Xerox 2012 Annual Report Download - page 75

73Xerox 2012 Annual Report
The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:
Allowance for Credit Losses United States Canada Europe Other (3) Total
Balance at December 31, 2010 $ 91 $ 37 $ 81 $ 3 $ 212
Provision 15 11 74 – 100
Charge-offs (31) (17) (59) (1) (108)
Recoveries and other (1) – 2 (5) – (3)
Balance at December 31, 2011 75 33 91 2 201
Provision 11 9 52 3 75
Charge-offs (21) (15) (59) (2) (97)
Recoveries and other (1) 3 4 1 1 9
Sale of finance receivables (18) – – – (18)
Balance at December 31, 2012 $ 50 $ 31 $ 85 $ 4 $ 170
Finance Receivables Collectively Evaluated for Impairment:
December 31, 2011 (2) $ 2,993 $ 825 $ 2,630 $ 108 $ 6,556
December 31, 2012 (2) $ 2,012 $ 801 $ 2,474 $ 194 $ 5,481
(1) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(2) Total Finance receivables exclude residual values of $2 and $7 and the allowance for credit losses of $170 and $201 at December 31, 2012 and 2011, respectively.
(3) Includes developing market countries and smaller units.
In the U.S. and Canada, customers are further evaluated or segregated
by class based on industry sector. The primary customer classes are
Finance & Other Services; Government & Education; Graphic Arts;
Industrial; Healthcare and Other. In Europe, customers are further
grouped by class based on the country or region of the customer.
The primary customer classes include the U.K./Ireland, France and
the following European regions – Central, Nordic and Southern. These
groupings or classes are used to understand the nature and extent of
our exposure to credit risk arising from finance receivables.
We evaluate our customers based on the following credit quality
indicators:
• Investment grade: This rating includes accounts with excellent to
good business credit, asset quality and the capacity to meet financial
obligations. These customers are less susceptible to adverse effects
due to shifts in economic conditions or changes in circumstance.
The rating generally equates to a Standard & Poors (“S&P”) rating
of BBB- or better. Loss rates in this category are normally minimal at
less than 1%.
• Non-investment grade: This rating includes accounts with average
credit risk that are more susceptible to loss in the event of adverse
business or economic conditions. This rating generally equates to a
BB S&P rating. Although we experience higher loss rates associated
with this customer class, we believe the risk is somewhat mitigated
by the fact that our leases are fairly well dispersed across a large and
diverse customer base. In addition, the higher loss rates are largely
offset by the higher rates of return we obtain with such leases. Loss
rates in this category are generally in the range of 2% to 4%.
• Substandard: This rating includes accounts that have marginal
credit risk such that the customer’s ability to make repayment
is impaired or may likely become impaired. We use numerous
strategies to mitigate risk including higher rates of interest,
prepayments, personal guarantees, etc. Accounts in this category
include customers who were downgraded during the term of the
lease from investment and non-investment grade evaluations when
the lease was originated. Accordingly there is a distinct possibility for
a loss of principal and interest or customer default. The loss rates in
this category are around 10%.