FINANCING RECEIVABLES AND OPERATING LEASES |
3. | FINANCING RECEIVABLES AND OPERATING LEASES |
Our financing receivables and operating leases consist of assets that we finance for our customers, which we manage as a portfolio of investments. Equipment financed for our customers is accounted for as investments in direct financing, sales-type or operating leases in accordance with Accounting Standards Codification (“ASC”) Topic 840, Leases. We also finance third-party software, maintenance, and services for our customers, which are classified as notes receivables. Our notes receivables are interest bearing and are often due over a period of time that corresponds with the terms of the leased products. FINANCING RECEIVABLES—NET
Our financing receivables, net consist of the following (in thousands):
December 31, 2016 | | Notes Receivables | | | Lease-Related Receivables | | | Total Financing Receivables | | Minimum payments | | $ | 53,167 | | | $ | 71,343 | | | $ | 124,510 | | Estimated unguaranteed residual value (1) | | | - | | | | 18,069 | | | | 18,069 | | Initial direct costs, net of amortization (2) | | | 465 | | | | 518 | | | | 983 | | Unearned income | | | - | | | | (7,017 | ) | | | (7,017 | ) | Reserve for credit losses (3) | | | (3,508 | ) | | | (778 | ) | | | (4,286 | ) | Total, net | | $ | 50,124 | | | $ | 82,135 | | | $ | 132,259 | | Reported as: | | | | | | | | | | | | | Current | | $ | 32,269 | | | $ | 33,676 | | | $ | 65,945 | | Long-term | | | 17,855 | | | | 48,459 | | | | 66,314 | | Total, net | | $ | 50,124 | | | $ | 82,135 | | | $ | 132,259 | |
| (1) | Includes estimated unguaranteed residual values of $11,932 thousand for direct financing leases, which have been sold and accounted for as sales. |
| (2) | Initial direct costs are shown net of amortization of $665 thousand. |
| (3) | For details on reserve for credit losses, refer to Note 5, “Reserves for Credit Losses.” |
March 31, 2016 | | Notes Receivables | | | Lease-Related Receivables | | | Total Financing Receivables | | Minimum payments | | $ | 44,442 | | | $ | 66,303 | | | $ | 110,745 | | Estimated unguaranteed residual value (1) | | | - | | | | 12,693 | | | | 12,693 | | Initial direct costs, net of amortization (2) | | | 312 | | | | 475 | | | | 787 | | Unearned income | | | - | | | | (5,543 | ) | | | (5,543 | ) | Reserve for credit losses (3) | | | (3,381 | ) | | | (685 | ) | | | (4,066 | ) | Total, net | | $ | 41,373 | | | $ | 73,243 | | | $ | 114,616 | | Reported as: | | | | | | | | | | | | | Current | | $ | 24,962 | | | $ | 31,486 | | | $ | 56,448 | | Long-term | | | 16,411 | | | | 41,757 | | | | 58,168 | | Total, net | | $ | 41,373 | | | $ | 73,243 | | | $ | 114,616 | |
| (1) | Includes estimated unguaranteed residual values of $6,722 thousand for direct financing leases which have been sold and accounted for as sales. |
| (2) | Initial direct costs are shown net of amortization of $612 thousand. |
| (3) | For details on reserve for credit losses, refer to Note 5, “Reserves for Credit Losses.” |
OPERATING LEASES—NET
Operating leases—net represents leases that do not qualify as direct financing leases. The components of the operating leases—net are as follows (in thousands):
| | December 31, 2016 | | | March 31, 2016 | | Cost of equipment under operating leases | | $ | 17,062 | | | $ | 36,635 | | Accumulated depreciation | | | (8,886 | ) | | | (18,897 | ) | Investment in operating lease equipment—net (1) | | $ | 8,176 | | | $ | 17,738 | |
| (1) | These totals include estimated unguaranteed residual values of $928 thousand and $3,417 thousand as of December 31, 2016 and March 31, 2016, respectively. |
TRANSFERS OF FINANCIAL ASSETS
We enter into arrangements to transfer the contractual payments due under financing receivables and operating lease agreements, which are accounted for as sales or secured borrowings in accordance with Codification Topic 860, Transfers and Servicing. For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. As of December 31, 2016 and March 31, 2016 we had financing receivables of $54.9 million and $36.1 million, respectively, and operating leases of $6.7 million and $13.9 million, respectively, which were collateral for non-recourse notes payable. See Note 7, "Notes Payable and Credit Facility."
For transfers accounted for as sales, we derecognize the carrying value of the asset transferred and recognize a net gain or loss on the sale, which are presented within net sales in the consolidated statement of operations. During the three months ended December 31, 2016 and 2015, we recognized net gains of $0.9 million and $1.4 million, respectively, and total proceeds from these sales were $55.8 million and $54.1 million, respectively. During the nine months ended December 31, 2016 and 2015, we recognized net gains of $4.1 million and $5.4 million, respectively. The total proceeds from these sales were $185.4 million and $162.7 million for the nine months ended December 31, 2016 and 2015, respectively.
For certain assignments of financial assets, we retain a servicing obligation. For assignments accounted for as sales, we allocate a portion of the proceeds to deferred revenues, which is recognized as we perform the services. In a limited number of such sales, we indemnified the assignee in the event that the lessee elected to early terminate the lease. As of December 31, 2016, our maximum potential future payments related to such guarantees is $1.2 million. We believe the possibility of making any payments to be remote.
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