Xerox 2013 Annual Report Download - page 99

The principal value of the U.S. receivables derecognized from our balance sheet was $761 and $644 at December 31,
2013 and 2012, respectively (sales value of approximately $833 and $715, respectively).
The beneficial interest represents our right to receive future cash flows from the sold receivables, which exceed the
servicing fee as well as the ultimate purchaser's initial investment and associated return on that investment. The
beneficial interest was initially recognized at an estimate of fair value based on the present value of the expected future
cash flows. The present value of the expected future cash flows was calculated using management's best estimate of
key assumptions including credit losses, prepayment rate and an appropriate risk adjusted discount rate (all
unobservable Level 3 inputs) for which we utilized annualized rates of 2.1%, 9.3% and 10.0%, respectively. These
assumptions are supported by both our historical experience and anticipated trends relative to the particular portfolio of
receivables sold. However, to assess the sensitivity on the fair value of the beneficial interest, we adjusted the credit
loss rate, prepayment rate and discount rate assumptions individually by 10% and 20% while holding the other
assumptions constant. Although the effect of multiple assumption changes was not considered in this analysis, a 10% or
20% adverse variation in any one of these three individual assumptions would have decreased the initially recorded
beneficial interest by approximately $3 or less for sales in 2013 and $4 or less for sales in 2012.
We will continue to service the sold receivables for which we receive a 1% servicing fee. We have concluded that the
1% servicing fee is adequate compensation and, accordingly, no servicing asset or liability was recorded.
Canada Lease Finance Receivables Transfer: In December 2013, our Canadian subsidiary transferred its entire
interest in a group of lease finance receivables to a third-party trust. The transfer was accounted for as a sale and
resulted in the derecognition of lease receivables with a net carrying value of $257, net of allowance of $5, the receipt of
cash proceeds of $248 and a beneficial interest of $26. A pre-tax gain of $15 was recognized on this transaction and is
net of additional fees and expenses of approximately $1. We will continue to service the sold receivables for which we
will receive a 1% servicing fee. We have concluded that the 1% servicing fee is adequate compensation and,
accordingly, no servicing asset or liability was recorded. The principal value of the Canadian receivables derecognized
from our balance sheet was $245 at December 31, 2013 (sale value of approximately $265).
Consistent with the U.S. transfers, the beneficial interest was initially recognized at an estimate of fair value based on
the present value of the expected future cash flows. The present value of the expected future cash flows was calculated
using management's best estimate of key assumptions including credit losses, prepayment rate and an appropriate risk
adjusted discount rate (all unobservable Level 3 inputs) for which we utilized annualized rates of 1.7%, 12.0% and
10.0%, respectively. These assumptions are supported by both our historical experience and anticipated trends relative
to the particular portfolio of receivables sold. However, to assess the sensitivity on the fair value of the beneficial
interest, we adjusted the credit loss rate, prepayment rate and discount rate assumptions individually by 10% and 20%
while holding the other assumptions constant. Although the effect of multiple assumption changes was not considered in
this analysis, a 10% or 20% adverse variation in any one of these three individual assumptions would have decreased
the initially recorded beneficial interest by approximately $1 or less.
Summary Finance Receivable Sales The lease portfolios transferred and sold were all from our Document Technology
segment and the gains on these sales were reported in Financing revenues within the Document Technology segment.
The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest
when due beyond our beneficial interests which were $150 and $103 at December 31, 2013 and 2012, respectively, and
are included in Other current assets and Other long-term assets accordingly in the accompanying Consolidated Balance
Sheets. Beneficial interests of $124 and $103 at December 31, 2013 and 2012, respectively, are held by the
bankruptcy-remote subsidiaries and therefore are not available to satisfy any of our creditor obligations. We report
collections on the beneficial interests as operating cash flows in the Consolidated Statements of Cash Flows because
such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis
considering their weighted average lives of less than 2 years.
The net impact from the sales of finance receivables on operating cash flows is summarized below:
Year Ended December 31,
2013 2012 2011
Net cash received for sales of finance receivables(1) $631 $625 $ —
Impact from prior sales of finance receivables(2) (392)(45) —
Collections on beneficial interest 58 ——
Estimated Increase to Operating Cash Flows $297 $580 $ —
_________________
(1) Net of beneficial interest, fees and expenses.
(2) Represents cash that would have been collected if we had not sold finance receivables.
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