Accounting for Leases as a Lessor

6 Months Ended

Apr. 30, 2020

Leases [Abstract]

Accounting for Leases as a Lessor

Accounting for Leases as a Lessor The Company’s lease offerings are non-cancelable and the payment schedule primarily consists of fixed payments. Variable payments that are based on an index are included in lease receivables. The Company allocates consideration amongst lease components and non-lease components on a relative standalone selling price basis, when lease arrangements include multiple performance obligations. At the end of the lease term, the Company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms.

The Company retains a residual position in equipment through lease and finance agreements which is equivalent to an estimated market value. The residual amount is established prior to lease inception, based upon estimated equipment values at end of lease using product road map trends, historical analysis, future projections and remarketing experience. The Company’s residual amounts are evaluated at least annually to assess the appropriateness of our carrying values. Any anticipated declines in specific future residual values that are considered to be other-than-temporary would be recorded in current earnings. The Company is able to optimize the recovery of residual values by selling equipment in place, extending lease arrangements on a fixed term basis, entering into a monthly usage rental term beyond the initial lease term, and selling lease returned equipment in the secondary market. The contractual lease agreement also identifies return conditions that ensures the leased equipment will be in good operating condition upon return minus any normal wear and tear. During the residual review process, product changes, product updates, as well as market conditions are reviewed and adjustments if other than temporary are made to residual values in accordance with the impact of any such changes. The remarketing sales organization closely manages the sale of equipment lease returns to optimize the recovery of outstanding residual by product.

Financing Receivables

Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. The net investment in the lease is measured as the sum of the present value of lease receivable, the estimated unguaranteed residual value of the equipment less unearned income and allowance for credit losses. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:

	As of
	April 30, 2020		October 31, 2019
	In millions
Minimum lease payments receivable	$	9,051	$	9,070
Unguaranteed residual value	342		336
Unearned income	(715)		(754)
Financing receivables, gross	8,678		8,652
Allowance for doubtful accounts	(126)		(131)
Financing receivables, net	8,552		8,521
Less: current portion(1)	(3,630)		(3,572)
Amounts due after one year, net(1)	$	4,922	$	4,949

(1)The Company includes the current portion in Financing receivables, net of allowance for doubtful accounts, and amounts due after one year, net in Long-term financing receivables and other assets, in the accompanying Condensed Consolidated Balance Sheets.

Scheduled maturities of the Company's minimum lease payments receivable were as follows:

	As of
	April 30, 2020
Fiscal year	In millions
Remainder of fiscal 2020	$	2,357
2021	2,955
2022	2,013
2023	1,092
2024	489
Thereafter	145
Total undiscounted cash flows	$	9,051
Present value of lease payments (recognized as finance receivables)	$	8,286
Difference between undiscounted cash flows and discounted cash flows	$	765

Prior to the adoption of the new lease standard, scheduled maturities of the Company's minimum lease payments receivable were as follows:

	As of
	October 31, 2019
Fiscal year	In millions
2020	$	3,939
2021	2,449
2022	1,555
2023	752
2024	306
Thereafter	69
Total	$	9,070

Sale of Financing Receivables

During the six months ended April 30, 2020 and 2019, the Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the six months ended April 30, 2020 and 2019, the Company sold $50 million and $73 million, respectively, of financing receivables.

Credit Quality Indicators

The credit risk profile of gross financing receivables, based on internal risk ratings, was as follows:

	As of
	April 30, 2020		October 31, 2019
	In millions
Risk Rating:
Low	$	4,458	$	4,432
Moderate	3,960		3,933
High	260		287
Total	$	8,678	$	8,652

Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.

Allowance for Doubtful Accounts

The allowance for doubtful accounts for financing receivables as of April 30, 2020 and October 31, 2019 and the respective changes during the six and twelve months then ended were as follows:

	As of
	April 30, 2020		October 31, 2019
	In millions
Balance at beginning of period	$	131	$	120
Provision for doubtful accounts	12		33
Write-offs	(17)		(22)
Balance at end of period	$	126	$	131

The gross financing receivables and related allowance evaluated for loss were as follows:

	As of
	April 30, 2020		October 31, 2019
	In millions
Gross financing receivables collectively evaluated for loss	$	8,239	$	8,255
Gross financing receivables individually evaluated for loss(1)	439		397
Total	$	8,678	$	8,652
Allowance for financing receivables collectively evaluated for loss	$	85	$	84
Allowance for financing receivables individually evaluated for loss	41		47
Total	$	126	$	131

(1)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

Non-Accrual and Past-Due Financing Receivables

The following table summarizes the aging and non-accrual status of gross financing receivables:

	As of
	April 30, 2020		October 31, 2019
	In millions
Billed:(1)
Current 1-30 days	$	404	$	301
Past due 31-60 days	60		62
Past due 61-90 days	40		15
Past due > 90 days	104		88
Unbilled sales-type and direct-financing lease receivables	8,070		8,186
Total gross financing receivables	$	8,678	$	8,652
Gross financing receivables on non-accrual status(2)	$	303	$	276
Gross financing receivables 90 days past due and still accruing interest(2)	$	136	$	121

(1)Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.

(2)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

Operating Leases

Operating lease assets included in Property, plant and equipment in the Condensed Consolidated Balance Sheets were as follows:

	As of
	April 30, 2020		October 31, 2019
	In millions
Equipment leased to customers	$	7,018	$	7,185
Accumulated depreciation	(3,131)		(3,101)
Total	$	3,887	$	4,084

Minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:

	As of
	April 30, 2020
Fiscal year	In millions
Remainder of fiscal 2020	$	972
2021	1,424
2022	702
2023	188
2024	34
Thereafter	2
Total	$	3,322

If a lease is classified as an operating lease, the Company records lease revenue on a straight line basis over the lease term. At commencement of an operating lease, initial direct costs are deferred and are expensed over the lease term on the same basis as the lease revenue is recorded.

The following table presents amounts included in the Condensed Consolidated Statement of Earnings related to lessor activity:

	Three Months Ended April 30, 2020		Six Months Ended April 30, 2020
	In millions
Sales-type leases and direct financing leases:
Interest income	$	115	$	228
Lease income - operating leases	608		1,233
Total lease income	$	723	$	1,461

Variable Interest Entities

In February 2020 and September 2019, the Company issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity (“SPE”). The SPE meets the definition of a Variable Interest Entity ("VIE") and is consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.

The Company’s risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.

The following table presents the assets and liabilities held by the consolidated VIE as of April 30, 2020, which are included in the Condensed Consolidated Balance Sheets. The assets in the table below include those that can be used to settle the obligations of the VIE. Additionally, general creditors do not have recourse to the assets of the VIE.

	As of
	April 30, 2020		October 31, 2019
Assets held by VIE	In millions
Other current assets	$	50	$	76
Financing receivables
Short-term	$	359	$	194
Long-term	$	407	$	229
Property, plant and equipment	$	507	$	303
Liabilities held by VIE
Notes payable and short-term borrowings, net of unamortized debt issuance costs	$	610	$	385
Long-term debt, net of unamortized debt issuance costs	$	627	$	370