Accounting for Leases as a Lessor

12 Months Ended

Oct. 31, 2021

Financing Receivables

Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. The components of financing receivables were as follows:


	As of October 31,
	2021		2020
	In millions
Minimum lease payments receivable	$	9,526	$	9,448
Unguaranteed residual value	390		364
Unearned income	(718)		(754)
Financing receivables, gross	9,198		9,058
Allowance for credit losses	(228)		(154)
Financing receivables, net	8,970		8,904
Less: current portion	(3,932)		(3,794)
Amounts due after one year, net	$	5,038	$	5,110

As of October 31, 2021, scheduled maturities of the Company's minimum lease payments receivable were as follows:


	As of October 31,
	2021
Fiscal year	In millions
2022	$	4,338
2023	2,557
2024	1,567
2025	747
2026	233
Thereafter	84
Total undiscounted cash flows	$	9,526
Present value of lease payments (recognized as finance receivables)	$	8,808
Difference between undiscounted cash flows and discounted cash flows	$	718

Sale of Financing Receivables

The Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the fiscal years ended October 31, 2021 and 2020, the Company sold $142 million and $103 million, respectively, of financing receivables.

Credit Quality Indicators

Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction and periodically updates the risk ratings when there is a change in the underlying credit quality. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.

The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2021, presented on an amortized cost basis by year of origination was as follows:


	As of October 31, 2021
	Risk Rating
	Low		Moderate		High
Fiscal Year	In millions
2021	$	1,978	$	1,542	$	49
2020	1,441		1,061		87
2019	829		771		85
2018	364		407		78
2017 and prior	169		234		103
Total	$	4,781	$	4,015	$	402

The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2020, was as follows:


	As of October 31,
	2020
	In millions
Risk Rating:
Low	$	4,590
Moderate	4,091
High	377
Total	$	9,058

Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment. Effective November 1, 2020, under the new guidance for credit losses, the Company discloses its credit quality by year of origination. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.

Allowance for Credit Losses

The allowance for credit losses for financing receivables and changes therein were as follows:


	As of October 31,
	2021		2020		2019
	In millions
Balance at beginning of period	$	154	$	131	$	120
Adjustment for adoption of the new credit loss standard	28		—		—
Provision for credit losses	61		43		33
Adjustment to the existing allowance	19		—		—
Write-offs	(34)		(20)		(22)
Balance at end of period	$	228	$	154	$	131

Non-Accrual and Past-Due Financing Receivables

The following table summarizes the aging and non-accrual status of gross financing receivables:


	As of October 31,
	2021		2020
	In millions
Billed:(1)
Current 1-30 days	$	410	$	340
Past due 31-60 days	35		43
Past due 61-90 days	17		22
Past due >90 days	111		140
Unbilled sales-type and direct-financing lease receivables	8,625		8,513
Total gross financing receivables	$	9,198	$	9,058
Gross financing receivables on non-accrual status(2)	$	257	$	364
Gross financing receivables 90 days past due and still accruing interest(2)	$	78	$	74

(1)Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.

(2)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

Operating Leases

Operating lease assets included in Property, plant and equipment in the Consolidated Balance Sheets were as follows:


	As of October 31,
	2021		2020
	In millions
Equipment leased to customers	$	7,039	$	7,184
Accumulated depreciation	(3,038)		(3,157)
Total	$	4,001	$	4,027

As of October 31, 2021, minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:


	As of October 31,
	2021
Fiscal year	In millions
2022	$	1,744
2023	1,090
2024	457
2025	89
2026	26

Total	$	3,406

If a lease is classified as an operating lease, the Company records lease revenue on a straight-line basis over the lease term. At commencement of an operating lease, initial direct costs are deferred and are expensed over the lease term on the same basis as the lease revenue is recorded.

The following table presents amounts included in the Consolidated Statement of Earnings related to lessor activity:


	For the fiscal years ended October 31,
	2021		2020		2019
	In millions
Sales-type leases and direct financing leases:
Interest income	$	494	$	469	$	458
Lease income - operating leases	2,383		2,431		2,596
Total lease income	$	2,877	$	2,900	$	3,054

Variable Interest Entities

The Company has issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity ("SPE"). The SPE meets the definition of a VIE and is consolidated, along with the associated debt, into the Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.

The Company's risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.

The following table presents the assets and liabilities held by the consolidated VIE as of October 31, 2021 and 2020, which are included in the Consolidated Balance Sheets. The assets in the table below includes those that can be used to settle the obligations of the VIE. Additionally, general Creditors do not have recourse to the assets of the VIE.


	As of October 31,
	2021		2020
Assets held by VIE	In millions
Other current assets	$	165	$	120
Financing receivables
Short-term	$	749	$	531
Long-term	$	707	$	584
Property, plant and equipment	$	854	$	665
Liabilities held by VIE
Notes payable and short-term borrowings, net of unamortized debt issuance costs	$	1,204	$	886
Long-term debt, net of unamortized debt issuance costs	$	950	$	834

Financing receivables transferred via securitization through the SPE were $1.1 billion and $1.2 billion for the fiscal years ended October 31, 2021 and 2020, respectively. Leased equipment transferred via securitization through the SPE was $720 million and $675 million for the fiscal years ended October 31, 2021 and 2020, respectively.