Xerox 2007 Annual Report Download - page 59

supplies and non-maintenance services. Our revenue
allocation for lease deliverables begins by allocating
revenues to the maintenance and executory costs plus
profit thereon. The remaining amounts are allocated to
the equipment and financing elements. We perform
extensive analyses of available verifiable objective
evidence of equipment fair value based on cash selling
prices during the applicable period. The cash selling prices
are compared to the range of values included in our lease
accounting systems. The range of cash selling prices must
be reasonably consistent with the lease selling prices,
taking into account residual values that accrue to our
benefit, in order for us to determine that such lease prices
are indicative of fair value. Our pricing interest rates,
which are used in determining customer payments, are
developed based upon a variety of factors including local
prevailing rates in the marketplace and the customer’s
credit history, industry and credit class. We reassess our
pricing interest rates quarterly based on changes in the
local prevailing rates in the marketplace. These interest
rates are adjusted if the rates vary by twenty-five basis
points or more, cumulatively, from the last rate in effect.
The pricing interest rates generally equal the implicit rates
within the leases, as corroborated by our comparisons of
cash to lease selling prices.
Residual Values for Equipment under Lease: Residual
values represent the recorded estimated fair value of
equipment as of the end of the lease. Residual values
associated with equipment under sales-type leases are
included as a component of our net finance receivables
balance and amounted to $69 million and $90 million at
December 31, 2007 and 2006. Residual values associated
with equipment under operating leases represent the
recorded estimated salvage value at the end of the lease
term and are included as a component of equipment on
operating leases, net and amounted to $36 million and
$41 million at December 31, 2007 and 2006. Equipment
under operating leases and similar arrangements are
depreciated to estimated salvage value over their
estimated useful lives.
We review residual values regularly and, when
appropriate, adjust them based on estimates of expected
market conditions at the end of the lease, including the
impacts of future product launches, changes in
remanufacturing strategies and the expected lessee
behavior at the end of the lease term. Impairments to
residual values occur when available information indicates
that the decline in recorded value is other than temporary
and we would therefore not be able to fully recover the
recorded values. Impairments on residual values are
recognized as losses in the period in which the estimate is
changed or as a revision in depreciation estimates for
sales-type leases and operating leases, respectively. We
recorded $1 million and $4 million in residual value
impairment charges for the years ended December 31,
2007 and 2005. We did not record any residual value
impairment charges for the year ended December 31,
2006.
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. We continuously
monitor collections and payments from our customers and
maintain a provision for estimated credit losses based
upon our historical experience and any specific customer
collection issues that have been identified. While such
credit losses have historically been within our expectations
and the provisions established, we cannot guarantee that
we will continue to experience credit loss rates similar to
those we have 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
$134 million, $87 million, and $72 million in SAG expenses
in our Consolidated Statements of Income for the years
ended December 31, 2007, 2006 and 2005, respectively.
As discussed above, in preparing our Consolidated
Financial Statements for the three year period ended
December 31, 2007, 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 presented. During
the five year period ended December 31, 2007, our
allowance for doubtful accounts ranged from 3.0% to
4.6% of gross receivables. Holding all other assumptions
constant, a 1-percentage point increase or decrease in the
allowance from the December 31, 2007 rate of 3.1%
would change the 2007 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
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