Accounting for Leases as a Lessor

6 Months Ended

Apr. 30, 2021

Accounting for Leases as a Lessor 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
	April 30, 2021		October 31, 2020
	In millions
Minimum lease payments receivable	$	9,503	$	9,448
Unguaranteed residual value	383		364
Unearned income	(744)		(754)
Financing receivables, gross	9,142		9,058
Allowance for credit losses	(224)		(154)
Financing receivables, net	8,918		8,904
Less: current portion	(3,845)		(3,794)
Amounts due after one year, net	$	5,073	$	5,110

As of April 30, 2021 and October 31, 2020, scheduled maturities of the Company's minimum lease payments receivable were as follows:


	As of
	April 30, 2021		October 31, 2020
Fiscal year	In millions
Remainder of fiscal 2021	$	2,428	$	4,182
2022	3,157		2,662
2023	2,110		1,572
2024	1,153		720
2025	506		252
Thereafter	149		60
Total undiscounted cash flows	$	9,503	$	9,448
Present value of lease payments (recognized as finance receivables)	$	8,759	$	8,694
Unearned income	$	744	$	754

Sale of Financing Receivables

The Company enters into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the three and six months ended April 30, 2021 the Company sold $23 million and $80 million of financing receivables, respectively. During the fiscal year ended October 31, 2020, the Company sold $103 million 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 financing receivables, based on internal risk ratings as of April 30, 2021, presented on amortized cost basis by year of origination was as follows:


	As of April 30, 2021
	Risk Rating
	Low		Moderate		High
Fiscal Year	In millions
2021	$	698	$	575	$	20
2020	1,841		1,402		95
2019	1,173		1,072		93
2018	603		615		93
2017 and prior	317		405		140
Total	$	4,632	$	4,069	$	441

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 as of April 30, 2021 and October 31, 2020 and the respective changes during the six and twelve months then ended were as follows:


	As of
	April 30, 2021		October 31, 2020
	In millions
Balance at beginning of period	$	154	$	131
Adjustment for adoption of the new credit loss standard	28		—
Provision for credit losses	39		43
Adjustment to the existing allowance	19		—
Write-offs	(16)		(20)
Balance at end of period	$	224	$	154

Non-Accrual and Past-Due Financing Receivables

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


	As of
	April 30, 2021		October 31, 2020
	In millions
Billed:(1)
Current 1-30 days	$	351	$	340
Past due 31-60 days	29		43
Past due 61-90 days	27		22
Past due > 90 days	112		140
Unbilled sales-type and direct-financing lease receivables	8,623		8,513
Total gross financing receivables	$	9,142	$	9,058
Gross financing receivables on non-accrual status(2)	$	326	$	364
Gross financing receivables 90 days past due and still accruing interest(2)	$	74	$	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 Condensed Consolidated Balance Sheets were as follows:


	As of
	April 30, 2021		October 31, 2020
	In millions
Equipment leased to customers	$	7,207	$	7,184
Accumulated depreciation	(3,281)		(3,157)
Total	$	3,926	$	4,027

Minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:


	As of
	April 30, 2021
Fiscal year	In millions
Remainder of fiscal 2021	$	959
2022	1,358
2023	734
2024	197
2025	18
Thereafter	2
Total	$	3,268

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 Condensed Consolidated Statement of Earnings related to lessor activity:


	Three Months Ended April 30,				Six Months Ended April 30,
	2021		2020		2021		2020
	In millions
Sales-type leases and direct financing leases:
Interest income	$	124	$	115	$	246	$	228
Lease income - operating leases	595		608		1,199		1,233
Total lease income	$	719	$	723	$	1,445	$	1,461

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 Condensed 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.

In March 2021, the Company issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.

The following table presents the assets and liabilities held by the consolidated VIE as of April 30, 2021, which are included in the Condensed Consolidated Balance Sheets. The assets in the table below include 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
	April 30, 2021		October 31, 2020
Assets held by VIE	In millions
Other current assets	$	128	$	120
Financing receivables
Short-term	$	693	$	531
Long-term	$	733	$	584
Property, plant and equipment	$	868	$	665
Liabilities held by VIE
Notes payable and short-term borrowings, net of unamortized debt issuance costs	$	1,150	$	886
Long-term debt, net of unamortized debt issuance costs	$	1,005	$	834