Financing Receivables and Operating Leases


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts. 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. Lease receivables consist of arrangements with terms of four years on average. Loan receivables represent financing arrangements related to the sale of the Company's hardware, software, and services, which may include additional funding for other costs associated with network installation and integration of the Company's products and services. Loan receivables generally have terms of up to three years. Financed service contracts include financing receivables related to technical support and advanced services. 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.

During the fourth quarter of fiscal 2017, the Company reclassified $1.9 billion of its financing receivables related to software and the financing of indirect costs from financed service contracts and other to loan receivables to better reflect the classification of software receivables which have increased. Balances for prior years have been reclassified to conform to the current period's presentation.

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



July 29, 2017	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,784		$	4,560		$	2,517		$	9,861
Residual value	173			—			—			173
Unearned income	(145		)	—			—			(145		)
Allowance for credit loss	(162		)	(103		)	(30		)	(295		)
Total, net	$	2,650		$	4,457		$	2,487		$	9,594
Reported as:
Current	$	1,301		$	2,104		$	1,451		$	4,856
Noncurrent	1,349			2,353			1,036			4,738
Total, net	$	2,650		$	4,457		$	2,487		$	9,594



July 30, 2016	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	3,272		$	3,446		$	2,059		$	8,777
Residual value	202			—			—			202
Unearned income	(174		)	—			—			(174		)
Allowance for credit loss	(230		)	(97		)	(48		)	(375		)
Total, net	$	3,070		$	3,349		$	2,011		$	8,430
Reported as:
Current	$	1,490		$	1,580		$	1,202		$	4,272
Noncurrent	1,580			1,769			809			4,158
Total, net	$	3,070		$	3,349		$	2,011		$	8,430

Future minimum lease payments to the Company on lease receivables as of July 29, 2017 are summarized as follows (in millions):



Fiscal Year	Amount
2018	$	1,318
2019	813
2020	438
2021	183
2022	9
Thereafter	23
Total	$	2,784

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, excluding residual value, less unearned income categorized by the Company’s internal credit risk rating as of July 29, 2017 and July 30, 2016 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
July 29, 2017	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,408	$	1,181	$	50	$	2,639
Loan receivables	2,865		1,516		179		4,560
Financed service contracts	1,593		902		22		2,517
Total	$	5,866	$	3,599	$	251	$	9,716



	INTERNAL CREDIT RISK RATING
July 30, 2016	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,703	$	1,294	$	101	$	3,098
Loan receivables	1,792		1,464		190		3,446
Financed service contracts	1,271		774		14		2,059
Total	$	4,766	$	3,532	$	305	$	8,603

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.

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.

The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of July 29, 2017 and July 30, 2016 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 29, 2017	31 - 60		61 - 90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	160	$	60	$	216	$	436	$	2,203	$	2,639	$	14	$	14
Loan receivables	230		48		259		537		4,023		4,560		43		43
Financed service contracts	160		77		523		760		1,757		2,517		18		2
Total	$	550	$	185	$	998	$	1,733	$	7,983	$	9,716	$	75	$	59



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 30, 2016	31 - 60		61 - 90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	111	$	25	$	251	$	387	$	2,711	$	3,098	$	60	$	60
Loan receivables	83		37		167		287		3,159		3,446		42		42
Financed service contracts	159		124		436		719		1,340		2,059		30		10
Total	$	353	$	186	$	854	$	1,393	$	7,210	$	8,603	$	132	$	112

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 $666 million and $670 million as of July 29, 2017 and July 30, 2016, respectively.

As of July 29, 2017, the Company had financing receivables of $315 million, net of unbilled or current receivables, 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 $144 million as of July 30, 2016.


(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			Total
Allowance for credit loss as of July 30, 2016	$	230		$	97		$	48		$	375
Provisions	(25		)	7			(17		)	(35		)
Recoveries (write-offs), net	(37		)	(11		)	(1		)	(49		)
Foreign exchange and other	(6		)	10			—			4
Allowance for credit loss as of July 29, 2017	$	162		$	103		$	30		$	295



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Allowance for credit loss as of July 25, 2015	$	259		$	87		$	36		$	382
Provisions	(13		)	13			17			17
Recoveries (write-offs), net	(10		)	—			(5		)	(15		)
Foreign exchange and other	(6		)	(3		)	—			(9		)
Allowance for credit loss as of July 30, 2016	$	230		$	97		$	48		$	375



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Allowance for credit loss as of July 26, 2014	$	233		$	98		$	18		$	349
Provisions	45			(8		)	20			57
Recoveries (write-offs), net	(7		)	1			(1		)	(7		)
Foreign exchange and other	(12		)	(4		)	(1		)	(17		)
Allowance for credit loss as of July 25, 2015	$	259		$	87		$	36		$	382


(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 29, 2017			July 30, 2016
Operating lease assets	$	356		$	296
Accumulated depreciation	(212		)	(161		)
Operating lease assets, net	$	144		$	135

Minimum future rentals on noncancelable operating leases as of July 29, 2017 are summarized as follows (in millions):



Fiscal Year	Amount
2018	$	183
2019	102
2020	39
2021	5
Thereafter	2
Total	$	331