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.

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



January 27, 2018	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,762		$	4,846		$	2,479		$	10,087
Residual value	168			—			—			168
Unearned income	(145		)	—			—			(145		)
Allowance for credit loss	(165		)	(94		)	(13		)	(272		)
Total, net	$	2,620		$	4,752		$	2,466		$	9,838
Reported as:
Current	$	1,222		$	2,258		$	1,445		$	4,925
Noncurrent	1,398			2,494			1,021			4,913
Total, net	$	2,620		$	4,752		$	2,466		$	9,838



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

Future minimum lease payments to the Company on lease receivables as of January 27, 2018 are summarized as follows (in millions):



Fiscal Year	Amount
2018 (remaining six months)	$	707
2019	1,054
2020	602
2021	292
2022	98
Thereafter	9
Total	$	2,762

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 January 27, 2018 and July 29, 2017 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
January 27, 2018	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,322	$	1,244	$	51	$	2,617
Loan receivables	3,054		1,716		76		4,846
Financed service contracts	1,572		895		12		2,479
Total	$	5,948	$	3,855	$	139	$	9,942



	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

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 January 27, 2018 and July 29, 2017 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
January 27, 2018	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	98	$	96	$	278	$	472	$	2,145	$	2,617	$	19	$	19
Loan receivables	66		124		151		341		4,505		4,846		45		45
Financed service contracts	54		85		414		553		1,926		2,479		2		2
Total	$	218	$	305	$	843	$	1,366	$	8,576	$	9,942	$	66	$	66



	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

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 $462 million and $666 million as of January 27, 2018 and July 29, 2017, respectively.

As of January 27, 2018, the Company had financing receivables of $358 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 $315 million as of July 29, 2017.


(c)	Allowance for Credit Loss Rollforward

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



Three months ended January 27, 2018	CREDIT LOSS ALLOWANCES
	Lease Receivables		Loan Receivables			Financed Service Contracts			Total
Allowance for credit loss as of October 28, 2017	$	160	$	106		$	23		$	289
Provisions	3		(13		)	(10		)	(20		)
Foreign exchange and other	2		1			—			3
Allowance for credit loss as of January 27, 2018	$	165	$	94		$	13		$	272



Six months ended January 27, 2018	CREDIT LOSS ALLOWANCES
	Lease Receivables		Loan Receivables			Financed Service Contracts			Total
Allowance for credit loss as of July 29, 2017	$	162	$	103		$	30		$	295
Provisions	1		(11		)	(16		)	(26		)
Foreign exchange and other	2		2			(1		)	3
Allowance for credit loss as of January 27, 2018	$	165	$	94		$	13		$	272



Three months ended January 28, 2017	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Allowance for credit loss as of October 29, 2016	$	227		$	111		$	48		$	386
Provisions	2			—			(1		)	1
Recoveries (write-offs), net	(2		)	(4		)	—			(6		)
Foreign exchange and other	(2		)	(1		)	—			(3		)
Allowance for credit loss as of January 28, 2017	$	225		$	106		$	47		$	378



Six months ended January 28, 2017	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	(2		)	12			(1		)	9
Recoveries (write-offs), net	(2		)	(4		)	—			(6		)
Foreign exchange and other	(1		)	1			—			—
Allowance for credit loss as of January 28, 2017	$	225		$	106		$	47		$	378

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 January 27, 2018 and July 29, 2017, 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):



	January 27, 2018			July 29, 2017
Operating lease assets	$	364		$	356
Accumulated depreciation	(232		)	(212		)
Operating lease assets, net	$	132		$	144

Minimum future rentals on noncancelable operating leases as of January 27, 2018 are summarized as follows (in millions):



Fiscal Year	Amount
2018 (remaining six months)	$	103
2019	137
2020	68
2021	15
Thereafter	2
Total	$	325