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Financing Receivables
 9 Months Ended
Sep. 30, 2018
Financing Receivables  
Financing Receivables

 

5. Financing Receivables: Financing receivables primarily consist of investment in sales-type and direct financing leases, commercial financing receivables and client loan and installment payment receivables (loans). Investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans) are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loans and installment payment financing contracts are priced independently at competitive market rates.

 

A summary of the components of the company’s financing receivables is presented as follows:

 

 

 

Investment in

 

 

 

Client Loan and

 

 

 

 

 

Sales-Type and

 

Commercial

 

Installment Payment

 

 

 

(Dollars in millions)

 

Direct Financing

 

Financing

 

Receivables/

 

 

 

At September 30, 2018:

 

Leases

 

Receivables

 

(Loans)

 

Total

 

Financing receivables, gross

 

$
6,566

 

$
9,397

 

$
12,259

 

$
28,222

 

Unearned income

 
(502

)
(30

)
(576

)
(1,108

)

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

$
6,064

 

$
9,367

 

$
11,683

 

$
27,114

 

Allowance for credit losses

 
(103

)
(12

)
(210

)
(325

)

Unguaranteed residual value

 
549

 

—

 

—

 
549

 

Guaranteed residual value

 
90

 

—

 

—

 
90

 

 

 

 

 

 

 

 

 

 

 

Total financing receivables, net

 

$
6,599

 

$
9,355

 

$
11,473

 

$
27,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

$
2,764

 

$
9,355

 

$
7,130

 

$
19,249

 

Noncurrent portion

 

$
3,836

 

$

—

 

$
4,343

 

$
8,179

 

 

 

 

Investment in

 

 

 

Client Loan and

 

 

 

 

 

Sales-Type and

 

Commercial

 

Installment Payment

 

 

 

(Dollars in millions)

 

Direct Financing

 

Financing

 

Receivables/

 

 

 

At December 31, 2017:

 

Leases

 

Receivables

 

(Loans)

 

Total

 

Financing receivables, gross

 

$
7,128

 

$
11,649

 

$
13,311

 

$
32,087

 

Unearned income

 
(535

)
(32

)
(644

)
(1,210

)

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

$
6,593

 

$
11,617

 

$
12,667

 

$
30,877

 

Allowance for credit losses

 
(103

)
(21

)
(211

)
(336

)

Unguaranteed residual value

 
630

 

—

 

—

 
630

 

Guaranteed residual value

 
100

 

—

 

—

 
100

 

 

 

 

 

 

 

 

 

 

 

Total financing receivables, net

 

$
7,220

 

$
11,596

 

$
12,456

 

$
31,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

$
2,900

 

$
11,596

 

$
7,226

 

$
21,721

 

Noncurrent portion

 

$
4,320

 

$

—

 

$
5,230

 

$
9,550

 

 

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $754 million and $773 million at September 30, 2018 and December 31, 2017, respectively.

 

The company did not have any financing receivables held for sale as of September 30, 2018 and December 31, 2017.

 

Financing Receivables by Portfolio Segment

 

The following tables present the recorded investment by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2018 and December 31, 2017. Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At September 30, 2018:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Recorded investment

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
3,526

 

$
1,377

 

$
1,161

 

$
6,064

 

Loan receivables

 
6,118

 
3,313

 
2,252

 
11,683

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$
9,644

 

$
4,690

 

$
3,413

 

$
17,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment collectively evaluated for impairment

 

$
9,484

 

$
4,634

 

$
3,338

 

$
17,456

 

Recorded investment individually evaluated for impairment

 

$
161

 

$
56

 

$
75

 

$
291

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2018

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
63

 

$
9

 

$
31

 

$
103

 

Loan receivables

 
108

 
52

 
51

 
211

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
172

 

$
61

 

$
82

 

$
314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs

 

$
(5

)

$
(1

)

$
(3

)

$
(9

)

Recoveries

 
0

 
0

 
2

 
2

 

Provision

 
10

 
10

 
2

 
21

 

Other*

 
(9

)
(2

)
(4

)
(15

)

 

 

 

 

 

 

 

 

 

 

Ending balance at September 30, 2018

 

$
167

 

$
68

 

$
78

 

$
313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
61

 

$
12

 

$
29

 

$
103

 

Loan receivables

 

$
106

 

$
55

 

$
48

 

$
210

 

 

 

 

 

 

 

 

 

 

 

Related allowance, collectively evaluated for impairment

 

$
42

 

$
15

 

$
5

 

$
62

 

Related allowance, individually evaluated for impairment

 

$
125

 

$
52

 

$
73

 

$
250

 

 

* Primarily represents translation adjustments.

 

Write-offs of lease receivables and loan receivables were $6 million and $3 million, respectively, for the nine months ended September 30, 2018. Provisions for credit losses recorded for lease receivables and loan receivables were $4 million and $17 million, respectively, for the nine months ended September 30, 2018.

 

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $143 million, $56 million and $76 million, respectively, for the three months ended September 30, 2018 and $156 million, $31 million and $101 million, respectively, for the three months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended September 30, 2018 and 2017.

 

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $136 million, $56 million and $79 million, respectively, for the nine months ended September 30, 2018 and $165 million, $27 million and $131 million, respectively, for the nine months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the nine months ended September 30, 2018 and 2017.

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At December 31, 2017:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Recorded investment

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
3,911

 

$
1,349

 

$
1,333

 

$
6,593

 

Loan receivables

 
6,715

 
3,597

 
2,354

 
12,667

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$
10,626

 

$
4,946

 

$
3,687

 

$
19,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment collectively evaluated for impairment

 

$
10,497

 

$
4,889

 

$
3,604

 

$
18,990

 

Recorded investment individually evaluated for impairment

 

$
129

 

$
57

 

$
83

 

$
269

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2017

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
54

 

$
4

 

$
76

 

$
133

 

Loan receivables

 
169

 
18

 
89

 
276

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
223

 

$
22

 

$
165

 

$
410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs

 

$
(51

)

$
(1

)

$
(85

)

$
(137

)

Recoveries

 
1

 
1

 
0

 
2

 

Provision

 
(8

)
29

 
(4

)
16

 

Other*

 
7

 
11

 
6

 
24

 

 

 

 

 

 

 

 

 

 

 

Ending balance at December 31, 2017

 

$
172

 

$
61

 

$
82

 

$
314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
63

 

$
9

 

$
31

 

$
103

 

Loan receivables

 

$
108

 

$
52

 

$
51

 

$
211

 

 

 

 

 

 

 

 

 

 

 

Related allowance, collectively evaluated for impairment

 

$
43

 

$
15

 

$
6

 

$
64

 

Related allowance, individually evaluated for impairment

 

$
128

 

$
46

 

$
76

 

$
250

 

 

* Primarily represents translation adjustments.

 

Write-offs of lease receivables and loan receivables were $55 million and $82 million, respectively, for the year ended December 31, 2017.  Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $7 million, respectively, for the year ended December 31, 2017.

 

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

 

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

 

Past Due Financing Receivables

 

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following table summarizes information about the recorded investment in lease and loan financing receivables, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.

 

 

 

 

 

 

 

Recorded

 

Billed

 

Recorded

 

 

 

Total

 

Recorded

 

Investment

 

Invoices

 

Investment

 

(Dollars in millions)

 

Recorded

 

Investment

 

> 90 Days and

 

> 90 Days and

 

Not

 

At September 30, 2018:

 

Investment

 

> 90 Days (1)

 

Accruing (1)

 

Accruing

 

Accruing (2)

 

Americas

 

$
3,526

 

$
268

 

$
213

 

$
27

 

$
59

 

EMEA

 
1,377

 
26

 
10

 
2

 
17

 

Asia Pacific

 
1,161

 
36

 
8

 
2

 
29

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease receivables

 

$
6,064

 

$
330

 

$
230

 

$
31

 

$
105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$
6,118

 

$
382

 

$
276

 

$
27

 

$
128

 

EMEA

 
3,313

 
62

 
23

 
4

 
77

 

Asia Pacific

 
2,252

 
78

 
31

 
8

 
49

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loan receivables

 

$
11,683

 

$
523

 

$
330

 

$
39

 

$
254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
17,747

 

$
853

 

$
561

 

$
70

 

$
359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $291 million is individually evaluated for impairment with a related allowance of $250 million.

 

 

 

 

 

 

 

Recorded

 

Billed

 

Recorded

 

 

 

Total

 

Recorded

 

Investment

 

Invoices

 

Investment

 

(Dollars in millions)

 

Recorded

 

Investment

 

> 90 Days and

 

> 90 Days and

 

Not

 

At December 31, 2017:

 

Investment

 

> 90 Days (1)

 

Accruing (1)

 

Accruing

 

Accruing (2)(3)

 

Americas

 

$
3,911

 

$
239

 

$
197

 

$
29

 

$
44

 

EMEA

 
1,349

 
32

 
5

 
3

 
27

 

Asia Pacific

 
1,333

 
57

 
23

 
3

 
36

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease receivables

 

$
6,593

 

$
328

 

$
225

 

$
36

 

$
107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$
6,715

 

$
345

 

$
254

 

$
38

 

$
96

 

EMEA

 
3,597

 
90

 
17

 
0

 
74

 

Asia Pacific

 
2,354

 
63

 
12

 
3

 
54

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loan receivables

 

$
12,667

 

$
498

 

$
283

 

$
41

 

$
224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
19,259

 

$
825

 

$
507

 

$
77

 

$
331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3)

Recast to conform to current period presentation, which includes billed impaired amounts.

 

Credit Quality Indicators

 

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

 

The following tables present the recorded investment net of allowance for credit losses for each class of receivables, by credit quality indicator, at September 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

 

(Dollars in millions)

 

Lease Receivables

 

Loan Receivables

 

At September 30, 2018:

 

Americas

 

EMEA

 

Asia Pacific

 

Americas

 

EMEA

 

Asia Pacific

 

Credit ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa – Aa3

 

$
385

 

$
54

 

$
87

 

$
668

 

$
128

 

$
169

 

A1 – A3

 
741

 
167

 
434

 
1,285

 
400

 
845

 

Baa1 – Baa3

 
796

 
416

 
278

 
1,381

 
994

 
541

 

Ba1 – Ba2

 
754

 
432

 
184

 
1,308

 
1,032

 
358

 

Ba3 – B1

 
459

 
185

 
88

 
797

 
443

 
172

 

B2 – B3

 
298

 
100

 
52

 
517

 
239

 
102

 

Caa – D

 
32

 
10

 
8

 
55

 
23

 
16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
3,465

 

$
1,365

 

$
1,132

 

$
6,012

 

$
3,258

 

$
2,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

Lease Receivables

 

Loan Receivables

 

At December 31, 2017:

 

Americas

 

EMEA

 

Asia Pacific

 

Americas

 

EMEA

 

Asia Pacific

 

Credit ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa – Aa3

 

$
422

 

$
49

 

$
68

 

$
724

 

$
129

 

$
120

 

A1 – A3

 
855

 
190

 
544

 
1,469

 
502

 
961

 

Baa1 – Baa3

 
980

 
371

 
337

 
1,683

 
982

 
596

 

Ba1 – Ba2

 
730

 
448

 
184

 
1,253

 
1,186

 
325

 

Ba3 – B1

 
443

 
192

 
89

 
760

 
508

 
157

 

B2 – B3

 
367

 
77

 
64

 
630

 
204

 
113

 

Caa – D

 
51

 
13

 
18

 
88

 
34

 
31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
3,847

 

$
1,340

 

$
1,302

 

$
6,607

 

$
3,545

 

$
2,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings

 

The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2018 or for the year ended December 31, 2017.