
7.	Financing Receivables and Operating Leases


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. 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 the Company's financing receivables is presented as follows (in millions):



April 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,276		$	1,720		$	3,081		$	8,077
Residual value	226			—			—			226
Unearned income	(190		)	—			—			(190		)
Allowance for credit loss	(242		)	(80		)	(37		)	(359		)
Total, net	$	3,070		$	1,640		$	3,044		$	7,754
Reported as:
Current	$	1,424		$	820		$	2,004		$	4,248
Noncurrent	1,646			820			1,040			3,506
Total, net	$	3,070		$	1,640		$	3,044		$	7,754



July 26, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,532		$	1,683		$	3,210		$	8,425
Residual value	233			—			—			233
Unearned income	(238		)	—			—			(238		)
Allowance for credit loss	(233		)	(98		)	(18		)	(349		)
Total, net	$	3,294		$	1,585		$	3,192		$	8,071
Reported as:
Current	$	1,476		$	728		$	1,949		$	4,153
Noncurrent	1,818			857			1,243			3,918
Total, net	$	3,294		$	1,585		$	3,192		$	8,071

As of April 25, 2015 and July 26, 2014, the deferred service revenue related to "Financed Service Contracts and Other" was $1,520 million and $1,843 million, respectively.

Future minimum lease payments at April 25, 2015 are summarized as follows (in millions):



Fiscal Year	Amount
2015 (remaining three months)	$	498
2016	1,349
2017	857
2018	406
2019	146
Thereafter	20
Total	$	3,276

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 less unearned income categorized by the Company’s internal credit risk rating as of April 25, 2015 and July 26, 2014 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
April 25, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,590	$	1,371	$	125	$	3,086
Loan receivables	755		816		149		1,720
Financed service contracts and other	1,650		1,371		60		3,081
Total	$	3,995	$	3,558	$	334	$	7,887



	INTERNAL CREDIT RISK RATING
July 26, 2014	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,615	$	1,538	$	141	$	3,294
Loan receivables	953		593		137		1,683
Financed service contracts and other	1,744		1,367		99		3,210
Total	$	4,312	$	3,498	$	377	$	8,187

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

The Company’s 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.

In circumstances when collectibility is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of April 25, 2015 and July 26, 2014 were $1,900 million and $2,220 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,113 million and $8,420 million as of their respective period ends.

The following tables present the aging analysis of gross receivables less unearned income as of April 25, 2015 and July 26, 2014 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
April 25, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	102	$	48	$	138	$	288	$	2,798	$	3,086	$	38	$	38
Loan receivables	12		15		56		83		1,637		1,720		29		29
Financed service contracts and other	99		88		309		496		2,585		3,081		32		12
Total	$	213	$	151	$	503	$	867	$	7,020	$	7,887	$	99	$	79



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 26, 2014	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	63	$	46	$	202	$	311	$	2,983	$	3,294	$	48	$	41
Loan receivables	3		21		27		51		1,632		1,683		19		19
Financed service contracts and other	268		230		220		718		2,492		3,210		12		9
Total	$	334	$	297	$	449	$	1,080	$	7,107	$	8,187	$	79	$	69

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 $361 million and $334 million as of April 25, 2015 and July 26, 2014, respectively.

As of April 25, 2015, the Company had financing receivables of $75 million, net of unbilled or current receivables from the same contract, that were in the category of 91 days plus past due but remained on accrual status. Such balance was $78 million as of July 26, 2014. A financing receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.


(c)	Allowance for Credit Loss Rollforward

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



	CREDIT LOSS ALLOWANCES
Three Months Ended April 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of January 24, 2015	$	250		$	85		$	40		$	375
Provisions	(4		)	(5		)	(2		)	(11		)
Recoveries (write-offs), net	(1		)	—			—			(1		)
Foreign exchange and other	(3		)	—			(1		)	(4		)
Allowance for credit loss as of April 25, 2015	$	242		$	80		$	37		$	359
Financing receivables as of April 25, 2015 ⁽¹⁾	$	3,312		$	1,720		$	3,081		$	8,113



	CREDIT LOSS ALLOWANCES
Nine Months Ended April 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 26, 2014	$	233		$	98		$	18		$	349
Provisions	25			(15		)	21			31
Recoveries (write-offs), net	(6		)	1			—			(5		)
Foreign exchange and other	(10		)	(4		)	(2		)	(16		)
Allowance for credit loss as of April 25, 2015	$	242		$	80		$	37		$	359



	CREDIT LOSS ALLOWANCES
Three Months Ended April 26, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of January 25, 2014	$	254		$	98		$	22		$	374
Provisions	(6		)	(10		)	(2		)	(18		)
Recoveries (write-offs), net	(1		)	4			(1		)	2
Foreign exchange and other	2			—			—			2
Allowance for credit loss as of April 26, 2014	$	249		$	92		$	19		$	360
Financing receivables as of April 26, 2014 ⁽¹⁾	$	3,537		$	1,621		$	2,810		$	7,968



	CREDIT LOSS ALLOWANCES
Nine Months Ended April 26, 2014	Lease Receivables		Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 27, 2013	$	238	$	86		$	20		$	344
Provisions	9		5			—			14
Recoveries (write-offs), net	—		4			(1		)	3
Foreign exchange and other	2		(3		)	—			(1		)
Allowance for credit loss as of April 26, 2014	$	249	$	92		$	19		$	360

⁽¹⁾Total financing receivables before allowance for credit loss.

The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers 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 the Company’s 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. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.

Typically, the Company also considers 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 April 25, 2015 and July 26, 2014, are presented under “(b) Credit Quality of Financing Receivables” above.

The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, the Company uses expected default frequency rates published by a major third-party credit-rating agency as well as its 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

The Company provides 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):



	April 25, 2015			July 26, 2014
Operating lease assets	$	359		$	362
Accumulated depreciation	(195		)	(202		)
Operating lease assets, net	$	164		$	160

Minimum future rentals on noncancelable operating leases at April 25, 2015 were approximately $0.1 billion for the remaining three months of fiscal 2015, $0.2 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019.