Financing Receivables and Operating Leases


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts. Lease receivables represent sales-type and direct-financing leases resulting from the sale of Cisco’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Lease receivables consist of arrangements with terms of four years on average. Loan receivables represent financing arrangements related to the sale of our hardware, software, and services, which may include additional funding for other costs associated with network installation and integration of our products and services. Loan receivables generally have terms of up to three years. Financed service contracts include financing receivables related to technical support and advanced services. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.

A summary of our financing receivables is presented as follows (in millions):



October 27, 2018	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,511		$	4,924		$	2,240		$	9,675
Residual value	159			—			—			159
Unearned income	(140		)	—			—			(140		)
Allowance for credit loss	(131		)	(60		)	(8		)	(199		)
Total, net	$	2,399		$	4,864		$	2,232		$	9,495
Reported as:
Current	$	1,143		$	2,422		$	1,286		$	4,851
Noncurrent	1,256			2,442			946			4,644
Total, net	$	2,399		$	4,864		$	2,232		$	9,495



July 28, 2018	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,688		$	4,999		$	2,326		$	10,013
Residual value	164			—			—			164
Unearned income	(141		)	—			—			(141		)
Allowance for credit loss	(135		)	(60		)	(10		)	(205		)
Total, net	$	2,576		$	4,939		$	2,316		$	9,831
Reported as:
Current	$	1,249		$	2,376		$	1,324		$	4,949
Noncurrent	1,327			2,563			992			4,882
Total, net	$	2,576		$	4,939		$	2,316		$	9,831

Future minimum lease payments to Cisco on lease receivables as of October 27, 2018 are summarized as follows (in millions):



Fiscal Year	Amount
2019 (remaining nine months)	$	1,105
2020	614
2021	478
2022	231
2023	78
Thereafter	5
Total	$	2,511

Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.


(b)	Credit Quality of Financing Receivables

Gross receivables, excluding residual value, less unearned income categorized by our internal credit risk rating as of October 27, 2018 and July 28, 2018 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
October 27, 2018	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,238	$	1,084	$	49	$	2,371
Loan receivables	3,122		1,744		58		4,924
Financed service contracts	1,454		768		18		2,240
Total	$	5,814	$	3,596	$	125	$	9,535



	INTERNAL CREDIT RISK RATING
July 28, 2018	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,294	$	1,199	$	54	$	2,547
Loan receivables	3,184		1,752		63		4,999
Financed service contracts	1,468		835		23		2,326
Total	$	5,946	$	3,786	$	140	$	9,872

We determine the adequacy of our allowance for credit loss by assessing the risks and losses inherent in our financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by us to our customers, which consist of the following: lease receivables, loan receivables, and financed service contracts.

Our internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings.

The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of October 27, 2018 and July 28, 2018 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
October 27, 2018	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	79	$	27	$	121	$	227	$	2,144	$	2,371	$	5	$	5
Loan receivables	123		85		348		556		4,368		4,924		29		29
Financed service contracts	102		147		262		511		1,729		2,240		3		3
Total	$	304	$	259	$	731	$	1,294	$	8,241	$	9,535	$	37	$	37



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 28, 2018	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	72	$	27	$	155	$	254	$	2,293	$	2,547	$	9	$	9
Loan receivables	104		55		252		411		4,588		4,999		30		30
Financed service contracts	138		78		304		520		1,806		2,326		3		3
Total	$	314	$	160	$	711	$	1,185	$	8,687	$	9,872	$	42	$	42

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables is presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $474 million and $503 million as of October 27, 2018 and July 28, 2018, respectively.

As of October 27, 2018, we had financing receivables of $234 million, net of unbilled or current receivables, that were in the category of 91 days plus past due but remained on accrual status as they are well secured and in the process of collection. Such balance was $182 million as of July 28, 2018.


(c)	Allowance for Credit Loss Rollforward

The allowances for credit loss and the related financing receivables are summarized as follows (in millions):



Three months ended October 27, 2018	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables		Financed Service Contracts			Total
Allowance for credit loss as of July 28, 2018	$	135		$	60	$	10		$	205
Provisions (benefits)	(3		)	—		(2		)	(5		)
Foreign exchange and other	(1		)	—		—			(1		)
Allowance for credit loss as of October 27, 2018	$	131		$	60	$	8		$	199



Three months ended October 28, 2017	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables		Financed Service Contracts			Total
Allowance for credit loss as of July 29, 2017	$	162		$	103	$	30		$	295
Provisions	(2		)	2		(6		)	(6		)
Foreign exchange and other	—			1		(1		)	—
Allowance for credit loss as of October 28, 2017	$	160		$	106	$	23		$	289

We assess the allowance for credit loss related to financing receivables on either an individual or a collective basis. We consider various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include our historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level. Our internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.

Typically, we also consider receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of October 27, 2018 and July 28, 2018, are presented under “(b) Credit Quality of Financing Receivables” above.

We evaluate the remainder of our financing receivables portfolio for impairment on a collective basis and record an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, we use expected default frequency rates published by a major third-party credit-rating agency as well as our own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk, and correlation.


(d)	Operating Leases

We provide financing of certain equipment through operating leases, and the amounts are included in property and equipment in the Consolidated Balance Sheets. Amounts relating to equipment on operating lease assets and the associated accumulated depreciation are summarized as follows (in millions):



	October 27, 2018			July 28, 2018
Operating lease assets	$	475		$	356
Accumulated depreciation	(333		)	(238		)
Operating lease assets, net	$	142		$	118

Minimum future rentals on noncancelable operating leases as of October 27, 2018 are summarized as follows (in millions):



Fiscal Year	Amount
2019 (remaining nine months)	$	125
2020	108
2021	44
2022	3
Thereafter	1
Total	$	281