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Financing Receivables and Operating Leases
3 Months Ended
Oct. 25, 2014
Receivables [Abstract]  
Financing Receivables and Operating Leases
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):
October 25, 2014
Lease
Receivables
 
Loan
Receivables
 
Financed
Service
Contracts and Other
 
Total
Gross
$
3,498

 
$
1,744

 
$
3,071

 
$
8,313

Residual value
234

 

 

 
234

Unearned income
(223
)
 

 

 
(223
)
Allowance for credit loss
(248
)
 
(84
)
 
(36
)
 
(368
)
Total, net
$
3,261

 
$
1,660

 
$
3,035

 
$
7,956

Reported as:
 
 
 
 
 
 
 
Current
$
1,496

 
$
827

 
$
1,942

 
$
4,265

Noncurrent
1,765

 
833

 
1,093

 
3,691

Total, net
$
3,261

 
$
1,660

 
$
3,035

 
$
7,956

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


As of October 25, 2014 and July 26, 2014, the deferred service revenue related to the financed service contracts and other was $1,672 million and $1,843 million, respectively.
Future minimum lease payments at October 25, 2014 are summarized as follows (in millions):
Fiscal Year
Amount
2015 (remaining nine months)
$
1,303

2016
1,144

2017
681

2018
281

2019
87

Thereafter
2

Total
$
3,498


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 October 25, 2014 and July 26, 2014 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
October 25, 2014
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,665

 
$
1,482

 
$
128

 
$
3,275

Loan receivables
953

 
637

 
154

 
1,744

Financed service contracts and other
1,677

 
1,296

 
98

 
3,071

Total
$
4,295

 
$
3,415

 
$
380

 
$
8,090

 
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


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 October 25, 2014 and July 26, 2014 were $2,054 million and $2,220 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,324 million and $8,420 million as of their respective period ends.
The following tables present the aging analysis of gross receivables less unearned income as of October 25, 2014 and July 26, 2014 (in millions):
 
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 25, 2014
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
80

 
$
54

 
$
196

 
$
330

 
$
2,945

 
$
3,275

 
$
47

 
$
39

Loan receivables
17

 
41

 
89

 
147

 
1,597

 
1,744

 
41

 
37

Financed service contracts and other
144

 
163

 
532

 
839

 
2,232

 
3,071

 
12

 
7

Total
$
241

 
$
258

 
$
817

 
$
1,316

 
$
6,774

 
$
8,090

 
$
100

 
$
83

 
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


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 $661 million and $296 million as of October 25, 2014 and July 26, 2014, respectively.
As of October 25, 2014, the Company had financing receivables of $111 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 $78 million as of July 26, 2014. 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
Three Months Ended October 25, 2014
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 26, 2014
$
233

 
$
98

 
$
18

 
$
349

Provisions
22

 
(13
)
 
19

 
28

Recoveries (write-offs), net
(4
)
 
1

 

 
(3
)
Foreign exchange and other
(3
)
 
(2
)
 
(1
)
 
(6
)
Allowance for credit loss as of October 25, 2014
$
248

 
$
84

 
$
36

 
$
368

Financing receivables as of October 25, 2014 (1)
$
3,509

 
$
1,744

 
$
3,071

 
$
8,324

 
CREDIT LOSS ALLOWANCES
Three Months Ended October 26, 2013
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 27, 2013
$
238

 
$
86

 
$
20

 
$
344

Provisions
(3
)
 
6

 

 
3

Foreign exchange and other
2

 
1

 

 
3

Allowance for credit loss as of October 26, 2013
$
237

 
$
93

 
$
20

 
$
350

Financing receivables as of October 26, 2013 (1)
$
3,549

 
$
1,808

 
$
3,018

 
$
8,375

(1) Total financing receivables before allowance for credit loss.
The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.
Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of October 25, 2014 and July 26, 2014, are presented under “(b) Credit Quality of Financing Receivables” above.
The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, the Company uses expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk, and correlation.
(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):
 
October 25, 2014
 
July 26, 2014
Operating lease assets
$
349

 
$
362

Accumulated depreciation
(197
)
 
(202
)
Operating lease assets, net
$
152

 
$
160


Minimum future rentals on noncancelable operating leases at October 25, 2014 were approximately $0.2 billion for the remaining nine months of fiscal 2015, $0.1 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019.