NOTE 5 — FINANCIAL SERVICES

Dell Financial Services

Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. and Canada through Dell Financial Services (“DFS”). DFS's key activities include the origination, collection, and servicing of customer receivables related to the purchase of Dell products and services. New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services through DFS, were approximately $0.8 billion and $0.9 billion for the three months ended October 28, 2011, and October 29, 2010, respectively, and $2.5 billion and $2.8 billion for the nine months ended October 28, 2011, and October 29, 2010, respectively.

During the second quarter of Fiscal 2012, Dell acquired Dell Financial Services Canada Limited ("DFS Canada") from CIT Group Inc. The purchase included a portfolio of $367 million in gross contractual fixed-term leases and loans, Consumer installment, and Consumer revolving loans with a fair value at purchase of $309 million. Of the gross contractual amounts, $23 million was expected to be uncollectible at the date of acquisition. Dell also acquired a liquidating portfolio of computer equipment operating leases. The gross amount of the equipment associated with these operating leases at the date of acquisition was $67 million and is included in property, plant, and equipment in the Condensed Consolidated Statements of Financial Position. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information about Dell's acquisitions.

In the first quarter of Fiscal 2012, Dell entered into a definitive agreement to acquire CIT Vendor Finance's Dell-related assets and sales and servicing functions in Europe. The acquisition of these assets will enable global expansion of Dell's direct finance model. Subject to customary closing conditions, Dell expects to close substantially all of this acquisition in the fiscal year ending February 1, 2013.

Dell transfers certain U.S. customer financing receivables to special purpose entities (“SPEs”) which meet the definition of a variable interest entity and are consolidated into Dell's Condensed Consolidated Financial Statements. The SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer receivables in the capital markets. These SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Dell's risk of loss related to securitized receivables is limited to the amount of Dell's right to receive collections for assets securitized exceeding the amount required to pay interest, principal, and other fees and expenses related to the asset-backed securities. Dell provides credit enhancement to the securitization in the form of over-collateralization.

Dell's securitization programs contain standard structural features related to the performance of the securitized receivables. These structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these criteria are not met and Dell is unable to restructure the program, no further funding of receivables will be permitted and the timing of Dell's expected cash flows from over-collateralization will be delayed. At October 28, 2011, these criteria were met.

Financing Receivables

The following table summarizes the components of Dell's financing receivables segregated by portfolio segment:



	October 28, 2011									January 28, 2011
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Financing Receivables, net:
Customer receivables, gross	$	2,111		$	2,348		$	4,459		$	2,396		$	1,992		$	4,388
Allowances for losses	(175		)	(22		)	(197		)	(214		)	(27		)	(241		)
Customer receivables, net	1,936			2,326			4,262			2,182			1,965			4,147
Residual interest	—			343			343			—			295			295
Financing receivables, net	$	1,936		$	2,669		$	4,605		$	2,182		$	2,260		$	4,442
Short-term	$	1,936		$	1,390		$	3,326		$	2,182		$	1,461		$	3,643
Long-term	—			1,279			1,279			—			799			799
Financing receivables, net	$	1,936		$	2,669		$	4,605		$	2,182		$	2,260		$	4,442

Included in financing receivables, net, are receivables that are held by consolidated variable interest entities ("VIEs") as shown in the table below:



	October 28, 2011		January 28, 2011
	(in millions)
Financing receivables held by consolidated VIEs, net:
Short-term, net	$	1,055	$	1,087
Long-term, net	483		262
Financing receivables held by consolidated VIEs, net	$	1,538	$	1,349

The following tables summarizes the changes in the allowance for financing receivable losses for the respective periods:



	Three Months Ended
	October 28, 2011									October 29, 2010
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at the beginning of period	$	189		$	21		$	210		$	248		$	29		$	277
Principal charge-offs	(45		)	(2		)	(47		)	(66		)	(3		)	(69		)
Interest charge-offs	(8		)	—			(8		)	(12		)	—			(12		)
Recoveries	9			1			10			9			—			9
Provision and adjustments charged to income statement	30			2			32			49			3			52
Balance at end of period	$	175		$	22		$	197		$	228		$	29		$	257



	Nine Months Ended
	October 28, 2011									October 29, 2010
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at the beginning of period	$	214		$	27		$	241		$	224		$	13		$	237
Incremental allowance due to VIE consolidation	—			—			—			—			16			16
Principal charge-offs	(152		)	(6		)	(158		)	(175		)	(14		)	(189		)
Interest charge-offs	(28		)	—			(28		)	(29		)	—			(29		)
Recoveries	39			3			42			20			—			20
Provision and adjustments charged to income statement	102			(2		)	100			188			14			202
Balance at end of period	$	175		$	22		$	197		$	228		$	29		$	257

The following table summarizes the aging of Dell's customer receivables, gross, including accrued interest, as of October 28, 2011, and January 28, 2011, segregated by class:



	October 28, 2011								January 28, 2011
	Current		Past Due 1 — 90 Days		Past Due > 90 Days		Total		Current		Past Due 1 — 90 Days		Past Due > 90 Days		Total
	(in millions)
Revolving — Consumer
Owned since inception	$	1,204	$	148	$	46	$	1,398	$	1,302	$	153	$	48	$	1,503
Purchased	324		58		19		401		447		88		35		570
Fixed-term — Consumer
Owned since inception	19		1		—		20		—		—		—		—
Purchased	79		6		1		86		—		—		—		—
Fixed-term — Large Enterprise
Owned since inception	1,233		15		3		1,251		1,077		47		7		1,131
Purchased	21		4		—		25		—		—		—		—
Fixed-term — Public
Owned since inception	408		6		—		414		463		12		1		476
Purchased	18		1		—		19		—		—		—		—
Revolving — SMB
Owned since inception	254		22		5		281		246		26		5		277
Purchased	24		5		2		31		34		9		3		46
Fixed-term — SMB
Owned since inception	476		11		3		490		371		11		3		385
Purchased	40		3		—		43		—		—		—		—
Total customer receivables, gross	$	4,100	$	280	$	79	$	4,459	$	3,940	$	346	$	102	$	4,388

The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class as of October 28, 2011, and January 28, 2011. For revolving loans to consumers, Dell makes credit decisions based on propriety scorecards which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. For Commercial customers, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. These credit level scores range from one to sixteen for Public and Large Enterprise customers, and generally from one to six for small and medium business ("SMB") customers. The categories shown in the tables below segregate customer receivables based on the relative degrees of credit risk within each segment and product group. As loss experience varies substantially between financial products and customer segments, the credit quality categories cannot be compared between the different classes. The credit quality indicators for Consumer revolving accounts are primarily as of each quarter end date, and all others are generally updated on a periodic basis.

For the Consumer receivables shown in the below table, the higher quality category includes prime accounts which are generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720+. The middle category represents the mid-tier accounts that are comparable to U.S. FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to FICO scores below 660.



	October 28, 2011								January 28, 2011
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — Consumer
Owned since inception	$	201	$	407	$	790	$	1,398	$	251	$	415	$	837	$	1,503
Purchased	$	33	$	95	$	273	$	401	$	50	$	127	$	393	$	570
Fixed-term — Consumer
Owned since inception	$	1	$	9	$	10	$	20	$	—	$	—	$	—	$	—
Purchased	$	5	$	40	$	41	$	86	$	—	$	—	$	—	$	—

For the Large Enterprise and Public commercial receivables shown in the below table, Dell's internal credit level scoring has been aggregated to their most comparable external commercial rating agency equivalents. Investment grade generally represents the highest credit quality accounts, non-investment grade represents middle quality accounts, and sub-standard represents the lowest quality accounts.



	October 28, 2011								January 28, 2011
	Investment		Non-Investment		Sub-Standard		Total		Investment		Non-Investment		Sub-Standard		Total
	(in millions)
Fixed-term — Large Enterprise
Owned since inception	$	968	$	183	$	100	$	1,251	$	806	$	166	$	159	$	1,131
Purchased	$	11	$	10	$	4	$	25	$	—	$	—	$	—	$	—
Fixed-term — Public
Owned since inception	$	371	$	34	$	9	$	414	$	438	$	30	$	8	$	476
Purchased	$	15	$	3	$	1	$	19	$	—	$	—	$	—	$	—

For the SMB receivables shown in the table below, the higher quality category includes receivables that are generally within Dell's top two internal credit quality levels, which typically have the lowest loss experience. The middle category generally falls within credit levels three and four, and the lower category generally falls within Dell's bottom two credit levels, which experience higher loss rates. The revolving product is sold primarily to small business customers and the fixed-term products are more weighted toward medium-sized businesses. Although both fixed-term and revolving products generally rely on a six-level internal rating system, the grading criteria and classifications are different as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the SMB fixed-term and revolving classes.



	October 28, 2011								January 28, 2011^(a)
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — SMB
Owned since inception	$	101	$	83	$	97	$	281	$	108	$	85	$	84	$	277
Purchased	$	11	$	16	$	4	$	31	$	16	$	24	$	6	$	46
Fixed-term — SMB
Owned since inception	$	49	$	173	$	268	$	490	$	55	$	122	$	208	$	385
Purchased	$	4	$	34	$	5	$	43	$	—	$	—	$	—	$	—

____________________

(a) Amounts as of January 28, 2011 have been reclassified due to adjustments between credit quality categories.

Customer Receivables

The following is a description of the components of Dell's customer receivables:

•

Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. Revolving loans in the U.S. bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within 12 months on average. Revolving loans are included in short-term financing receivables. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full by a specific date, no interest is charged. These special programs generally range from 6 to 12 months. At October 28, 2011, and January 28, 2011, receivables under these special programs were $299 million and $398 million, respectively.

•

Fixed-term sales-type leases and loans — Dell enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments at October 28, 2011, were as follows: Fiscal 2012 - $307 million; Fiscal 2013 - $985 million; Fiscal 2014 - $587 million; Fiscal 2015 - $194 million; Fiscal 2016 and beyond - $22 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities and certain consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years.

Purchased Credit-Impaired Loans

Purchased Credit-Impaired (“PCI”) loans are acquired loans which showed evidence of deterioration in credit quality prior to their acquisition and for which it is probable that Dell will not collect all contractually required principal and interest payments. During the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. that consisted of revolving Dell customer account balances that met the definition of PCI loans. At October 28, 2011, the outstanding balance of these receivables, including principal and accrued interest, was $436 million and the carrying amount was $228 million.

The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is accreted into interest income using the effective yield method based on the expected future cash flows over the estimated lives of the PCI loans. Due to improved expectations of the amount of expected cash flows and higher post charge-off recoveries, Dell increased the accretable yield associated with these PCI loans by $8 million and $67 million for the three and nine months ended October 28, 2011, respectively. The increases in accretable yield will be amortized over the remaining life of the loans.

The following table shows activity for the accretable yield on the PCI loans for the three and nine months ended October 28, 2011:



	Three Months Ended			Nine Months Ended
	October 28, 2011			October 28, 2011
	(in millions)
Accretable Yield:
Balance at beginning of period	$	152		$	137
Additions/ Purchases	—			—
Accretion	(23		)	(67		)
Prospective yield adjustment	8			67
Balance at end of period	$	137		$	137

Residual Interest

Dell retains a residual interest in equipment leased under its fixed-term lease programs. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, Dell assesses the carrying amount of its recorded residual values for impairment. Anticipated declines in specific future residual values that are considered to be other-than-temporary are recorded in earnings.

Asset Securitizations

Customer receivables funded via securitization through SPEs were $501 million and $510 million, during the third quarters of Fiscal 2012 and Fiscal 2011, respectively, and $1.6 billion and $1.5 billion for the nine months ended October 28, 2011, and October 29, 2010, respectively. The programs are effective for 12 month periods and subject to an annual renewal process.

The structured financing debt related to the fixed-term lease and loan, and revolving loan securitization programs was $1.3 billion and $1.0 billion as of October 28, 2011, and January 28, 2011, respectively. The debt is collateralized solely by the financing receivables in the programs. The debt has a variable interest rate and an average duration of 12 to 36 months based on the terms of the underlying financing receivables. The total debt capacity related to the securitization programs is $1.4 billion. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the structured financing debt.

Dell enters into interest rate swap agreements to effectively convert a portion of the structured financing debt from a floating rate to a fixed rate. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information about interest rate swaps.