Customer Financing

9 Months Ended

Sep. 30, 2020

Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:


	September 30 2020	December 31 2019
Financing receivables:
Investment in sales-type/finance leases	$940	$1,029
Notes	423	443
Total financing receivables	1,363	1,472
Operating lease equipment, at cost, less accumulated depreciation of $265 and $235	764	834

Gross customer financing	2,127	2,306
Less allowance for losses on receivables	(17)	(8)
Total	$2,110	$2,298

We acquire aircraft to be leased to customers through trades, lease returns, purchases in the secondary market, and new aircraft transferred from our BCA segment. Leasing arrangements typically range in terms from 1 to 12 years and may include options to extend or terminate the lease. Certain leases include provisions to allow the lessee to purchase the underlying aircraft at a specified price. A minority of leases contain variable lease payments based on actual aircraft usage and are paid in arrears.

We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms. At September 30,

2020 and December 31, 2019, we individually evaluated for impairment customer financing receivables of $392 and $400, of which $381 and $388 were determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceeded the carrying values of the receivables.

We determine a receivable is past due when cash has not been received upon the due date specified in the contract. There were no past due customer financing receivables as of September 30, 2020.

We evaluate the collectability of customer financing receivables at commencement and on a recurring basis. If a customer financing receivable is deemed uncollectable, the customer is categorized as non-accrual status. When a customer is in non-accrual status at commencement, revenue is deferred until substantially all cash has been received or the customer is removed from non-accrual status. If a customer status changes to non-accrual after commencement and sufficient collateral is available, we recognize contractual interest income as payments are received to the extent payments exceed past due principal payments. If there is not sufficient collateral, then revenue is not recognized until payments exceed the principal balance. Receivables in non-accrual status as of September 30, 2020 and December 31, 2019 were $381 and $388. Interest income received for the nine and three months ended September 30, 2020 was $26 and $5.

The adequacy of the allowance for losses is assessed quarterly. Four primary factors influencing the level of our allowance for losses on customer financing receivables are customer credit ratings, default rates, expected loss rate and collateral values, which may be adversely affected by impacts that COVID-19 has on our customers. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by the major credit rating agencies.

Our financing receivable balances at September 30, 2020 by internal credit rating category and year of origination consisted of the following:


Rating categories	Current	2019	2018	2017	2016	Prior	Total
BBB						$353	$353
BB	$100	$50	$16			148	314
B				$53		174	227
CCC		35		244	$177	13	469


Total carrying value of financing receivables	$100	$85	$16	$297	$177	$688	$1,363

At September 30, 2020, our allowance related to receivables with ratings of CCC, B, BB, and BBB. We applied default rates that averaged 26%, 7.9%, 3.1%, and 0.2%, respectively, to the exposure associated with those receivables.

Customer Financing Exposure

Customer financing is collateralized by security in the related asset. The value of the collateral is closely tied to commercial airline performance and overall market conditions and may be subject to reduced valuation with market decline. Certain collateral values are being adversely impacted by the changes in market conditions driven by the COVID-19 pandemic. Declines in collateral values could result in asset impairments, reduced finance lease income, and an increase in the allowance for losses. Our customer financing collateral is concentrated in out-of-production aircraft and 747-8 aircraft. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft.

The majority of customer financing carrying values are concentrated in the following aircraft models:


	September 30 2020	December 31 2019
717 Aircraft ($104 and $124 accounted for as operating leases)	$658	$736
747-8 Aircraft ($123 and $130 accounted for as operating leases)	482	475
737 Aircraft ($220 and $240 accounted for as operating leases)	242	263
777 Aircraft ($230 and $236 accounted for as operating leases)	232	240
MD-80 Aircraft (accounted for as sales-type finance leases)	174	186
757 Aircraft ($14 and $22 accounted for as operating leases)	162	182
747-400 Aircraft ($27 and $31 accounted for as operating leases)	80	90

Lease income recorded in Revenue on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019 included $44 and $47 from sales-type/finance leases, and $99 and $105 from operating leases, of which $6 and $14 related to variable operating lease payments. Lease income recorded in Revenue on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019 included $15 and $15 from sales-type/finance leases, and $37 and $34 from operating leases, of which $2 and $6 related to variable operating lease payments.