Financing Receivables

3 Months Ended

Oct. 26, 2019


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts. Lease receivables represent sales-type 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 have terms of three years on average. 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 26, 2019	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,218		$	5,335		$	2,433		$	9,986
Residual value	138			—			—			138
Unearned income	(134		)	—			—			(134		)
Allowance for credit loss	(43		)	(81		)	(9		)	(133		)
Total, net	$	2,179		$	5,254		$	2,424		$	9,857
Reported as:
Current	$	976		$	2,575		$	1,475		$	5,026
Noncurrent	1,203			2,679			949			4,831
Total, net	$	2,179		$	5,254		$	2,424		$	9,857



July 27, 2019	Lease Receivables			Loan Receivables			Financed Service Contracts			Total
Gross	$	2,367		$	5,438		$	2,369		$	10,174
Residual value	142			—			—			142
Unearned income	(137		)	—			—			(137		)
Allowance for credit loss	(46		)	(71		)	(9		)	(126		)
Total, net	$	2,326		$	5,367		$	2,360		$	10,053
Reported as:
Current	$	1,029		$	2,653		$	1,413		$	5,095
Noncurrent	1,297			2,714			947			4,958
Total, net	$	2,326		$	5,367		$	2,360		$	10,053


(b)	Credit Quality of Financing Receivables

Gross receivables, excluding residual value, less unearned income categorized by our internal credit risk rating as of October 26, 2019 and July 27, 2019 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
October 26, 2019	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,128	$	904	$	52	$	2,084
Loan receivables	3,267		1,866		202		5,335
Financed service contracts	1,466		935		32		2,433
Total	$	5,861	$	3,705	$	286	$	9,852



	INTERNAL CREDIT RISK RATING
July 27, 2019	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,204	$	991	$	35	$	2,230
Loan receivables	3,367		1,920		151		5,438
Financed service contracts	1,413		939		17		2,369
Total	$	5,984	$	3,850	$	203	$	10,037

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 26, 2019 and July 27, 2019 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
October 26, 2019	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	91	$	73	$	215	$	379	$	1,705	$	2,084	$	24	$	24
Loan receivables	173		127		242		542		4,793		5,335		11		11
Financed service contracts	140		129		395		664		1,769		2,433		3		3
Total	$	404	$	329	$	852	$	1,585	$	8,267	$	9,852	$	38	$	38



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 27, 2019	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	101	$	42	$	291	$	434	$	1,796	$	2,230	$	13	$	13
Loan receivables	257		67		338		662		4,776		5,438		31		31
Financed service contracts	145		131		271		547		1,822		2,369		3		3
Total	$	503	$	240	$	900	$	1,643	$	8,394	$	10,037	$	47	$	47

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.

As of October 26, 2019, we had financing receivables of $188 million, net of unbilled or current receivables, that were greater than 120 days plus past due but remained on accrual status as they are well secured and in the process of collection. Such balance was $215 million as of July 27, 2019.


(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 26, 2019	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts		Total
Allowance for credit loss as of July 27, 2019	$	46		$	71		$	9	$	126
Provisions (benefits)	(3		)	27			—		24
Recoveries (write-offs), net	—			(16		)	—		(16		)
Foreign exchange and other	—			(1		)	—		(1		)
Allowance for credit loss as of October 26, 2019	$	43		$	81		$	9	$	133



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

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 26, 2019 and July 27, 2019, 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.