Cisco 2013 Annual Report Download - page 72

and adjust our requirements based on our business needs prior to firm orders being placed. Our purchase commitments are for
short-term product manufacturing requirements as well as for commitments to suppliers to secure manufacturing capacity.
Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility to
help ensure competitive lead times with the risk of inventory obsolescence because of rapidly changing technology and
customer requirements. We believe the amount of our inventory and purchase commitments is appropriate for our revenue
levels.
Financing Receivables and Guarantees We measure our net balance sheet exposure position related to our financing
receivables and financing guarantees by reducing the total of gross financing receivables and financing guarantees by the
associated allowances for credit loss and deferred revenue. As of July 27, 2013, our net balance sheet exposure position related
to financing receivables and financing guarantees was as follows (in millions):
FINANCING RECEIVABLES
FINANCING
GUARANTEES
TOTALJuly 27, 2013
Lease
Receivables
Loan
Receivables
Financed
Service
Contracts
and Other Total
Channel
Partner
End-User
Customers Total
Gross amount less unearned income ......... $3,507 $1,649 $ 3,136 $ 8,292 $ 438 $ 237 $ 675 $ 8,967
Allowance for credit loss ................. (238) (86) (20) (344) — — — (344)
Deferred revenue ....................... (41) (32) (2,036) (2,109) (225) (191) (416) (2,525)
Net balance sheet exposure ........... $3,228 $1,531 $ 1,080 $ 5,839 $ 213 $ 46 $ 259 $ 6,098
Financing Receivables Gross financing receivables less unearned income increased by 9% compared with the end of fiscal
2012. The change was primarily due to a 10% increase in lease receivables and an 18% increase in financed service contracts
and other, partially reduced by an 8% decline in loan receivables. We provide financing to certain end-user customers and
channel partners to enable sales of our products, services, and networking solutions. These financing arrangements include
leases, financed service contracts, and loans. Arrangements related to leases are generally collateralized by a security interest
in the underlying assets. Lease receivables include sales-type and direct-financing leases. We also provide certain qualified
customers financing for long-term service contracts, which primarily relate to technical support services and advanced
services. Our loan financing arrangements may include not only financing the acquisition of our products and services but also
providing additional funds for other costs associated with network installation and integration of our products and services. We
expect to continue to expand the use of our financing programs in the near term.
Financing Guarantees In the normal course of business, third parties may provide financing arrangements to our customers
and channel partners under financing programs. The financing arrangements to customers provided by third parties are related
to leases and loans and typically have terms of up to three years. In some cases, we provide guarantees to third parties for these
lease and loan arrangements. The financing arrangements to channel partners consist of revolving short-term financing
provided by third parties, generally with payment terms ranging from 60 to 90 days. In certain instances, these financing
arrangements result in a transfer of our receivables to the third party. The receivables are derecognized upon transfer, as these
transfers qualify as true sales, and we receive payments for the receivables from the third party based on our standard payment
terms. These financing arrangements facilitate the working capital requirements of the channel partners, and in some cases, we
guarantee a portion of these arrangements. We could be called upon to make payments under these guarantees in the event of
nonpayment by the channel partners or end-user customers. Historically, our payments under these arrangements have been
immaterial. Where we provide a guarantee, we defer the revenue associated with the channel partner and end-user financing
arrangement in accordance with revenue recognition policies, or we record a liability for the fair value of the guarantees. In
either case, the deferred revenue is recognized as revenue when the guarantee is removed.
Deferred Revenue Related to Financing Receivables and Guarantees The majority of the deferred revenue in the preceding
table is related to financed service contracts. The majority of the revenue related to financed service contracts, which primarily
relates to technical support services, is deferred as the revenue related to financed service contracts is recognized ratably over
the period during which the related services are to be performed. A portion of the revenue related to lease and loan receivables
is also deferred and included in deferred product revenue based on revenue recognition criteria not currently having been met.
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