Note 3. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)	January 3, 2015			December 28, 2013
Commercial	$	765		$	654
U.S. Government contracts	300			347
	1,065			1,001
Allowance for doubtful accounts	(30		)	(22		)
Total	$	1,035		$	979

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 $151 million at January 3, 2015 and $163 million at December 28, 2013.

Finance Receivables

Finance receivables are presented in the following table.

(In millions)	January 3, 2015			December 28, 2013
Finance receivables	$	1,289		$	1,548
Allowance for losses	(51		)	(55		)
Total finance receivables, net	$	1,238		$	1,493

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. These agreements typically have initial terms ranging from five to ten years and amortization terms ranging from eight to fifteen years. The average balance of loans was $1 million at January 3, 2015. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan. Finance receivables also includes held for sale receivables of $35 million and $65 million at January 3, 2015 and December 28, 2013, respectively. These finance receivables held for sale are recorded at fair value and are not included in the portfolio quality tables below.

Our finance receivables are diversified across geographic region and borrower industry. At January 3, 2015, 37% of our finance receivables were distributed throughout the U.S. compared with 41% at the end of 2013. At January 3, 2015 and December 28, 2013, finance receivables included $113 million and $200 million, respectively, of receivables that have been legally sold to a special purpose entity (SPE), which is a consolidated subsidiary of TFC. The assets of the SPE are pledged as collateral for its debt, which is reflected as securitized on-balance sheet debt in Note 7. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPE. In addition, at the end of 2014 and 2013, finance receivables of $565 million and $610 million, respectively, have been pledged as collateral for our debt.

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables 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 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 that do not meet the watchlist or nonaccrual categories are classified as performing.

Finance receivables categorized based on the credit quality indicators discussed above are summarized as follows:

(In millions)	January 3, 2015			December 28, 2013
Performing	$	1,062		$	1,285
Watchlist	111			93
Nonaccrual	81			105
Total	$	1,254		$	1,483
Nonaccrual as a percentage of finance receivables	6.46		%	7.08		%

We measure delinquency based on the contractual payment terms of our finance receivables. 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 by delinquency aging category are summarized in the table below:

(In millions)	January 3, 2015			December 28, 2013
Less than 31 days past due	$	1,080		$	1,295
31-60 days past due	117			108
61-90 days past due	28			37
Over 90 days past due	29			43
Total	$	1,254		$	1,483
60+ days contractual delinquency as a percentage of finance receivables	4.55		%	5.39		%

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios. 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 2014 or 2013.

A summary of impaired finance receivables and the average recorded investment is provided below:

(In millions)	January 3, 2015		December 28, 2013
Recorded investment:
Impaired loans with related allowance for credit losses	$	68	$	59
Impaired loans with no related allowance for credit losses	42		78
Total	$	110	$	137
Unpaid principal balance	$	115	$	141
Allowance for losses on impaired loans	20		14
Average recorded investment	115		155

Allowance for Losses

A rollforward of the allowance for losses on finance receivables and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude $121 million and $120 million of leveraged leases at January 3, 2015 and December 28, 2013, respectively, in accordance with generally accepted accounting principles.

(In millions)	January 3, 2015			December 28, 2013
Balance at the beginning of year	$	55		$	84
Provision for losses	6			(23		)
Charge-offs	(17		)	(17		)
Recoveries	7			12
Transfers	—			(1		)
Balance at the end of year	$	51		$	55
Allowance based on collective evaluation		31			41
Allowance based on individual evaluation	20			14
Finance receivables evaluated collectively	1,023			1,226
Finance receivables evaluated individually	110			137