
7.	Financing Receivables and Operating Leases


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.

A summary of the Company's financing receivables is presented as follows (in millions):



July 26, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,532		$	1,683		$	3,210		$	8,425
Residual value	233			—			—			233
Unearned income	(238		)	—			—			(238		)
Allowance for credit loss	(233		)	(98		)	(18		)	(349		)
Total, net	$	3,294		$	1,585		$	3,192		$	8,071
Reported as:
Current	$	1,476		$	728		$	1,949		$	4,153
Noncurrent	1,818			857			1,243			3,918
Total, net	$	3,294		$	1,585		$	3,192		$	8,071



July 27, 2013	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,529		$	1,649		$	3,136		$	8,314
Residual value	251			—			—			251
Unearned income	(273		)	—			—			(273		)
Allowance for credit loss	(238		)	(86		)	(20		)	(344		)
Total, net	$	3,269		$	1,563		$	3,116		$	7,948
Reported as:
Current	$	1,418		$	898		$	1,721		$	4,037
Noncurrent	1,851			665			1,395			3,911
Total, net	$	3,269		$	1,563		$	3,116		$	7,948

As of July 26, 2014 and July 27, 2013, the deferred service revenue related to the financed service contracts and other was $1,843 million and $2,036 million, respectively.

Future minimum lease payments at July 26, 2014 are summarized as follows (in millions):



Fiscal Year	Amount
2015	$	1,608
2016	1,049
2017	590
2018	227
2019	58
Total	$	3,532

Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.


(b)	Credit Quality of Financing Receivables

Gross receivables less unearned income categorized by the Company’s internal credit risk rating as of July 26, 2014 and July 27, 2013 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
July 26, 2014	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,615	$	1,538	$	141	$	3,294
Loan receivables	953		593		137		1,683
Financed service contracts and other	1,744		1,367		99		3,210
Total	$	4,312	$	3,498	$	377	$	8,187



	INTERNAL CREDIT RISK RATING
July 27, 2013	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,681	$	1,482	$	93	$	3,256
Loan receivables	842		777		30		1,649
Financed service contracts and other	1,876		1,141		119		3,136
Total	$	4,399	$	3,400	$	242	$	8,041

The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers, which consist of the following: lease receivables, loan receivables, and financed service contracts and other.

The Company’s internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings.

In circumstances when collectibility is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of July 26, 2014 and July 27, 2013 were $2,220 million and $2,453 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,420 million and $8,292 million as of their respective period ends.

The following tables present the aging analysis of gross receivables less unearned income as of July 26, 2014 and July 27, 2013 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 26, 2014	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	104	$	43	$	165	$	312	$	2,982	$	3,294	$	48	$	41
Loan receivables	2		1		16		19		1,664		1,683		19		19
Financed service contracts and other	301		238		230		769		2,441		3,210		12		9
Total	$	407	$	282	$	411	$	1,100	$	7,087	$	8,187	$	79	$	69



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 27, 2013	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	85	$	48	$	124	$	257	$	2,999	$	3,256	$	27	$	22
Loan receivables	6		3		11		20		1,629		1,649		11		9
Financed service contracts and other	75		48		392		515		2,621		3,136		18		11
Total	$	166	$	99	$	527	$	792	$	7,249	$	8,041	$	56	$	42

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables are presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $296 million and $406 million as of July 26, 2014 and July 27, 2013, respectively.

As of July 26, 2014, the Company had financing receivables of $116 million, net of unbilled or current receivables from the same contract, that were in the category of 91 days plus past due but remained on accrual status. Such balance was $87 million as of July 27, 2013. A financing receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.


(c)	Allowance for Credit Loss Rollforward

The allowances for credit loss and the related financing receivables are summarized as follows (in millions):



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 27, 2013	$	238		$	86		$	20		$	344
Provisions	4			9			1			14
Recoveries (write-offs), net	(11		)	5			(3		)	(9		)
Foreign exchange and other	2			(2		)	—			—
Allowance for credit loss as of July 26, 2014	$	233		$	98		$	18		$	349
Financing receivables as of July 26, 2014 ⁽¹⁾	$	3,527		$	1,683		$	3,210		$	8,420



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 28, 2012	$	247		$	122		$	11		$	380
Provisions	21			(20		)	10			11
Recoveries (write-offs), net	(30		)	(15		)	(1		)	(46		)
Foreign exchange and other	—			(1		)	—			(1		)
Allowance for credit loss as of July 27, 2013	$	238		$	86		$	20		$	344
Financing receivables as of July 27, 2013 ⁽¹⁾	$	3,507		$	1,649		$	3,136		$	8,292



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 30, 2011	$	237		$	103		$	27		$	367
Provisions	22			22			(13		)	31
Recoveries (write-offs), net	(2		)	—			(1		)	(3		)
Foreign exchange and other	(10		)	(3		)	(2		)	(15		)
Allowance for credit loss as of July 28, 2012	$	247		$	122		$	11		$	380
Financing receivables as of July 28, 2012 ⁽¹⁾	$	3,179		$	1,796		$	2,651		$	7,626

⁽¹⁾Total financing receivables before allowance for credit loss.


(d)	Operating Leases

The Company provides financing of certain equipment through operating leases, and the amounts are included in property and equipment in the Consolidated Balance Sheets. Amounts relating to equipment on operating lease assets and the associated accumulated depreciation are summarized as follows (in millions):



	July 26, 2014			July 27, 2013
Operating lease assets	$	362		$	326
Accumulated depreciation	(202		)	(203		)
Operating lease assets, net	$	160		$	123

Minimum future rentals on non-cancelable operating leases at July 26, 2014 are approximately $0.2 billion per year for fiscal 2015, $0.1 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019.