IBM 2008 Annual Report Download - page 57

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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Commercial financing receivables arise primarily from inventory
and accounts receivable financing for dealers and remarketers of
IBM and non-IBM products. Payment terms for inventory financing
and accounts receivable financing generally range from  to 
days. These short-term receivables are primarily unsecured and are
also subject to additional credit actions in order to mitigate the
associated risk.
Approximately  percent of Global Financing’s external financing
assets are in the segment’s core competency of technology equipment
and solutions financing. At December , , approximately  per-
cent of the external portfolio is with investment grade clients with no
exposure to consumers or mortgage-lending institutions.
Originations
The following are total external and internal financing originations.
($  )
For the year ended December : 2008 2007 2006
Client financing:
External $14,790 $14,171 $13,087
Internal 1,039 1,040 1,214
Commercial financing 32,078 30,541 27,969
TOTAL $47,907 $45,752 $42,270
Cash collections exceeded new financing originations for both client
and commercial financing in . When combined with currency
impacts, this resulted in a net decrease in financing assets from
December , . The increase in originations in  from ,
as well as the increase in  versus , was due to improving
volumes in both client and commercial financing.
Cash generated by Global Financing in  was primarily
deployed to pay intercompany payables and dividends to IBM.
Global Financing Receivables and Allowances
The following table presents external financing receivables, exclud-
ing residual values, and the allowance for doubtful accounts.
($  )
At December : 2008 2007
Gross financing receivables $26,599 $27,642
Specific allowance for doubtful accounts 386 230
Unallocated allowance for doubtful accounts 144 138
Total allowance for doubtful accounts
530 368
Net financing receivables $26,069 $27,274
Allowance for doubtful account coverage 2.0% 1.3%
Roll-Forward of Financing Receivables Allowance
for Doubtful Accounts
($  )
Allowance Additions/ Dec. 31,
Jan. 1, 2008 Used* (Reductions) Other** 2008
$368 $(63) $229 $(4) $530
* Represents reserved receivables, net of recoveries, that were disposed of during
the period.
** Primarily represents translation adjustments.
The percentage of financing receivables reserved increased from .
percent at December , , to . percent at December , 
primarily due to the increase in the specific allowance for doubtful
accounts. Specific reserves increased . percent from $ million
at December ,  to $ million at December ,  due to
current economic conditions. Unallocated reserves increased .
percent from $ million at December , , to $ million at
December , . Global Financing’s bad debt expense was an
addition of $ million for  and an addition of $ million for
. The increase was primarily attributed to the growth of the
specific reserves.
Residual Value
Residual value is a risk unique to the financing business and man-
agement of this risk is dependent upon the ability to accurately
project future equipment values at lease inception. Global Financing
has insight into product plans and cycles for the IBM products
under lease. Based upon this product information, Global Financing
continually monitors projections of future equipment values and
compares them with the residual values reflected in the portfolio. See
note A, “Significant Accounting Policies,” on page  for the company’s
accounting policy for residual values.
Global Financing optimizes the recovery of residual values by sell-
ing assets sourced from end of lease, leasing used equipment to new
clients, or extending lease arrangements with current clients. Sales of
equipment, which are primarily sourced from equipment returned at
end of lease, represented . percent of Global Financing’s revenue in
 and . percent in . The increase was driven primarily by the
increase in internal used equipment sales to the Systems and Technology
segment. The gross margin on these sales was . percent and .
percent in  and , respectively. The increase is primarily driven
by a shift in mix toward higher margin internal used equipment sales.
The table on page  presents the recorded amount of unguaran-
teed residual value for sales-type, direct financing and operating
leases at December ,  and . In addition, the table presents
the residual value as a percentage of the original amount financed,
and a schedule of when the unguaranteed residual value assigned to
equipment on leases at December ,  is expected to be returned
to the company. In addition to the unguaranteed residual value, on a
limited basis, Global Financing obtains guarantees of the future value