IBM 2013 Annual Report Download - page 75

74 Management Discussion
International Business Machines Corporation and Subsidiary Companies
Roll Forward of Global Financing Receivables
Allowance for Credit Losses
($ in millions)
January 1, 2013
Allowance
Used*
Additions/
(Reductions) Other**
December 31,
2013
$355 $(44 ) $85 $(5 ) $392
* Represents reserved receivables, net of recoveries, that were disposed of during
the period.
** Primarily represents translation adjustments.
The percentage of Global Financing receivables reserved was 1.2
percent at December 31, 2013 and 2012. Specific reserves increased
16 percent from $240 million at December 31, 2012, to $279 million
at December 31, 2013. Unallocated reserves decreased 2 percent
from $115 million at December 31, 2012, to $113 million at December
31, 2013, primarily due to lower general reserve requirements.
Global Financing’s bad debt expense was an increase of $85
million for 2013, compared to an increase of $26 million for 2012.
The year-to-year increase in bad debt expense was due to higher
specific reserve requirements, primarily in China, in the current year.
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 con-
tinually 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 93 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 the end of a lease, represented 55.8 percent and 51.6 percent of
Global Financing’s revenue in 2013 and 2012, respectively. The
increase was due to a shift from operating leases to used equipment
sales for internal transactions. The gross profit margins on these sales
were 58.3 percent and 53.6 percent in 2013 and 2012, respectively.
The increase in the gross profit margin was driven by a shift in mix
toward higher margin internal equipment sales and a margin increase
in internal equipment sales.
The table below presents the recorded amount of unguaranteed
residual value for sales-type, direct financing and operating leases
at December 31, 2012 and 2013. 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, 2013 is expected
to be returned to the company. In addition to the unguaranteed
residual value, on a limited basis, Global Financing will obtain guar-
antees 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 pay-
ments 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 of sales-type
leases were $479 million and $776 million for the financing transac-
tions originated during the years ended December 31, 2013 and
2012, respectively. In 2013, the residual value guarantee program
resulted in the company recognizing approximately $462 million of
revenue that would otherwise have been recognized in future peri-
ods as operating lease revenue. If the company had chosen to not
participate in a residual value guarantee program in 2013 and prior
years, the 2013 impact would be substantially mitigated by the effect
of prior year asset values being recognized as operating lease rev-
enue in the current year. The aggregate asset values associated with
the guarantees of direct financing leases were $218 million and $199
million for the financing transactions originated during the years
ended December 31, 2013 and 2012, respectively. The associated
aggregate guaranteed future values at the scheduled end of lease
were $29 million and $53 million for the financing transactions origi-
nated during the years ended December 31, 2013 and 2012,
respectively. The cost of guarantees was $3 million and $5 million
for the years ended December 31, 2013 and 2012, respectively.
Unguaranteed Residual Value
($ in millions)
To t a l Estimated Run Out of 2013 Balance
At December 31: 2012 2013 2014 2015 2016
2017 and
Beyond
Sales-type and direct financing leases $ 794 $ 736 $142 $204 $243 $149
Operating leases 259 200 93 50 42 15
Total unguaranteed residual value $ 1,053 $ 936 $235 $254 $285 $164
Related original amount financed $18,744 $17,642
Percentage 5.6% 5.3%