
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 24, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,317		$	1,963		$	3,598		$	8,878
Residual value	225			—			—			225
Unearned income	(182		)	—			—			(182		)
Allowance for credit loss	(255		)	(90		)	(33		)	(378		)
Total, net	$	3,105		$	1,873		$	3,565		$	8,543
Reported as:
Current	$	1,447		$	931		$	2,128		$	4,506
Noncurrent	1,658			942			1,437			4,037
Total, net	$	3,105		$	1,873		$	3,565		$	8,543



July 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,361		$	1,763		$	3,573		$	8,697
Residual value	224			—			—			224
Unearned income	(190		)	—			—			(190		)
Allowance for credit loss	(259		)	(87		)	(36		)	(382		)
Total, net	$	3,136		$	1,676		$	3,537		$	8,349
Reported as:
Current	$	1,468		$	856		$	2,167		$	4,491
Noncurrent	1,668			820			1,370			3,858
Total, net	$	3,136		$	1,676		$	3,537		$	8,349

As of October 24, 2015 and July 25, 2015, the deferred service revenue related to "Financed Service Contracts and Other" was $1,911 million and $1,853 million, respectively.

Future minimum lease payments at October 24, 2015 are summarized as follows (in millions):



Fiscal Year	Amount
2016 (remaining nine months)	$	1,307
2017	1,079
2018	606
2019	254
2020	70
Thereafter	1
Total	$	3,317

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 24, 2015 and July 25, 2015 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
October 24, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,670	$	1,336	$	129	$	3,135
Loan receivables	1,039		783		141		1,963
Financed service contracts and other	2,111		1,437		50		3,598
Total	$	4,820	$	3,556	$	320	$	8,696



	INTERNAL CREDIT RISK RATING
July 25, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,688	$	1,342	$	141	$	3,171
Loan receivables	788		823		152		1,763
Financed service contracts and other	2,133		1,389		51		3,573
Total	$	4,609	$	3,554	$	344	$	8,507

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 24, 2015 and July 25, 2015 were $2,308 million and $2,253 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,921 million and $8,731 million as of their respective period ends.

The following tables present the aging analysis of gross receivables less unearned income as of October 24, 2015 and July 25, 2015 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
October 24, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	100	$	51	$	176	$	327	$	2,808	$	3,135	$	83	$	72
Loan receivables	22		85		69		176		1,787		1,963		17		17
Financed service contracts and other	152		50		249		451		3,147		3,598		26		6
Total	$	274	$	186	$	494	$	954	$	7,742	$	8,696	$	126	$	95



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 25, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	90	$	27	$	185	$	302	$	2,869	$	3,171	$	73	$	73
Loan receivables	21		3		25		49		1,714		1,763		32		32
Financed service contracts and other	396		152		414		962		2,611		3,573		29		9
Total	$	507	$	182	$	624	$	1,313	$	7,194	$	8,507	$	134	$	114

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 is 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 $333 million and $496 million as of October 24, 2015 and July 25, 2015, respectively.

As of October 24, 2015, the Company had financing receivables of $119 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 as they are well-secured and in the process of collection. Such balance was $70 million as of July 25, 2015.


(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 25, 2015	$	259		$	87		$	36		$	382
Provisions	—			4			—			4
Recoveries (write-offs), net	(4		)	—			(3		)	(7		)
Foreign exchange and other	—			(1		)	—			(1		)
Allowance for credit loss as of October 24, 2015	$	255		$	90		$	33		$	378
Financing receivables as of October 24, 2015 ⁽¹⁾	$	3,360		$	1,963		$	3,598		$	8,921



	CREDIT LOSS ALLOWANCES
	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

⁽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 24, 2015 and July 25, 2015, 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 24, 2015			July 25, 2015
Operating lease assets	$	372		$	372
Accumulated depreciation	(207		)	(205		)
Operating lease assets, net	$	165		$	167

Minimum future rentals on noncancelable operating leases at October 24, 2015 were approximately $0.1 billion for the remaining nine months of fiscal 2016, $0.1 billion for fiscal 2017, and less than $0.1 billion per year for each of fiscal 2018 through fiscal 2020.