IBM 2011 Annual Report Download - page 68

66
Management Discussion
International Business Machines Corporation and Subsidiary Companies
The table below presents the recorded amount of unguaranteed
residual value for sales-type, direct financing and operating leases
at December 31, 2010 and 2011. 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 lease at December 31, 2011 is expected to be
returned to the company. 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.
While primarily focused on IBM products, guarantees are also
obtained for certain OEM products. 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, direct financing lease or operating lease. The
aggregate asset values associated with the guarantees for sales-type
leases were $821 million and $714 million for the financing transactions
originated during the years ended December 31, 2011 and 2010,
respectively. In 2011, the residual value guarantee program resulted
in the company recognizing approximately $532 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 guarantee program in 2011 and prior years, the
2011 impact would be substantially mitigated 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 was $43 million for the financing
transactions originated during 2011 and 2010, respectively. The cost
of guarantees was $4 million for the year ended December 31, 2011
and $5 million for the year ended December 31, 2010.
Unguaranteed Residual Value
($ in millions)
To t a l Estimated Run Out of 2011 Balance
2010 2011 2012 2013 2014
2015 and
Beyond
Sales-type and direct financing leases $ 871 $ 745 $177 $194 $241 $132
Operating leases 328 296 121 97 64 14
Total unguaranteed residual value $ 1,199 $ 1,041 $298 $291 $305 $146
Related original amount financed $20,412 $18,635
Percentage 5.9% 5.6%
Debt
At December 31: 2011 2010
Debt-to-equity ratio 7.2x 7.0x
The company funds Global Financing through borrowings using a
debt-to-equity ratio target of approximately 7 to 1. The debt used to
fund Global Financing assets is composed of intercompany loans
and external debt. The terms of the intercompany loans are set by
the company to substantially match the term and currency underlying
the financing receivable and are based on arm’s-length pricing. Both
assets and debt are presented in the Global Financing Balance Sheet
on page 64.
Global Financing provides funding predominantly for the company’s
external clients assets, as well as for assets under contract by other
IBM units. As previously stated, the company measures Global
Financing as a stand-alone entity, and accordingly, interest expense
relating to debt supporting Global Financing’s external client and
internal business is included in the “Global Financing Results of
Operations” on pages 63 and 64 and in note T, “Segment Infor-
mation,” on pages 135 to 139.
In the company’s Consolidated Statement of Earnings on page
70, however, the external debt-related interest expense supporting
Global Financing’s internal financing to the company is reclassified
from cost of financing to interest expense.