Receivables

Accounts Receivable, Net—Sotheby's Auction segment functions principally as an agent by offering works of art for sale at auction and by brokering private art sales. In its role as agent, Sotheby's accepts property on consignment and matches sellers (also known as consignors) to buyers through the auction or private sale process. Sotheby's invoices the buyer for the purchase price of the property (including the commission owed by the buyer), collects payment from the buyer and remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby's auction commissions include those paid by the buyer ("buyer's premium") and those paid by the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of the hammer price of the property sold at auction. Sotheby's private sale commissions are stipulated in a legally binding agreement between Sotheby’s and the seller, which outlines the terms of the arrangement including the desired sale price and the amount or rate of commission to be earned upon completion of the sale.

Under Sotheby’s standard auction payment terms, payments from buyers are due no more than 30 days from the sale date and payments to consignors are due 35 days from the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds being due to the consignor shortly thereafter. Extended payment terms are sometimes provided to an auction or private sale buyer in order to support and market a sale. Such terms typically extend the payment due date to a date that is no longer than one year from the sale date. In limited circumstances, the payment due date may be extended to a date that is beyond one year from the sale date. Any changes from the standard auction and private sale payment terms are subject to management approval under Sotheby's policy. When providing extended payment terms, Sotheby’s attempts to match the timing of cash receipt from the buyer with the timing of payment to the consignor, but is not always successful in doing so. As of December 31, 2012, $36.6 million of buyer receivables (of which $32 million is related to one buyer) and $31.4 million of the amounts owed to consignors are classified within Other Long-Term Assets and Other Long-Term Liabilities, respectively, based on their corresponding payment due dates. None of the property related to these buyer receivables has been released to the buyer.

Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer. If a buyer defaults on payment, the sale may be cancelled, and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future Sotheby's auction or negotiate a private sale with Sotheby's acting as its agent. In certain instances and subject to management approval under Sotheby’s policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer and/or the buyer may be allowed to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, Sotheby’s is liable to the seller for the net sale proceeds whether or not the buyer makes payment. As of December 31, 2012 and 2011, Accounts Receivable (net) includes $170 million and $107 million, respectively, related to situations when Sotheby's has paid the consignor before payment was collected from the buyer. As of December 31, 2012 and 2011, Accounts Receivable (net) also includes $83.7 million and $69.6 million, respectively, related to situations in which the buyer has taken possession of the property before making payment to Sotheby’s. Included in the $83.7 million is $3.9 million associated with purchases made by a related party (see Notes G and S). This related party receivable was collected in the first quarter of 2013.

Notes Receivable (net)—As of December 31, 2012 and December 31, 2011, Notes Receivable (net) consisted of the following (in thousands of dollars):



	December 31, 2012		December 31, 2011
Finance segment:
Secured loans	$	425,138	$	223,029
Auction segment:
Auction guarantee advances	16,224		7,512
Unsecured loan	2,142		2,142
Dealer segment:
Secured loan	3,536		—
Total Notes Receivable (net)	$	447,040	$	232,683

Notes Receivable (Finance Segment)—Through its Finance segment, Sotheby’s provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a “consignor advance”); and (2) general purpose term loans secured by property not presently intended for sale (a “term loan”).

A consignor advance allows a seller to receive funds upon consignment for an auction or private sale that will typically occur up to one year in the future. Consignor advances normally have maturities ranging between three and six months and may sometimes be issued interest free as an incentive to the consignor for entering into the consignment agreement. Interest free consignor advances can represent a significant portion of the Finance segment loan portfolio as of the end of certain quarterly reporting periods in advance of peak selling seasons. Interest bearing consignor advances typically carry a variable rate of interest.

Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and may generate future auction or private sale consignments and/or purchases. Term loans normally have initial maturities of up to two years and typically carry a variable market rate of interest.

In certain situations, term loans are also made to refinance clients' auction and private sale purchases. For the years ended December 31, 2012 and 2011, the Finance Segment made $95.4 million and $48.4 million, respectively, of such loans. These loans are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected within investing activities in the statement of cash flows. Upon repayment, the cash received in settlement of such loans is classified within operating activities in the statement of cash flows. As of December 31, 2012 and December 31, 2011, Notes Receivable (net) included $77.4 million and $36.7 million, respectively, of such loans.

The collection of secured loans can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby’s ability to realize on its collateral may be limited or delayed.

Sotheby’s target loan-to-value (“LTV”) ratio, which is defined as principal loan amount divided by the low auction estimate of the collateral, is 50% or lower. However, loans are also made at an initial LTV higher than 50%. In addition, as a result of the periodic revaluation of loan collateral, the LTV ratio of certain loans may increase above the 50% target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby’s specialists on an annual basis or more frequently if there is a material change in circumstances related to the loan or the disposal plans for the collateral.

Management believes that the LTV ratio is the critical credit quality indicator for Finance segment secured loans. The table below provides information regarding the LTV ratio of Finance segment secured loans as of December 31, 2012 and 2011 (in thousands of dollars):



	December 31, 2012			December 31, 2011
Aggregate LTV ratio of Finance segment secured loans	48		%	42		%
Finance segment secured loans with an LTV above 50%	$	120,662		$	134,300
Low auction estimate of collateral related to Finance segment secured loans with an LTV above 50%	$	184,205		$	225,200

From 2010 through 2012, Sotheby’s recognized $0.1 million of cumulative losses related to specific impaired Finance segment secured loans. The table below provides other credit quality information regarding Finance segment secured loans as of December 31, 2012 and 2011 (in thousands of dollars):



	December 31, 2012		December 31, 2011
Total secured loans	$	425,138	$	223,029
Loans past due	$	33,737	$	5,388
Loans more than 90 days past due	$	32,665	$	1,287
Non-accrual loans	$	—	$	—
Impaired loan	$	—	$	—
Allowance for credit losses:
Allowance for credit losses - impaired loans	$	—	$	—
Allowance for credit losses based on historical data	1,341		875
Total Allowance for Credit Losses - secured loans	$	1,341	$	875

Management considers a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of December 31, 2012, $33.7 million of the net Notes Receivable balance was considered to be past due, of which $32.7 million was more than 90 days past due. Management is continuing to accrue Finance Revenue on these past due loans. The collateral securing these loans has low auction estimates of approximately $77.7 million and $76.5 million, respectively. In consideration of the collateral related to these loans, current collateral disposal plans and negotiations with the borrowers, management believes that the principal and interest amounts due for these loans will be collected.

A non-accrual loan is a loan for which future Finance Revenue is not recorded due to management’s determination that it is probable that future interest on the loan is not collectible. Any cash receipts subsequently received on non-accrual loans are first applied to reduce the recorded principal balance of the loan, with any proceeds in excess of the principal balance then applied to interest owed by the borrower. The recognition of Finance Revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower or if management becomes aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of December 31, 2012 and December 31, 2011, there were no non-accrual loans outstanding.

A loan is considered to be impaired when management determines that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. If a loan is considered to be impaired, Finance Revenue is no longer recognized and bad debt expense is recorded for any principal or interest that is deemed uncollectible. As of December 31, 2012 and December 31, 2011, there were no impaired loans outstanding.

During the period January 1, 2011 to December 31, 2012, activity related to the Allowance for Credit Losses was as follows (in thousands of dollars):



Allowance for Credit Losses as of January 1, 2011	$	971
Change in loan loss provision	41
Write-offs	(137		)
Allowance for Credit Losses at December 31, 2011	875
Change in loan loss provision	466
Allowance for Credit Losses as of December 31, 2012	$	1,341

As of December 31, 2012, loans to three borrowers totaling $54.8 million (LTV of 48%), $51.1 million (LTV of 72%), and $50.5 million (LTV of 50%), respectively, each represented approximately 12% of the net Notes Receivable balance. For the year ended December 31, 2012, consolidated Finance Revenues include $4.6 million related to these three loans, which represents 26% of total Finance Revenues. No other loan exceeds 10% of the net Notes Receivable balance.

As of December 31, 2012, unfunded commitments to extend additional credit through Sotheby's Finance Segment were $8.9 million, of which $0.9 million is committed to an employee of Sotheby's who is not an Executive Officer. As of December 31, 2012, this same employee had an outstanding Finance segment loan of approximately $0.1 million.

Notes Receivable (Auction Segment)—Sotheby’s is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. Such auction guarantee advances are recorded on the balance sheet within Notes Receivable (net). As of December 31, 2012 and 2011, auction guarantee advances totaled $16.2 million and $7.5 million, respectively. (See Note Q for information related to auction guarantees.)

Under certain circumstances, Sotheby's, through its Auction segment, finances the purchase of works of art by unaffiliated art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by Sotheby's and the art dealer. As of December 31, 2012 and 2011, one such unsecured loan totaled $2.1 million. Sotheby's is no longer accruing interest with respect to this unsecured loan, but management believes that the $2.1 million balance is collectible based on discussions with the borrower.

Notes Receivable (Dealer Segment)—Sotheby's Dealer segment, with the assistance of Finance segment employees, sometimes provides secured loans to certain art dealers to finance the purchase of works of art. In these situations, the Dealer segment acquires a partial ownership interest in the purchased property in addition to providing the loan. Upon its eventual sale, the loan is repaid and any profit or loss is shared by Sotheby's and the art dealer according to their respective ownership interests. As of December 31, 2012, Notes Receivable (net) included one Dealer segment loan of $3.5 million. No Dealer segment loans were outstanding as of December 31, 2011. In 2012, Sotheby's earned $0.4 million in interest income on such loans.

Weighted Average Interest Rates—In 2012 and 2011, the weighted average interest rates earned on Notes Receivable were 5.1% and 5.3%, respectively.