5. Financing Receivables: Financing receivables primarily consist of investment in sales-type and direct financing leases, commercial financing receivables and client loan and installment payment receivables (loans). Investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans) are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loans and installment payment financing contracts are priced independently at competitive market rates.

A summary of the components of the company’s financing receivables is presented as follows:

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At March 31, 2018	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	7,130		$	10,120		$	12,746		$	29,996
Unearned income	(537		)	(36		)	(628		)	(1,201		)

Recorded Investment	$	6,594		$	10,084		$	12,118		$	28,795
Allowance for credit losses	(112		)	(19		)	(210		)	(341		)
Unguaranteed residual value	558			—			—			558
Guaranteed residual value	89			—			—			89

Total financing receivables, net	$	7,128		$	10,065		$	11,908		$	29,101

Current portion	$	3,102		$	10,065		$	7,078		$	20,245
Noncurrent portion	$	4,026		$	—		$	4,830		$	8,856

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At December 31, 2017	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	7,128		$	11,649		$	13,311		$	32,087
Unearned income	(535		)	(32		)	(644		)	(1,210		)

Recorded Investment	$	6,593		$	11,617		$	12,667		$	30,877
Allowance for credit losses	(103		)	(21		)	(211		)	(336		)
Unguaranteed residual value	630			—			—			630
Guaranteed residual value	100			—			—			100

Total financing receivables, net	$	7,220		$	11,596		$	12,456		$	31,272

Current portion	$	2,900		$	11,596		$	7,226		$	21,721
Noncurrent portion	$	4,320		$	—		$	5,230		$	9,550

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $687 million and $773 million at March 31, 2018 and December 31, 2017, respectively.

The company did not have any financing receivables held for sale as of March 31, 2018 and December 31, 2017.

Financing Receivables by Portfolio Segment

The following tables present the recorded investment by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at March 31, 2018 and December 31, 2017. Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

(Dollars in millions)
At March 31, 2018	Americas			EMEA			Asia Pacific		Total
Recorded Investment
Lease receivables	$	3,898		$	1,337		$	1,359	$	6,594
Loan receivables	6,272			3,493			2,353		12,118

Ending balance	$	10,170		$	4,829		$	3,712	$	18,711

Recorded investment collectively evaluated for impairment	$	10,038		$	4,775		$	3,632	$	18,446
Recorded investment individually evaluated for impairment	$	132		$	54		$	80	$	265

Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	63		$	9		$	31	$	103
Loan receivables	108			52			51		211

Total	$	172		$	61		$	82	$	314

Write-offs	$	(1	)	$	(1	)	$	0	$	(2	)
Recoveries	0			—			—		0
Provision	9			(5		)	1		5
Other	1			2			2		4

Ending balance at March 31, 2018	$	180		$	57		$	85	$	322

Lease receivables	$	71		$	8		$	33	$	112
Loan receivables	$	109		$	49		$	52	$	210

Related allowance, collectively evaluated for impairment	$	50		$	14		$	7	$	71
Related allowance, individually evaluated for impairment	$	131		$	43		$	78	$	251

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $130 million, $55 million and $81 million, respectively, for the three months ended March 31, 2018 and $173 million, $23 million and $161 million, respectively, for the three months ended March 31, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended March 31, 2018 and 2017.

(Dollars in millions)
At December 31, 2017:	Americas			EMEA			Asia Pacific			Total
Recorded Investment
Lease receivables	$	3,911		$	1,349		$	1,333		$	6,593
Loan receivables	6,715			3,597			2,354			12,667

Ending balance	$	10,626		$	4,946		$	3,687		$	19,259

Recorded investment collectively evaluated for impairment	$	10,497		$	4,889		$	3,604		$	18,990
Recorded investment individually evaluated for impairment	$	129		$	57		$	83		$	269

Allowance for credit losses
Beginning balance at January 1, 2017
Lease receivables	$	54		$	4		$	76		$	133
Loan receivables	169			18			89			276

Total	$	223		$	22		$	165		$	410

Write-offs	$	(51	)	$	(1	)	$	(85	)	$	(137	)
Recoveries	1			1			0			2
Provision	(8		)	29			(4		)	16
Other	7			11			6			24

Ending balance at December 31, 2017	$	172		$	61		$	82		$	314

Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	$	108		$	52		$	51		$	211

Related allowance, collectively evaluated for impairment	$	43		$	15		$	6		$	64
Related allowance, individually evaluated for impairment	$	128		$	46		$	76		$	250

Write-offs of lease receivables and loan receivables were $55 million and $82 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $7 million, respectively, for the year ended December 31, 2017.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following table summarizes information about the recorded investment in leases and loans financing receivables, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At March 31, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,898	$	278	$	242	$	27	$	38
EMEA	1,337		26		9		1		17
Asia Pacific	1,359		48		19		3		29

Total lease receivables	$	6,594	$	353	$	269	$	32	$	85


Americas	$	6,272	$	265	$	168	$	31	$	103
EMEA	3,493		103		23		3		80
Asia Pacific	2,353		60		9		4		54

Total loan receivables	$	12,118	$	427	$	200	$	38	$	237


Total	$	18,711	$	780	$	470	$	70	$	322

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $265 million is individually evaluated for impairment with a related allowance of $251 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2017:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)(3)
Americas	$	3,911	$	239	$	197	$	29	$	44
EMEA	1,349		32		5		3		27
Asia Pacific	1,333		57		23		3		36

Total lease receivables	$	6,593	$	328	$	225	$	36	$	107


Americas	$	6,715	$	345	$	254	$	38	$	96
EMEA	3,597		90		17		0		74
Asia Pacific	2,354		63		12		3		54

Total loan receivables	$	12,667	$	498	$	283	$	41	$	224


Total	$	19,259	$	825	$	507	$	77	$	331

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3)

Recast to conform to current period presentation, which includes billed impaired amounts.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

The following tables present the recorded investment net of allowance for credit losses for each class of receivables, by credit quality indicator, at March 31, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

(Dollars in millions)	Lease Receivables						Loan Receivables
At March 31, 2018:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit Ratings:
Aaa — Aa3	$	391	$	53	$	56	$	629	$	137	$	98
A1 — A3	824		161		567		1,327		417		984
Baa1 — Baa3	983		373		341		1,583		968		592
Ba1 — Ba2	687		441		188		1,107		1,143		327
Ba3 — B1	522		196		95		840		508		164
B2 — B3	373		94		64		600		243		112
Caa — D	47		11		14		76		29		25

Total	$	3,827	$	1,329	$	1,326	$	6,163	$	3,444	$	2,301

(Dollars in millions)	Lease Receivables						Loan Receivables
At December 31, 2017:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit Ratings:
Aaa — Aa3	$	422	$	49	$	68	$	724	$	129	$	120
A1 — A3	855		190		544		1,469		502		961
Baa1 — Baa3	980		371		337		1,683		982		596
Ba1 — Ba2	730		448		184		1,253		1,186		325
Ba3 — B1	443		192		89		760		508		157
B2 — B3	367		77		64		630		204		113
Caa — D	51		13		18		88		34		31

Total	$	3,847	$	1,340	$	1,302	$	6,607	$	3,545	$	2,303

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the three months ended March 31, 2018 or for the year ended December 31, 2017.