Note 4. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)	September 28, 2013	December 29, 2012
Commercial	$ 708	$ 534
U.S. Government contracts	340	314
	1,048	848
Allowance for doubtful accounts	(24)	(19	)
Total	$ 1,024	$ 829

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $136 million at September 28, 2013 and $149 million at December 29, 2012.

Finance Receivables

Finance receivables by portfolio, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table:

(In millions)	September 28, 2013	December 29, 2012
Captive	$ 1,379	$ 1,704
Non-captive	210	370
Total finance receivables	1,589	2,074
Less: Allowance for losses	62	84
Less: Finance receivables held for sale	91	140
Total finance receivables held for investment, net	$ 1,436	$ 1,850

In the third quarter of 2013, we determined that we no longer had the intent to hold the remaining non-captive loan portfolio for the foreseeable future and, accordingly, transferred $34 million of the remaining non-captive loans, net of a $1 million allowance for losses, from the held for investment classification to the held for sale classification.

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.

We classify finance receivables held for investment as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Recognition of interest income is suspended for these accounts and all cash collections are used to reduce the net investment balance. We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful. Previously suspended interest income is recognized at that time.

Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.

A summary of finance receivables held for investment categorized based on the credit quality indicators discussed above is as follows:

	September 28, 2013				December 29, 2012
(In millions)	Performing	Watchlist	Nonaccrual	Total	Performing	Watchlist	Nonaccrual	Total
Captive	$ 1,173	$ 101	$ 105	$ 1,379	$ 1,476	$ 130	$ 98	$ 1,704
Non-captive	119	—	—	119	185	—	45	230
Total	$ 1,292	$ 101	$ 105	$ 1,498	$ 1,661	$ 130	$ 143	$ 1,934
% of Total	86.3%	6.7%	7.0%		85.9%	6.7%	7.4%

We measure delinquency based on the contractual payment terms of our loans and leases. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

Finance receivables held for investment by delinquency aging category are summarized in the table below:

	September 28, 2013					December 29, 2012
(In millions)	Less Than 31 Days Past Due	31-60 Days Past Due	61-90 Days Past Due	Over 90 Days Past Due	Total	Less Than 31 Days Past Due	31-60 Days Past Due	61-90 Days Past Due	Over 90 Days Past Due	Total
Captive	$ 1,206	$ 85	$ 62	$ 26	$ 1,379	$ 1,531	$ 87	$ 55	$ 31	$ 1,704
Non-captive	119	—	—	—	119	226	—	1	3	230
Total	$ 1,325	$ 85	$ 62	$ 26	$ 1,498	$ 1,757	$ 87	$ 56	$ 34	$ 1,934

We had no accrual status loans greater than 90 days past due at September 28, 2013 or December 29, 2012. At September 28, 2013 and December 29, 2012, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 5.87% and 4.65%, respectively.

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables held for investment for borrowers experiencing financial difficulties or accepted a transfer of assets in full or partial satisfaction of the loan balance. The types of modifications we typically make include extensions of the original maturity date of the contract, delays in the timing of required principal payments, deferrals of interest payments, advances to protect the value of our collateral and principal reductions contingent on full repayment prior to the maturity date. The changes effected by modifications made during the first nine months of 2013 and 2012 to finance receivables held for investment were not material.

Impaired Loans

We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. Interest income recognized on impaired loans was not significant in the first nine months of 2013 or 2012.

A summary of impaired finance receivables, excluding leveraged leases, is provided below:

	Recorded Investment
(In millions)	Impaired Loans with No Related Allowance for Credit Losses		Impaired Loans with Related Allowance for Credit Losses		Total Impaired Loans		Unpaid Principal Balance		Allowance For Losses On Impaired Loans		Average Recorded Investment
September 28, 2013
Captive	$	64	$	76	$	140	$	143	$	21	$	135
Non-captive	—		—		—		—		—		24
Total	$	64	$	76	$	140	$	143	$	21	$	159
December 29, 2012
Captive	$	61	$	66	$	127	$	128	$	15	$	121
Non-captive	11		33		44		59		12		149
Total	$	72	$	99	$	171	$	187	$	27	$	270

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below. The finance receivables reported in this table specifically exclude $119 million and $122 million of leveraged leases at September 28, 2013 and December 29, 2012, respectively, in accordance with authoritative accounting standards.

	September 28, 2013				December 29, 2012
	Finance Receivables Evaluated		Allowance Based on Individual	Allowance Based on Collective	Finance Receivables Evaluated		Allowance Based on Individual	Allowance Based on Collective
(In millions)	Individually	Collectively	Evaluation	Evaluation	Individually	Collectively	Evaluation	Evaluation
Captive	$ 140	$ 1,239	$ 21	$ 41	$ 127	$ 1,577	$ 15	$ 55
Non-captive	—	—	—	—	44	64	12	2
Total	$ 140	$ 1,239	$ 21	$ 41	$ 171	$ 1,641	$ 27	$ 57

Allowance for Losses

We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation. For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis for the Captive product line include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. For the Captive product line, the allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.

Finance receivables held for investment are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.

A rollforward of the allowance for losses on finance receivables held for investment is provided below:

(In millions)	Captive			Non-captive			Total
For the nine months ended September 28, 2013
Beginning balance	$	70		$	14		$	84
Provision for losses	(6		)	(17		)	(23		)
Charge-offs	(7		)	(2		)	(9		)
Recoveries	5			6			11
Transfers	—			(1		)	(1		)
Ending balance	$	62		$	—		$	62
For the nine months ended September 29, 2012
Beginning balance	$	101		$	55		$	156
Provision for losses	1			(5		)	(4		)
Charge-offs	(40		)	(38		)	(78		)
Recoveries	8			4			12
Ending balance	$	70		$	16		$	86