What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-05-26 compared with 2022-03-10 · 751 added, 571 removed, 962 unchanged (58% of the section changed)

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Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

Consolidated Income Statement for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Balance Sheet as of December 31, 2021 and 2020

Consolidated Statement of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statement of Equity for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Income Statement for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022

Consolidated Statement of Comprehensive Income (Loss) for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022

Consolidated Balance Sheet as of March 31, 2023 and 2022, and December 31, 2021

Consolidated Statement of Cash Flows for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022

Consolidated Statement of Equity for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022

Notes to Consolidated Financial Statements

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To the Board of Directors and Stockholders of Kyndryl Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Kyndryl Holdings, Inc.

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated income statements, statements of comprehensive income (loss), statements of equity and statements of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Kyndryl Holdings, Inc.

and its subsidiaries (the “Company”) as of March 31, 2023, March 31, 2022 and December 31, 2021, and the related consolidated statements of income, of comprehensive income (loss), of equity and of cash flows for the year ended March 31, 2023, for the three months ended March 31, 2022 and for the years ended December 31, 2021 and December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023, March 31, 2022 and December 31, 2021 , and the results of its operations and its cash flows for the year ended March 31, 2023, for the three months ended March 31, 2022 and for the years ended December 31, 2021 and December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated f inancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies

and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Reporting Unit Goodwill Impairment Assessment

As described in Note 10 to the consolidated financial statements, the Company’s goodwill balance was $732 million as of December 31, 2021 including $176 million associated with the Strategic Markets reporting unit (the “Reporting Unit”).

Goodwill is reviewed for impairment annually, or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

In the fourth quarter of 2021, management reviewed its goodwill balances for impairment.

Fair value is determined by management using a discounted cash flow model, which requires significant judgments and assumptions relating to discount rates, expected revenue growth, and projected EBITDA margins.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the Reporting Unit is a critical audit matter are (i) the significant judgment by management when developing the fair value of the Reporting Unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the expected revenue growth and projected EBITDA margins;

Reporting Unit Goodwill Impairment Assessment - October 1, 2022

As described in Notes 1 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $812 million as of March 31, 2023, including $142 million associated with the Principal Markets segment, of which the majority of the goodwill balance related to the Canada reporting unit (the “Reporting Unit”).

Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate an impairment may exist.

As a result of the Company’s change in year end, the annual goodwill impairment assessment date was changed from October 1 to January 1.

For the year ended March 31, 2023, management performed the goodwill impairment test at both October 1, 2022 and January 1, 2023.

As disclosed by management, as part of the annual review of goodwill for impairment, management prepared a quantitative valuation analysis as of October 1, 2022 using an income-based approach where fair value is determined by management using a discounted cash flow model, which requires significant judgment and assumptions relating to discount rates, expected revenue growth, and projected EBITDA margins.

The principal considerations for our determination that performing procedures relating to the Reporting Unit goodwill impairment assessment – October 1, 2022 is a critical audit matter are (i) the significant judgment by management when developing significant assumptions related to the discount rate, expected revenue growth, and projected EBITDA margins used in the fair value estimate of the Reporting Unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the discount rate, expected revenue growth and projected EBITDA margins;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, (i) testing management's process for developing the fair value estimate of the Reporting Unit, (ii) evaluating the appropriateness of the discounted cash flow model;

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Reporting Unit.

These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the Reporting Unit, (ii) evaluating the appropriateness of the discounted cash flow model;

(iii) testing the completeness and accuracy of underlying data used in the model;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to the expected revenue growth and projected EBITDA margins.

and (iv) evaluating the reasonableness of the significant assumptions used by management related to the discount rate, expected revenue growth, and projected EBITDA margins.

Evaluating management’s assumptions related to the expected revenue growth and projected EBITDA margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Reporting Unit;

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and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model.

Professionals with specialized skill and knowledge were

used to assist in evaluating the appropriateness of the discounted cash flow model and the reasonableness of the discount rate assumption.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 10, 2022

We have served as the Company’s auditor since 2020.

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Interest expense

Other (income) and expense

Other expense

Total costs and expenses

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Weighted-average diluted shares outstanding

* Including related-party revenue of $ 704 in 2021, $ 645 in 2020 and $ 613 in 2019

** Including related-party cost of service of $ 3,979 in 2021, $ 3,767 in 2020 and $ 3,592 in 2019

* Including related-party revenue of $ 287 for the year ended March 31, 2023, $ 236 for the three months ended March 31, 2022, $ 704 for the year ended December 31, 2021, and $ 645 for the year ended December 31, 2020

** Including related-party cost of service of $ 1,382 for the year ended March 31, 2023, $ 924 for the three months ended March 31, 2022, $ 3,979 for the year ended December 31, 2021, and $ 3,767 for the year ended December 31, 2020

The accompanying notes are an integral part of the financial statements.

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Prior service costs (credits)

Net (losses) gains arising during the period

Net gains (losses) arising during the period

Curtailments and settlements

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Restricted cash

Accounts receivable (net of allowances of $ 44 in 2021 and $ 91 in 2020)*

Deferred costs

Accounts receivable (net of allowances of $ 32 at March 31, 2023, $ 44 at March 31, 2022, and $ 44 at December 31, 2021)*

Deferred costs (current portion)

Prepaid expenses and other current assets

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Operating right-of-use assets, net

Deferred costs

Deferred costs (noncurrent portion)

Deferred taxes

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Pension assets

Other noncurrent assets

Current liabilities:

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Value-added tax and income tax liabilities

Short-term debt

Current portion of long-term debt

Accrued compensation and benefits

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Operating lease liabilities (noncurrent portion)

Other liabilities

Other noncurrent liabilities

Total liabilities

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Stockholders’ equity

Net Parent investment

Common stock, par value $ 0.01 per share, and additional paid-in capital ( 1,000.0 shares authorized, 224.2 shares issued)

Common stock, par value $ 0.01 per share, and additional paid-in capital

(shares authorized:

shares issued:

March 31, 2023 – 229.6 , March 31, 2022 – 224.5 , December 31, 2021 – 224.2 )

Accumulated deficit

Treasury stock, at cost (shares:

March 31, 2023 – 1.9 , March 31, 2022 – 0.2 , December 31, 2021 – 0.0 )

Accumulated other comprehensive income (loss)

Total stockholders’ equity before noncontrolling interests

Noncontrolling interests

Total stockholders’ equity before non-controlling interests

Non-controlling interests

Total liabilities and equity

* Including related-party accounts receivable of $ 373 at December 31, 2021

** Including related-party accounts payable of $ 733 at December 31, 2021

* Including related-party accounts receivable of $ 343 at March 31, 2022 and $ 373 at December 31, 2021

** Including related-party accounts payable of $ 806 at March 31, 2022 and $ 733 at December 31, 2021

The accompanying notes are an integral part of the financial statements.

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Depreciation and amortization

Depreciation of property and equipment

Depreciation of property, equipment and capitalized software

Depreciation of right-of-use assets

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Accounts payable

Taxes (including items settled with Parent)

Taxes (including items settled with former Parent in prior-year periods)

Other assets and other liabilities

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Cash flows from investing activities:

Payments for property and equipment

Capital expenditures

Proceeds from disposition of property and equipment

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Common stock repurchases for tax withholdings

Net cash provided by financing activities

Other financing activities, net

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net change in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at January 1

Cash, cash equivalents and restricted cash at December 31

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Supplemental data

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Other comprehensive income (loss), net of tax

Net transfers from Parent

Issuance of common stock and reclassification of net transfers from Parent

Common stock issued under employee plans

Purchases of treasury stock

Changes in non-controlling interests

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Other comprehensive income (loss), net of tax

Issuance of common stock and reclassification of net transfers from Parent

Common stock issued under employee plans

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Changes in non-controlling interests

Equity - December 31, 2021

Equity - March 31, 2022

Common Stock and

Paid-In Capital

Comprehensive

Income (Loss)

Equity – April 1, 2022

Net income (loss)

Other comprehensive income (loss), net of tax

Common stock issued under employee plans

Purchases of treasury stock

Changes in non-controlling interests

Equity – March 31, 2023

The accompanying notes are an integral part of the financial statements.

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Kyndryl Holdings, Inc.

(“we”, “the Company” or “Kyndryl”) is a leading technology services company and the largest infrastructure services provider in the world, serving as a partner to more than 4,000 customers whose operations span over 100 countries.

(“we”, “the Company” or “Kyndryl”) is a leading technology services company and the largest IT infrastructure services provider in the world, serving thousands of enterprise customers whose operations span over 100 countries.

Prior to November 3, 2021, the Company was wholly owned by International Business Machines Corporation (“IBM”, “Parent” or “former Parent”).

In October 2021, the Board of Directors of IBM approved the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit (the “Kyndryl Businesses”) of its Global Technology Services (“GTS”) segment through the distribution of shares of Kyndryl’s common stock to IBM stockholders.

In conjunction with the Distribution, Kyndryl underwent an internal reorganization following which it became the holder, directly or through its subsidiaries, of the Kyndryl Businesses.

On October 12, 2021, Kyndryl’s registration statement on Form 10, as amended, was declared effective by the US Securities and Exchange Commission (“SEC”).

In November 2021, our former Parent, IBM effected the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit (the “Kyndryl Businesses”) of its Global Technology Services (“GTS”) segment through the distribution of shares of Kyndryl’s common stock to IBM stockholders.

In connection with the Separation, the Company entered into several agreements with IBM that govern the relationship of the parties following the Separation.

On November 3, 2021, the Separation was achieved through the Parent’s pro rata distribution of 80.1 % of the shares of common stock of Kyndryl to holders of the Parent’s common stock as of the close of business on the record date of October 25, 2021.

The Parent retained 19.9 % of the shares of the Company’s common stock.

The Parent’s stockholders of record received one share of the Company’s common stock for every five shares of the Parent’s common stock.

Kyndryl’s stock began trading as an independent company on November 4, 2021, and IBM disposed of its 19.9 % retained interest in Kyndryl common stock in the year following the Spin-off.

Description of Business

Our purpose is to design, build and manage secure and responsive private, public and multicloud environments to accelerate our customers’ digital transformations.

Our purpose is to design, build and manage secure and responsive private, public and multicloud environments to serve our customers’ needs and accelerate their digital transformations.

We have a long track record of helping enterprises navigate major technological changes, particularly by enabling our customers to focus on the core aspects of their businesses during these shifts while trusting us with their most critical systems.

We provide engineering talent, operating paradigms and insights derived from our data around IT patterns.

We provide engineering talent, operating solutions and insights derived from our knowledge and data around IT systems.

This enables us to deliver advisory, implementation and managed services at scale across technology infrastructures that allow our customers to de-risk and realize the full value of their digital transformations.

We do this while embracing new technologies and solutions and continually expanding our skills and capabilities, as we help advance the vital systems that power progress for our customers.

We deliver transformation and secure cloud services capabilities, insights and depth of expertise to modernize and manage IT environments based on our customers’ unique patterns of transformation at scale.

We deliver technology services capabilities, insights and depth of expertise to modernize and manage IT environments based on our customers’ unique needs.

We offer services across domains such as cloud services, core enterprise and zCloud services, applications, data and artificial intelligence services, digital workplace services, security and resiliency services and network and edge services as we continue to support our customers through technological change.

Our services enable us to modernize and manage cloud and on-premise environments as “one” for our customers, enabling them to scale seamlessly.

Our services enable us to modernize and manage cloud and on-premises environments as “one” for our customers, enabling them to scale seamlessly.

To deliver these services, we rely on our global team of skilled practitioners, consisting of approximately 90,000 professionals.

Basis of Presentation

We prepare our consolidated financial statements in accordance with U.S.

generally accepted accounting principles (“GAAP”), which requires us to make estimates and assumptions that impact the amounts reported and disclosed in our consolidated financial statements and the accompanying notes.

We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions, particularly in light of the continuing COVID-19 pandemic.

COVID-19 has had and we expect will continue to have, significant effects on economic activity, on demand for our services and on our results of operations in 2022.

The financial statements and footnotes for the annual periods ending December 31, 2020 and 2019 and the period from January 1 through November 3, 2021 (the “pre-Separation periods”) reflect allocations of certain IBM corporate, infrastructure and shared services expenses using a variety of allocation methodologies that are appropriate for the type of allocated expense.

Where possible, these charges were allocated based on direct usage, with the remainder

allocated on a pro rata basis of headcount, gross profit, asset or other allocation methodologies that are considered to be a reasonable reflection of the utilization of services provided or the benefit received by Kyndryl during the periods presented.

We prepare our consolidated financial statements in accordance with Generally Accepted Accounting Principles in the United States (“U.S.

GAAP”), which requires us to make estimates and assumptions that impact the amounts reported and disclosed in our consolidated financial statements and the accompanying notes.

We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions.

The financial statements and footnotes for the year ending December 31, 2020 and the period from January 1 through November 3, 2021 (the “pre-Separation periods”) reflect allocations of certain IBM corporate, infrastructure and shared services expenses using a variety of allocation methodologies that are appropriate for the type of allocated expense.

Where possible, these charges were allocated based on direct usage, with the remainder allocated on a pro rata basis of headcount, gross profit, asset or other allocation methodologies that are considered to be a reasonable reflection of the utilization of services provided or the benefit received by Kyndryl during the periods presented.

For the periods subsequent to November 3, 2021, the financial statements are presented on a consolidated basis as the Company became a standalone public company.

The Consolidated Balance Sheet of the Company for the pre-Separation periods includes assets and liabilities of IBM that are specifically identifiable or otherwise attributable to the Company, including subsidiaries and/or joint ventures (“JVs”) conducting managed infrastructure services business in which IBM had a controlling financial interest or was the primary beneficiary.

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In addition, Net Parent investment in the Consolidated Balance Sheet represents the accumulation of the Company’s net income (loss) over time and net non-trade intercompany transactions between Kyndryl and IBM (for example, investments from IBM or distributions to IBM).

As a result of the allocations and carve-out methodologies used to prepare the consolidated financial statements for the pre-Separation periods, the results may not be indicative of the Company’s future performance, and may not reflect the results of operations, financial position and cash flows Kyndryl would have achieved if it had been a separate, standalone company during the pre-Separation periods.

As a result of the allocations and carve-out methodologies used to prepare the consolidated financial statements for the pre-Separation periods, the results for those periods may not be indicative of the Company’s future performance, and may not reflect the results of operations, financial position and cash flows Kyndryl would have achieved if it had been a separate, standalone company during the pre-Separation periods.

The income tax provision included in these consolidated financial statements for the pre-Separation periods was calculated using the separate return basis, as if Kyndryl filed separate tax returns.

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Current income tax liabilities including amounts for unrecognized tax benefits related to Kyndryl’s activities included in the Parent’s income tax returns were assumed to be immediately settled with Parent through the Net Parent investment account in the Consolidated Balance Sheet and reflected in Net transfers from Parent in the Consolidated Statement of Cash Flows during these periods.

Certain items have been recast to conform to current period presentation.

Consolidation

For the pre-Separation periods, the accompanying financial statements of Kyndryl were derived from the consolidated financial statements and accounting records of the Parent as if the Company operated on a standalone basis during the periods presented and were prepared in accordance with U.S.

Transition Period

In January 2022, the Board of Directors of Kyndryl approved a change to the fiscal year-end of the Company from December 31 to March 31.

The Company’s 2023 fiscal year began on April 1, 2022 and ended March 31, 2023.

The Company filed a Transition Report on Form 10-QT for the period of January 1 to March 31, 2022 (the “Transition Period”) with the U.S.

Securities and Exchange Commission (“SEC”) on May 13, 2022.

Principles of Consolidation

For the pre-Separation periods, the accompanying financial statements were derived from the consolidated financial statements and accounting records of the Parent as if the Company operated on a standalone basis during the periods presented and were prepared in accordance with U.S.

GAAP and pursuant to the rules and regulations of the SEC.

Historically, the Company consisted of the managed infrastructure services unit of the Parent’s Global Technology Services segment and did not operate as a separate standalone company.

Accordingly, the Parent had reported the financial position and results of operations, cash flows and changes in equity of the Company in the Parent’s consolidated financial statements.

Accordingly, the Parent had reported the

financial position and results of operations, cash flows and changes in equity of the Company in the Parent’s consolidated financial statements.

All significant intercompany transactions during the pre-Separation periods between Kyndryl and IBM have been included in the consolidated financial statements.

Intercompany transactions between Kyndryl and IBM are considered to be effectively settled in the consolidated financial statements at the time the transaction is recorded.

Intercompany transactions between Kyndryl and IBM were considered to be effectively settled in the consolidated financial statements at the time the transaction was recorded.

The total net effect of the settlement of these intercompany transactions is reflected as Net transfers from Parent in the financing activities section in the Consolidated Statement of Cash Flows and in the Consolidated Balance Sheet within Net Parent investment.

After the Separation on November 3, 2021, the Company’s financial statements for the periods from November 4, 2021, through December 31, 2021, are consolidated financial statements based on our reported results as a standalone company.

All significant transactions and accounts within Kyndryl were eliminated.

All significant intercompany transactions between IBM and Kyndryl prior to the Separation were included within Net Parent investment on the accompanying Consolidated Financial Statements.

After the Separation on November 3, 2021, the Company’s consolidated financial statements are based on our reported results as a standalone company.

All significant transactions and intercompany accounts between Kyndryl entities were eliminated.

Prior to the Separation, all significant intercompany transactions between IBM and Kyndryl were included within Net Parent investment on the accompanying consolidated financial statements.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes.

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Certain items have been recast to conform to current-period presentation.

Dollars are in millions except where otherwise noted.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts that are reported in the consolidated financial statements and accompanying disclosures.

Estimates are used in determining the allocation of costs and expenses from IBM and are used in determining the following, among others:

revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets including goodwill and intangible assets, the depreciable and amortizable lives of other long-lived assets, loss contingencies, allowance for credit losses, deferred transition costs and other matters.

These estimates are based on management’s knowledge of current events, historical experience and actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances, including the macroeconomic impacts of the COVID-19 pandemic (beginning in 2020).

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect amounts that are reported in the consolidated financial statements and accompanying disclosures.

Estimates are used in determining the following, among others:

revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets including goodwill and intangible assets, the depreciable and amortizable lives of long-lived assets, loss contingencies, allowance for credit losses, deferred transition costs and other matters.

Estimates were also used in determining the allocation of costs and expenses from IBM for the pre-Separation periods.

Actual results may be different from these estimates.

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Refer to Note 3 – Revenue Recognition for contract assets for the periods presented.

Contract assets are included in prepaid expenses and other current assets in the Consolidated Balance Sheet.

The unconditional unbilled accounts receivable of $ 454 million and $ 358 million at December 31, 2021 and 2020, respectively, is included in accounts receivable in the Consolidated Balance Sheet.

The Company’s rights to consideration are presented separately depending on whether those rights are conditional or unconditional;

total conditional contract assets of $ 30 million, $ 41 million and $ 62 million at March 31, 2023, March 31, 2022 and December 31, 2021, respectively, are included in prepaid expenses and other current assets.

Total unconditional contract assets (“unbilled accounts receivable”) of $ 384 million, $ 473 million and $ 454 million at March 31, 2023, March 31, 2022 and December 31, 2021, respectively, are included in accounts receivable in the Consolidated Balance Sheet.

Additionally, in determining the transaction price, the Company would adjust the promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of payments agreed to by the parties to the contract provide the client or the Company with a significant benefit of financing, in which case the contract contains a significant financing component.

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The Company’s capabilities as an infrastructure services company include offerings that often encompass multiple types of services and may integrate various OEM hardware and/or OEM software components.

When an arrangement contains multiple distinct performance obligations, revenue follows the specific revenue recognition policies for each performance obligation, depending on the type of offering.

The Company determines if the products or services are distinct and allocates the consideration to each distinct performance obligation on a relative standalone selling price basis.

When an arrangement contains multiple separate performance obligations, revenue follows the specific revenue recognition policies for each performance obligation, depending on the type of offering.

The Company determines if the products or services are distinct and allocates the consideration to each separate performance obligation on a relative standalone selling price basis.

When products and services are not distinct, the Company determines an appropriate measure of progress based on the nature of its overall promise for the single performance obligation.

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The Company establishes SSP based on management’s estimated selling price or observable prices of products or services sold separately in comparable circumstances to similar clients.

For OEM hardware and/or OEM software components, the Company is able to establish SSP based on the cost from the vendor.

hardware and/or OEM software components, the Company is able to establish SSP based on the cost from the vendor.

The Company reassesses SSP ranges on a periodic basis or when facts and circumstances change.

In certain instances, the Company may not be able to establish a SSP range based on observable prices and the Company estimates SSP.

In certain instances, the Company may not be able to establish an SSP range based on observable prices and the Company estimates SSP.

The Company estimates SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices.

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Nature of Products and Services

The Company delivers transformation and secure cloud services capabilities, insights and depth of expertise to modernize and manage IT environments based on its customers’ unique patterns of transformation at scale.

The Company offers services such as cloud managed services, data services, security and resiliency services, enterprise infrastructure services, digital workplace services, network services, managed Independent Software Vendor services and distributed cloud services to support its customers through technological change.

The Company delivers transformation and secure cloud services capabilities, insights and depth of expertise to modernize and manage IT environments based on its customers’ needs.

The Company offers services such as cloud managed services, application hosting and modernization, security and resiliency services, enterprise infrastructure services, digital workplace services, network services and distributed cloud services to support its customers through technological change.

Many of these services can be delivered entirely or partially through cloud or as-a-service delivery models.

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The Company’s services offerings may include the integration and/or sale of OEM hardware and/or software components.

Contracts that include hardware and/or software components are evaluated to determine if they are distinct performance obligations as discussed in “Performance Obligations” above.

Further, the Company assesses contracts with customers to determine whether an embedded lease arrangement exists.

A contract with a customer includes an embedded lease when the Company grants the customer a right to control the use of an identified asset for a period of time in exchange for consideration.

Generally, the hardware or software utilized in outsourcing, managed services, application management and other cloud-based services arrangements are not distinct and do not meet the criteria to be considered an embedded lease.

As a result, revenue is generally recognized over time, consistent with the services provided to the customer.

For distinct OEM hardware sales, revenue is recognized when control has transferred to the customer which typically occurs when the hardware has been shipped to the client, risk of loss has transferred to the client and the Company has a present right to payment for the hardware.

Arrangements that include a license to the software are determined to have distinct software components.

To meet this criterion, the customer must have both the contractual right to take possession of the software at any time and the ability to feasibly run the software on its own hardware or hire another party to host the software without significant economic or functional penalty.

Revenue for distinct software is typically recognized at the beginning of the services arrangement as that is the point in time the customer can access and benefit from the software and the point at which they have a legal right to possession.

Contracts that include hardware and/or software components are evaluated to determine if they are separate performance obligations as discussed in “Performance Obligations” above.

For distinct OEM hardware sales, revenue is

recognized when control has transferred to the customer, which typically occurs when the hardware has been shipped to the client, risk of loss has transferred to the client and the Company has a present right to payment for the hardware.

Cost of Services

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If the carrying amount is deemed not recoverable, an impairment loss is recognized.

Refer to Note 3 – Revenue Recognition for the amount of deferred costs to fulfill a contract at December 31, 2021 and 2020.

Refer to Note 3 – Revenue Recognition for the amount of deferred costs to fulfill a contract at March 31, 2023, March 31, 2022 and December 31, 2021.

In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the Company for the recovery of unbilled accounts receivable, unamortized deferred contract costs and additional costs incurred by the Company to transition the services.

Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis, which approximates the pattern that the assets’ economic benefits are expected to be consumed, over the

expected customer relationship period if the Company expects to recover those costs.

The expected customer relationship period is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years .

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The Company has determined that certain commissions programs meet the requirements to be capitalized.

Some commission programs are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized.

For contracts shorter than one year, the Company has elected the practical expedient to recognize sales commissions as incurred.

Additionally, some commission programs are not subject to capitalization as the revenue for services is paid over time and the commission expense is paid and recognized as the related revenue is recognized.

Expense and Other (Income)

Expense and other income within the Company’s financial statements through the Separation reflect allocations to the Company by IBM based on direct usage, with the remainder allocated on a pro-rata basis of gross profit, headcount, assets or other measures the Company has determined as reasonable.

Expense and other income within the Company’s consolidated financial statements for the periods from November 4, 2021, through December 31, 2021, are based on our reported results as a standalone company.

Selling, General and Administrative

Expense and other income within the Company’s consolidated financial statements for the periods from November 4, 2021 onward is based on our reported results as a standalone company.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expense is charged to income as incurred, except for certain sales commissions, which are capitalized and amortized.

For further information regarding capitalizing sales commissions, see “Incremental Costs of Obtaining a Contract” above.

Expenses of promoting and selling services are classified as selling expense and, in addition to sales commissions, include such items as compensation, advertising and travel.

Expenses of promoting and selling services are classified as selling

expense and, in addition to sales commissions, include such items as compensation, advertising and travel.

General and administrative expense includes such items as compensation, legal costs, office supplies, non-income taxes, insurance and office rental.

In addition, general and administrative expense includes other operating items such as allowance for credit losses, amortization of certain intangible assets and research, development and engineering (“RD&E”) costs allocated to the Company by the former Parent.

Total RD&E costs allocated to Kyndryl were $ 63 million, $ 76 million and $ 83 million for the years ended December 31, 2021, 2020 and 2019.

Advertising and Promotional Expense

Total RD&E costs were $ 79 million, $ 23 million, $ 63 million and $ 76 million for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the years ended December 31, 2021 and 2020, respectively.

Advertising and promotional costs are expensed as incurred.

Advertising and promotional expense, which includes media, agency and promotional expense directly incurred by the Company was $ 56 million, $ 34 million and $ 55 million in 2021, 2020 and 2019, respectively, and is recorded in SG&A expense in the Consolidated Income Statement.

Other (Income) and Expense

Other (income) and expense primarily consists of expense related to certain components of retirement-related costs, including interest costs, expected return on plan assets, amortization of prior service costs (credits), curtailments and settlements and other net periodic benefit costs.

Advertising and promotional expense, which includes media, agency and promotional expense directly incurred by the Company was $ 136 million, $ 54 million, $ 56 million and $ 34 million for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the years ended December 31, 2021 and 2020, respectively.

Costs related to the initial establishment of the Kyndryl brand are recorded in Transaction-related costs in the Consolidated Income Statement.

All other advertising and promotional costs are recorded in SG&A expense in the Consolidated Income Statement.

Other Expense

Other expense primarily consists of (income) and expense related to certain components of retirement-related costs, including interest costs, expected return on plan assets, amortization of prior service costs (credits), curtailments and settlements and other net periodic benefit costs.

Also included are gains and losses from foreign currency transactions, certain real estate transactions and corporate expenses.

For more information, see Note 17 – Related-Party Transactions.

Defined Benefit Pension and Nonpension Postretirement Benefit Plans

Prior to the Separation, the defined benefit plans and nonpension postretirement benefit plans in which certain Kyndryl employees participated were sponsored by IBM.

During this period, an allocation of certain assets and liabilities was reflected in the Consolidated Balance Sheet based on legal entities, and the Consolidated Income Statement reflected a proportional allocation of net period benefit cost based on headcount associated with the Company.

In September 2021, in preparation for the Separation, certain defined benefit plans and nonpension postretirement benefit plans were amended, and Kyndryl became sponsor or co-sponsor (with IBM) of these plans.

Refer to Note 16 – Retirement-Related Benefits for further details on the accounting for these plans.

As a result of the amendment of these plans to make Kyndryl sponsor or co-sponsor in September 2021, the funded status of these plans became recognized in the Consolidated Balance Sheet.

The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation at the balance sheet date.

During this period, the Consolidated Income Statement reflected a proportional allocation of net period benefit cost based on headcount associated with the Company.

For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels.

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For co-sponsored plans, the fair value of plan assets based on Company contributions, distributions and market returns and the benefit obligation attributed to employees of the Company are allocated to Kyndryl.

Overfunded plans, in which the fair value of plan assets exceeds the benefit obligation, are aggregated and recorded as a prepaid pension asset equal to this excess.

Underfunded plans, in which the benefit obligation exceeds the fair value of plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess.

The current portion of the retirement and nonpension post-retirement benefit obligations represents the actuarial present value of benefits payable in the next twelve months exceeding the fair value of plan assets, measured on a plan-by-plan basis.

This obligation is recorded in accrued compensation and benefits in the Consolidated Balance Sheet.

Overfunded plans, in which the fair value of plan assets exceeds the benefit obligation, are aggregated, and recorded in pension assets in the Consolidated Balance Sheet.

Underfunded plans, in which the benefit obligation exceeds the fair value of plan assets, are aggregated and the noncurrent portion of this excess is recorded in retirement and nonpension postretirement benefit obligations in the Consolidated Balance Sheet.

The current portion of the benefit obligation in excess of the fair value of plan assets represents the actuarial present value of benefits payable in the next twelve months, measured on a plan-by-plan basis.

The current portion of this obligation is recorded in accrued compensation and benefits in the Consolidated Balance Sheet.

Net periodic benefit cost of defined benefit pension and nonpension postretirement benefit plans is recorded in the Consolidated Income Statement and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs (credits) and actuarial (gains) losses previously recognized as a component of other comprehensive income (loss) (OCI).

The service cost component of net benefit cost is recorded in Cost of services and SG&A in the Consolidated Income Statement (unless eligible for capitalization) based on the employees’ respective functions.

The other components of net benefit cost are presented separately from service cost within other (income) and expense in the Consolidated Income Statement.

The other components of net benefit cost are presented separately from service cost within other expense in the Consolidated Income Statement.

Actuarial (gains) losses and prior service costs (credits) are recognized as a component of OCI in the Consolidated Statement of Comprehensive Income (Loss) as they arise.

Those actuarial (gains) losses and prior service costs/(credits) are subsequently recognized as a component of net periodic benefit cost pursuant to the recognition and amortization provisions of applicable accounting guidance.

Those actuarial (gains) losses and prior service

costs (credits) are subsequently recognized as a component of net periodic benefit cost pursuant to the recognition and amortization provisions of applicable accounting guidance.

Actuarial (gains) losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions.

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In September 2021, in preparation for the Separation, Kyndryl established standalone defined contribution plans, and employees identified as Kyndryl employees were enrolled into these plans.

Contribution expense associated with employer matching benefits are recorded when the employee renders service to the Company.

Contribution expense associated with employer matching benefits is recorded when the employee renders service to the Company.

The charge is recorded in Cost of services and SG&A in the Consolidated Income Statement based on the employees’ respective functions.

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Compensation costs associated with Kyndryl employees’ participation in the Parent’s incentive plans have been identified for employees who exclusively support Kyndryl operations.

Stock-based compensation represents the cost related to stock-based awards granted to employees under the stock-based compensation plans.

After the Separation, stock-based compensation expense represents the cost related to stock-based awards granted to employees under Kyndryl’s stock-based compensation plan (the “Kyndryl Plan”).

The Company establishes stock-based compensation values at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line basis (net of estimated forfeitures) over the requisite employee service period.

Kyndryl grants the Company’s employees Restricted Stock Units (RSUs), market-conditioned performance awards (Launch Performance Stock Units, or “Launch PSUs”) and stock options.

RSUs are stock awards granted to employees that entitle the holder to shares of Kyndryl common stock as the award vests, typically over a one - to four-year period.

Market-conditioned performance awards are restricted stock units granted to employees with vesting conditions based on the Company’s stock price and are cliff-vested at the end of the service period.

Stock options are vested over a one - to four-year period.

Kyndryl grants the Company’s employees Restricted Stock Units (RSUs), market-conditioned stock units, performance-conditioned stock units and stock options.

RSUs are stock units granted to employees that entitle the holder to shares of Kyndryl common stock as the award vests, typically over a one - to four-year period.

Market-conditioned stock units are granted to employees with vesting conditions based on the Company’s achievement of a market condition and are cliff vested at the end of the three-year service period.

Performance-conditioned stock units are granted to employees with vesting conditions based on the attainment of operational targets (e.g., signings and free cash flows) and are cliff vested at the end of the three-year performance period.

Stock options are vested over a one - to four-year period and have a ten-year contractual term.

As of March 31, 2023, 30.9 million shares of common stock have been approved to be granted to employees under the Kyndryl Plan.

Dividend equivalents are not paid on the stock-based awards described above.

The fair value of the RSUs is determined on the grant date based on Kyndryl’s stock price, adjusted for the exclusion of dividend equivalents where applicable.

The fair value of market-conditioned performance awards is determined on the date of grant using a Monte Carlo simulation model which estimates the probability of satisfying market conditions.

The fair value of market-conditioned stock units is determined on the date of grant using a Monte Carlo simulation model which estimates the probability of satisfying market conditions.

The fair value of the performance-conditioned stock units is determined on the grant date based on Kyndryl’s stock price.

The fair value of stock options is determined on the grant date using a Black-Scholes model.

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The equity award exchange ratio was determined as the closing per share price of IBM shares on the last trading day prior to the Spin-off divided by the opening price of Kyndryl common stock on the first trading day following the Spin-off.

The Company records deferred tax assets for awards that result in tax deductions in the consolidated financial statements calculated using the separate return basis based on the amount of compensation cost recognized and the relevant statutory tax rates.

The Company records deferred tax assets for awards that result in tax deductions in the consolidated financial statements calculated based on the amount of compensation cost recognized and the relevant statutory tax rates.

The differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded as a benefit or expense to the provision for income taxes in the Consolidated Income Statement.

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Prior to the third quarter of 2021, Kyndryl did not independently execute derivative financial instruments to manage its foreign currency risk and instead participated in a centralized foreign currency hedging program administered by IBM.

The hedging activity allocated to Kyndryl is for the management of the Company’s forecasted foreign currency expenses.

The hedging activity allocated to Kyndryl was for the management of the Company’s forecasted foreign currency expenses.

In the third quarter of 2021, we began to execute trades to manage foreign currency risk.

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Derivatives are recognized in the Consolidated Balance Sheet at fair value on a gross basis as either assets or liabilities and classified as current or noncurrent based upon whether the maturity of the instrument is less than or greater than twelve months.

We designate the derivative based on the exposure being hedged and assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instrument is highly effective in offsetting changes

in cash flows of the hedged items.

Changes in the fair value of effective derivatives designated as cash flow hedge are recorded, net of applicable taxes, in OCI and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings.

Changes in fair value of derivatives not designated as effective hedges are reported in earnings primarily in other (income) and expense.

Changes in the fair value of effective-hedging derivatives designated as cash flow hedge are recorded, net of applicable taxes, in OCI and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings.

Changes in fair value of derivatives not designated as effective hedges are reported in earnings primarily in other expense.

See Note 7 – Financial Assets and Liabilities for further information.

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All other assets and liabilities denominated in a currency other than U.S.

dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other (income) and expense.

dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other expense.

Income and expense items are translated at the weighted-average rates of exchange prevailing during the year.

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An allowance for uncollectible receivables and contract assets, if needed, is estimated based on specific customer situations, current and future expected economic conditions and past experiences of losses, as well as an assessment of potential recoverability of the balance due.

Effective January 1, 2020, the Company adopted the new accounting standard related to current expected credit losses (Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326)).

The standard applies to financial assets measured at amortized cost, including accounts receivable and certain off-balance sheet commitments.

As of the effective date, the Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model.

The impact related to adopting the new standard was not material.

Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible.

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Transfers of Financial Assets

The Company enters into arrangements to sell to third-party financial institutions certain financial assets (primarily accounts receivable).

For a transfer of financial assets to be considered a sale, the asset must be legally isolated from the Company, and the purchaser must have control of the asset.

Determining whether all the requirements have been met includes an evaluation of legal considerations, the extent of the Company’s continuing involvement with

the assets transferred and any other relevant consideration.

While we do continue to service the assets, doing so does not create significant continuing involvement.

When the true-sale criteria are met, the Company derecognizes the carrying value of the financial asset transferred and recognizes a net gain or loss on the sale.

The proceeds from these arrangements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows.

If the true-sale criteria are not met, the transfer is considered a secured borrowing, and the financial asset remains on the Consolidated Balance Sheet with proceeds from the sale recognized as debt and recorded as cash flows from financing activities in the Consolidated Statement of Cash Flows.

Arrangements to sell accounts receivable are used in the normal course of business as part of the Company’s cash and liquidity management.

Third-party programs primarily in the U.S.

and several countries in Europe enable the Company to sell certain accounts receivable, without recourse, to third parties to manage credit, collection, concentration and currency risk.

In the fourth quarter of 2021, the Company entered into a third-party factoring program and had arrangements to sell certain financial assets under this facility.

Proceeds from receivables sold under this program and proceeds from receivables sold to third parties outside of this program, were $ 326 million and $ 36 million, respectively, for the year ended December 31, 2021.

Prior to the Separation, the gross amount of the Company’s receivables sold to third parties under the former Parent’s facility was $ 296 million, $ 803 million and $ 650 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The fees and the net gains and losses associated with the transfer of receivables were not material for any of the periods presented.

Additionally, prior to entering into the third-party factoring program in the fourth quarter of 2021, the Company had arrangements to assign certain financial assets to IBM’s Global Financing business.

Refer to Note 17 – Related-Party Transactions for further information, including the amount of proceeds under these arrangements for the years ended December 31, 2021, 2020 and 2019.

The Company has entered into agreements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse.

The Company determined these are true sales.

The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized, at the time of the transfer.

An agreement with a third-party financial institution, initially executed in November 2021 and since amended, enables us to sell, at any one time, on a revolving basis, up to $ 1.0 billion of our trade receivables with payment terms from three to nine months .

This amended agreement provides that we may sell an additional amount of trade receivables with payment terms of less than three months , contingent on the approval of the counterparty to purchase such receivables, with no defined limit on such sales.

The initial term of this agreement was 18 months , and the agreement automatically resets to a term of 18 months after every six months , unless one of the parties elects not to extend.

Beginning in June 2022, the Company entered into an agreement with a separate third-party financial institution in which the sale of receivables is contingent on the approval of the counterparty with no defined facility limit.

The initial term of this agreement is 12 months .

Prior to entering into the third-party agreement in November 2021, the Company had arrangements to assign certain financial assets to the financing division of our former Parent, as well as to sell receivables under the former Parent’s agreements with third parties.

Refer to Note 17 – Transactions With Former Parent for further information, including the amount of proceeds under this arrangement for the years ended December 31, 2021 and 2020.

The net proceeds from these arrangements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows.

Gross proceeds from receivables sold to third parties and the financing division of our former Parent were $ 3.1 billion, $ 485 million, $ 2.5 billion and $ 3.9 billion for the year ended March 31, 2023, the three months ended March 31, 2022, and the years ended December 31, 2021 and 2020, respectively.

The fees associated with the transfers of receivables were $ 47 million for the year ended March 31, 2023, $ 7 million for the three months ended March 31, 2022, and no t material for the years ended December 31, 2021 and 2020.

Fair Value Measurement

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As part of that evaluation, the Company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the Company, as the lessee, has the right to control the use of that asset.

In its ordinary course of business, the Company enters into leases as a lessee for property and equipment.

Prior to the Separation, the Company recognized right-of-use (“ROU”) assets and associated lease liabilities in the Consolidated Balance Sheet for leases with a term of more than twelve months when a majority percentage of utilization was attributed to the Company.

The lease liabilities were measured at the lease commencement date and determined using the present value of the lease payments not yet paid and the Parent’s incremental borrowing rate, since they were negotiated by the Parent prior to Separation.

Any new or modified leases entered into after the Separation are measured at Kyndryl’s incremental borrowing rate.

The interest rate implicit in the lease is generally not determinable in transactions where the Company is the lessee.

The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid rent and lease incentives.

Leases are classified as either finance leases or operating leases.

The Company recognized right-of-use (“ROU”) assets and associated lease liabilities in the Consolidated Balance Sheet for leases with a term of more than twelve months when a majority percentage of utilization was attributed to the Company.

The lease liabilities recognized pre-Separation were measured at the lease commencement date and determined using the present value of the lease payments not yet paid and the Parent’s incremental borrowing rate, since they were negotiated by the Parent prior to Separation.

Any new or modified leases entered into after the Separation are measured at Kyndryl’s incremental borrowing rate, as the interest rate implicit in the lease is generally not determinable in transactions where the Company is the lessee.

The ROU asset equals the lease liability adjusted for any

initial direct costs, prepaid rent and lease incentives.

The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.

Operating leases are included in operating right-of-use assets net, current operating lease liabilities and operating lease liabilities in the Consolidated Balance Sheet.

Finance leases are included in property and equipment, short-term debt and long-term debt in the Consolidated Balance Sheet.

Finance leases are included in property and equipment, current portion of long-term debt and long-term debt in the Consolidated Balance Sheet.

The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

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Intangible Assets Including Goodwill

Goodwill attributed to the Company represents the historical goodwill balances in the Parent’s managed infrastructure services business arising from acquisitions specific to the Company.

Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets.

The primary drivers that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset.

Goodwill recorded

in an acquisition is assigned to applicable reporting units based on expected revenues or expected cash flows.

Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues or expected cash flows.

Goodwill inherited from the former Parent pre-Separation represents the historical goodwill balances in the IBM’s managed infrastructure services business arising from acquisitions specific to the Company.

Identifiable intangible assets with finite lives are amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time.

Amortization of completed technology is recorded in cost of services, and amortization of all other intangible assets is recorded in SG&A expense.

All costs related to internally developed computer software during planning and evaluation stage are expensed as incurred.

All costs related to internally developed computer software during the preliminary project stage and post-implementation operation stage are expensed as incurred.

Costs incurred during application development stage are capitalized and included in intangibles.

Long-lived assets, other than goodwill, are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Long-lived assets, other than goodwill, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The impairment test is based on undiscounted cash flows and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values.

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These costs include employee retention expenses, information technology costs, marketing expenses to establish the Kyndryl brand, legal, accounting, consulting and other professional service costs required to prepare for and execute the Separation, and other costs related to contract and supplier novation and integration.

Workforce Rebalancing and Site-Rationalization Charges

The Company has incurred workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets and charges related to lease terminations.

We record a liability for employee termination benefits either when it is probable that an employee is entitled to them and the amount of the benefits can be reasonably estimated or when management has communicated the termination plan to employees.

Workforce rebalancing charges are recorded as a separate line on the Consolidated Income Statement.

Charges related to ceasing to use leased assets and owned fixed assets and charges related to lease terminations are recognized as cost of services or selling, general and administrative expenses based on our classification policy for each category.

Refer to Note 19 – Workforce Rebalancing and Site-Rationalization Charges for details of this program.

Property and Equipment

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When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the determination of net income or loss.

We compute depreciated expense on a straight-line method over the estimated useful lives of the assets as follows:

We compute depreciation expense on a straight-line method over the estimated useful lives of the assets as follows:

Classification

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Post-Separation, the income tax provisions are calculated based on Kyndryl’s operating footprint, as well as tax return elections and assertions.

Current income tax liabilities including amounts for unrecognized tax benefits related to our activities included in IBM’s income tax returns were deemed to be immediately settled with IBM through the Net Parent investment account in the Consolidated Balance Sheet and reflected in Net transfers from Parent in the financing activities section in the Consolidated Statement of Cash Flows.

Prior to the Separation, current income tax liabilities including amounts for unrecognized tax benefits related to our activities included in IBM’s income tax returns were deemed to be immediately settled with IBM through the Net Parent investment account in the Consolidated Balance Sheet and reflected in Net transfers from

Parent in the financing activities section in the Consolidated Statement of Cash Flows.

Post-Separation, liabilities related to unrecognized tax benefits for which the Company is liable are reported within the Consolidated Balance Sheet based upon tax authorities’ ability to assert the Company may be the primary obligor for historical taxes, among other factors.

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Net loss per share is computed by dividing net loss for the period by the weighted-average number of common shares outstanding during the period.

The calculation of basic and diluted earnings per share for any of the periods presented prior to the Separation and the Distribution were based on the number of shares outstanding on November 4, 2021.

For periods prior to the Separation and Distribution, it is assumed that there are no dilutive equity instruments as there were no Kyndryl stock-based awards outstanding prior to the Separation and the Distribution.

Weighted-average common shares outstanding do not include restricted stock, market-conditioned performance awards or stock options for the periods presented because the effect of their inclusion would have been anti-dilutive.

The calculation of basic and diluted earnings per share for any of the periods presented prior to Separation were based on the number of shares outstanding on November 4, 2021, which assumed that there are no dilutive equity instruments as there were no Kyndryl stock-based awards outstanding prior to that date.

Weighted-average common shares outstanding do not include restricted stock, market-conditioned and performance-conditioned stock units or stock options for the periods presented because the effect of their inclusion would have been anti-dilutive.

Refer to Note 6 – Net Loss per Share for a reconciliation as well as Note 15 – Stock-based Compensation for further discussion on awards.

ACCOUNTING CHANGES

New Standards to be Implemented

In October 2021, the Financial Accounting Standards Board (“FASB”) issued guidance (“Revenue Contracts with Customers Acquired in a Business Combination”) which requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination as if it had originated the contracts, in accordance with ASC 606, Revenue from Contracts with Customers.

Deferred revenue acquired in a business combination is no longer required to be measured at its fair value, which had historically resulted in a deferred revenue impairment at the date of acquisition.

The amendment is effective January 1, 2023, and early adoption is permitted.

The Company is evaluating the impact of the guidance and adoption date.

Standards Implemented

In December 2019, the FASB issued guidance (“Simplifying the Accounting for Income Taxes”) intended to simplify various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarified and amended existing guidance to improve consistency in application.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued guidance (“Simplifying the Accounting for Income Taxes”) intended to simplify various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarified and amended existing guidance to improve consistency in application.

The guidance was effective January 1, 2021, and early adoption was permitted.

The Company adopted the guidance on a prospective basis as of the effective date.

The guidance did not have a material impact in the consolidated financial results.

The guidance did not have a material impact on the Company’s consolidated financial statements.

In October 2021, the FASB issued guidance (“Revenue Contracts with Customers Acquired in a Business Combination”) which requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination as if the acquirer had originated the contracts, in accordance with ASC 606, Revenue from Contracts with Customers .

Deferred revenue acquired in a business combination is no longer required to be measured at

its fair value, which had historically resulted in a deferred revenue impairment at the date of acquisition.

The guidance was effective January 1, 2023, and early adoption was permitted.

The Company adopted the guidance as of January 1, 2022.

Our adoption did not materially affect our consolidated financial statements.

In December 2022, the FASB issued guidance deferring the sunset date of ASC 848, Reference Rate Reform to December 31, 2024.

The FASB previously issued temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of markets transitioning from the use of LIBOR and other interbank offered rates to alternative reference rates.

The Company has evaluated the impact of the amended guidance and concluded that the guidance will not have a material impact on the Company’s consolidated financial statements.

New Standards to be Implemented

In September 2022, the FASB amended its guidance related to supplier finance programs.

The amended guidance requires additional disclosures surrounding the use of supplier finance programs to purchase goods or services, including disclosing the key terms of the programs, the amount of obligations outstanding at the end of the reporting period, and a roll-forward of those obligations.

The new guidance, except the roll-forward information, is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The roll-forward information is effective for fiscal years beginning after December 15, 2023.

Early adoption is permitted.

The Company has evaluated the impact of the amended guidance and concluded that the guidance will have no impact on the Company’s consolidated financial statements, given that we do not have any supplier finance programs.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842) – Common-Control Arrangements .

This guidance amends the accounting for leasehold improvements in common-control arrangements by requiring a lessee in a common-control arrangement to amortize leasehold improvements that it owns over the improvements’ useful life to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease.

The Company has evaluated the impact of the amended guidance and concluded that the guidance will not have a material impact on the Company’s consolidated financial statements.

REVENUE RECOGNITION

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Additionally, as a practical expedient, the Company does not include contracts that have an original duration of one year or less.

RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

At December 31, 2021, the aggregate amount of RPO related to customer contracts that are unsatisfied or partially unsatisfied was $ 49.7 billion.

Approximately 54 percent of the amount is expected to be recognized as revenue in the subsequent two years , approximately 37 percent in subsequent years three through five , and the balance thereafter.

RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency.

At March 31, 2023, the aggregate amount of RPO related to customer contracts that are unsatisfied or partially unsatisfied was $ 38.5 billion.

Approximately 59 percent of the amount is expected to be recognized as revenue in the next two years , approximately 35 percent in the subsequent three years , and the balance thereafter.

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the year ended December 31, 2021, revenue was reduced by $ 16 million for performance obligations satisfied (or partially satisfied) in previous periods, mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

For the year ended March 31, 2023, revenue increased by $ 8 million for performance obligations satisfied (or partially satisfied) in previous periods, mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Contract Balances

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(Dollars in millions)

Accounts receivable (net of allowances of $ 44 in 2021 and $ 91 in 2020)

Accounts receivable (net of allowances of $ 32 at March 31, 2023, $ 44 at March 31, 2022, and $ 44 at December 31, 2021) *

Contract assets **

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Deferred income (noncurrent)

* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.

The amount of revenue recognized during the year ended December 31, 2021, that was included within the deferred income balance at December 31, 2020, was $ 877 million.

The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the years ended December 31, 2021, 2020 and 2019:

Including unbilled receivable balances of $ 384 million at March 31, 2023, $ 473 million at March 31, 2022 and $ 454 million at December 31, 2021.

Contract assets represent services performed by the Company prior to billing the client, which give the Company the right to consideration that is typically subject to milestone completion or client acceptance.

They are included within prepaid expenses and other current assets in the Consolidated Balance Sheet.

The amount of revenue recognized during the year ended March 31, 2023 that was included within the deferred income balance at March 31, 2022 was $ 582 million.

The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the years ended December 31, 2021 and 2020:

Year Ended December 31,

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* Primarily represents translation adjustments and reclassifications .

The decrease in the accounts receivable allowance during 2021 was primarily due to collections from certain clients that we previously reserved for.

The contract assets allowance for expected credit losses was not material in any of the periods presented.

Major Clients

No single client represented more than 10 percent of the Company’s total revenue during the year ended March 31, 2023 and the three months ended March 31, 2022 (transition period).

Other than transactions with the former Parent, no single client represented 10 percent or more of the Company’s total revenue in the years ended December 31, 2021 and 2020.

Other than receivables with the former Parent, no single client represented more than 10 percent of the Company’s total accounts receivable balance as of March 31, 2023, March 31, 2022 and December 31, 2021, respectively.

Deferred Costs

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For contracts with an estimated amortization period of less than one year, we elected the practical expedient to expense incremental costs immediately.

The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at December 31, 2021 and 2020:

The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at March 31, 2023, March 31, 2022 and December 31, 2021:

(Dollars in millions)

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Total deferred costs *

* Of the total deferred costs, $ 920 million was current and $ 1,265 million was noncurrent at December 31, 2021, and $ 1,205 million was current and $ 1,441 million was noncurrent at December 31, 2020.

* Of the total deferred costs, $ 1,070 million was current and $ 1,166 million was noncurrent at March 31, 2023, $ 1,143 million was current and $ 1,244 million was noncurrent at March 31, 2022, and $ 920 million was current and $ 1,265 million was noncurrent at December 31, 2021.

The amount of total deferred costs amortized during the year ended March 31, 2023 was $ 1.7 billion, composed of $ 342 million of amortization of deferred transition costs, $ 857 million of amortization of prepaid software and $ 472 million of amortization of capitalized contract costs.

The amount of total deferred costs amortized during the three months ended March 31, 2022 (transition period) was $ 455 million, composed of $ 112 million of amortization of deferred transition costs, $ 207 million of amortization of prepaid software and $ 136 million of amortization of capitalized contract costs.

The amount of total deferred costs amortized during the year ended December 31, 2021 was $ 1.8 billion, composed of $ 403 million of amortization of deferred transition costs, $ 874 million of amortization of prepaid software and $ 563 million of amortization of capitalized contract costs.

Total deferred costs amortized during the year ended December 31, 2020 was $ 2.1 billion, composed of $ 478 million of amortization of deferred transition costs, $ 901 million of amortization of prepaid software and $ 683 million of amortization of capitalized contract costs.

There were no material impairment losses incurred in both years.

There were no material impairment losses incurred in any period.

Refer to Note 1 – Significant Accounting Policies for additional information on deferred costs to fulfill a contract and capitalized costs of obtaining a contract.

In conjunction with the Separation, the Company implemented a new operating structure.

With this change, the way the Company organizes its operating and reportable segments was revised to better reflect the way the chief operating decision maker (“CODM”) reviews performance and allocates resources.

In addition, the measure of segment operating performance used by Kyndryl’s CODM changed.

The updated measure of segment operating performance used by Kyndryl’s CODM is adjusted EBITDA.

Adjusted EBITDA is defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), pension costs other than pension servicing costs and multi-employer plan costs, early extinguishment of debt charges, workforce rebalancing and restructuring charges, transaction-related and integration-related items, goodwill and long-lived asset impairment charges, foreign currency impacts of highly inflationary countries, significant litigation costs, stock-based compensation expense and income taxes.

The use of revenue and adjusted EBITDA aligns with how the CODM assesses performance and allocates resources for the Company’s segments.

Our reportable segments correspond to how the chief operating decision maker (“CODM”) reviews performance and allocates resources.

Our four reportable segments consist of the following:

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Principal Markets:

This reportable segment represents the aggregation of our operations in Australia / New Zealand, Canada, France, Germany, India, Italy, Spain / Portugal, and the United Kingdom / Ireland, comprised of Kyndryl’s operations in those respective countries.

This reportable segment represents the aggregation of our operations in Australia / New Zealand, Canada, France, Germany, India, Italy, Spain / Portugal, and the United Kingdom / Ireland.

Strategic Markets:

This reportable segment is comprised of our operations in all other countries.

While this reporting change did not impact the Company's consolidated results, segment data has been recast in the tables below to be consistent for all periods presented.

This reportable segment is comprised of our operations in all other countries in which we operate.

The measure of segment operating performance used by Kyndryl’s CODM is adjusted EBITDA.

Adjusted EBITDA is defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased and owned fixed assets, charges related to lease terminations, transaction-related costs, pension costs other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges, impairment expense, significant litigation costs, and foreign currency impacts of highly inflationary countries.

of revenue and adjusted EBITDA aligns with how the CODM assesses performance and allocates resources for the Company’s segments.

Our geographic markets frequently work together to sell and implement certain contracts.

The resulting revenues and costs from these contracts may be apportioned among the participating geographic markets.

environment and its effects on the industries served by our geographic markets affect revenues and operating expenses within our geographic markets to differing degrees.

The economic environment and its effects on the industries served by our geographic markets affect revenues and operating expenses within our geographic markets to differing degrees.

Currency fluctuations also tend to affect our geographic markets differently, depending on the geographic concentrations and locations of their businesses.

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Total segment adjusted EBITDA

The following table reconciles consolidated totals to certain segment information:

The following table reconciles consolidated pretax income (loss) to segment adjusted EBITDA:

Year Ended December 31,

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Workforce rebalancing charges

Charges related to ceasing to use leased/fixed assets and lease terminations

Transaction-related costs

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Interest expense

Depreciation expense

Depreciation of property, equipment and capitalized software

Amortization expense

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Segment adjusted EBITDA

* Other adjustments represents significant litigation costs and pension costs other than pension servicing costs and multi-employer plan costs.

* Other adjustments represent pension expense other than pension servicing costs and multi-employer plan costs, significant litigation costs and currency impacts of highly inflationary countries.

Segment Assets and Other Items

The Company does not allocate assets to the above reportable segments for our CODM’s review.

Major Clients

Other than transactions with the Parent (see Note 17 – Related-Party Transactions), no single client represented 10 percent or more of the Company’s total revenue in 2021, 2020 or 2019.

Geographic Information

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* Revenues are attributed to countries based on the location of the client and exclude certain allocations.

At December 31,

(Dollars in millions)

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Reserves for uncertain tax positions

Intercompany prepayment *

Global Intangible Low-Taxed Income (GILTI)

Undistributed foreign earnings

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Goodwill impairment

Return to provision

Nondeductible items

Effective tax rate

* Represents a U.S.

tax rate benefit related to foreign tax prepayment on prepaid royalty income.

The provision for income taxes for 2021 was $ 397 million compared to $ 246 million in 2020.

* Includes intercompany prepayment of 0.5 % and 0.7 % in 2021 and 2020, respectively.

The provision for income taxes for the year ended March 31, 2023 was $ 524 million compared to $ 402 million for the year ended December 31, 2021.

The increase in income tax expense was primarily driven by the changes in valuation allowances, offset by tax charges in 2021 related to the transfer of Kyndryl’s operations that were considered a one-time item from Separation.

The provision for income taxes for the year ended December 31, 2021 was $ 402 million compared to $ 247 million for the year ended December 31, 2020.

The increase in income tax expense was primarily driven by foreign operations, tax charges related to the transfer of Kyndryl’s operations from IBM that were deemed to be immediately settled with IBM through the Net Parent Investment account and changes in uncertain tax positions, offset by valuation allowance reductions.

The provision for income taxes for 2020 was $ 246 million compared to $ 364 million in 2019.

The decrease in the provision was primarily driven by higher pretax losses in 2020 partially offset by an increase in valuation allowances in jurisdictions with losses.

The Company’s effective tax rate for the year ended March 31, 2023 was lower than the Company’s statutory tax rate primarily due to changes in valuation allowances, taxes on foreign operations and uncertain tax positions.

The Company’s effective tax rate for the three months ended March 31, 2022 was lower than the Company’s statutory tax rate primarily due to tax effects of cross-border tax laws, undistributed foreign earnings, taxes on foreign operations, uncertain tax positions and the establishment of valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

The Company’s effective tax rate for 2021 was lower than the statutory tax rate primarily due to changes in valuation allowances, losses in certain jurisdictions that cannot be benefited from and tax charges related to the transfer of Kyndryl’s operations from IBM that were deemed to be immediately settled with IBM through the Net Parent Investment account.

The Company’s effective tax rate for 2020 was lower than the statutory tax rate primarily due to changes in valuation allowances and losses in certain jurisdictions that cannot be benefited from.

tax reform introduced Global Intangible Low-Taxed Income (“GILTI”), which subjects a U.S.

shareholder to current tax on income earned by certain foreign subsidiaries.

GAAP allows companies to either (i) recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or (ii) account for taxes on GILTI as

period costs in the year the tax is incurred.

The Company has elected to recognize GILTI impact in the specific period in which it occurs.

The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:

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Stock-based and other compensation

Domestic tax loss/credit carryforwards

tax loss/credit carryforwards

Deferred income

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Fixed assets and depreciation

Restructuring charges

Goodwill and intangible assets

Workforce rebalancing charges

Limitation on deductibility of interest

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Gross deferred tax liabilities

As of December 31, 2021, the Company had tax-affected domestic and foreign net operating loss deferred tax assets of $ 16 million and $ 76 million, respectively.

If not utilized, the foreign net operating loss carryforwards will begin to expire in 2022.

The federal net operating loss can be carried forward indefinitely.

The valuation allowances as of December 31, 2021, 2020 and 2019 were $ 6 million, $ 1.11 billion and $ 650 million, respectively.

The additions to valuation allowances for the years ended December 31, 2020 and 2019 were $ 460 million and $ 342 million, respectively.

The reduction in valuation allowances in 2021 was $ 1.10 billion.

The decrease in valuation allowance is primarily attributable to net operating losses and tax credit carryforwards that existed on a separate return basis for the historical periods presented on a “carve-out” basis.

As of March 31, 2023, the Company had tax-effected U.S.

and foreign net operating loss deferred tax assets of $ 412 million and $ 118 million, respectively.

As of March 31, 2022, the Company had tax-effected U.S.

and foreign net operating loss deferred tax assets of $ 35 million and $ 102 million, respectively.

As of December 31, 2021, the Company had tax-effected U.S.

and foreign net operating loss deferred tax assets of $ 16 million and $ 76 million, respectively.

If not utilized, the U.S.

state net operating loss carryforwards will begin to expire in 2026 and foreign net operating loss carryforwards will begin to expire in 2024.

federal net operating loss can be carried forward indefinitely.

The valuation allowances as of March 31, 2023 and 2022, and December 31, 2021 were $ 620 million, $ 65 million, and $ 6 million, respectively.

The increase in valuation allowances from March 31, 2022 to March 31, 2023 was

$ 555 million.

The increase in valuation allowance is primarily a result of current year net operating losses generated in the U.S.

that are not supported by the reversal of taxable temporary differences and changes in judgment associated with the realizability of deferred tax assets in certain foreign jurisdictions.

For purposes of the historical periods presented on a “carve-out” basis, the Company’s income tax provisions were calculated using the separate return basis, as if the Company filed separate tax returns.

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Post-Separation, certain net operating losses and tax credit carryforwards that were included for purposes of the historical periods presented on a “carve-out” basis available to be utilized by IBM are not available for future utilization by the Company and were settled through Net Parent investment immediately prior to the Separation.

The Company scheduled the utilization of net operating losses and tax credit carryforwards and concluded that a valuation allowance of $ 6 million should remain on a portion of our foreign net operating losses that are not more-likely-than-not to be realized prior to expiration.

As of December 31, 2021, based on all available evidence, Management concluded that no other valuation allowance was necessary to reduce the deferred tax assets remaining post-Separation since estimated future taxable income is expected

to be sufficient to utilize these assets prior to their expiration.

As of March 31, 2023, based on all available evidence, management concluded that no other valuation allowance was necessary to reduce the deferred tax assets remaining post-Separation since estimated future taxable income is expected to be sufficient to utilize these assets prior to their expiration.

Estimates of future taxable income could change, perhaps materially, which may require us to revise our assessment of the recoverability of the deferred tax asset at that time.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

Year Ended December 31,

(Dollars in millions)

Balance at January 1

Balance at beginning of period

Additions based on tax positions related to the current year

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Settlements (closed out to Net Parent investment)

Balance at December 31

Balance at end of period

With limited exceptions, the Company is subject to U.S.

federal, state and local, and non-U.S.

income tax audits for tax years subsequent to September 1, 2021.

With limited exceptions, the Company is generally subject to income tax audits for tax years subsequent to September 1, 2021, or post-Separation, including the U.S., Germany, Japan, and Spain, which constitutes the Company’s major jurisdictions.

Pursuant to the Tax Matters Agreement, any tax liabilities attributable to the tax period (or portion thereof) ending on or before November 3, 2021, are generally not the Company’s liability.

As of December 31, 2021, the Company is not aware of any open income tax audits that would result in a liability owed by the Company.

As of March 31, 2023, the Company is not aware of any material open income tax audits that would result in a liability owed by the Company.

The Company does not expect a significant increase or decrease in unrecognized tax benefits within the next twelve months.

The net amount of $ 23 million in unrecognized tax benefits, if recognized, would favorably affect the Company’s effective tax rate.

The net amount of $ 104 million unrecognized tax benefits, if recognized, would favorably affect the Company’s effective tax rate.

Interest and penalties related to income tax liabilities are included in income tax expense.

During the year ended December 31, 2021, the Company recognized $ 0 million in interest expense and penalties.

The Company had $ 0 million for interest and penalties accrued at December 31, 2021.

During the year ended March 31, 2023, the Company recognized $ 6 million in interest expense and penalties.

The Company had $ 6 million for interest and penalties accrued at March 31, 2023.

Pursuant to the Tax Matters Agreement with Kyndryl’s former Parent, the Company identified certain tax refunds related to estimated tax payments and refundable value-added taxes for which we are required to reimburse our former Parent as the refunds are received, as well as certain tax benefits related to net operating losses that were transferred to the Company for which we are required to indemnify our former Parent as the tax benefits are realized.

As of December 31, 2021, the Company estimated the amount of our indemnification obligations to our former Parent related to these tax refunds and tax benefits to be approximately $ 99 million, where $ 66 million is recorded in other accrued expenses and liabilities expected to be paid within one year, and $ 33 million is recorded in other liabilities expected to be paid beyond the one-year period.

As of March 31, 2023, the Company estimated the amount of our indemnification obligations to our former Parent related to these tax refunds and tax benefits to be approximately $ 14 million, where $ 2 million is recorded in other accrued expenses and liabilities expected to be paid within one year, and $ 12 million is recorded in other liabilities expected to be paid beyond the one-year period.

The Company also estimated the amount of our former Parent’s indemnification obligations to us related to income tax liabilities attributable to tax periods (or portions thereof) ending on or before November 3, 2021, to be approximately $ 45 million, which is recorded in prepaid expenses and other current assets on our Consolidated Balance Sheet.

At December 31, 2021, the Company’s undistributed earnings from certain non-U.S.

At March 31, 2023, the Company’s undistributed earnings from certain non-U.S.

subsidiaries were not indefinitely reinvested.

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and undistributed earnings to the extent the foreign earnings are not restricted by local laws and can be accessed in a cost-effective manner.

Undistributed earnings of approximately $ 122 million and other outside basis differences in foreign subsidiaries are indefinitely reinvested in foreign operations.

Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings and outside basis differences is not practicable.

Undistributed earnings of approximately $ 185 million in foreign subsidiaries are indefinitely reinvested and would only be taxable upon future distributions, liquidation or other disposition of the foreign subsidiaries.

Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

NET LOSS PER SHARE

We did no t declare any stock dividends in the periods presented.

The following tables provide the computation of basic and diluted earnings per share of common stock for the twelve months ended December 31, 2021, 2020 and 2019.

The following tables provide the computation of basic and diluted earnings per share of common stock for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the years ended December 31, 2021 and 2020.

Year Ended December 31,

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Diluted earnings (loss) per share

The following securities were not included in the computation of diluted earnings (loss) per share because they would have been anti-dilutive:

Prior to the Separation, the Company did not have any publicly-traded common stock or equivalents issued and outstanding.

Accordingly, for periods prior to the Separation, the number of shares used in the calculation of basic and diluted earnings per share were based on the 224.1 million shares distributed in the Separation.

Post-Separation, the Company’s basic and diluted weighted-average shares outstanding were the same.

The following securities were not included in the computation of diluted net loss per share because they would have been anti-dilutive:

(In millions)

Nonvested RSUs issued and outstanding

Market-conditioned performance awards

Nonvested restricted stock units

Nonvested performance-conditioned stock units

Nonvested market-conditioned stock units

Stock options issued and outstanding

Pre-Separation, the Company did not have any publicly-traded common stock or equivalents issued or outstanding.

Accordingly, for the period ended December 31, 2020 there were no anti-dilutive securities that were not included in the computation of diluted net loss per share.

FINANCIAL ASSETS AND LIABILITIES

Financial Assets and Liabilities Measured at Fair Value

The gross balances of derivative assets contained within prepaid expenses and other current assets in the Consolidated Balance Sheet at December 31, 2021, were $ 9 million.

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at December 31, 2021, were $ 1 million.

These financial instruments are categorized as Level 2 in the fair value hierarchy.

There were no outstanding derivatives in the Consolidated Balance Sheet at December 31, 2020.

The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach.

However, in the Consolidated Balance Sheet, the Company does not offset derivative assets against liabilities with counterparties in master netting arrangements by counterparty, and there were no derivative instruments activity impacted by master netting agreements at December 31, 2021 and 2020.

The Company also has time deposits that are classified as available-for-sale debt securities with carrying values that approximate fair value.

The balance of these securities contained within cash and cash equivalents in the Consolidated Balance Sheet at December 31, 2021, was $ 609 million.

These securities are categorized as Level 2 in the fair value hierarchy.

There were no outstanding available-for-sale debt securities in the Consolidated Balance Sheet at December 31, 2020.

The following table presents the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2023, March 31, 2022 and December 31, 2021.

At March 31, 2023

At March 31, 2022

At December 31, 2021

(Dollars in millions)

Derivatives designated as hedging instruments:

Foreign exchange contracts

Derivatives not designated as hedging instruments:

Foreign exchange contracts

The gross balances of derivative assets are contained within prepaid expenses and other current assets, and the gross balances of derivative liabilities are contained within other accrued expenses and liabilities in the Consolidated Balance Sheet.

The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures.

There was no netting of derivative assets against liabilities in the Consolidated Balance Sheet at March 31, 2023, March 31, 2022 and December 31, 2021.

Financial Assets and Liabilities Not Measured at Fair Value

Accounts receivable are financial assets with carrying values that approximate fair value.

Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair value.

If measured at fair value in the consolidated financial statements, these financial instruments would be classified as Level 3 in the fair value

hierarchy, except for short-term debt, which would be classified as Level 2.

Fair value of long-term debt for which quoted prices are not available, is calculated using an expected present value technique that uses rates currently available to the Company for debt with similar terms and remaining maturities.

The carrying value of long-term debt approximates fair value.

If measured at fair value in the consolidated financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value.

If measured at fair value in the consolidated financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

The Company also has time deposits that have maturities of 90 days or less, and their carrying values approximate fair value.

They are measured for impairment on a recurring basis by comparing their fair value with their amortized cost basis.

There were no impairments of financial assets recognized for any of the periods presented.

The balance of these time deposits with maturities of 90 days or less contained within cash and cash equivalents in the Consolidated Balance Sheet at March 31, 2023, March 31, 2022 and December 31, 2021 was $ 814 million, $ 972 million and $ 609 million, respectively.

If measured at fair value in the consolidated financial statements, time deposits with maturities of 90 days or less would be categorized as Level 2 in the fair value hierarchy.

The fair value of our outstanding debt (excluding finance lease obligations) is based on various methodologies, including quoted prices in active markets for identical debt instruments, which is a Level 1 measurement, and calculated fair value using an expected present value technique that uses rates currently available to the Company for debt in active markets with similar terms and remaining maturities, which is a Level 2 measurement.

Our outstanding debt (excluding finance lease obligations) had a carrying value of $ 3.0 billion as of March 31, 2023, March 31, 2022, and December 31, 2021, respectively.

The debt had an estimated fair value of $ 2.5 billion, $ 2.7 billion and $ 3.0 billion as of March 31, 2023, March 31, 2022, and December 31, 2021, respectively, which consisted of quoted prices for identical debt instruments (Level 1) and expected present value calculated off observable inputs (Level 2).

Derivative Financial Instruments

In the normal course of business, we are exposed to risks arising from business operations and economic factors, such as fluctuations in currency exchange rates.

We use derivatives to manage the volatility related to these exposures with the objective of reducing fluctuations in earnings and cash flows associated with changes in currency exchange rates.

Anticipated Cost Transactions

At December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $ 213 million.

The Company had no forward contracts outstanding under this program at December 31, 2020.

Derivatives Designated as Hedging Instruments

The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain currencies.

Changes in fair value of derivatives designated as a cash flow hedge are recorded, net of applicable taxes, in other comprehensive income and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings.

The cash flows associated with derivatives designated as cash flow hedges are reported in cash flows from operating activities in the Consolidated Statement of Cash Flows.

Through the pre-Separation periods, derivatives designated as cash flow hedges were deemed to be associated with the Company’s operations and were allocated to the Company’s Consolidated Income Statement based on its pro-rata share of the underlying items hedged, where applicable, with the remainder allocated on a pro-rata basis of revenue.

At March 31, 2023, March 31, 2022 and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $ 283 million, $ 216 million and $ 213 million, respectively.

The notional amounts of derivative instruments do not necessarily represent the amounts exchanged by the Company with third parties and are not necessarily a direct measure of the financial exposure.

The maximum remaining length of time over which the Company hedged its exposure is approximately one year .

At December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.5 years.

At December 31, 2021, in connection with cash flow hedges of currency cost transactions, the Company recorded net deferred gains of $ 4 million (before taxes) in AOCI.

At December 31, 2020, there were no currency exchange derivatives that were recorded in the Company’s consolidated financial statements.

The Company estimates that $ 4 million (before taxes) of deferred net gains on derivatives in AOCI at December 31, 2021, will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The Company uses a global treasury center to manage the cash of its subsidiaries.

This center principally uses currency swaps to convert cash flows in a cost-effective manner.

Changes in fair value of derivatives not designated as hedges are reported in earnings in other (income) and expense.

At March 31, 2023, March 31, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.5 years.

At March 31, 2023, March 31, 2022 and December 31, 2021, the total fair value of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $ 1 million, $ 4 million and $ 4 million, respectively.

At March 31, 2023, March 31, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency cost transactions, the Company had unrealized gains of $ 1 million, $ 3 million and $ 4 million (each before taxes), respectively, in AOCI.

The Company estimates that $ 1 million (before taxes) of deferred net gains on derivatives in AOCI at March 31, 2023 will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

Derivatives Not Designated as Hedging Instruments

The Company enters into currency forward and swap contracts to hedge exposures related to assets and liabilities across its subsidiaries.

These contracts are not designated as hedging instruments, and therefore changes in fair value of these contracts are reported in earnings in other expense.

Cash flows from derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows.

The terms of these swap contracts are generally less than one year .

The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement.

At December 31, 2021, the total notional amount of derivative instruments in economic hedges of currency exposure was $ 581 million, and there were no outstanding derivatives instruments at December 31, 2020.

The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other expense in the Consolidated Income Statement.

At March 31, 2023, March 31, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $ 1.5 billion, $ 945 million and $ 581 million, respectively.

At March 31, 2023, March 31, 2022 and December 31, 2021, the total fair value of derivative instruments in economic hedges of foreign currency exposure was $ 6 million, $ 3 million and $ 5 million, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of cash flow hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:

Gains (Losses) from

(Dollars in millions)

Hedge Activity

For the year ended December 31:

Cost of services

Selling, general and administrative expenses

Other (income) and expense

The effects of derivatives not designated as hedging instruments on the Consolidated Income Statement are as follows:

Gain (Loss) Recognized in Consolidated Income Statement

Recognized on

Attributable to Risk

(Dollars in millions)

Income Statement

For the year ended December 31:

(Dollars in millions)

Derivative instruments not designated as hedging instruments:

Recognized on Derivatives

Foreign exchange contracts

Other (income) and expense

NA – not applicable

Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income

Other expense

The effects of derivatives designated as hedging instruments on the Consolidated Income Statement and Other Comprehensive Income are as follows:

Gain (Loss) Recognized in Consolidated Income Statement

and Other Comprehensive Income

(Dollars in millions)

Recognized in OCI

Income Statement

For the year ended December 31:

Derivative instruments in cash flow hedges:

Recognized in OCI *

Foreign exchange contracts

Consolidated Income Statement Line Item

Reclassified from AOCI *

Cost of services

Selling, general and administrative expenses

For the years ended December 31, 2021, 2020 and 2019, there were no gains or losses excluded from the assessment of hedge effectiveness for cash flow hedges, or associated with an underlying exposure that did not or was not expected to occur;

* Pre-Separation, hedging activity was allocated from the former Parent to the Consolidated Income Statement, resulting in no gain (loss) either recognized in other comprehensive income or reclassified from accumulated other comprehensive income.

For the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, there were no gains or losses excluded from the assessment of hedge effectiveness for cash flow hedges, or associated with an underlying exposure that did not or was not expected to occur;

nor are there any anticipated in the normal course of business.

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Property and equipment, net

Depreciation of property and equipment was $ 1.30 billion, $ 1.45 billion and $ 1.47 billion for the years ended December 31, 2021, 2020 and 2019, respectively.

During the year ended December 31, 2021, the Company disposed of certain property and equipment with net book value of approximately $ 200 million.

Additionally, the decrease in net property and equipment in 2021 was attributable to depreciation outpacing capital expenditures and the final transfer of assets from our former Parent at Separation.

In the 2020 period, the Company’s property and equipment balance was based on an allocation of IBM’s balances depending on the type of asset.

Information technology equipment balances relating to assets specifically utilized by the Company were fully allocated to the Company.

Leasehold improvements associated with leases attributed to Kyndryl were fully allocated to the Company.

The remaining asset balances representing assets associated with space (land, buildings, and office and other equipment in the space) were allocated based on the percentage of space utilized.

The 2020 basis of presentation prior to Separation assumed a greater basis of assets attributable to Kyndryl as compared to the assets ultimately transferred, and the transfer was recorded as a non-cash distribution within the net parent investment at Separation.

Depreciation of property and equipment was $ 900 million, $ 246 million, $ 1.3 billion and $1.5 billion for the year ended March 31, 2023, the three months ended March 31, 2022 (the transition period) and the years ended

December 31, 2021, and 2020, respectively.

Additionally, as part of the site-rationalization program, the Company recognized $ 7 million of accelerated depreciation related to ceasing to use certain owned fixed assets.

Refer to Note 19 – Workforce Rebalancing and Site-Rationalization Charges for additional details.

The following table presents the various components of lease costs:

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Total lease costs

For pre-Separation periods, the Company’s right-of-use assets and lease liabilities reflected in the Consolidated Balance Sheet are based on an allocation of IBM’s balances depending on the type of lease.

Finance lease balances relating to assets specifically utilized by the Company were fully allocated to the Company.

The real estate lease balances were allocated based on the percentage of space utilized.

The remaining lease balances were allocated to the Company based on headcount.

The Company had no sale and leaseback transactions for the years ended December 31, 2021, 2020 and 2019.

For pre-Separation periods, the Company’s components of lease costs reflected in the Consolidated Income Statement are based on an allocation of IBM’s lease costs, depending on the type of lease.

Finance lease costs relating to assets specifically utilized by the Company were fully allocated to the Company.

The real estate lease costs were allocated based on the percentage of space utilized by the Company.

The remaining lease costs were allocated to the Company based on headcount.

The Company had no sale and leaseback transactions for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020.

The following table presents supplemental information relating to the cash flows arising from lease transactions.

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Right-of-use assets obtained in exchange for new operating lease liabilities

* Includes opening balance additions as a result of the adoption of the new lease guidance effective January 1, 2019.

The post-adoption addition of leases for the year ended December 31, 2019 was $ 430 million for operating leases and $ 141 million for finance leases.

The following table presents the weighted-average lease term and discount rate for finance and operating leases:

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* Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.

** The Company entered into lease agreements for certain facilities and equipment with payments totaling approximately $ 27 million that have not yet commenced as of December 31, 2021, and therefore are not included in this table.

** The Company entered into lease agreements for certain facilities and equipment with payments totaling approximately $ 2 million that have not yet commenced as of March 31, 2023 and therefore are not included in this table.

The following table presents the total amount of finance leases recognized in the Consolidated Balance Sheet:

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Lease liabilities:

Short-term debt

Long-term debt

For the twelve months ended March 31, 2023, we identified and abandoned certain operating right-of-use assets that were inherited from the former Parent at Separation.

We determined that we will no longer receive economic benefits from these leased properties and do not have the intent or practical ability to sublease or sell them.

Accordingly, we recorded accelerated depreciation in the amount of $ 69 million for the year ended March 31, 2023, representing the remaining carrying value of the identified right-of-use assets.

Refer to Note 19 – Workforce Rebalancing and Site-Rationalization Charges for details of this program.

INTANGIBLE ASSETS INCLUDING GOODWILL

Business Combinations

On February 1, 2022, the Company completed two business combinations.

Our financial statements for the three months ended March 31, 2022 reflect the assets, liabilities, operating results and cash flows of both business combinations commencing from the acquisition date.

These transactions consisted of an immaterial acquisition in our Strategic Markets segment and a transfer of a majority interest ( 51 %) of a managed infrastructure services joint venture in Japan (the “Exa transaction”) from our former Parent that could not be completed prior to the Separation due to local regulatory approvals.

The Company completed the Exa transaction for consideration of $ 48 million, net of cash acquired of $ 59 million.

The non-controlling interest associated with the Exa transaction represents the fair value of the joint venture pro-rated by the non-controlling shareholder’s percentage of ownership ( 49 %).

The Exa transaction enabled us to seamlessly continue our relationships with certain key customers in Japan.

Acquisition costs associated with these two acquisitions were immaterial and expensed as incurred.

The following table summarizes total consideration transferred, fair value of net assets acquired, net liabilities assumed and goodwill for the Exa transaction:

(Dollars in millions)

Cash consideration

Non-controlling interest

Total enterprise value

Cash acquired

Net liabilities assumed, excluding cash

Deferred tax liabilities arising from acquired intangibles

Intangible assets *

Total purchase price allocation

* Intangible assets acquired consists of $ 16 million of patents and trademarks and $ 91 million of customer relationships.

Intangible Assets

The following tables present the Company’s intangible asset balances by major asset class.

At December 31, 2021

At March 31, 2023

Gross Carrying

1 unchanged sentence

Capitalized software

Client relationships

Customer relationships*

Completed technology

Patents and trademarks*

At December 31, 2020

At March 31, 2022

Gross Carrying

1 unchanged sentence

Capitalized software

Client relationships

Customer relationships*

Completed technology

Patents and trademarks*

There was no impairment of identifiable intangible assets recorded in 2021 and 2020.

The net carrying amount of intangible assets decreased $ 24 million during the year ended December 31, 2021, primarily due to intangible asset amortization, partially offset by additions of capitalized software.

The aggregate intangible asset amortization expense was $ 37 million, $ 29 million and $ 29 million for the years ended December 31, 2021, 2020 and 2019 respectively.

In 2021, the Company retired $ 7 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at December 31, 2021:

At December 31, 2021

Gross Carrying

(Dollars in millions)

The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable by first assessing qualitative factors to determine if it is more likely than not that fair value is less than carrying value and whether it is necessary to perform the quantitative goodwill impairment test.

This quantitative test is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.

After performing the annual goodwill impairment qualitative analysis during the fourth quarter of 2021, the Company determined it was necessary to perform the quantitative goodwill impairment test.

We use an income-based approach where fair value is determined using a discounted cash flow model that requires significant judgment with respect to revenue and growth rates, based upon annual budgets and long-term

strategic plans.

Fair value estimates employed in our annual impairment review of goodwill involve using various assumptions.

Assumptions critical to our fair value estimates were discount rates, expected revenue growth and projected EBITDA margins used in determining the fair value of the reporting units.

These and other assumptions are impacted by economic conditions and expectations of management and may change based on different facts and circumstances.

We believe the assumptions used to estimate future cash flows are reasonable, but there can be no assurance that the expected cash flows will be realized.

The use of different assumptions would increase or decrease discounted cash flows or earnings projections and therefore could change impairment determinations.

In the fourth quarter of 2021, the Company reviewed its goodwill balances for impairment under both the previous segment structure and the new segment structure, as required.

For further details on segment changes, see Note 4 – Segments.

The Company determined that $ 469 million of goodwill in the former EMEA ($ 293 million) and current U.S.

($ 176 million) reporting units was impaired in fourth quarter 2021, largely attributable to margin challenges in the EMEA segment as well as the geographic re-segmentation of the former Americas segment.

The impairment was recorded in the Impairment expense line item within the Consolidated Income Statement.

The rollforward of goodwill balances by segment for the years ended December 31, 2021 and December 31, 2020 were as follows:

Capitalized software

Customer relationships

Completed technology

Patents and trademarks

* Amounts include effects from foreign currency translation.

There was no impairment of identifiable intangible assets recorded in the periods reported.

The net carrying amount of intangible assets increased $ 26 million during the year ended March 31, 2023, primarily due to additions of capitalized software, partially offset by amortization and retirement of internal use software inherited from our former

The aggregate intangible asset amortization expense was $ 46 million, $ 7 million and $ 37 million for the year ended March 31, 2023, three months ended March 31, 2022 and year ended December 31, 2021, respectively.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at March 31, 2023:

(Dollars in millions)

Relationships

Year ending March 31:

The following table presents a roll-forward of goodwill balances by segment for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021:

Re-allocation

January 1, 2020

December 31, 2020

December 31, 2021

United States

Principal Markets

1 unchanged sentence

Primarily driven by foreign currency translation.

Management reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable by first assessing qualitative factors to determine if it is more likely than not that fair value is less than carrying value.

As a result of the change in our fiscal year-end, the annual goodwill impairment assessment date was changed from October 1 to January 1.

The change was made to better align the annual goodwill impairment test with the change in our annual planning and budgeting process for the new fiscal year-end.

In the year ended March 31, 2023, the Company performed the goodwill impairment test at both October 1, 2022 and January 1, 2023.

The change in annual impairment testing did not delay, accelerate or avoid an impairment charge.

The Company has determined this change in the method of applying an accounting principle is preferable.

We use an income-based approach where fair value is determined using a discounted cash flow model that requires significant judgment with respect to revenue growth rates, based upon annual budgets and long-term strategic plans.

Fair value estimates employed in our annual impairment review of goodwill involve using various assumptions.

Assumptions critical to our fair value estimates were discount rates, expected revenue growth and projected EBITDA margins used in determining the fair value of the reporting units.

These and other assumptions are impacted by economic conditions and expectations of management and may change based on different facts and circumstances.

We believe the assumptions used to estimate future cash flows are reasonable, but there can be no assurance that the expected cash

flows will be realized.

The use of different assumptions would increase or decrease discounted cash flows or earnings projections and therefore could change impairment determinations.

There were no goodwill impairment losses recorded for the year ended March 31, 2023.

We prepared our impairment test as of January 1, 2023 and determined that the fair values of each of our reporting units exceeded net book value by more than 90 %.

Among our reporting units, the narrowest difference between the calculated fair value and net book value was in our Principal Markets segment’s Canada reporting unit, whose calculated fair value exceeded its net book value by 93 %.

Future developments related to macroeconomic factors, including increases to the discount rate used, or changes to other inputs and assumptions, including revenue growth, could reduce the fair value of this and/or other reporting units and lead to impairment.

As a result of our impairment test performed as of October 1, 2022, the Company determined that the fair values of each of our reporting units exceeded net book value by more than 50 %.

Cumulatively, the Company has recorded $ 469 million in goodwill impairment charges within its former EMEA ($ 293 million) and current United States ($ 176 million) reporting units.

The following table presents the components of our debt:

Weighted-Average

(Dollars in millions)

Interest Rate

Long-term debt

Unsecured floating-rate term loan

November 2024

Commercial loan agreement

Unsecured senior notes due 2026

Unsecured senior notes due 2028

Unsecured senior notes due 2031

Unsecured senior notes due 2041

Finance lease obligations **

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Current maturities of long-term debt

As of December 31, 2021.

Contractual obligations of long-term debt outstanding at December 31, 2021, were as follows:

Total long-term debt

* Floating rate was calculated as of March 31, 2023, using a rate equal to one-month U.S.

dollar LIBOR plus 1.125 %.

** Finance lease obligations were presented using the weighted-average incremental borrowing rate.

Contractual obligations of long-term debt outstanding at March 31, 2023, exclusive of finance lease obligations, were as follows:

(Dollars in millions)*

Year ending March 31:

* Contractual obligations approximate scheduled repayments.

Senior Unsecured Notes

In October 2021, in preparation for the Separation, we completed the offering of $ 2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes (the “Notes”) as follows:

In October 2021, we completed the offering of $ 2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes (the “Notes”) as follows:

$ 700 million aggregate principal amount of 2.05 % Senior Notes due 2026, $ 500 million aggregate principal amount of 2.70 % Senior Notes due 2028, $ 650 million aggregate principal amount of 3.15 % Senior Notes due 2031 and $ 550 million aggregate principal amount of 4.10 % Senior Notes due 2041.

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The Notes are subject to customary affirmative covenants, negative covenants and events of default for financings of this type and are redeemable at our option in a customary manner.

In connection with the issuance of the Notes, we entered into a registration rights agreement with the initial purchasers of the Notes, pursuant to which we will use commercially reasonable efforts to file and have declared effective a registration statement with respect to a registered offer to exchange each series of Notes for new notes with substantially identical terms by October 15, 2022.

If the exchange offer is not completed on or before October 15, 2022 and, under certain other circumstances, we are required to use commercially reasonable efforts to file and have declared effective a shelf registration statement relating to the resale of the Notes.

In connection with the issuance of the Notes, we entered into a registration rights agreement with the initial purchasers of the Notes, pursuant to which we completed a registered offering to exchange each series of Notes for new notes with substantially identical terms during the quarter ended September 30, 2022.

Term Loan and Revolving Credit Facility

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Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, plus a margin, as further described in the Credit Agreements.

The total expense recorded by the Company for the Term Loan Credit Agreement and Revolving Credit Agreement was immaterial in 2021.

The Notes, revolving credit facility and term loan were initially guaranteed by Parent.

Approximately $ 900 million of the net proceeds from the term loan and the sale of the Notes was transferred to Parent in conjunction with the Separation.

Following the completion of the Separation on November 3, 2021, the guarantee was released and the Notes, term loan and revolving credit facility are no longer obligations of IBM.

The total facility fees recorded by the Company for the Term Loan Credit Agreement and Revolving Credit Agreement was $ 5 million for the year ended March 31, 2023, and immaterial for the three months ended March 31, 2022 and the years ended December 31, 2021.

As of March 31, 2023, there has been no drawdown on the Revolving Credit Agreement.

The Notes, revolving credit facility and term loan were initially guaranteed by our former Parent.

Approximately $ 900 million of the net proceeds from the term loan and the sale of the Notes was transferred to our former Parent in conjunction with the Separation.

Following the completion of the Separation on November 3, 2021, the guarantee was released and the Notes, term loan and revolving credit facility are no longer obligations of our former Parent.

We expect to be able to voluntarily prepay borrowings under the Credit Agreements without premium or penalty, subject to customary “breakage” costs.

The Credit Agreements include certain customary mandatory

prepayment provisions.

In addition, the Credit Agreements include customary events of default and affirmative and negative covenants as well as a maintenance covenant that will require that the ratio of our indebtedness for borrowed money to consolidated EBITDA (as defined in the Credit Agreements) for any period of four consecutive fiscal quarters be no greater than 3.50 to 1.00.

The Credit Agreements include certain customary mandatory prepayment provisions.

In addition, the Credit Agreements include customary events of default and affirmative and

negative covenants as well as a maintenance covenant that will require that the ratio of our indebtedness for borrowed money to consolidated EBITDA (as defined in the Credit Agreements) for any period of four consecutive fiscal quarters be no greater than 3.50 to 1.00.

The Company is in compliance with its debt covenants.

Loan Agreement

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Interest on Debt

Interest expense for the years ended December 31, 2021, 2020 and 2019 was $ 64 million, $ 63 million and $ 76 million, respectively.

Interest expense for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020 was $ 94 million, $ 21 million, $ 64 million and $ 63 million, respectively.

Cost of financing and interest capitalized for the periods presented was immaterial.

Pre-Separation, most of the interest in the Consolidated Income Statement reflects the allocation of interest expense associated with debt issued by IBM for which a portion of the proceeds benefited Kyndryl.

Such IBM debt has not been attributed to the Company for any periods presented because IBM’s borrowings were not the legal obligation of the Company, except for the loan agreement described below.

Post-Separation, interest expense also reflects the standalone interest related to our fourth quarter borrowings.

Refer to Note 17 – Related-Party Transactions for more information on the allocation of IBM’s corporate expenses.

Most of the interest for the pre-Separation period presented in the historical Consolidated Income Statement reflects the allocation of interest expense associated with debt issued by IBM from which a portion of the proceeds benefited Kyndryl.

OTHER LIABILITIES

The following table provides the components of other liabilities at December 31, 2021 and 2020.

The following table provides the components of other liabilities at March 31, 2023, March 31, 2022 and December 31, 2021.

At December 31,

(Dollars in millions)

Workforce rebalancing (current)

Other service accruals

Other current accruals

Other accrued expenses and liabilities

3 unchanged sentences

Other noncurrent liabilities

In response to changing business needs, the Company has in the past taken workforce rebalancing actions to increase productivity, enhance cost-competitiveness and rebalance skills.

The noncurrent liabilities related to workforce rebalancing actions are accruals primarily related to terminated employees who are no longer working for the Company who were granted annual payments to supplement their incomes in certain countries.

In response to changing business needs, the Company has taken workforce rebalancing actions to increase productivity, enhance cost-competitiveness and rebalance skills.

The current and noncurrent workforce rebalancing liabilities at March 31, 2022 and December 31, 2021 were derived from actions taken by the former Parent related to terminated employees who are no longer working for the Company who were granted annual payments in certain countries.

Depending on the individual country’s legal requirements, these required payments will continue until the former employee begins receiving pension benefits or dies.

Workforce rebalancing costs decreased in 2021 compared to 2020.

The workforce rebalancing liabilities at March 31, 2023 include liabilities inherited from our former Parent plus new actions taken by Kyndryl during the fiscal year.

Refer to Note 19 – Workforce Rebalancing and Site-Rationalization Charges for details.

Pursuant to the Tax Matters Agreement with our former Parent, the Company will be required to reimburse our former Parent for certain tax refunds we receive and to indemnify our former Parent for certain tax payments.

2 unchanged sentences

The Company guarantees certain loans and financial commitments.

The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at December 31, 2021, and December 31, 2020, were not material.

Additionally, the Company has contractual commitments that are noncancellable with certain software and cloud partners to provides services to its customers.

At December 31, 2021, we had short-term (in 2022), mid-term (in 2023 and 2024) and long-term (after 2024) purchase commitments in the amount of $ 0.8 billion, $ 1.5 billion and $ 1.1 billion, respectively.

The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at March 31, 2023, March 31, 2022 and December 31, 2021 were not material.

Additionally, the Company has contractual commitments that are noncancellable with certain software, hardware and cloud partners used in the delivery of services to customers.

Certain of these commitments were allocated to the Company as part of the Separation from its former Parent.

The Company has determined that these commitments may exceed the Company’s needs over the next four to six years .

If the Company is unable to satisfy, reduce or amend its contractual commitments, it will record the future charges for any payments related to excess commitments as cost of services.

At March 31, 2023, we had short-term (April 2023 through March 2024), mid-term (April 2024 through March 2026) and long-term (April 2026 onward) purchase commitments in the amount of $ 0.7 billion, $ 1.0 billion and $ 1.1 billion, respectively.

As a company with approximately 90,000 employees and with clients around the world, Kyndryl is subject to, or could become subject to, either as plaintiff or defendant, a variety of contingencies, including claims, demands and suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business.

6 unchanged sentences

In accordance with the relevant accounting guidance, the Company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible.

In addition, the Company may also disclose matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry and investor, customer and employee relations considerations.

Following the Separation from IBM, the Company has continued to analyze its ongoing disputes and outstanding claims in the context of the Separation and Distribution agreement from IBM and the avenues available for resolution post-Separation.

In connection with this assessment, in the quarter ended December 31, 2021, the Company recorded $ 62 million of estimated liabilities in anticipation of the potential resolution related to these matters.

In addition, the Company may also disclose matters based on its consideration of other matters and qualitative factors.

The Company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate) to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

4 unchanged sentences

While the Company will continue to defend itself vigorously, it is possible that the Company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

As of March 31, 2023 the Company has recorded $ 50 million and $ 24 million of current and noncurrent legal reserves, respectively.

In July 2017, BMC Software, Inc.

(“BMC”) sued IBM in the U.S.

Court for the Southern District of Texas in a dispute involving IBM’s managed infrastructure services business.

BMC alleges IBM’s removal of BMC software from one of its client’s sites at the client’s request constituted breach of contract and trade secret misappropriation.

IBM defeated BMC’s motion for injunctive relief, completed the client’s transformation project and counterclaimed for breach of contract.

In September 2021, the trial court overruled in part and granted in part the magistrate judge’s recommendations on summary judgment, dismissing IBM’s counterclaims and permitting some of BMC’s claims for damages to proceed.

The case remains pending.

The following tables present reclassifications and taxes related to items of other comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019:

(“BMC”) filed suit against IBM in the U.S.

Court for the Southern District of Texas in a dispute involving various aspects of IBM’s business, including its managed infrastructure business.

BMC alleged IBM’s removal of BMC software from one of its client’s sites at the client’s request constituted breach of contract, fraudulent inducement and trade secret misappropriation.

In May 2022, the trial court entered a judgment

against IBM and awarded BMC $ 717 million in direct damages and $ 717 million in punitive damages, plus interest.

IBM has appealed the judgment and is seeking a complete reversal on appeal.

IBM may seek an indemnity from the Company in connection with this matter.

Until there is a final and conclusive judgment in the case after all appeals and proceedings are concluded, until the amount of any applicable insurance is determined, and until a definitive assessment of Kyndryl’s indemnity obligations (if any) occurs, which in the aggregate will likely take several years, the amount of indemnity obligation (if any) that the Company may owe to IBM is indeterminate.

Separately, certain contractual disputes have arisen between Kyndryl and IBM following the Separation.

IBM and Kyndryl have commenced arbitration proceedings related to certain of these matters.

Kyndryl intends to vigorously pursue its interests and defenses in these matters, including asserting its own claims in arbitration if necessary.

The following tables present reclassifications and taxes related to items of other comprehensive income (loss) for the year ended March 31, 2023, the three months ended March 31, 2022 (transition period) and the years ended December 31, 2021 and 2020:

(Dollars in millions)

Tax (Expense)

For the year ended December 31, 2021:

For the year ended March 31, 2023

Foreign currency translation adjustments

5 unchanged sentences

Prior service (credits) costs

Net (losses) gains arising during the period

Net gains (losses) arising during the period

Curtailments and settlements

Amortization of prior service (credits) costs

Amortization of net (gains) losses

5 unchanged sentences

Tax (Expense)

For the three months ended March 31, 2022:

Foreign currency translation adjustments

Unrealized gains (losses) on cash flow hedges:

Unrealized gains (losses) arising during the period

Reclassification of (gains) losses to net income

Total unrealized gains (losses) on cash flow hedges

Retirement-related benefit plans*:

Net gains (losses) arising during the period

Curtailments and settlements

Amortization of net (gains) losses

Total retirement-related benefit plans

Other comprehensive income (loss)

* These AOCI components are included in the computation of net periodic benefit cost.

Refer to Note 16 – Retirement-Related Benefits for additional information.

(Dollars in millions)

Tax (Expense)

For the year ended December 31, 2021:

Foreign currency translation adjustments

Unrealized gains (losses) on cash flow hedges

Unrealized gains (losses) arising during the period

Reclassification of (gains) losses to net income

Total unrealized gains (losses) on cash flow hedges

Retirement-related benefit plans*:

Net (losses) gains arising during the period

Amortization of prior service (credits) costs

Prior service (credits) costs

Net gains (losses) arising during the period

Curtailments and settlements

Amortization of net (gains) losses

8 unchanged sentences

Retirement-related benefit plans*:

Prior service costs (credits)

Net (losses) gains arising during the period

Net gains (losses) arising during the period

Amortization of prior service (credits) costs

Amortization of net (gains) losses

17 unchanged sentences

December 31, 2020

Other comprehensive income (loss)**

December 31, 2020

Net transfers from Parent

1 unchanged sentence

December 31, 2021

Other comprehensive income (loss)

March 31, 2022

Other comprehensive income (loss)

March 31, 2023

Foreign currency translation adjustments are presented gross.

No amounts were reclassified from accumulated other comprehensive income.

STOCK-BASED COMPENSATION

7 unchanged sentences

Stock-based compensation cost, net of tax

The Company’s total unrecognized compensation cost related to non-vested awards at December 31, 2021 was $ 235 million and is expected to be recognized over a weighted-average period of approximately 2.7 years.

If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel all or a portion of the remaining unearned stock-based compensation expense.

Future unearned stock-based compensation will increase to the extent the Company grants additional equity awards, changes incentive awards terms, or assumes unvested equity awards in connection with acquisitions.

Capitalized stock-based compensation cost was not material at December 31, 2021, 2020 and 2019.

The Company’s total unrecognized compensation cost related to non-vested awards at March 31, 2023 was $ 165 million and is expected to be recognized over a weighted-average period of approximately 2.2 years.

Capitalized stock-based compensation cost was not material during any period presented.

Incentive Awards

Stock-based incentive awards were provided to employees under the terms of Kyndryl’s employment and the long-term performance plans (the “Plans” or “LTPP”).

Awards under the Plans principally include Restricted Stock Units (RSUs), market-conditioned performance awards (launch PSUs) and stock options.

Stock-based incentive awards were provided to employees under the terms of Kyndryl’s employment and Kyndryl Plan.

Awards under the Kyndryl Plan principally include Restricted Stock Units (RSUs), market-conditioned and performance-conditioned stock units and stock options.

RSUs and stock options generally vest based on continued passage of time.

Market-conditioned performance awards are cliff-vested at the end of the service period.

The following table summarizes RSU, market-conditioned performance award and stock option activities:

Market-conditioned and performance-conditioned stock units are cliff-vested at the end of the performance period if the market or performance conditions have been satisfied.

The following table summarizes RSU, market-conditioned stock units, performance-conditioned stock units and stock option activities:

Market-Conditioned

Performance Awards

Performance-Conditioned

(in millions)

Balance at December 31, 2020

Awards converted from IBM programs

(in millions)

Nonvested balance at December 31, 2021

Awards granted

1 unchanged sentence

Awards canceled/forfeited

Balance at December 31, 2021

Nonvested balance at March 31, 2022

Awards granted

Awards vested

Awards canceled/forfeited

Nonvested balance at March 31, 2023

Stock Options

1 unchanged sentence

(in millions)

Term (in years)

Balance at December 31, 2020

Awards converted from IBM programs

Outstanding balance at December 31, 2021

Awards granted

Awards vested

Awards exercised

Awards canceled/forfeited

Balance at December 31, 2021

NM – not meaningful;

stock options from former Parent were fully vested in 2019.

The weighted-average grant date fair value of RSUs granted for the years ended December 31, 2021, 2020 and 2019 was $ 18 , $ 117 and $ 123 , respectively.

The weighted-average grant price prior to Separation used in the assessment was derived from the Parent’s stock price at grant.

The aggregate fair value (which is based on the stock price at grant date) of restricted stock units (including former Parent’s PSUs converted to RSUs) vested was $ 45 million, $ 36 million and $ 34 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Outstanding balance at March 31, 2022

Awards granted

Awards exercised

Awards canceled/forfeited

Outstanding balance at March 31, 2023

The weighted-average grant-date fair value of RSUs granted by Kyndryl for the years ended March 31, 2023, the three months ended March 31, 2022 (transition period) and the post-Separation period in the year ended December 31, 2021 was $ 10.80 , $ 17.61 and $ 18.20 , respectively.

Prior to the Separation, the weighted-average grant-date fair value of RSUs and PSUs granted by our former Parent was $ 126.01 and $ 114.70 for the pre-Separation period in the year ended December 31, 2021 and for the year ended December 31, 2020, respectively, which were derived from our former Parent’s stock price at their grant dates.

On the Separation date, such awards were converted to Kyndryl awards, resulting in a weighted-average grant-date fair value of $ 28.78 per share.

The grant date fair value of the market-conditioned stock units issued during the years ended March 31, 2023 and December 31, 2021 were determined using Monte Carlo simulation models which estimate the probability of satisfying market conditions.

The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended March 31, 2023 were a share price of $ 10.89 , a risk-free rate of 2.85 %, no dividend yield, and a volatility of 39 %.

The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended December 31, 2021 were a share price of $ 18.31 , a term structure of risk-free rates of 0.26 % for one year, 0.64 % for two years and 0.92 % for three years, no dividend yield, and a volatility of 35 %.

For the year ended March 31, 2023 and December 31, 2021, the volatility assumptions used in the Monte Carlo simulations were based on the average unadjusted three-year historic volatility across a group of peer companies.

The grant date fair value of performance-conditioned stock units issued during the year ended March 31, 2023 was $ 10.62 , determined using the stock price at the grant date, and is recognized as stock-based compensation expense based upon the probability of achievement of performance targets at each reporting period over the vesting period.

The total fair value of RSUs, market-conditioned stock units and performance-conditioned stock units that vested during the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020 was $ 127 million, $ 15 million, $ 45 million and $ 36 million, respectively.

The weighted-average grant date fair value of stock options granted during the year ended December 31, 2021 was $ 6.54 per share.

No stock options were granted in any other period presented.

The weighted-average remaining contractual term for stock options outstanding at March 31, 2023 and March 31, 2022 was 8.7 and 9.7 , respectively, with immaterial aggregate intrinsic value.

The weighted-average remaining contractual term for stock options exercisable at March 31, 2023 and 2022 was 2.1 and 3.1 years, respectively.

During the year ended March 31, 2023, the total fair value of shares vested was $ 6 million.

There was no vesting during the three months ended March 31, 2022 or during the years ended December 31, 2021 or 2020.

No stock options were exercised during any period presented.

At March 31, 2023, there were 1.1 million stock options that were vested and exercisable with an immaterial aggregate intrinsic value.

The method used to determine the fair value of the stock options granted during the year ended December 31, 2021 was a Black-Scholes model on the grant date.

The assumptions used to produce the fair value of stock options issued during the year ended December 31, 2021 were the share price on the date of issuance, weighted-average expected option term of 6.25 years, no dividend yield, volatility of 35 % and a risk-free interest rate of 1.4 %.

The volatility assumption used was based on the average unadjusted historic volatility of common shares across a group of peer companies.

The Company utilized the simplified method to estimate the weighted-average option term due to a lack of relevant historical data.

RETIREMENT-RELATED BENEFITS

Description of Plans

The Company sponsors and co-sponsors defined benefit pension plans and other nonpension postretirement benefit plans that cover certain non-U.S.

Defined Benefit Pension Plans

The Company sponsors and co-sponsors defined benefit pension plans that cover certain non-U.S.

employees and retirees.

2 unchanged sentences

Accordingly, the net benefit plan obligations and the related benefit plan expenses of those plans have been recorded in the Company’s consolidated financial statements.

The nonpension postretirement benefit plans provide a fixed monthly dollar credit for retiree health care expense.

The benefit obligation and related expenses for these plans are included in the consolidated financial statements.

Additionally, certain Company employees participate in multi-employer defined benefit pension plans and post-retirement health plans which are sponsored by third parties and include other participants as well as defined contribution plans that are sponsored by the Company.

Accordingly, the Company does not record an asset or liability to recognize the funded status of the multi-employer plans.

However, the Company records service cost and defined contribution cost attributable to its employees who participate in the multi-employer and the defined contribution plans, as well as expense allocated for certain corporate and shared functional employees.

These amounts are included in the Consolidated Income Statement.

Plan Financial Information

The following tables present the components of net periodic benefit cost for the retirement-related benefit plans recognized in the Consolidated Income Statement, excluding defined contribution plans.

The following tables present the components of net periodic pension cost for the defined benefit pension plans recognized in the Consolidated Income Statement.

(Dollars in millions)

Defined Benefit Pension Plans

Nonpension Postretirement Benefit Plans

For the year ended December 31:

Interest cost*

3 unchanged sentences

Curtailments and settlements*

Multi-employer plans and other costs**

Total net periodic benefit cost

* These components of net periodic benefit cost are included in other (income) and expense in the Consolidated Income Statement.

Multi-employer plan costs represent required contributions for the period to multi-employer plans, which are plans sponsored by third parties.

The Company recognizes expense in connection with these plans as contributions are funded.

The following table presents the changes in net benefit obligation and plan assets, excluding defined contribution plans and multi-employer plans.

Defined Benefit

Nonpension Postretirement

Pension Plans

Benefit Plans

Total net periodic pension cost

* These components of net periodic pension cost are included in other expense in the Consolidated Income Statement.

The following table presents the changes in net benefit obligation and plan assets for the defined benefit pension plans.

(Dollars in millions)

Change in benefit obligation

Benefit obligation at January 1

Benefit obligation at beginning of period

Service cost*

7 unchanged sentences

Amendments, curtailments, settlements and other

Benefit obligation at December 31

Benefit obligation at end of period

Change in plan assets

Fair value of plan assets at January 1

Fair value of plan assets at beginning of period

Actual return on plan assets

4 unchanged sentences

Foreign exchange impact

Fair value of plan assets at December 31

Funded status at December 31

Fair value of plan assets at end of period

Funded Status at end of period

Accumulated benefit obligation***

2 unchanged sentences

Represents the benefit obligation assuming no future participant compensation increases.

The following table presents the amounts recorded in the Consolidated Balance Sheet.

Defined Benefit

Nonpension Postretirement

Pension Plans

Benefit Plans

The following table presents the amounts recorded in the Consolidated Balance Sheet for the defined benefit pension plans.

At December 31,

(Dollars in millions)

3 unchanged sentences

Funded status, net

The following table presents information for defined benefit plans with accumulated benefit obligations (ABO) or projected benefit obligations (PBO) in excess of plan assets.

At December 31, 2021

The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) or projected benefit obligations (PBO) in excess of plan assets.

At March 31, 2023

At March 31, 2022

At December 31, 2021

3 unchanged sentences

Plan assets in excess of PBO

The following table presents information for the nonpension postretirement benefit plans with accumulated postretirement benefit obligations (APBO) in excess of plan assets.

At December 31, 2021

At December 31, 2020

(Dollars in millions)

APBO in excess of plan assets

Plan assets in excess of APBO

The following table presents the pretax net loss and prior service costs (credits) recognized in OCI and the changes in pretax net loss and prior service costs (credits) as well as Separation-related transfers from Parent recognized in AOCI for the retirement-related benefits plans.

Defined Benefit

Nonpension Postretirement

Pension Plans

Benefit Plans

(Dollars in millions)

Net loss (gain) at January 1

Net loss (gain) at beginning of period

Current period loss (gain)

2 unchanged sentences

Separation-related transfers from Parent **

Net loss (gain) at December 31

Prior service costs (credits) at January 1

Net loss (gain) at end of period

Prior service costs (credits) at beginning of period

Current period prior service costs (credits)

1 unchanged sentence

Separation-related transfers from Parent **

Prior service costs (credits) at December 31

Prior service costs (credits) at end of period

Total amounts recognized in accumulated other comprehensive loss (income) *

See Note 14 - Equity for the total change in AOCI and the Consolidated Statement of Comprehensive Income for the components of net periodic benefit cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.

See Note 14 – Equity for the total change in AOCI and the Consolidated Statement of Comprehensive Income for the components of net periodic benefit cost, which includes components related to nonpension postretirement benefit plans as well as the related tax effects, recognized in OCI for the retirement-related benefit plans.

Separation-related transfers from Parent represent the pretax impact resulting from the assumption of pension assets and liabilities, along with the associated deferred costs, in connection with establishment of certain Kyndryl legal entities.

2 unchanged sentences

See Note 14 – Equity.

The following table presents the weighted-average assumptions used to measure the net periodic benefit cost and the year-end benefit obligations.

Defined Benefit

Nonpension Postretirement

Pension Plans

Benefit Plans

The following table presents the weighted-average assumptions used to measure the net periodic pension cost and the year-end benefit obligations for the defined benefit pension plans.

Weighted-average assumptions used to measure

Net periodic benefit cost

Net periodic pension cost

Discount rate

5 unchanged sentences

Interest crediting rate - cash balance plans

In certain countries, a portfolio of high-quality corporate bonds is used to construct a yield curve.

Cash flows from the Company’s expected benefit obligation payments are matched to the yield curve to derive discounts.

In certain countries, a hypothetical portfolio of high-quality corporate bonds is used to construct a yield curve.

Projected cash flows from the Company’s expected benefit obligation payments are matched to the yield curve to derive discounts.

In other countries where the markets for high-quality long-term bonds are not as well developed, a portfolio of long-term government bonds is used as a base and a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan.

2 unchanged sentences

The use of expected returns may result in pension income that is greater or less than the actual return of those plan assets in a given year.

Over time, however, the expected rate of return is expected to

approximate the actual long-term results, leading to a pattern of income or loss recognition that more closely matches the pattern of services provided by the employees.

For the nonpension postretirement benefit plans, the Company reviews external data to determine the healthcare costs trends.

The healthcare cost trend rates have an insignificant effect on plan costs or other benefit obligations due to terms of the plan which limit the Company’s obligation to the participants.

Investment Policies and Strategies

The investment objective of the plan assets is to generate returns that will enable the plan to meet its future obligations.

Over time, however, the expected rate of return is expected to approximate the actual long-term results, leading to a pattern of income or loss recognition that more closely matches the pattern of services provided by the employees.

The investment objective of the defined benefit plans is to generate returns that will enable the plan to meet its future obligations.

The weighted-average target allocation for the defined benefit plans is 28 percent equity securities, 43 percent fixed-income securities, 5 percent real estate, 15 percent insurance contracts and 8 percent other investments.

1 unchanged sentence

Generally, these defined benefit plans do not invest in illiquid assets, and their use of derivatives is mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies.

Plan Assets and Fair Value Measurements

The following table presents the Company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2021 and 2020.

December 31, 2021

December 31, 2020

The following table presents the Company’s defined benefit pension plans’ asset classes and their associated fair value at March 31, 2023, March 31, 2022 and December 31, 2021.

At March 31, 2023

At March 31, 2022

(Dollars in millions)

7 unchanged sentences

Fair value of plan assets

At December 31, 2021

(Dollars in millions)

Equity securities

Government and related (1)

Corporate bonds

Insurance contracts

Cash and short-term investments (2)

Derivative assets (3)

Investments measured at net asset value using NAV as a practical expedient (4)

Fair value of plan assets

Includes debt issued by national, state and local governments and agencies.

4 unchanged sentences

include commingled funds, hedge funds, common collective trusts, private equity partnerships and real estate partnerships.

For the year ended December 31, 2021, there were no plan assets in the nonpension postretirement benefit plans.

For the year ended December 31, 2020, the nonpension postretirement benefit plans held plan assets of $ 13 million, invested in government debt and corporate bonds categorized as Level 2 in the fair value hierarchy.

Approximately 78 % of plan assets are held in plans which are co-sponsored by the Company along with IBM.

Approximately 79 percent of plan assets are held in plans which are co-sponsored by the Company and the former Parent.

The allocation of the fair value of co-sponsored plan assets is based on the initial pension assets assumed in connection with establishment of certain Kyndryl legal entities, Company contributions, distributions and market returns.

Retirement-related benefit plan assets are recognized and measured at fair value.

Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the Company could

realize in current market transactions.

Defined benefit pension plan assets are recognized and measured at fair value.

Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the Company could realize in current market transactions.

The following is a description of the valuation techniques used to measure plan assets at fair value.

26 unchanged sentences

The NAV is based on the value of the underlying assets owned by the fund, minus liabilities multiplied by the plan’s ownership of the investment.

Contributions and Direct Benefit Payments

It is the Company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws.

From time to time, the Company contributes additional amounts as it deems appropriate.

The following table presents the contributions made to the defined benefit pension plan, nonpension postretirement benefit plans, multi-employer plans, defined contribution plans and direct payments made in 2021, 2020 and 2019.

The cash contributions to the multi-employer plans represent the annual cost included in the net periodic benefit cost recognized in the Consolidated Income Statement.

Year Ended December 31,

(Dollars in millions)

Defined benefit plans

Multi-employer plans*

Defined contribution plans

Direct payments

Multi-employer plans are sponsored by third parties.

Contributions to nonpension postretirement benefit plans were not material for any periods presented.

Prior to September 1, 2021, certain U.S.

employees were eligible to participate in the IBM 401(k) Plus Plan, which provided matching contributions up to 6 % of eligible pay.

On September 1, 2021, employees who participated in the IBM 401(k) Plus Plan were transferred to the Kyndryl 401(k) Plan and eligible to continue to receive matching contributions up to 6 % of eligible pay.

For all eligible employees hired or rehired on or after September 1, 2021, the Kyndryl 401(k) Plan provides a matching contribution of up to 3 % of eligible pay.

The Company estimates contributions to its defined benefit and multi-employer plans in 2022 to be approximately $ 29 million, the largest of which will be contributed to a defined benefit plan in Spain.

The company contributed $ 27 million, $ 2 million, $ 25 million and $ 4 million to the defined benefit pension plans during the year ended March 31, 2023, the three months ended March 31, 2022, and the years ended December 31, 2021 and 2020, respectively.

Additionally, the Company made direct payments of $ 37 million, $ 11 million, $ 33 million and $ 19 million to participants of the defined benefit pension plans during the year ended March 31, 2023, the three months ended March 31, 2022, and the years ended December 31, 2021 and 2020, respectively.

The Company estimates contributions to its defined benefit pension plans in fiscal year 2024 to be approximately $ 23 million.

This amount generally represents legally mandated minimum contributions.

Financial market performance in 2022 could increase the legally mandated minimum contribution in certain countries that require monthly or daily remeasurement of the funded status.

Financial market performance in fiscal year 2024 could increase the legally mandated minimum contribution in certain countries that require monthly or daily remeasurement of the funded status.

The Company could also elect to contribute more than the legally mandated amount based on market conditions or other factors.

Expected Benefit Payments – Defined Benefit Pension Plans and Nonpension Postretirement Benefit Plans

The following table presents the total expected benefit payments to participants of both the defined benefit pension plans and nonpension postretirement benefit plans.

Defined Benefit

Postretirement

The following table presents the expected benefit payments to participants of the defined benefit pension plans.

(Dollars in millions)

Pension Plans

Benefit Plans

The 2022 expected benefit payments not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.

RELATED-PARTY TRANSACTIONS

Related-Party Revenue and Purchases

Benefit Payments

Fiscal year ending March 31,

The fiscal year 2024 expected benefit payments not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.

Defined Contribution Retirement Plans

The Company sponsors defined contribution retirement plans for certain eligible employees.

The Company’s contribution expense associated with employer matching benefits was $ 142 million, $ 35 million, $ 165 million and $ 194 million for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, respectively.

Nonpension Postretirement Benefit Plans and Multi-Employer Plans

Certain Company employees participate in multi-employer defined benefit pension plans and post-retirement health plans which are sponsored by third parties and include other participants as well as other nonpension postretirement benefit plans that are sponsored by the Company.

Accordingly, the Company does not record an asset or liability to recognize the funded status of the multi-employer plans.

However, the Company records service cost attributable to its employees who participate in the multi-employer plans, as well as expense allocated for certain corporate and shared functional employees.

These amounts are included in the Consolidated Income Statement, and were not material for any of the periods presented.

The nonpension postretirement benefit plans provide a fixed monthly dollar credit for retiree health care expense.

The related expenses for these plans are included in the consolidated financial statements, and were not material for any period presented.

Contributions to the nonpension postretirement benefit plans and the multi-employer plans and components of net periodic benefit cost related to these plans and were not material for any period presented.

Additionally, the components resulting in a change in benefit obligation and the activity recognized in AOCI related to the nonpension postretirement benefit plans were not material for the periods presented.

The nonpension postretirement benefit plans had a noncurrent liability recorded in the retirement and nonpension postretirement benefit obligation Consolidated Balance Sheet of $ 10 million, $ 17 million and $ 19 million at March 31, 2023, March 31, 2022 and December 31, 2021, respectively.

The weighted-average discount rate used to measure the nonpension postretirement benefit plan obligation was 3.02 %, 1.23 %, 1.04 % and 8.31 % for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, respectively.

There were no plan assets in the nonpension postretirement benefit plans for any period presented.

As a result, the noncurrent liability related to these plans represented the accumulated postretirement benefit obligation in excess of plan assets for each period presented.

Future expected benefit payments to participants of the nonpension postretirement benefit plans are not expected to be material, and the Company expects contributions to the multi-employer and nonpension postretirement benefits plans to be not material in fiscal year 2024.

TRANSACTIONS WITH FORMER PARENT

Change in Beneficial Ownership

IBM transferred all of its 19.9 % retained interest in Kyndryl common stock to a third-party financial institution through exchange agreements in May and August 2022.

IBM ceased to be a related party of Kyndryl in August 2022.

Transactions related to former Parent after August 11, 2022 are no longer reported as related-party activities.

As a result, there was no related-party revenue or cost of services recognized subsequent to August 11, 2022.

Revenue and Purchases Related to Former Parent

Kyndryl provides various services to IBM, including those related to hosting data centers and servicing IBM’s information technology infrastructure, which are reported as revenue in the Company’s Consolidated Income Statement.

Revenue generated from these services was $ 704 million, $ 645 million and $ 613 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Related-party revenue generated from these services was $ 287 million, $ 236 million, $ 704 million and $ 645 million for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, respectively.

No related-party revenue was recognized after August 2022.

Kyndryl utilizes various IBM products and services, recognized as costs of services, in the fulfillment of services contracts.

Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $ 4.0 billion, $ 3.8 billion and $ 3.6 billion for the years ended December 31, 2021, 2020 and 2019, respectively.

Included in these related-party cost of services were:

costs incurred by Kyndryl to provide services to the former Parent for networking and IT services prior to Separation in the amounts of $ 384 million, $ 509 million and $ 484 million for the years ended December 31, 2021, 2020 and 2019, respectively;

costs related to the usage of IBM-branded software allocated to Kyndryl by the former Parent prior to Separation in the amounts of $ 2.8 billion, $ 2.7 billion and $ 2.6 billion for the years ended December 31, 2021, 2020 and 2019, respectively;

depreciation charges related to IBM hardware allocated to Kyndryl prior to Separation in the amounts of $ 447 million, $ 520 million and $ 538 million for the years ended December 31, 2021, 2020 and 2019, respectively;

and costs related to services provided to Kyndryl’s customers that were outsourced to IBM post-Separation in the amount of $ 312 million during the fourth quarter of 2021.

The capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Company’s Consolidated Statement of Cash Flows in the amounts of $ 299 million, $ 504 million and $ 526 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $ 1.4 billion, $ 924 million, $ 4.0 billion and $ 3.8 billion for the year ended March 31, 2023, the

three months ended March 31, 2022, and the years ended December 31, 2021 and 2020, respectively.

No related-party cost of services was recognized after August 2022.

Capital Expenditures with Former Parent

Related-party capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Company’s Consolidated Statement of Cash Flows in the amounts of $ 89 million, $ 25 million, $ 299 million and $ 504 million for the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, respectively.

Additionally, as part of the Separation, IBM has committed to provide Kyndryl, at no cost, up to approximately $ 265 million of upgraded hardware over an expected two-year period.

The amounts committed by IBM are reflected within other assets (noncurrent) within the Consolidated Balance Sheet at December 31, 2021.

The expected average useful life of the upgraded hardware is approximately five years , and the Company intends to recognize total depreciation approximating $ 265 million over the useful life, consistent with our depreciation policy.

Acquired Intangible Assets

Within the historical periods presented, the Company has been charged a management fee for the use of certain acquired intangible assets by IBM for acquisitions which were not specific to Kyndryl.

The amounts reflected within cost of services on the Consolidated Income Statement for these fees were $ 26 million, $ 31 million and $ 15 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The amounts for these fees reflected within Selling, general and administrative expense within the Consolidated Income Statement were $ 37 million, $ 49 million and $ 23 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The amounts committed by IBM are reflected within other assets (noncurrent) within the Consolidated Balance Sheet at March 31, 2023.

For the year ended March 31, 2023, $ 84 million of the upgraded hardware committed by IBM was delivered to Kyndryl.

Accordingly, such balance was transferred from other assets (noncurrent) to property and equipment on the Balance Sheet and recognized as non-cash investing activity.

The Company intends to recognize depreciation expense related to such equipment over its useful life of five years , consistent with its depreciation policy.

Allocation of Corporate Expenses

The Consolidated Income Statement, Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows include an allocation of general corporate expenses from IBM prior to the Separation.

The financial information in these consolidated financial statements does not necessarily include all of the expenses that would have been incurred by Kyndryl had it been a separate, standalone company.

It is not practicable to estimate actual costs that would have been incurred had Kyndryl been a standalone company during the periods presented.

Allocations for management costs and corporate support services provided to Kyndryl for the years ended December 31, 2021, 2020 and 2019 totaled $ 1.0 billion, $ 1.3 billion and $ 1.2 billion, respectively.

These amounts include costs for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services.

Following the Separation, general corporate expenses from IBM are no longer allocated to Kyndryl;

therefore, no related amounts were reflected on the Company’s financial statements for the year ended March 31, 2023 or the three months ended March 31, 2022.

Prior to the Separation, IBM allocated certain general corporate expenses that would have been incurred by Kyndryl had it been a separate, standalone company.

These allocated general corporate expenses from IBM were recorded in the historical Consolidated Income Statement, Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows.

Allocations for management costs and corporate support services provided to Kyndryl for the year ended December 31, 2021 were $ 989 million, which consisted of $ 10 million of allocated other expense, $ 46 million of allocated interest expense and $ 932 million of allocated selling, general and administrative expense.

Allocations for management costs and corporate support services provided to Kyndryl for the year ended December 31, 2020 were $ 1.3 billion, which consisted of $ 4 million of allocated other expense, $ 63 million of allocated interest expense and $ 1.2 billion of allocated selling, general and administrative expense.

Allocated selling, general and administrative expense primarily represents expenses for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services.

All such amounts have been deemed to have been incurred and settled by Kyndryl in the period in which the costs were recorded and are included in the net Parent investment.

These costs were allocated based on direct usage as applicable, with the remainder allocated on a pro-rata basis of gross profit, headcount, assets or other measures.

The following table presents the components of the allocation of general corporate expenses from IBM.

For the Year Ended December 31,

(Dollars in millions)

Selling, general and administrative expense

Interest expense

Other (income) and expense

Total expense and other (income)

Net Parent Investment

Prior to the Separation, related-party transactions between Kyndryl and IBM were included within Net Parent investment in the Consolidated Balance Sheet as these related-party transactions were not settled in cash.

Net Parent investment in the Consolidated Balance Sheet and Consolidated Statement of Changes in Equity represents IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM and Kyndryl’s accumulated earnings.

Net transfers from IBM are included within Net Parent investment.

The components of Net

transfers from IBM and the reconciliation to the corresponding amount presented on the Consolidated Statement of Cash Flows were as follows:

For the Year Ended December 31,

(Dollars in millions)

Cash pooling and general financing activities/other

Allocation of Parent’s corporate expenses/other

Related-party sales and purchases

Related-party intangible assets fee

Issuance of common stock and reclassification of net parent investment

Total Net transfers (to) from Parent per Consolidated Statement of Equity

Allocation of Parent’s stock-based compensation

Total Net transfers (to) from Parent per Consolidated Statement of Cash Flows

Approximately $ 900 million of the net proceeds from the term loan and the sale of the Notes was transferred to IBM in conjunction with the Separation.

See Note 11 – Borrowings.

As a result of the Separation, net Parent investment in the Consolidated Balance Sheet and Consolidated Statement of Equity was fully settled on November 3, 2021.

As such, there was no balance in net Parent investment at December 31, 2021, March 31, 2022 and March 31, 2023, and there was no activity within the account during the three months ended March 31, 2022 and the year ended March 31, 2023.

Prior to the Separation, net Parent investment in the historical Balance Sheet and Statement of Equity represented IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM, and Kyndryl’s accumulated earnings.

During the years ended December 31, 2021 and 2020, there were non-cash transfers of $ 30 million to Parent and $ 377 million from Parent, respectively, which included income taxes, allocation of Parent’s stock-based compensation, depreciation and other non-cash items.

Assignment of Receivables

A portion of Kyndryl’s receivables with extended payment terms have historically been assigned to IBM’s Global Financing business.

These receivables were not recognized on the Company’s Consolidated Balance Sheet.

The gross amounts of Kyndryl receivables assigned to IBM Global Financing were $ 1.9 billion, $ 3.1 billion and $ 3.0 billion for the years ended December 31, 2021, 2020 and 2019, respectively.

Prior to the Separation, a portion of Kyndryl’s receivables with extended payment terms were assigned to IBM’s Global Financing business.

These receivables were not recognized on the Company’s Consolidated Balance

The gross amounts of Kyndryl receivables assigned to IBM Global Financing was $ 1.9 billion for the year ended December 31, 2021.

The fees and the net gains and losses associated with the assignment of receivables were not material for any of the periods presented.

In October 2021, in preparation for the Separation, the Company entered into a Receivables Purchase Agreement with an unaffiliated bank with capacity similar to the amounts historically financed by IBM.

Software Purchase Agreements

In conjunction with the Separation, Kyndryl has agreed to purchase IBM software for internal use and the delivery of services to Kyndryl customers in a pricing arrangement with IBM that extends through 2026, subject to adjustment in certain circumstances, including the termination of customer contracts.

As a result, there was no assignment of Kyndryl receivables for the year ended March 31, 2023 and the three months ended March 31, 2022.

Lease Guarantees

Kyndryl identified 71 lease agreements with third parties with an estimated aggregate lease liability guaranteed by IBM of $ 181 million.

SUBSEQUENT EVENTS

On January 27, 2022, the Board of Directors approved a change in the Company’s fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31.

The Company will file a transition report on Form 10-QT for the three-month period ended March 31, 2022, in accordance with SEC rules and regulations.

All subsequent fiscal years for the Company will be from April 1 to March 31.

The Company is making the fiscal year change on a prospective basis and will not adjust operating results for prior periods.

Kyndryl has lease agreements with third parties with an estimated aggregate lease liability of $ 79 million that are guaranteed by IBM as of March 31, 2023.

TRANSITION PERIOD

We are presenting our consolidated financial statements for the three-month period ended March 31, 2022, as required.

The following tables provide certain unaudited comparative financial information for the same period of the prior year.

Three Months Ended March 31,

(In millions, except per share amounts)

2021 (unaudited)

Cost of services **

Selling, general and administrative expenses

Workforce rebalancing charges

Transaction-related costs

Interest expense

Other expenses

Total costs and expenses

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Basic earnings (loss) per share

Diluted earnings (loss) per share

Weighted-average basic shares outstanding

Weighted-average diluted shares outstanding

* Including related-party revenue of $ 236 million and $ 154 million for the three months ended March 31, 2022 and 2021, respectively

** Including related-party cost of services of $ 924 million and $ 1,006 million for the three months ended March 31, 2022 and 2021, respectively

Three Months Ended March 31,

(Dollars in millions)

2021 (unaudited)

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Depreciation and amortization

Depreciation of property and equipment

Depreciation of right-of-use assets

Amortization of transition costs and prepaid software

Amortization of capitalized contract costs

Amortization of intangible assets

Stock-based compensation

Deferred taxes

Net (gain) loss on asset sales and other

Change in operating assets and liabilities:

Deferred costs (excluding amortization)

Right-of-use assets and liabilities (excluding depreciation)

Workforce rebalancing liabilities

Accounts payable

Taxes (including items settled with former Parent in prior-year period)

Other assets and other liabilities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Payments for property and equipment

Proceeds from disposition of property and equipment

Other investing activities, net

Net cash used in investing activities

Cash flows from financing activities:

Debt repayments

Net transfers from Parent

Common stock repurchases for tax withholdings

Other financing activities, net

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net change in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at January 1

Cash, cash equivalents and restricted cash at March 31

Supplemental data

Income taxes paid, net of refunds received

Interest paid on debt

WORKFORCE REBALANCING AND SITE-RATIONALIZATION CHARGES

During the year ended March 31, 2023, management initiated actions to reduce our overall cost structure and increase our operating efficiency.

These actions gave rise to workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and lease termination charges.

We expect the total charges to be incurred for this program to be approximately $ 270 million, consisting of $ 150 million in workforce rebalancing charges and $ 120 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

The Company expects that these actions will reduce future payroll costs, rent expenses and depreciation of property and equipment.

We will continue to seek opportunities to improve operational efficiency and reduce costs, which may result in additional charges in future periods.

The following table presents the segment breakout of charges incurred during the year ended March 31, 2023.

(Dollars in millions)

March 31, 2023

United States

Principal Markets

Strategic Markets

Total charges by segment

Corporate charges not allocated to the segments

Total charges

The following table presents the classification of workforce rebalancing and site-rationalization activity in the Consolidated Income Statement during the year ended March 31, 2023.

(Dollars in millions)

March 31, 2023

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges (benefits)

Total charges

The following table presents the components of and changes in our workforce rebalancing and site-rationalization charges accrual during the year ended March 31, 2023.

Ceasing to Use

Company-owned

(Dollars in millions)

Leased Assets

Balance at March 31, 2022

Cash payments

Non-cash adjustments

Balance at March 31, 2023

* Excludes workforce rebalancing liabilities inherited from the former Parent of $ 57 million as of March 31, 2022, charges of $ 16 million related to one-off terminations, cash payments of $ 32 million, and ending balance of $ 42 million as of March 31, 2023.

Workforce rebalancing liabilities are recorded within Other Liabilities;

refer to Note 12 – Other Liabilities for further details.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data