Xerox 2004 Annual Report Download - page 23

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determining the economic life, we consider the most
objective measure to be the original contract term,
since most equipment is returned by lessees at or near
the end of the contracted term. The economic life of
most of our products is five years since this represents
the most frequent contractual lease term for our prin-
cipal products and only a small percentage of our
leases are for original terms longer than five years.
There is no significant after-market for our used
equipment. We believe five years is representative of
the period during which the equipment is expected to
be economically usable, with normal service, for the
purpose for which it is intended. Residual values are
established at lease inception using estimates of fair
value at the end of the lease term and are established
with due consideration to forecasted supply and
demand for our various products, product retirement
and future product launch plans, end of lease customer
behavior, remanufacturing strategies, competition and
technological changes.
Accounts and Finance Receivables Allowance for
Doubtful Accounts and Credit Losses: We perform
ongoing credit evaluations of our customers and adjust
credit limits based upon customer payment history and
current creditworthiness. Wecontinuously monitor col-
lections and payments from our customers and maintain
aprovision for estimated credit losses based upon our
historical experience and anyspecificcustomer collec-
tion issues that have been identified. While such credit
losses havehistorically been within our expectations
and the provisions established, wecannot guarantee
that we will continue to experience credit loss rates
similar to those wehave experienced in the past.
Measurement of such losses requires consideration
of historical loss experience, including the need to
adjust for current conditions, and judgments about the
probable effects of relevant observable data, including
present economic conditions such as delinquency rates
and financial health of specific customers. We recorded
bad debt provisions of $110 million, $224 million, and
$332 million in selling, administrative and general
expenses in our Consolidated Statements of Income
for the years ended December 31, 2004, 2003 and 2002,
respectively. The declining trend in our provision for
doubtful accounts is primarily due to improvements in
customer administration, receivables aging, write-off
trends, collection practices and credit approval policies.
As discussed above, in preparing our Consolidated
Financial Statements for the three years ended
December 31, 2004, we estimated our provision for
doubtful accounts based on historical experience and
customer-specific collection issues. This methodology
has been consistently applied for all periods present-
ed. During the five year period ended December 31,
2004, our allowance for doubtful accounts ranged
from 4.2 to 5.5 percent of gross receivables. Holding all
other assumptions constant, a one percentage point
increase or decrease in the allowance from the
December 31, 2004 rate of 4.2 percent would change
the 2004 provision by approximately $110 million.
Historically, about half of the provision for doubtful
accounts relates to our finance receivables portfolio.
This provision is inherently more difficult to estimate
than the provision for trade accounts receivable
because the underlying lease portfolio has an average
maturity, at any time, of approximately two to three
years and contains past due billed amounts, as well as
unbilled amounts. The estimated credit quality of any
given customer and class of customer or geographic
location can significantly change during the life of the
portfolio. We consider all available information in our
quarterly assessments of the adequacy of the provision
for doubtful accounts.
Provisions for Excess and Obsolete Inventory
Losses: We value our inventories at the lower of average
cost or market. Inventories also include equipment that
is returned at the end of the lease term. Returned equip-
ment is recorded at the lower of remaining net book
value or salvage value. Salvage value consists of the
estimated market value (generally determined based on
replacement cost) of the salvageable component parts,
which are expected to be used in the remanufacturing
process. Weregularly reviewinventory quantities,
including equipment to be leased to customers, which is
included as part of finished goods inventory, and record
aprovision for excess and/or obsolete inventory based
primarily on our estimated forecast of product demand
and production requirements. Several factors may influ-
ence the realizability of our inventories, including our
decision to exit a product line, technological changes
and new product development. These factors could
result in an increase in the amount of excess or obsolete
inventory quantities. Additionally, our estimates of
future product demand may prove to be inaccurate, in
which case we may have understated or overstated the
provision required for excess and obsolete inventories.
Although we make every effort to ensure the accuracy
of our forecasts of future product demand, including the
impact of future product launches and changes in
remanufacturing strategies, significant unanticipated
changes in demand or technological developments
could materially impact the value of our inventory and
our reported operating results if our estimates prove to
be inaccurate. We recorded $73 million, $78 million, and
$115 million in inventory write-down charges for the
years ended December 31, 2004, 2003 and 2002, respec-
tively. The decline in inventory write-down charges is
due to the absence of business exiting activities, stabi-
lization of our product lines, manufacturing outsourcing
related improvements and a lower level of inventories.