Finance Receivables, Net

Finance receivables include sales-type leases, direct financing leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net were as follows:



	December 31,
	2016			2015
Gross receivables	$	4,380		$	4,683
Unearned income	(526		)	(577		)
Subtotal	3,854			4,106
Residual values	—			—
Allowance for doubtful accounts	(110		)	(118		)
Finance Receivables, Net	3,744			3,988
Less: Billed portion of finance receivables, net	90			97
Less: Current portion of finance receivables not billed, net	1,256			1,315
Finance Receivables Due After One Year, Net	$	2,398		$	2,576

Contractual maturities of our gross finance receivables as of December 31, 2016 were as follows (including those already billed of $90):



2017		2018		2019		2020		2021		Thereafter		Total
$	1,628	$	1,225	$	855	$	485	$	175	$	12	$	4,380

Sale of Finance Receivables

In 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities for cash proceeds and beneficial interests. The transfers were accounted for as sales with derecognition of the associated lease receivables. There have been no transfers or sales of finance receivables since 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables. The following is a summary of our prior sales activity:



	Year Ended December 31,
	2013		2012
Net carrying value (NCV) sold	$	676	$	682
Allowance included in NCV	17		18
Cash proceeds received	635		630
Beneficial interests received	86		101

The principal value of the finance receivables derecognized from our balance sheet was $76 and $238 at December 31, 2016 and 2015, respectively (sales value of approximately $81 and $256, respectively).

Summary Finance Receivable Sales

The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest when due beyond our beneficial interests which were $24 and $38 at December 31, 2016 and 2015, respectively, and are included in Other current assets and Other long-term assets in the accompanying Consolidated Balance Sheets. Beneficial interests of $13 and $30 at December 31, 2016 and 2015, respectively, are held by the bankruptcy-remote subsidiaries and therefore are not available to satisfy any of our creditor obligations. We report collections on the beneficial interests as operating cash flows in the Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis considering their weighted average lives of less than two years.

The net impact from the sales of finance receivables on operating cash flows is summarized below:




	2016			2015			2014			2013/2012
Net cash received for sales of finance receivables⁽¹⁾	$	—		$	—		$	—		$	1,256
Impact from prior sales of finance receivables⁽²⁾	(186		)	(342		)	(527		)	(437		)
Collections on beneficial interests	30			56			94			58
Estimated (Decrease) Increase to Operating Cash Flows	$	(156	)	$	(286	)	$	(433	)	$	877

_____________


(1)	Net of beneficial interest, fees and expenses.


(2)	Represents cash that would have been collected if we had not sold finance receivables.

Finance Receivables - Allowance for Credit Losses and Credit Quality

Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality.

The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. This loss rate is primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups. The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

Since our allowance for doubtful finance receivables is determined by country, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of those countries/regions. Loss rates in the U.S. remained steady and did not change significantly during 2016 and 2015. Since Europe is comprised of various countries and regional economies, the risk profile within our European portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. Charge-offs in Europe were $15 in 2016 as compared to $17 in 2015, reflecting continued stabilization of Europe from the credit issues that began back in 2011.

The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:



Allowance for Credit Losses:	United States			Canada			Europe			Other⁽²⁾			Total
Balance at December 31, 2014⁽¹⁾	$	51		$	20		$	58		$	2		$	131
Provision	11			6			10			1			28
Charge-offs	(8		)	(10		)	(17		)	(1		)	(36		)
Recoveries and other⁽³⁾	—			1			(6		)	—			(5		)
Balance at December 31, 2015	$	54		$	17		$	45		$	2		$	118
Provision	10			3			11			—			24
Charge-offs	(12		)	(8		)	(15		)	—			(35		)
Recoveries and other⁽³⁾	3			4			(4		)	—			3
Balance at December 31, 2016	$	55		$	16		$	37		$	2		$	110
Finance Receivables Collectively Evaluated for Impairment:
December 31, 2015⁽⁴⁾	$	2,174		$	365		$	1,509		$	58		$	4,106
December 31, 2016⁽⁴⁾	$	2,138		$	378		$	1,286		$	52		$	3,854

_____________


(1)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified as Other was reclassified to the U.S. Prior year amounts have been reclassified to conform to current year presentation.


(2)	Includes developing market countries and smaller units.


(3)	Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.


(4)	Total Finance receivables exclude the allowance for credit losses of $110 and $118 at December 31, 2016 and 2015, respectively.

In the U.S. and Canada, customers are further evaluated or segregated by class based on industry sector. The primary customer classes are Finance & Other Services, Government & Education; Graphic Arts; Industrial; Healthcare and Other. In Europe, customers are further grouped by class based on the country or region of the customer. The primary customer classes include the U.K./Ireland, France and the following European regions - Central, Nordic and Southern. These groupings or classes are used to understand the nature and extent of our exposure to credit risk arising from finance receivables.

We evaluate our customers based on the following credit quality indicators:

•

Investment grade: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally less than 1%.

•

Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category are generally in the range of 2% to 4%.

•

Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade evaluation when the lease was originated. Accordingly there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are around 10%.

Credit quality indicators are updated at least annually, and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:



	December 31, 2016								December 31, 2015⁽⁴⁾
	Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables		Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables
Finance and other services	$	181	$	342	$	95	$	618	$	195	$	285	$	91	$	571
Government and education	543		57		8		608		575		48		7		630
Graphic arts	138		102		107		347		145		92		127		364
Industrial	82		78		24		184		89		62		22		173
Healthcare	79		47		17		143		90		46		19		155
Other	82		103		53		238		121		107		53		281
Total United States	1,105		729		304		2,138		1,215		640		319		2,174
Finance and other services	54		43		15		112		55		35		9		99
Government and education	52		6		2		60		59		7		2		68
Graphic arts	39		37		24		100		45		35		21		101
Industrial	21		13		6		40		23		12		3		38
Other	33		25		8		66		33		23		3		59
Total Canada	199		124		55		378		215		112		38		365
France	181		222		51		454		203		207		101		511
U.K/Ireland	189		63		1		253		235		91		3		329
Central⁽¹⁾	182		148		19		349		206		186		25		417
Southern⁽²⁾	36		131		14		181		36		138		17		191
Nordic⁽³⁾	26		22		1		49		24		35		2		61
Total Europe	614		586		86		1,286		704		657		148		1,509
Other	35		15		2		52		41		16		1		58
Total	$	1,953	$	1,454	$	447	$	3,854	$	2,175	$	1,425	$	506	$	4,106

_____________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.


(4)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified as Other was reclassified to the U.S. Prior year amounts have been reclassified to conform to current year presentation.

The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance.

We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured. The aging of our billed finance receivables is as follows:



	December 31, 2016
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	13	$	3	$	1	$	17	$	601	$	618	$	11
Government and education	10		4		3		17		591		608		25
Graphic arts	13		1		—		14		333		347		5
Industrial	4		1		1		6		178		184		5
Healthcare	3		1		1		5		138		143		5
Other	9		2		1		12		226		238		5
Total United States	52		12		7		71		2,067		2,138		56
Canada	3		—		—		3		375		378		8
France	3		—		—		3		451		454		20
U.K./Ireland	2		1		—		3		250		253		1
Central⁽¹⁾	2		1		—		3		346		349		5
Southern⁽²⁾	5		1		1		7		174		181		6
Nordic⁽³⁾	1		—		—		1		48		49		1
Total Europe	13		3		1		17		1,269		1,286		33
Other	3		—		—		3		49		52		—
Total	$	71	$	15	$	8	$	94	$	3,760	$	3,854	$	97



	December 31, 2015⁽⁴⁾
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	10	$	2	$	2	$	14	$	557	$	571	$	14
Government and education	12		1		4		17		613		630		37
Graphic arts	12		2		1		15		349		364		8
Industrial	5		1		1		7		166		173		7
Healthcare	4		1		1		6		149		155		9
Other	14		2		2		18		263		281		7
Total United States	57		9		11		77		2,097		2,174		82
Canada	3		—		—		3		362		365		9
France	—		—		—		—		511		511		25
U.K./Ireland	1		—		—		1		328		329		1
Central⁽¹⁾	3		1		1		5		412		417		7
Southern⁽²⁾	8		2		3		13		178		191		10
Nordic⁽³⁾	1		—		—		1		60		61		4
Total Europe	13		3		4		20		1,489		1,509		47
Other	1		1		—		2		56		58		—
Total	$	74	$	13	$	15	$	102	$	4,004	$	4,106	$	138

_____________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.


(4)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified as Other was reclassified to the U.S. Prior year amounts have been reclassified to conform to current year presentation.