unsecured loans to clients. The table above does not include unsecured loans of $3.1 million and $9.7 million as of June 30, 2011 and 2010, respectively.

The Finance segment's loans are predominantly variable interest rate loans; however, short-term, interest-free advances with maturities typically ranging between 3 and 6 months are provided to certain consignors in order to secure high-value property for auctions and can represent a significant portion of the client loan portfolio as of the end of certain quarterly reporting periods in advance of peak selling seasons. For the three months ended June 30, 2011 and 2010, the weighted average interest rates earned on Notes Receivable were 5.4% and 4.2%, respectively. For the six months ended June 30, 2011 and 2010, the weighted average interest rates earned on Notes Receivable were 5% and 5.2%, respectively. The carrying value of the loan portfolio approximates its fair value.

As of June 30, 2011, loans to entities related to one borrower totaled $50.2 million, which comprised approximately 26% of the net Notes Receivable balance. As of June 30, 2011, loans to two other borrowers of $27.7 million and $20 million comprised approximately 14% and 10%, respectively, of the net Notes Receivable balance.