IBM 2009 Annual Report Download - page 61

Global Financing Receivables and Allowances
The following table presents external financing receivables exclud-
ing residual values and the allowance for doubtful accounts.
($ in millions)
At December 31: 2009 2008
Gross financing receivables $25,508 $26,599
Specific allowance for doubtful accounts 416 386
Unallocated allowance for doubtful accounts 120 144
Total allowance for doubtful accounts 536 530
Net financing receivables $24,972 $26,069
Allowance for doubtful accounts coverage 2.1% 2.0%
Roll Forward of Financing Receivables Allowance
for Doubtful Accounts
($ in millions)
Allowance Additions/ Dec. 31,
Jan. 1, 2009 Used* (Reductions) Other** 2009
$530 $(153) $143 $16 $536
* Represents reserved receivables, net of recoveries, that were disposed of
during the period.
** Primarily represents translation adjustments.
The percentage of Global Financing receivables reserved increased
from 2.0 percent at December 31, 2008 to 2.1 percent at
December 31, 2009 primarily due to the decline in the gross
financing receivables balance from December 31, 2008. Specific
reserves increased 7.8 percent from $386 million at December 31,
2008 to $416 million at December 31, 2009. Unallocated reserves
decreased 16.6 percent from $144 million at December 31,
2008, to $120 million at December 31, 2009. Global Financing’s
bad debt expense was an increase of $143 million for 2009,
compared to an increase of $229 million for 2008. The year-to-
year decrease was primarily attributed to the decline of required
specific reserve additions.
Residual Value
Residual value is a risk unique to the financing business and
management of this risk is dependent upon the ability to accu-
rately 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 equip-
ment values and compares them with the residual values reflected
in the portfolio. See note A, “Significant Accounting Policies,” on
page 79 for the company’s accounting policy for residual values.
Global Financing optimizes the recovery of residual values
by selling assets sourced from end of lease, leasing used equip-
ment to new clients, or extending lease arrangements with
current clients. Sales of equipment, which are primarily sourced
from equipment returned at the end of a lease, represented 43.7
percent of Global Financing’s revenue in 2009 and 39.7 percent
in 2008. The percentage increase was driven primarily by the
decrease in financing revenue. The gross margin on these sales
was 51.3 percent and 50.0 percent in 2009 and 2008, respec-
tively. The increase is primarily driven by a shift in mix toward
higher margin internal used equipment sales.
The table on page 60 presents the recorded amount of
unguaranteed residual value for sales-type, direct financing and
operating leases at December 31, 2008 and 2009. In addition,
the table presents the residual value as a percentage of the
related original amount financed and a run out of when the
unguaranteed residual value assigned to equipment on leases
at December 31, 2009 is expected to be returned to the com-
pany. In addition to the unguaranteed residual value, on a limited
basis, Global Financing will obtain guarantees of the future value
of the equipment to be returned at end of lease. These third-
party guarantees are included in minimum lease payments as
provided for by accounting standards in the determination of
lease classifications for the covered equipment and provide
protection against risk of loss arising from declines in equipment
values for these assets. The residual value guarantee increases
the minimum lease payments that are utilized in determining the
classification of a lease as a sales-type lease or operating lease.
The aggregate asset values associated with the guarantees
were $569 million and $1,083 million for the financing transac-
tions originated during the years ended December 31, 2009 and
2008, respectively. In 2009, the residual value guarantee pro-
gram resulted in the company recognizing approximately $400
million of revenue that would otherwise have been recognized in
future periods as operating lease revenue. If the company had
chosen to not participate in a residual value program in 2009
and prior years, the 2009 impact would be substantially miti-
gated by the effect of prior year asset values being recognized
as operating lease revenue in the current year. The associated
aggregate guaranteed future values at the scheduled end of
lease were $30 million and $56 million for the financing transac-
tions originated during 2009 and 2008, respectively. The cost
of guarantees was $4 million for the year ended December 31,
2009 and $7 million for the year ended December 31, 2008.
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