Accounts Receivable, Net

Accounts receivable, net were as follows:



	December 31,
	2017			2016
Invoiced	$	1,048		$	651
Accrued	368			374
Allowance for doubtful accounts	(59		)	(64		)
Accounts Receivable, Net	$	1,357		$	961

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. Prior to the fourth quarter 2017, we had facilities in the U.S., Canada and several countries in Europe that enabled us to sell certain accounts receivable, without recourse, to third-parties. The accounts receivable sold were generally short-term trade receivables with payment due dates of less than 60 days. In connection with the efforts of our Strategic Transformation Program to reduce costs and simplify our business processes, during the fourth quarter 2017 we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe, which resulted in a one-time reduction in our operating cash flows. The remaining accounts receivable sales facility in Europe enables us to sell receivables associated with our distributor network on an ongoing basis without recourse. Under this remaining arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.

In the sales arrangements terminated in the fourth quarter 2017, a portion of the sales proceeds was normally held back by the purchaser and payment was deferred until collection of the related sold receivables. Our risk of loss following the sales of accounts receivable under these programs was limited to the outstanding amount deferred. These balances were included in Other current assets in the accompanying Consolidated Balance Sheets and the balance at December 31, 2016 was $48. Due to the termination of these programs in the fourth quarter 2017, there is no remaining balance deferred at December 31, 2017. We reported the collections on these balances as operating cash flows in the Consolidated Statements of Cash Flows because they were the result of an operating activity and the associated interest rate risk was considered de minimis due to their short-term nature.

Of the accounts receivable sold and derecognized from our balance sheet, $161 and $531 remained uncollected as of December 31, 2017 and 2016, respectively. Accounts receivable sales activity was as follows:



	Year Ended December 31,
	2017		2016		2015
Accounts receivable sales	$	1,733	$	2,267	$	2,142
Deferred proceeds	164		233		247
Loss on sale of accounts receivable	10		16		13

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,
	2017			2016
Gross receivables	$	4,354		$	4,380
Unearned income	(494		)	(526		)
Subtotal	3,860			3,854
Residual values	—			—
Allowance for doubtful accounts	(108		)	(110		)
Finance Receivables, Net	3,752			3,744
Less: Billed portion of finance receivables, net	112			90
Less: Current portion of finance receivables not billed, net	1,317			1,256
Finance Receivables Due After One Year, Net	$	2,323		$	2,398

Contractual maturities of our gross finance receivables as of December 31, 2017 were as follows (including those already billed of $112):



2018		2019		2020		2021		2022		Thereafter		Total
$	1,686	$	1,211	$	827	$	454	$	163	$	13	$	4,354

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 2017 and 2016. 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 $11 in 2017 as compared to $15 in 2016, 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, 2015⁽¹⁾	$	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
Provision	11			2			4			—		17
Charge-offs	(12		)	(5		)	(11		)	—		(28		)
Recoveries and other⁽³⁾	2			2			5			—		9
Balance at December 31, 2017	$	56		$	15		$	35		$	2	$	108
Finance Receivables Collectively Evaluated for Impairment:
December 31, 2016⁽⁴⁾	$	2,138		$	378		$	1,286		$	52	$	3,854
December 31, 2017⁽⁴⁾	$	2,029		$	397		$	1,362		$	72	$	3,860

_____________


(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 $108 and $110 at December 31, 2017 and 2016, 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 5%.

•

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 generally in the range of 7% to 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, 2017								December 31, 2016⁽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	$	199	$	345	$	75	$	619	$	215	$	343	$	60	$	618
Government and education	490		61		6		557		535		56		17		608
Graphic arts	84		97		141		322		135		106		106		347
Industrial	82		84		14		180		88		82		14		184
Healthcare	88		48		9		145		92		39		12		143
Other	68		98		40		206		90		106		42		238
Total United States	1,011		733		285		2,029		1,155		732		251		2,138
Finance and other services	54		42		27		123		54		43		15		112
Government and education	48		5		5		58		52		6		2		60
Graphic arts	34		35		27		96		39		37		24		100
Industrial	20		12		11		43		21		13		6		40
Other	36		25		16		77		33		25		8		66
Total Canada	192		119		86		397		199		124		55		378
France	234		226		22		482		181		222		51		454
U.K/Ireland	106		150		10		266		95		148		10		253
Central⁽¹⁾	189		149		16		354		182		148		19		349
Southern⁽²⁾	52		144		13		209		36		131		14		181
Nordic⁽³⁾	29		21		1		51		26		22		1		49
Total Europe	610		690		62		1,362		520		671		95		1,286
Other	38		28		6		72		35		15		2		52
Total	$	1,851	$	1,570	$	439	$	3,860	$	1,909	$	1,542	$	403	$	3,854

_____________


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


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.


(4)	The December 31, 2016 amounts have been reclassified to conform to 2017 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, 2017
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	18	$	3	$	1	$	22	$	597	$	619	$	12
Government and education	18		3		3		24		533		557		21
Graphic arts	12		1		—		13		309		322		6
Industrial	6		1		1		8		172		180		4
Healthcare	5		1		1		7		138		145		5
Other	7		1		1		9		197		206		3
Total United States	66		10		7		83		1,946		2,029		51
Canada	8		2		1		11		386		397		17
France	6		—		—		6		476		482		22
U.K./Ireland	3		—		—		3		263		266		—
Central⁽¹⁾	1		2		—		3		351		354		6
Southern⁽²⁾	4		1		1		6		203		209		6
Nordic⁽³⁾	—		—		—		—		51		51		—
Total Europe	14		3		1		18		1,344		1,362		34
Other	3		—		—		3		69		72		—
Total	$	91	$	15	$	9	$	115	$	3,745	$	3,860	$	102



	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

_____________


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


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.

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 continued 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 associated with these sales was $76 at December 31, 2016. During 2017, we exercised the various clean-up calls we, as the servicer, held on the sold receivables and, accordingly, repurchased the remaining balances of the previously derecognized receivables and terminated the programs. The amounts repurchased were not material.

The ultimate purchaser of the transferred receivables had 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 at December 31, 2016 and were included in Other current assets and Other long-term assets in the accompanying Consolidated Balance Sheets. Due to the repurchase of receivables during 2017, there is no remaining balance of beneficial interests at December 31, 2017. We reported collections on the beneficial interests as operating cash flows in the Consolidated Statements of Cash Flows because such beneficial interests were the result of an operating activity and the associated interest rate risk was deemed de minimis considering the weighted average life of the sold receivables was less than two years.