Pitney Bowes 2008 Annual Report Download - page 43

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the allocated equipment fair value to the range of cash selling prices in standalone transactions during the period to ensure the
allocated equipment fair value approximates average cash selling prices.
We provide lease financing for our products primarily through sales-type leases. We classify our leases in accordance with SFAS No.
13, Accounting for Leases. The vast majority of our leases qualify as sales-type leases using the present value of minimum lease
payments classification criteria outlined in SFAS No. 13. We believe that our sales-type lease portfolio contains only normal
collection risk with no important uncertainties with respect to future costs. Accordingly, we record the fair value of equipment as
sales revenue, the cost of equipment as cost of sales and the minimum lease payments plus the estimated residual value as gross
finance receivables. The difference between the gross finance receivable and the equipment fair value is recorded as unearned income
and is amortized as income over the lease term using the interest rate implicit in the lease.
Equipment residual values are determined at inception of the lease using estimates of equipment fair value at the end of the lease term.
Estimates of future equipment fair value are based primarily on our historical experience. We also consider forecasted supply and
demand for our various products, product retirement and future product launch plans, end of lease customer behavior, regulatory
changes, remanufacturing strategies, used equipment markets, if any, competition and technological changes. We evaluate residual
values on an annual basis or as changes to the above considerations occur. In 2007, we recorded an impairment charge of $46 million
related to the transition of our product line. See Note 14 to the Consolidated Financial Statements for further details.
See Note 1 to the Consolidated Financial Statements for our accounting policies on revenue recognition.
Allowances for doubtful accounts and credit losses
Allowance for doubtful accounts
We estimate our accounts receivable risks and provide allowances for doubtful accounts accordingly. We evaluate the adequacy of
the allowance for doubtful accounts on a periodic basis. Our evaluation includes historical loss experience, length of time receivables
are past due, adverse situations that may affect a customer’s ability to repay and prevailing economic conditions. We make
adjustments to our allowance if our evaluation of allowance requirements differs from our actual aggregate reserve. This evaluation is
inherently subjective because our estimates may be revised as more information becomes available. Based on historical experience,
we have not had any material revisions to our recorded allowance for doubtful accounts.
Allowance for credit losses
We estimate our finance receivables risks and provide allowances for credit losses accordingly. We establish credit approval limits
based on the credit quality of our customers and the type of equipment financed. We charge finance receivables to the allowance for
credit losses after collection efforts are exhausted and we deem the account uncollectible. We base credit decisions primarily on a
customer’s financial strength. We believe that our concentration of credit risk for finance receivables in our internal financing
division is limited because of our large number of customers, small account balances and customer geographic and industry
diversification. Our general policy for finance receivables contractually past due for over 120 days is to discontinue revenue
recognition. We resume revenue recognition when payments reduce the account to 60 days or less past due.
We evaluate the adequacy of allowance for credit losses on a periodic basis. Our evaluation includes historical loss experience, the
nature and volume of our portfolios, adverse situations that may affect a customer’s ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. We make adjustments to our allowance for credit losses if the evaluation of reserve
requirements differs from the actual aggregate reserve. This evaluation is inherently subjective because our estimates may be revised
as more information becomes available.
Accounting for income taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. When we prepare our consolidated financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a
provision for our taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”), which supplements Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, by
defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires a
two-step approach under which the tax effect of a position is recognized only if it is “more-likely-than-not” to be sustained and the
amount of the tax benefit recognized is equal to the largest tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement of the tax position. This is a different standard for recognition than the approach previously required. Both
approaches require us to exercise considerable judgment and estimates are inherent in both processes.