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Accounts Receivable and Finance Receivables | 9 Months Ended
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Sep. 29, 2018
Accounts Receivable and Finance Receivables |
Accounts Receivable and Finance Receivables | Note 6. Accounts Receivable and Finance Receivables Accounts Receivable Accounts receivable is composed of the following:
(In millions) |  |  |  |  |  | September 29, 2018 |  | December 30, 2017
Commercial |  |  |  |  | $ | 895 | $ | 1,007
U.S. Government contracts, including foreign military sales |  |  |  |  |  | 156 |  | 383
|  |  |  |  |  | 1,051 |  | 1,390
Allowance for doubtful accounts |  |  |  |  |  | (25) |  | (27)
Total |  |  |  |  | $ | 1,026 | $ | 1,363
Upon adoption of ASC 606, unbilled receivables, primarily related to U.S. Government contracts, totaling $203 million were reclassified from accounts receivable to contract assets or liabilities, depending on the net position of the contract as discussed in Note 15. In addition, $71 million of accounts receivable, net were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 3. Finance Receivables Finance receivables are presented in the following table:
(In millions) |  |  |  |  |  | September 29, 2018 |  | December 30, 2017
Finance receivables |  |  |  |  | $ | 815 | $ | 850
Allowance for losses |  |  |  |  |  | (29) |  | (31)
Total finance receivables, net |  |  |  |  | $ | 786 | $ | 819
Credit Quality Indicators and Nonaccrual Finance Receivables We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual. We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accrual of interest income is suspended for these accounts and all cash collections are generally applied to reduce the net investment balance. Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing. Delinquency We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category. Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
(Dollars in millions) |  |  |  | September 29, 2018 |  | December 30, 2017
Performing |  |  | $ | 723 | $ | 733
Watchlist |  |  |  | 48 |  | 56
Nonaccrual |  |  |  | 44 |  | 61
Nonaccrual as a percentage of finance receivables |  |  |  | 5.40% |  | 7.18%
Less than 31 days past due |  |  | $ | 752 | $ | 791
31-60 days past due |  |  |  | 22 |  | 25
61-90 days past due |  |  |  | 32 |  | 14
Over 90 days past due |  |  |  | 9 |  | 20
60 + days contractual delinquency as a percentage of finance receivables |  |  |  | 5.03% |  | 4.00%
Impaired Loans On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. Interest income recognized on impaired loans was not significant in the first nine months of 2018 or 2017. A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:
(In millions) |  |  |  |  |  | September 29, 2018 |  | December 30, 2017
Recorded investment: |  |  |  |  |  |  |  |
Impaired loans with related allowance for losses |  |  |  |  | $ | 14 | $ | 24
Impaired loans with no related allowance for losses |  |  |  |  |  | 30 |  | 70
Total |  |  |  |  | $ | 44 | $ | 94
Unpaid principal balance |  |  |  |  | $ | 54 | $ | 106
Allowance for losses on impaired loans |  |  |  |  |  | 4 |  | 6
Average recorded investment |  |  |  |  |  | 62 |  | 92
A summary of the allowance for losses on finance receivables, based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
(In millions) |  |  |  |  |  | September 29, 2018 |  | December 30, 2017
Allowance based on collective evaluation |  |  |  |  | $ | 25 | $ | 25
Allowance based on individual evaluation |  |  |  |  |  | 4 |  | 6
Finance receivables evaluated collectively |  |  |  |  |  | 671 |  | 658
Finance receivables evaluated individually |  |  |  |  |  | 44 |  | 94

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