Kyndryl Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data: ​ Index to Consolidated Financial Statements ​ ​ ​ Page ​ ​ Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 52 Consolidated Income Statement for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022 55 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 56 Consolidated Balance Sheet as of March 31, 2023 and 2022, and December 31, 2021 57 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 58 Consolidated Statement of Equity for the Years Ended March 31, 2023, December 31, 2021 and 2020 and the Three Months Ended March 31, 2022 59 Notes to Consolidated Financial Statements 60 ​ ​ ​ ​ 51 Table of Contents Report of Independent Registered Public Accounting Firm ​ To the Board of Directors and Stockholders of Kyndryl Holdings, Inc. ​ 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 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. 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 52 Table of Contents 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 ​ The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. 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 - 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 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 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; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were 53 Table of Contents 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 May 26, 2023 ​ We have served as the Company’s auditor since 2020. ​ ​ ​ ​ 54 Table of Contents KYNDRYL HOLDINGS, INC. CONSOLIDATED INCOME STATEMENT (In millions, except per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, ​ Notes 2023 2022 2021 2020 Revenues * ​ 3 ​ $ 17,026 ​ $ 4,431 ​ $ 18,657 ​ $ 19,352 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of services ** ​ 3 ​ $ 14,498 ​ $ 3,824 ​ $ 16,550 ​ $ 17,137 Selling, general and administrative expenses ​ ​ ​ ​ 2,914 ​ ​ 690 ​ ​ 2,776 ​ ​ 2,948 Workforce rebalancing charges ​ 19 ​ ​ 71 ​ ​ — ​ ​ 39 ​ ​ 918 Transaction-related costs ​ ​ ​ ​ 264 ​ ​ 58 ​ ​ 627 ​ ​ 21 Impairment expense ​ 10 ​ ​ — ​ ​ — ​ ​ 469 ​ ​ — Interest expense ​ 11 ​ ​ 94 ​ ​ 21 ​ ​ 64 ​ ​ 63 Other expense ​ ​ ​ ​ 35 ​ ​ 27 ​ ​ 35 ​ ​ 25 Total costs and expenses ​ ​ ​ $ 17,876 ​ $ 4,620 ​ $ 20,560 ​ $ 21,112 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ ​ ​ $ ( 851 ) ​ $ ( 189 ) ​ $ ( 1,903 ) ​ $ ( 1,760 ) Provision for income taxes ​ 5 ​ $ 524 ​ $ 40 ​ $ 402 ​ $ 247 Net income (loss) ​ ​ ​ $ ( 1,374 ) ​ $ ( 229 ) ​ $ ( 2,304 ) ​ $ ( 2,007 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings (loss) per share ​ 6 ​ $ ( 6.06 ) ​ $ ( 1.02 ) ​ $ ( 10.28 ) ​ $ ( 8.96 ) Diluted earnings (loss) per share ​ ​ ​ ​ ( 6.06 ) ​ ​ ( 1.02 ) ​ ​ ( 10.28 ) ​ ​ ( 8.96 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average basic shares outstanding ​ 6 ​ ​ 226.7 ​ ​ 224.4 ​ ​ 224.1 ​ ​ 224.1 Weighted-average diluted shares outstanding ​ ​ ​ ​ 226.7 ​ ​ 224.4 ​ ​ 224.1 ​ ​ 224.1 ​ * 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. ​ ​ 55 Table of Contents KYNDRYL HOLDINGS, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, ​ 2023 2022 2021 2020 Net income (loss) ​ $ ( 1,374 ) ​ $ ( 229 ) ​ $ ( 2,304 ) ​ $ ( 2,007 ) Other comprehensive income (loss), before tax: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign currency translation adjustments ​ ​ ( 186 ) ​ ​ ( 51 ) ​ ​ 194 ​ ​ 129 Unrealized gains (losses) on cash flow hedges: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ ​ ( 4 ) ​ ​ 1 ​ ​ 4 ​ ​ — Reclassification of (gains) losses to net income ​ ​ 2 ​ ​ ( 1 ) ​ ​ ( 1 ) ​ ​ — Total unrealized gains (losses) on cash flow hedges ​ ​ ( 3 ) ​ ​ — ​ ​ 3 ​ ​ — Retirement-related benefit plans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Prior service costs (credits) ​ ​ 4 ​ ​ — ​ ​ 1 ​ ​ — Net gains (losses) arising during the period ​ ​ 175 ​ ​ 136 ​ ​ 72 ​ ​ ( 41 ) Curtailments and settlements ​ ​ 10 ​ ​ 4 ​ ​ 3 ​ ​ — Amortization of prior service (credits) costs ​ ​ 1 ​ ​ — ​ ​ — ​ ​ ( 1 ) Amortization of net (gains) losses ​ ​ 40 ​ ​ 16 ​ ​ 51 ​ ​ 36 Total retirement-related benefit plans ​ ​ 229 ​ ​ 156 ​ ​ 127 ​ ​ ( 6 ) Other comprehensive income (loss), before tax ​ ​ 40 ​ ​ 105 ​ ​ 324 ​ ​ 123 Income tax (expense) benefit related to items of other comprehensive income (loss) ​ ​ ( 14 ) ​ ​ ( 50 ) ​ ​ ( 33 ) ​ ​ 2 Other comprehensive income (loss), net of tax ​ ​ 27 ​ ​ 54 ​ ​ 292 ​ ​ 125 Total comprehensive income (loss) ​ $ ( 1,347 ) ​ $ ( 175 ) ​ $ ( 2,013 ) ​ $ ( 1,883 ) ​ The accompanying notes are an integral part of the financial statements. ​ 56 Table of Contents KYNDRYL HOLDINGS, INC. CONSOLIDATED BALANCE SHEET (In millions, except per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ Notes 2023 2022 2021 Assets: ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ ​ ​ $ 1,847 ​ $ 2,134 ​ $ 2,223 Restricted cash ​ ​ ​ ​ 12 ​ ​ 20 ​ ​ 17 Accounts receivable (net of allowances of $ 32 at March 31, 2023, $ 44 at March 31, 2022, and $ 44 at December 31, 2021)* ​ ​ ​ ​ 1,523 ​ ​ 2,271 ​ ​ 2,279 Deferred costs (current portion) ​ 3 ​ 1,070 ​ ​ 1,143 ​ 920 Prepaid expenses and other current assets ​ ​ ​ ​ 510 ​ ​ 525 ​ ​ 337 Total current assets ​ ​ ​ $ 4,963 ​ $ 6,092 ​ $ 5,777 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 8 ​ $ 2,779 ​ $ 2,834 ​ $ 2,923 Operating right-of-use assets, net ​ 9 ​ ​ 964 ​ ​ 1,312 ​ ​ 1,361 Deferred costs (noncurrent portion) ​ 3 ​ ​ 1,166 ​ ​ 1,244 ​ ​ 1,265 Deferred taxes ​ 5 ​ ​ 248 ​ ​ 555 ​ ​ 675 Goodwill ​ 10 ​ ​ 812 ​ ​ 823 ​ ​ 732 Intangible assets, net ​ 10 ​ ​ 171 ​ ​ 145 ​ ​ 36 Pension assets ​ 16 ​ ​ 94 ​ ​ 61 ​ ​ 58 Other noncurrent assets ​ ​ ​ ​ 267 ​ ​ 375 ​ ​ 385 Total assets ​ ​ ​ $ 11,464 ​ $ 13,442 ​ $ 13,213 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts payable** ​ ​ ​ $ 1,774 ​ $ 1,555 ​ $ 1,140 Value-added tax and income tax liabilities ​ ​ ​ ​ 347 ​ ​ 284 ​ ​ 357 Current portion of long-term debt ​ 11 ​ ​ 110 ​ ​ 96 ​ ​ 105 Accrued compensation and benefits ​ ​ ​ 533 ​ ​ 509 ​ 381 Deferred income (current portion) ​ 3 ​ 820 ​ ​ 882 ​ 872 Operating lease liabilities (current portion) ​ 9 ​ 316 ​ ​ 374 ​ 360 Accrued contract costs ​ ​ ​ ​ 346 ​ ​ 676 ​ ​ 498 Other accrued expenses and liabilities ​ 12 ​ ​ 624 ​ ​ 682 ​ ​ 744 Total current liabilities ​ ​ ​ $ 4,868 ​ $ 5,058 ​ $ 4,457 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Long-term debt ​ 11 ​ $ 3,111 ​ $ 3,127 ​ $ 3,128 Retirement and nonpension postretirement benefit obligations ​ 16 ​ ​ 504 ​ ​ 716 ​ ​ 856 Deferred income (noncurrent portion) ​ 3 ​ ​ 362 ​ ​ 452 ​ ​ 475 Operating lease liabilities (noncurrent portion) ​ 9 ​ ​ 707 ​ ​ 928 ​ ​ 1,007 Other noncurrent liabilities ​ 12 ​ ​ 450 ​ ​ 449 ​ ​ 522 Total liabilities ​ ​ ​ $ 10,002 ​ $ 10,730 ​ $ 10,446 Commitments and contingencies ​ 13 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity ​ 14 ​ ​ ​ ​ ​ ​ ​ ​ ​ Common stock, par value $ 0.01 per share, and additional paid-in capital (shares authorized: 1,000.0 ; shares issued: March 31, 2023 – 229.6 , March 31, 2022 – 224.5 , December 31, 2021 – 224.2 ) ​ ​ ​ ​ 4,428 ​ ​ 4,315 ​ ​ 4,284 Accumulated deficit ​ ​ ​ ​ ( 1,978 ) ​ ​ ( 605 ) ​ ​ ( 375 ) Treasury stock, at cost (shares: March 31, 2023 – 1.9 , March 31, 2022 – 0.2 , December 31, 2021 – 0.0 ) ​ ​ ​ ​ ( 23 ) ​ ​ ( 4 ) ​ ​ ( 1 ) Accumulated other comprehensive income (loss) ​ ​ ​ ​ ( 1,062 ) ​ ​ ( 1,089 ) ​ ​ ( 1,143 ) Total stockholders’ equity before non-controlling interests ​ ​ ​ $ 1,365 ​ $ 2,618 ​ $ 2,765 Non-controlling interests ​ ​ ​ ​ 97 ​ ​ 94 ​ ​ 3 Total equity ​ ​ ​ $ 1,462 ​ $ 2,711 ​ $ 2,767 Total liabilities and equity ​ ​ ​ $ 11,464 ​ $ 13,442 ​ $ 13,213 ​ * 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. ​ 57 Table of Contents KYNDRYL HOLDINGS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, ​ 2023 2022 2021 2020 ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 1,374 ) ​ $ ( 229 ) ​ $ ( 2,304 ) ​ $ ( 2,007 ) ​ Adjustments to reconcile net income (loss) to cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation of property, equipment and capitalized software ​ ​ 900 ​ ​ 246 ​ ​ 1,300 ​ ​ 1,445 ​ Depreciation of right-of-use assets ​ ​ 428 ​ ​ 103 ​ ​ 327 ​ ​ 424 ​ Amortization of transition costs and prepaid software ​ 1,199 ​ 319 ​ 1,278 ​ 1,379 ​ Amortization of capitalized contract costs ​ ​ 472 ​ ​ 136 ​ ​ 563 ​ ​ 683 ​ Amortization of intangible assets ​ 46 ​ 7 ​ 37 ​ 29 ​ Goodwill impairment ​ ​ — ​ ​ — ​ ​ 469 ​ ​ — ​ Stock-based compensation ​ ​ 113 ​ ​ 31 ​ ​ 71 ​ ​ 64 ​ Deferred taxes ​ ​ 285 ​ ​ ( 10 ) ​ ​ ( 401 ) ​ ​ ( 52 ) ​ Net (gain) loss on asset sales and other ​ ​ 6 ​ ​ 12 ​ ​ 11 ​ ​ 4 ​ Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred costs (excluding amortization) ​ ​ ( 1,592 ) ​ ​ ( 672 ) ​ ​ ( 1,618 ) ​ ​ ( 1,917 ) ​ Right-of-use assets and liabilities (excluding depreciation) ​ ​ ( 361 ) ​ ​ ( 117 ) ​ ​ ( 374 ) ​ ​ ( 372 ) ​ Workforce rebalancing liabilities ​ ​ 41 ​ ​ ( 73 ) ​ ​ ( 341 ) ​ ​ 560 ​ Receivables ​ 664 ​ ( 31 ) ​ ( 1,076 ) ​ 387 ​ Accounts payable ​ ​ 282 ​ ​ 384 ​ ​ 125 ​ ​ 70 ​ Taxes (including items settled with former Parent in prior-year periods) ​ ​ 90 ​ ​ ( 66 ) ​ ​ 994 ​ ​ 299 ​ Other assets and other liabilities ​ ( 415 ) ​ 151 ​ 822 ​ ( 365 ) ​ Net cash provided by (used in) operating activities ​ $ 781 ​ $ 189 ​ $ ( 119 ) ​ $ 628 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures ​ $ ( 865 ) ​ $ ( 180 ) ​ $ ( 752 ) ​ $ ( 1,036 ) ​ Proceeds from disposition of property and equipment ​ 23 ​ 9 ​ 194 ​ 84 ​ Other investing activities, net ​ ​ 7 ​ ​ ( 53 ) ​ ​ ( 14 ) ​ ​ ( 1 ) ​ Net cash used in investing activities ​ $ ( 835 ) ​ $ ( 225 ) ​ $ ( 572 ) ​ $ ( 953 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Debt repayments ​ $ ( 118 ) ​ $ ( 28 ) ​ $ ( 91 ) ​ $ ( 66 ) ​ Proceeds from issuance of debt, net of debt issuance costs ​ ​ — ​ ​ — ​ ​ 3,038 ​ ​ — ​ Net transfers (to) from Parent ​ — ​ ​ — ​ ​ ( 30 ) ​ ​ 377 ​ Common stock repurchases for tax withholdings ​ ​ ( 19 ) ​ ( 3 ) ​ ( 1 ) ​ — ​ Other financing activities, net ​ ​ ( 4 ) ​ ​ ( 12 ) ​ ​ — ​ ​ — ​ Net cash provided by (used in) financing activities ​ $ ( 141 ) ​ $ ( 43 ) ​ $ 2,915 ​ $ 312 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash, cash equivalents and restricted cash ​ $ ( 100 ) ​ $ ( 7 ) ​ $ ( 22 ) ​ $ 1 ​ Net change in cash, cash equivalents and restricted cash ​ $ ( 294 ) ​ $ ( 86 ) ​ $ 2,203 ​ $ ( 13 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents and restricted cash at beginning of period ​ $ 2,154 ​ $ 2,240 ​ $ 38 ​ $ 50 ​ Cash, cash equivalents and restricted cash at end of period ​ $ 1,860 ​ $ 2,154 ​ $ 2,240 ​ $ 38 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income taxes paid, net of refunds received ​ $ 167 ​ $ 47 ​ $ 12 ​ $ — ​ Interest paid on debt ​ $ 98 ​ $ 3 ​ $ 2 ​ $ — ​ ​ The accompanying notes are an integral part of the financial statements. 58 Table of Contents KYNDRYL HOLDINGS, INC. CONSOLIDATED STATEMENT OF EQUITY (In millions) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock and ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Net ​ Other ​ ​ ​ ​ ​ ​ Non- ​ ​ ​ ​ ​ Paid-In Capital ​ Parent ​ Comprehensive ​ Treasury ​ Accumulated ​ Controlling ​ Total ​ ​ Shares ​ Amount ​ Investment ​ Income (Loss) ​ Stock ​ Deficit ​ Interests ​ Equity Equity – January 1, 2020 ​ ​ — ​ $ — ​ $ 7,159 ​ $ ( 1,221 ) ​ $ — ​ $ — ​ $ 56 ​ $ 5,994 Net income (loss) ​ ​ ​ ​ ​ ​ ​ ​ ( 2,007 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 2,007 ) Other comprehensive income (loss), net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 125 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 125 Net transfers from Parent ​ ​ ​ ​ ​ ​ ​ ​ 872 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 872 Changes in non-controlling interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2 ​ ​ 2 Equity – December 31, 2020 ​ ​ — ​ $ — ​ $ 6,023 ​ $ ( 1,096 ) ​ $ — ​ $ — ​ $ 58 ​ $ 4,985 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock and ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Net ​ Other ​ ​ ​ ​ ​ ​ Non- ​ ​ ​ ​ ​ Paid-In Capital ​ Parent ​ Comprehensive ​ Treasury ​ Accumulated ​ Controlling ​ Total ​ ​ Shares ​ Amount ​ Investment ​ Income (Loss) ​ Stock ​ Deficit ​ Interests ​ Equity Equity - January 1, 2021 ​ ​ — ​ $ — ​ $ 6,023 ​ $ ( 1,096 ) ​ $ — ​ $ — ​ $ 58 ​ $ 4,985 Net income (loss) ​ ​ ​ ​ ​ ​ ​ ​ ( 1,929 ) ​ ​ ​ ​ ​ ​ ​ ​ ( 375 ) ​ ​ ​ ​ ​ ( 2,304 ) Other comprehensive income (loss), net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 292 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 292 Issuance of common stock and reclassification of net transfers from Parent ​ ​ 224.1 ​ ​ 4,271 ​ ​ ( 4,095 ) ​ ​ ( 339 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 163 ) Common stock issued under employee plans ​ ​ 0.1 ​ ​ 13 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Purchases of treasury stock ​ ​ 0.0 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 1 ) ​ ​ ​ ​ ​ ​ ​ ​ ( 1 ) Changes in non-controlling interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 56 ) ​ ​ ( 56 ) Equity - December 31, 2021 ​ ​ 224.2 ​ $ 4,284 ​ $ — ​ $ ( 1,143 ) ​ $ ( 1 ) ​ $ ( 375 ) ​ $ 3 ​ $ 2,767 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock and ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Net ​ Other ​ ​ ​ ​ ​ ​ Non- ​ ​ ​ ​ ​ Paid-In Capital ​ Parent ​ Comprehensive ​ Treasury ​ Accumulated ​ Controlling ​ Total ​ ​ Shares ​ Amount ​ Investment ​ Income (Loss) ​ Stock ​ Deficit ​ Interests ​ Equity Equity - January 1, 2022 ​ ​ 224.2 ​ $ 4,284 ​ $ — ​ $ ( 1,143 ) ​ $ ( 1 ) ​ $ ( 375 ) ​ $ 3 ​ $ 2,767 Net income (loss) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 229 ) ​ ​ ​ ​ ​ ( 229 ) Other comprehensive income (loss), net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 54 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 54 Common stock issued under employee plans ​ ​ 0.5 ​ ​ 31 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 31 Purchases of treasury stock ​ ​ ( 0.2 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 3 ) ​ ​ ​ ​ ​ ​ ​ ​ ( 3 ) Changes in non-controlling interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 91 ​ ​ 91 Equity - March 31, 2022 ​ ​ 224.5 ​ $ 4,315 ​ $ — ​ $ ( 1,089 ) ​ $ ( 4 ) ​ $ ( 605 ) ​ $ 94 ​ $ 2,711 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock and ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Net ​ Other ​ ​ ​ ​ ​ ​ Non- ​ ​ ​ ​ ​ Paid-In Capital ​ Parent ​ Comprehensive ​ Treasury ​ Accumulated ​ Controlling ​ Total ​ ​ Shares ​ Amount ​ Investment ​ Income (Loss) ​ Stock ​ Deficit ​ Interests ​ Equity Equity – April 1, 2022 ​ ​ 224.5 ​ $ 4,315 ​ $ — ​ $ ( 1,089 ) ​ $ ( 4 ) ​ $ ( 605 ) ​ $ 94 ​ $ 2,711 Net income (loss) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 1,374 ) ​ ​ ​ ​ ​ ( 1,374 ) Other comprehensive income (loss), net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 27 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 27 Common stock issued under employee plans ​ ​ 4.8 ​ ​ 113 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 113 Purchases of treasury stock ​ ​ ( 1.7 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ( 19 ) ​ ​ ​ ​ ​ ​ ​ ​ ( 19 ) Changes in non-controlling interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 4 ​ ​ 4 Equity – March 31, 2023 ​ ​ 227.7 ​ $ 4,428 ​ $ — ​ $ ( 1,062 ) ​ $ ( 23 ) ​ $ ( 1,978 ) ​ $ 97 ​ $ 1,462 ​ The accompanying notes are an integral part of the financial statements. ​ ​ 59 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES ​ Kyndryl’s Spin-off Kyndryl Holdings, Inc. (“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 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. 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 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 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 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-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 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. 60 Table of Contents 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. Certain of these subsidiaries and JVs were historically managed by IBM’s GTS segment but not transferred to Kyndryl in conjunction with the Separation. The JVs’ balance sheet balances, revenues, costs, expenses and cash flow activities were recorded in the consolidated financial statements during the pre-Separation periods. The JVs’ balance sheet amounts were settled through Net Parent investment on the Separation date, and their business activities were no longer recorded in the Consolidated Income Statement and Consolidated Statement of Cash Flow after the Separation date. Cash and cash equivalents held by IBM at the corporate level during the pre-Separation periods were not attributable to the Company for any of the periods presented due to IBM’s centralized approach to cash management and the financing of its operations. Only cash amounts specifically held by Kyndryl are reflected in the Consolidated Balance Sheet. IBM’s debt was not attributed to the Company for any of the periods presented because IBM’s borrowings are not the legal obligation of Kyndryl. The only third-party debt obligations included in the consolidated financial statements are those for which the legal obligor is a legal entity of Kyndryl. Interest expense for the pre-Separation periods in the Consolidated Income Statement reflects the allocation of interest on borrowing and funding related activity associated with the portion of IBM’s borrowings where the proceeds benefited us. Transfers of cash, both to and from IBM’s centralized cash management system prior to Separation, are reflected as a component of Net Parent investment in the Consolidated Balance Sheet and as financing activities in the accompanying Consolidated Statement of Cash Flows. 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 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. The calculation of income taxes on a hypothetical separate return basis requires a considerable amount of judgment and use of both estimates and allocations; pre-Separation current and deferred taxes may not be reflective of the actual tax balances subsequent to the Separation. 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. 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 61 Table of Contents 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 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 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. Percentages presented are calculated from the underlying whole-dollar amounts. Certain items have been recast to conform to current-period presentation. Use of Estimates 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. 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. Actual results may be different from these estimates. Revenue The Company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. Revenue is recognized when, or as, control of a promised service or product transfers to a client, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, the Company estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. The Company’s contracts may include terms that could cause variability in the transaction price, including, for example, rebates, volume discounts, service-level penalties and performance bonuses or other forms of variable consideration. In certain rare circumstances, if we grant the customer the right to return a product and receive a full or partial credit or refund of any consideration paid, the Company (i) recognizes revenue for the transferred products in the amount of consideration to which it expects to be entitled, (ii) records a refund liability and (iii) recognizes an asset for its right to recover products from customers on settling the refund liability. The Company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company may not be able to reliably estimate variable consideration in certain long-term arrangements due to uncertainties that are not expected to be resolved for a long period of time or when the Company’s experience with similar types of contracts is limited. Changes in estimates of variable consideration are included in Note 3 – Revenue Recognition. 62 Table of Contents The Company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days . Invoices are generally issued as services are rendered and/or as control transfers, either at monthly or quarterly intervals or upon achievement of contractual milestones. In some services contracts, the Company bills the client prior to recognizing revenue from performing the services. In these cases, deferred income is presented in the Consolidated Balance Sheet. In other services contracts, the Company performs the services prior to billing the client. When the Company performs services prior to billing the client, the right to consideration is typically subject to milestone completion or client acceptance, and the amount is recorded as a contract asset. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract liabilities) at the contract level. Refer to Note 3 – Revenue Recognition for contract assets for the periods presented. 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. As a practical expedient, the Company does not account for significant financing components if the period between when the Company transfers the promised product or service to the client and when the client pays for that product or service will be one year or less. The Company may include subcontractor services or original equipment manufacturer (OEM) hardware and/or OEM software components in certain integrated services arrangements. In these types of arrangements, revenue from sales of OEM hardware and/or OEM software components or services is recorded net of costs when the Company is acting as an agent between the client and the vendor and gross when the Company is the principal for the transaction. To determine whether the Company is an agent or principal, the Company considers whether it obtains control of the products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most notably whether the Company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion. The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. Performance Obligations 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 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. The revenue policies below are applied to each performance obligation, as applicable. Standalone Selling Price The Company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which the Company would sell a promised product or service separately to a client. 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 63 Table of Contents 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 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. Estimating SSP is a formal process that includes review and approval by the Company’s management. 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’ 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. The Company’s services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price-per-measure-of-output contract, and the contract terms range from less than one year to over 10 years . The Company typically satisfies the performance obligation and recognizes revenue over time in services arrangements because the client simultaneously receives and consumes the benefits provided as the Company performs the services. In outsourcing, other managed services, application management and other cloud-based services arrangements, the Company determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised. Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenue from as-a-service type contracts is recognized either on a straight-line basis or on a usage basis, depending on the terms of the arrangement (such as whether the Company is standing ready to perform or whether the contract has usage-based metrics). If an as-a-service contract includes setup activities, those promises in the arrangement are evaluated to determine if they are distinct. In design and build arrangements, revenue is recognized based on progress toward completion of the performance obligation using a cost-to-cost measure of progress (e.g., labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract). The estimation of cost at completion is complex, subject to many variables and requires significant judgment. Changes in original estimates are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known by the Company. Refer to Note 3 – Revenue Recognition for the amount of revenue recognized in the reporting period on a cumulative catch-up basis (i.e., from performance obligations satisfied, or partially satisfied, in previous periods). The Company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost measure of progress to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For other types of services contracts, any losses are recorded as incurred. 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 separate performance obligations as discussed in “Performance Obligations” above. For distinct OEM hardware sales, revenue is 64 Table of Contents 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 ​ Recurring operating costs for services contracts are recognized as incurred. Certain eligible, nonrecurring costs (i.e., setup costs) incurred in the initial phases of outsourcing contracts and other cloud-based services contracts, are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future and the costs are expected to be recovered. These costs consist of transition and setup costs related to the installation of systems and processes and other deferred fulfillment costs, including, for example, prepaid assets used in services contracts (i.e., prepaid software or prepaid maintenance). Capitalized costs are amortized on a straight-line basis over the expected period of benefit, which approximates the pattern of transfer to the client of the services to which the asset relates and includes anticipated contract renewals or extensions. Additionally, fixed assets associated with these contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset and recorded in cost of sales. If an asset is contract-specific and cannot be repurposed, then the depreciation period is the shorter of the useful life of the asset or the contract term. Setup costs paid on behalf of clients in excess of the fair value of services delivered in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit. The Company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. 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 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 . Expected renewal periods are only included in the expected customer relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The Company has determined that certain commissions programs meet the requirements to be capitalized. 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 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 65 Table of Contents 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. 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 $ 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. 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, 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. For nonpension postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held for the benefit of participants. 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 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 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 66 Table of Contents 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. Prior service costs (credits) represent the cost of benefit changes attributable to prior service granted in plan amendments. The measurement of benefit obligations and net periodic benefit cost is based on estimates and assumptions approved by the Company’s management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The Company participates in non-U.S. multi-employer pension plans and makes required contributions to those plans, which are recorded in Cost of services and SG&A in the Consolidated Income Statement based on the employees’ respective functions. Defined Contribution Plans Prior to the Separation, the Parent offered various defined contribution plans for U.S. and non-U.S. employees. 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 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. Stock-Based Compensation Prior to the Separation, the Company participated in various IBM stock-based compensation plans, including incentive compensation plans and an employee stock purchase plan. All awards granted under the plans were based on IBM’s common shares and, as such, were reflected in the Parent’s Consolidated Statement of Stockholders’ Equity and not in the Company’s Consolidated Statement of Equity. For historical periods, stock-based compensation cost is based on the awards and terms previously granted to employees by the Parent. Compensation costs associated with Kyndryl employees’ participation in the Parent’s incentive plans have been identified for employees who exclusively support Kyndryl operations. 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 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 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. Stock-based compensation cost is recorded in Cost of services and SG&A in the Consolidated Income Statement based on the employees’ respective functions. 67 Table of Contents At the time of Kyndryl’s Spin-off, each outstanding IBM RSU and PSU held by a Kyndryl employee was converted into a Kyndryl RSU. 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 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. Derivative Financial Instruments 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 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. The Company does not use derivative financial instruments for trading or speculative purposes. The Company’s derivative financial instruments that qualify for hedge accounting are designated as cash flow hedges. Additionally, the Company may enter into derivative contracts that economically hedge certain of its risks, even when hedge accounting does not apply, or the Company elects not to apply hedge accounting. 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-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. 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. Cash flows from derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. Translation of Non-U.S. Currency Amounts Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to U.S. dollars at year-end exchange rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange prevailing during the year. Property and equipment, deferred income and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the Company acquired the assets or liabilities. 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 expense. Income and expense items are translated at the weighted-average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in which exchange rates change. 68 Table of Contents Cash and Cash Equivalents All highly liquid investments with an original maturity of three months or less on the date of purchase are considered to be cash equivalents. Accounts Receivable and Allowance for Current Expected Credit Losses The Company classifies the right to consideration in exchange for products or services transferred to a client as a receivable. Receivables are recorded concurrent with billing and delivery of a service to customers. 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. Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that the customer is no longer in operation and/or there is no reasonable expectation of additional collections or repossession. Transfers of Financial Assets 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 In determining the fair value of its financial instruments, the Company uses methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. 69 Table of Contents Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following fair value hierarchy: ● Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date; ● Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and ● Level 3 — Unobservable inputs for the asset or liability. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the Company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In determining the fair value of financial instruments, the Company considers certain market valuation adjustments to the “base valuations” using the methodologies described below for several parameters that market participants would consider in determining fair value: ● Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument. ● Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s credit risk as observed in the credit default swap market. The Company holds investments in time deposits that are designated as available-for-sale. Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized cost basis. There were no impairments recognized for any of the periods presented. Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are recorded at fair value or at cost, as appropriate, in the period they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The impairment models used for non-financial assets depend on the type of asset. The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy. Leases When procuring goods or services, the Company determines whether an arrangement contains a lease at its inception. 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. 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 70 Table of Contents 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, 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. The Company made a policy election to not recognize leases with a lease term of twelve months or less in the Consolidated Balance Sheet. For all asset classes, the Company has elected the lessee practical expedient to combine lease and non-lease components (e.g., maintenance services) and account for the combined unit as a single lease component. A significant portion of the Company’s lease portfolio is real estate leases, which are mainly accounted for as operating leases and are primarily used for corporate offices and data centers. The average term of the real estate leases is approximately five years . The Company also has equipment leases, such as for IT equipment and vehicles, which have lease terms that range from two to five years . For certain of these operating and finance leases, the Company applies a portfolio approach to account for the lease assets and lease liabilities. Intangible Assets Including Goodwill 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 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 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. Impairment 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. Goodwill is tested for impairment at least annually and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which aligns with our operating segments. Impairment charges related to long-lived assets, intangible assets and goodwill, if any, are recorded as impairment expense in the Consolidated Income Statement. Transaction-related Costs The Company classifies certain expenses related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs” in the Consolidated Income Statement. Transaction-related costs include expenditures incurred to prepare for and execute the Separation and establish Kyndryl as a standalone business. 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. 71 Table of Contents 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 Property and equipment are recorded at cost, or in the case of acquired property and equipment, at fair value at the date of the acquisition. Expenditures for repairs and maintenance costs are expensed as incurred, whereas expenditures that extend the life or increase the functionality of the asset are capitalized as additions to property and equipment. 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 depreciation expense on a straight-line method over the estimated useful lives of the assets as follows: ​ ​ ​ ​ Classification Estimated Useful Life Buildings ​ 30 to 50 years Land improvements ​ 20 years Leasehold improvements* ​ Estimated useful life or term of lease Office and other equipment ​ 2 to 20 years Information technology equipment ​ 1.5 to 5 years * Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 10 years . Environmental The costs of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup program becomes likely and it is probable that the Company will incur cleanup costs and those costs can be reasonably estimated, the Company accrues remediation costs for known environmental liabilities. Income Taxes Prior to the Separation, our operations were included in the consolidated U.S. federal and certain state and local and foreign income tax returns filed by IBM, where applicable. The Company also files certain separate foreign income tax returns. For purposes of the historical periods presented on a “carve-out” basis, the income tax provisions have been calculated using the separate return basis, as if the Company filed separate tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company were a separate taxpayer and a standalone enterprise for the periods presented. Tax attributes have been reported based on the hypothetical separate return basis results for the periods presented in the Company’s financial statements. The calculation of income taxes on a hypothetical separate return basis requires a considerable amount of judgment and use of both estimates and allocations; pre-Separation current and deferred taxes may not be reflective of the actual tax balances subsequent to the Separation. Post-Separation, the income tax provisions are calculated based on Kyndryl’s operating footprint, as well as tax return elections and assertions. 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 72 Table of Contents 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. Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. U.S. 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. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies and actions. When there is a change in the determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to provision for income taxes in the period in which such determination is made. The Company recognizes additional tax liabilities when the Company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Balance Sheet. To the extent that new information becomes available which causes the Company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. Net Loss per Share 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 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. ​ NOTE 2. ACCOUNTING CHANGES Standards Implemented 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 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 73 Table of Contents 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. ​ NOTE 3. REVENUE RECOGNITION Disaggregation of Revenue The Company views its segment results to be the best view of disaggregated revenue. Refer to Note 4 – Segments. Remaining Performance Obligations The remaining performance obligation (“RPO”) represents the aggregate amount of contractual deliverables yet to be recognized as revenue at the end of the reporting period. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed. The customer is not considered committed when it is able to terminate for convenience without payment of a substantive penalty. The RPO also includes estimates of variable consideration. 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, 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. 74 Table of Contents Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods 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 The following table provides information about accounts receivable, contract assets and deferred income balances: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Accounts receivable (net of allowances of $ 32 at March 31, 2023, $ 44 at March 31, 2022, and $ 44 at December 31, 2021) * ​ $ 1,523 ​ $ 2,271 ​ $ 2,279 Contract assets ** ​ 30 ​ 41 ​ 62 Deferred income (current) ​ 820 ​ 882 ​ 872 Deferred income (noncurrent) ​ 362 ​ 452 ​ 475 * 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) ​ 2023 2022 2021 2020 Beginning balance ​ $ 44 ​ $ 44 ​ $ 91 ​ $ 82 Additions (releases) ​ ​ 6 ​ ​ 6 ​ ​ ( 23 ) ​ ​ 25 Write-offs ​ ​ ( 13 ) ​ ​ ( 4 ) ​ ​ ( 5 ) ​ ​ ( 7 ) Other * ​ ​ ( 5 ) ​ ​ ( 2 ) ​ ​ ( 19 ) ​ ​ ( 9 ) Ending balance ​ $ 32 ​ $ 44 ​ $ 44 ​ $ 91 * Primarily represents translation adjustments and reclassifications . 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. 75 Table of Contents Deferred Costs ​ Costs to acquire and fulfill customer contracts are deferred and amortized over the contract period or expected customer relationship life. 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 . 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 March 31, 2023, March 31, 2022 and December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Deferred transition costs ​ $ 856 ​ $ 961 ​ $ 1,012 Prepaid software costs ​ 782 ​ 806 ​ 658 Capitalized costs to fulfill contracts ​ 285 ​ 302 ​ 235 Capitalized costs to obtain contracts ​ 313 ​ 318 ​ 282 Total deferred costs * ​ $ 2,236 ​ $ 2,387 ​ $ 2,185 * 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. 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. NOTE 4. 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: ​ United States: This reportable segment is comprised of Kyndryl’s operations in the United States. ​ Japan: This reportable segment is comprised of Kyndryl’s operations in Japan. ​ 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. ​ Strategic Markets: 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. The use 76 Table of Contents 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. 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. The following table reflects the results of the Company’s segments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ United States ​ $ 4,726 ​ $ 1,169 ​ $ 4,805 ​ $ 5,084 Japan ​ ​ 2,502 ​ ​ 706 ​ ​ 2,923 ​ ​ 3,042 Principal Markets ​ ​ 5,957 ​ ​ 1,579 ​ ​ 7,085 ​ ​ 7,187 Strategic Markets ​ ​ 3,840 ​ ​ 978 ​ ​ 3,844 ​ ​ 4,040 Total revenue ​ $ 17,026 ​ $ 4,431 ​ $ 18,657 ​ $ 19,352 Segment adjusted EBITDA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ United States ​ $ 839 ​ $ 248 ​ $ 842 ​ $ 940 Japan ​ ​ 407 ​ ​ 154 ​ ​ 501 ​ ​ 534 Principal Markets ​ ​ 371 ​ ​ 98 ​ ​ 341 ​ ​ 375 Strategic Markets ​ ​ 436 ​ ​ 92 ​ ​ 540 ​ ​ 488 Total segment adjusted EBITDA ​ $ 2,052 ​ $ 592 ​ $ 2,223 ​ $ 2,337 ​ The following table reconciles consolidated pretax income (loss) to segment adjusted EBITDA: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Pretax income (loss) ​ $ ( 851 ) ​ $ ( 189 ) ​ $ ( 1,903 ) ​ $ ( 1,760 ) Workforce rebalancing charges ​ ​ 71 ​ ​ — ​ ​ 39 ​ ​ 918 Charges related to ceasing to use leased/fixed assets and lease terminations ​ ​ 80 ​ ​ — ​ ​ — ​ ​ — Transaction-related costs ​ ​ 264 ​ ​ 58 ​ ​ 627 ​ ​ 21 Stock-based compensation expense ​ ​ 113 ​ ​ 31 ​ ​ 71 ​ ​ 64 Impairment expense ​ ​ — ​ ​ — ​ ​ 469 ​ ​ — Interest expense ​ ​ 94 ​ ​ 21 ​ ​ 64 ​ ​ 63 Depreciation of property, equipment and capitalized software ​ ​ 900 ​ ​ 246 ​ ​ 1,300 ​ ​ 1,445 Amortization expense ​ ​ 1,245 ​ ​ 326 ​ ​ 1,314 ​ ​ 1,408 Corporate expense not allocated to the segments ​ ​ 77 ​ ​ 56 ​ ​ 154 ​ ​ 153 Other adjustments* ​ ​ 59 ​ ​ 43 ​ ​ 88 ​ ​ 27 Segment adjusted EBITDA ​ $ 2,052 ​ $ 592 ​ $ 2,223 ​ $ 2,337 * 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. 77 Table of Contents Segment Assets and Other Items ​ The Company does not allocate assets to the above reportable segments for our CODM’s review. ​ Geographic Information ​ The following tables provide information for those countries that represent 10 percent or more of the specific category. Refer to Note 8 – Property and Equipment and Note 9 – Leases for more information on allocation methodologies. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Revenue* ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ United States ​ $ 4,726 ​ $ 1,169 ​ $ 4,805 ​ $ 5,081 Japan ​ ​ 2,502 ​ ​ 706 ​ ​ 2,923 ​ ​ 3,037 Other countries ​ ​ 9,797 ​ ​ 2,556 ​ ​ 10,930 ​ ​ 11,235 Total revenue ​ $ 17,026 ​ $ 4,431 ​ $ 18,657 ​ $ 19,352 * Revenues are attributed to countries based on the location of the client and exclude certain allocations. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At ​ At ​ ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Property and equipment, net ​ ​ ​ ​ ​ ​ ​ ​ ​ United States * ​ $ 922 ​ $ 894 ​ $ 890 Other countries ​ ​ 1,857 ​ ​ 1,940 ​ ​ 2,033 Total property and equipment, net ​ $ 2,779 ​ $ 2,834 ​ $ 2,923 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating right-of-use assets, net ​ ​ ​ ​ ​ ​ ​ ​ ​ United States * ​ $ 124 ​ $ 199 ​ $ 205 Japan ​ ​ 110 ​ ​ 124 ​ ​ 139 Belgium ​ ​ 149 ​ ​ 167 ​ ​ 176 Other countries ​ ​ 580 ​ ​ 822 ​ ​ 841 Total operating right-of-use assets, net ​ $ 964 ​ $ 1,312 ​ $ 1,361 * Includes corporate and other. ​ NOTE 5. TAXES Prior to the Separation, income taxes have been calculated as if we filed income tax returns for the Company on a standalone basis. The Company’s operations historically have been included in the income tax returns of IBM. ​ Income (loss) before income taxes by geography was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Income (loss) before income taxes: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. operations ​ $ ( 1,543 ) ​ $ ( 255 ) ​ $ ( 1,765 ) ​ $ ( 974 ) Non-U.S. operations ​ ​ 692 ​ ​ 66 ​ ​ ( 138 ) ​ ​ ( 786 ) Total income (loss) before income taxes ​ $ ( 851 ) ​ $ ( 189 ) ​ $ ( 1,903 ) ​ $ ( 1,760 ) ​ 78 Table of Contents The components of the provision for income taxes by taxing jurisdiction were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 U.S. federal: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current ​ $ — ​ $ — ​ $ 17 ​ $ — Deferred ​ ​ ( 19 ) ​ ​ ( 43 ) ​ ​ ( 73 ) ​ ​ — ​ ​ $ ( 19 ) ​ $ ( 43 ) ​ $ ( 56 ) ​ $ — U.S. state and local: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current ​ $ 2 ​ $ — ​ $ — ​ $ — Deferred ​ ​ ( 4 ) ​ ​ ( 10 ) ​ ​ ( 5 ) ​ ​ — ​ ​ $ ( 2 ) ​ $ ( 10 ) ​ $ ( 5 ) ​ $ — Non-U.S.: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current ​ $ 236 ​ $ 51 ​ $ 790 ​ $ 305 Deferred ​ ​ 308 ​ ​ 42 ​ ​ ( 327 ) ​ ​ ( 58 ) ​ ​ $ 545 ​ $ 93 ​ $ 463 ​ $ 247 Total provision for income taxes ​ $ 524 ​ $ 40 ​ $ 402 ​ $ 247 ​ A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate from continuing operations was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, ​ 2023 2022 2021 2020 Statutory rate ​ 21.0 % ​ 21.0 % ​ 21.0 % ​ 21.0 % Tax differential on foreign income ​ ( 3.9 ) % ​ ( 1.1 ) % ​ ( 8.6 ) % ​ ( 5.9 ) % State and local taxes ​ 5.7 % ​ 5.6 % ​ 3.0 % ​ 2.8 % Valuation allowances ​ ( 72.0 ) % ​ ( 30.8 ) % ​ ( 16.1 ) % ​ ( 26.1 ) % Reserves for uncertain tax positions ​ ( 6.5 ) % ​ ( 5.4 ) % ​ ( 8.3 ) % ​ ( 4.9 ) % Global Intangible Low-Taxed Income (GILTI) ​ ( 2.0 ) % ​ ( 4.4 ) % ​ — % ​ — % Undistributed foreign earnings ​ 1.5 % ​ ( 3.4 ) % ​ ( 0.6 ) % ​ ( 1.0 ) % Impact of foreign operations ​ ( 8.6 ) % ​ 2.5 % ​ ( 4.7 ) % ​ — % Separation-related transactions ​ — % ​ — % ​ ( 2.6 ) % ​ — % Goodwill impairment ​ — % ​ — % ​ ( 4.0 ) % ​ — % Tax Credits ​ 4.7 % ​ — % ​ — % ​ — % Return to provision ​ 0.3 % ​ ( 4.4 ) % ​ — % ​ — % Nondeductible items ​ ( 2.0 ) % ​ ( 0.6 ) % ​ — % ​ — % Other* ​ — % ​ — % ​ ( 0.2 ) % ​ 0.1 % Effective tax rate ​ ( 61.6 ) % ​ ( 21.0 ) % ​ ( 21.1 ) % ​ ( 14.0 ) % * 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. 79 Table of Contents 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. The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Deferred tax assets ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement benefits ​ $ 115 ​ $ 201 ​ $ 255 Leases ​ ​ 280 ​ ​ 408 ​ ​ 340 Stock-based and other compensation ​ ​ 36 ​ ​ 64 ​ ​ 60 U.S. tax loss/credit carryforwards ​ ​ 412 ​ ​ 35 ​ ​ 16 Deferred income ​ ​ 47 ​ ​ 55 ​ ​ 31 Foreign tax loss/credit carryforwards ​ ​ 118 ​ ​ 102 ​ ​ 76 Allowance for credit losses ​ ​ 28 ​ ​ 16 ​ ​ 10 Fixed assets and depreciation ​ ​ — ​ ​ 112 ​ ​ 130 Goodwill and intangible assets ​ ​ 34 ​ ​ — ​ ​ — Workforce rebalancing charges ​ ​ 25 ​ ​ — ​ ​ — Limitation on deductibility of interest ​ ​ 35 ​ ​ 5 ​ ​ — Accruals ​ ​ 61 ​ ​ 63 ​ ​ 57 Other ​ ​ 124 ​ ​ 74 ​ ​ 54 Gross deferred tax assets ​ $ 1,314 ​ $ 1,135 ​ $ 1,029 Less: valuation allowance ​ ​ ( 620 ) ​ ​ ( 65 ) ​ ​ ( 6 ) Net deferred tax assets ​ $ 694 ​ $ 1,069 ​ $ 1,023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred tax liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed assets and depreciation ​ $ 7 ​ $ — ​ $ — Goodwill and intangible assets ​ ​ — ​ ​ 25 ​ ​ — Leases and right-of-use assets ​ ​ 267 ​ ​ 411 ​ ​ 331 Undistributed foreign earnings ​ ​ 19 ​ ​ 32 ​ ​ 25 Deferred transition costs ​ ​ 135 ​ ​ 122 ​ ​ 106 Prepaids ​ ​ 30 ​ ​ 3 ​ ​ — Other ​ ​ 87 ​ ​ 6 ​ ​ 21 Gross deferred tax liabilities ​ $ 544 ​ $ 600 ​ $ 483 ​ 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. The U.S. 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 80 Table of Contents $ 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. Prior to Separation, the Company’s operations were included in the consolidated U.S. federal and certain state, local and foreign income tax returns filed by IBM. 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. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Balance at beginning of period ​ $ 55 ​ $ 44 ​ $ 18 ​ $ 15 Additions based on tax positions related to the current year ​ ​ 46 ​ ​ 12 ​ ​ 479 ​ ​ 89 Additions for tax positions of prior years ​ ​ 3 ​ ​ — ​ ​ — ​ ​ — Reductions for tax positions of prior years (including impacts due to a lapse of statute) ​ ​ — ​ ​ ( 1 ) ​ ​ — ​ ​ — Settlements (closed out to Net Parent investment) ​ ​ — ​ ​ — ​ ​ ( 453 ) ​ ​ ( 86 ) Balance at end of period ​ $ 104 ​ $ 55 ​ $ 44 ​ $ 18 ​ 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. 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 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 $ 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 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 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. 81 Table of Contents At March 31, 2023, the Company’s undistributed earnings from certain non-U.S. subsidiaries were not indefinitely reinvested. Accordingly, the Company recorded a deferred tax liability of $ 19 million for the estimated taxes associated with the repatriation of these earnings. The Company intends to repatriate certain foreign earnings that have been taxed in the U.S. 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 $ 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. ​ NOTE 6. 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 year ended March 31, 2023, the three months ended March 31, 2022 (transition period), and the years ended December 31, 2021 and 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (In millions, except per share amounts) ​ 2023 ​ 2022 ​ 2021 ​ 2020 Net income (loss) on which basic and diluted earnings per share is calculated ​ $ ( 1,374 ) ​ $ ( 229 ) ​ $ ( 2,304 ) ​ $ ( 2,007 ) Number of shares on which basic and diluted earnings per share is calculated ​ ​ 226.7 ​ ​ 224.4 ​ ​ 224.1 ​ ​ 224.1 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings (loss) per share ​ ( 6.06 ) ​ ( 1.02 ) ​ ( 10.28 ) ​ ​ ( 8.96 ) Diluted earnings (loss) per share ​ ( 6.06 ) ​ ( 1.02 ) ​ ( 10.28 ) ​ ​ ( 8.96 ) ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ Year Ended ​ Ended ​ Year Ended ​ ​ March 31, ​ March 31, ​ December 31, (In millions) ​ 2023 ​ 2022 ​ 2021 Nonvested restricted stock units ​ 9.4 ​ 9.8 ​ 10.2 Nonvested performance-conditioned stock units ​ 2.3 ​ — ​ — Nonvested market-conditioned stock units ​ 2.3 ​ 1.8 ​ 1.8 Stock options issued and outstanding ​ 3.7 ​ 3.8 ​ 3.8 Total ​ 17.7 ​ 15.5 ​ 15.8 ​ 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. 82 Table of Contents NOTE 7. FINANCIAL ASSETS AND LIABILITIES Financial Assets and Liabilities Measured at Fair Value 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Hierarchy ​ At March 31, 2023 ​ At March 31, 2022 ​ At December 31, 2021 (Dollars in millions) Level Assets Liabilities Assets Liabilities Assets Liabilities Derivatives designated as hedging instruments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign exchange contracts ​ 2 ​ $ 4 ​ $ 3 ​ $ 4 ​ $ — ​ $ 4 ​ $ — Derivatives not designated as hedging instruments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign exchange contracts ​ 2 ​ ​ 11 ​ ​ 5 ​ ​ 5 ​ ​ 2 ​ ​ 5 ​ ​ — Total ​ ​ ​ $ 15 ​ $ 9 ​ $ 9 ​ $ 2 ​ $ 9 ​ $ 1 ​ 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 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). 83 Table of Contents Derivative Financial Instruments 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 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 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. ​ 84 Table of Contents The Effect of Derivative Instruments in the Consolidated Income Statement The effects of derivatives not designated as hedging instruments on the Consolidated Income Statement are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gain (Loss) Recognized in Consolidated Income Statement ​ ​ ​ ​ ​ ​ Three ​ ​ ​ ​ ​ ​ Consolidated ​ Year Ended ​ Months Ended ​ Year Ended ​ Year Ended ​ ​ Income Statement ​ March 31, ​ March 31, ​ December 31, ​ December 31, (Dollars in millions) Line Item ​ 2023 ​ 2022 ​ 2021 2020 Derivative instruments not designated as hedging instruments: ​ Recognized on Derivatives Foreign exchange contracts ​ Other expense ​ $ 20 ​ $ ( 1 ) ​ $ 4 ​ $ 6 Total ​ ​ $ 20 ​ $ ( 1 ) ​ $ 4 ​ $ 6 ​ 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 ​ ​ ​ ​ Three ​ ​ ​ ​ ​ ​ Year Ended ​ Months Ended ​ Year Ended ​ Year Ended ​ ​ March 31, ​ March 31, ​ December 31, ​ December 31, (Dollars in millions) 2023 2022 ​ 2021 2020 Derivative instruments in cash flow hedges: ​ Recognized in OCI * Foreign exchange contracts ​ $ ( 4 ) ​ $ 1 ​ $ 4 ​ $ — Total ​ $ ( 4 ) ​ $ 1 ​ $ 4 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated Income Statement Line Item ​ Reclassified from AOCI * Cost of services ​ $ ( 2 ) ​ $ 1 ​ $ 1 ​ $ 7 Selling, general and administrative expenses ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1 ) Total ​ $ ( 2 ) ​ $ 1 ​ $ 1 ​ $ 6 * 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. ​ N OTE 8. PROPERTY AND EQUIPMENT ​ The following table presents the balances of property and equipment by type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At ​ At ​ ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Information technology equipment ​ $ 6,912 ​ $ 7,646 ​ $ 7,847 Buildings and leasehold improvements ​ ​ 2,665 ​ ​ 2,862 ​ ​ 2,869 Office and other equipment ​ ​ 370 ​ ​ 401 ​ ​ 397 Land and land improvements ​ ​ 70 ​ ​ 71 ​ ​ 72 Property and equipment, gross ​ $ 10,016 ​ $ 10,980 ​ $ 11,185 Accumulated depreciation ​ ​ ( 7,237 ) ​ ​ ( 8,146 ) ​ ​ ( 8,261 ) Property and equipment, net ​ $ 2,779 ​ $ 2,834 ​ $ 2,923 ​ 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 85 Table of Contents 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. ​ ​ NOTE 9. LEASES The following table presents the various components of lease costs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Finance lease costs $ 85 ​ $ 21 ​ $ 69 ​ $ 61 Operating lease costs ​ 434 ​ ​ 111 ​ ​ 354 ​ 424 Short-term lease costs ​ 7 ​ ​ 4 ​ ​ 7 ​ 10 Variable lease costs ​ 108 ​ ​ 16 ​ ​ 73 ​ 114 Sublease income ​ ( 9 ) ​ ​ ( 1 ) ​ ​ ( 5 ) ​ ( 4 ) Total lease costs $ 625 ​ $ 150 ​ $ 498 ​ $ 605 ​ 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. Cash payments related to variable lease costs and short-term leases are not included in the measurement of operating and finance lease liabilities and, as such, are excluded from the amounts below. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31, (Dollars in millions) 2023 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ Operating cash outflows for finance leases ​ $ 5 ​ $ 1 ​ $ 3 ​ $ 3 Financing cash outflows for finance leases ​ ​ 83 ​ ​ 20 ​ ​ 70 ​ ​ 72 Operating cash outflows for operating leases ​ ​ 417 ​ ​ 118 ​ ​ 327 ​ ​ 450 Right-of-use assets obtained in exchange for new finance lease liabilities ​ ​ 111 ​ ​ 19 ​ ​ 86 ​ ​ 129 Right-of-use assets obtained in exchange for new operating lease liabilities ​ ​ 175 ​ ​ 67 ​ ​ 562 ​ ​ 336 ​ 86 Table of Contents The following table presents the weighted-average lease term and discount rate for finance and operating leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ December 31, ​ 2023 ​ 2022 ​ 2021 Finance leases ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term 3.5 years ​ 3.6 years ​ 3.3 years Weighted-average discount rate 3.36 % ​ 1.82 % ​ 1.41 % Operating leases ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term 4.7 years ​ 5.1 years ​ 5.2 years Weighted-average discount rate 4.38 % ​ 2.84 % ​ 2.66 % ​ The following table presents a maturity analysis of expected undiscounted cash flows for operating and finance leases on an annual basis for the next five years and thereafter. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ending ​ March 31, ​ March 31, ​ March 31, ​ March 31, ​ March 31, ​ ​ ​ ​ Imputed ​ ​ ​ ​ (Dollars in millions) 2024 2025 2026 2027 2028 Thereafter Interest* Total** Finance leases $ 67 $ 78 $ 61 $ 35 $ 21 $ — $ ( 20 ) ​ $ 242 ​ Operating leases ​ 350 $ 256 $ 206 $ 120 $ 65 $ 138 $ ( 113 ) ​ ​ 1,022 ​ * 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 $ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Right-of-use assets – Property and equipment ​ $ 245 ​ $ 220 ​ $ 221 Lease liabilities: ​ ​ ​ ​ ​ ​ Current ​ ​ 82 ​ ​ 68 ​ ​ 76 Noncurrent ​ ​ 160 ​ ​ 151 ​ ​ 147 ​ 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. ​ NOTE 10. 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. 87 Table of Contents The following table summarizes total consideration transferred, fair value of net assets acquired, net liabilities assumed and goodwill for the Exa transaction: ​ ​ ​ ​ ​ ​ ​ March 31, (Dollars in millions) ​ 2022 Cash consideration ​ $ 107 Non-controlling interest ​ ​ 102 Total enterprise value ​ $ 209 ​ ​ ​ ​ Cash acquired ​ $ 59 Net liabilities assumed, excluding cash ​ ​ ( 16 ) Deferred tax liabilities arising from acquired intangibles ​ ​ ( 32 ) Intangible assets * ​ ​ 107 Goodwill ​ ​ 91 Total purchase price allocation ​ $ 209 * 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 March 31, 2023 ​ Gross Carrying Accumulated Net Carrying (Dollars in millions) Amount Amortization Amount Capitalized software ​ $ 83 ​ $ ( 15 ) ​ $ 68 Customer relationships* ​ 232 ​ ( 141 ) ​ 91 Completed technology ​ 20 ​ ( 20 ) ​ — Patents and trademarks* ​ 18 ​ ( 6 ) ​ 13 Total ​ $ 353 ​ $ ( 182 ) ​ $ 171 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At March 31, 2022 ​ Gross Carrying Accumulated Net Carrying (Dollars in millions) Amount Amortization Amount Capitalized software ​ $ 16 ​ $ ( 16 ) ​ $ 1 Customer relationships* ​ ​ 229 ​ ​ ( 100 ) ​ ​ 129 Completed technology ​ 20 ​ ( 20 ) ​ — Patents and trademarks* ​ 18 ​ ( 2 ) ​ 16 Total ​ $ 283 ​ $ ( 138 ) ​ $ 145 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ Gross Carrying Accumulated Net Carrying (Dollars in millions) Amount Amortization Amount Capitalized software ​ $ 16 ​ $ ( 13 ) ​ $ 3 Customer relationships ​ 130 ​ ( 97 ) ​ 33 Completed technology ​ 20 ​ ( 20 ) ​ — Patents and trademarks ​ 2 ​ ( 2 ) ​ — Total ​ $ 169 ​ $ ( 132 ) ​ $ 36 * 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 88 Table of Contents Parent. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capitalized ​ Customer ​ Patents and ​ ​ (Dollars in millions) ​ Software Relationships ​ Trademarks ​ Total Year ending March 31: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 ​ $ 18 ​ $ 27 ​ $ 3 ​ $ 49 2025 ​ ​ 19 ​ ​ 24 ​ ​ 3 ​ 46 2026 ​ ​ 17 ​ ​ 20 ​ ​ 3 ​ 41 2027 ​ ​ 14 ​ ​ 17 ​ ​ 3 ​ 34 2028 ​ ​ — ​ ​ 1 ​ ​ — ​ 1 Thereafter ​ ​ — ​ ​ 1 ​ ​ — ​ 1 ​ Goodwill ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Currency ​ ​ ​ ​ ​ ​ ​ ​ ​ Additions ​ ​ ​ Additions ​ ​ (Dollars in ​ Balance at ​ Translation ​ ​ ​ ​ ​ ​ Balance at ​ and ​ Balance at ​ and ​ Balance at millions) ​ January 1, ​ and Other ​ Re-allocation ​ ​ ​ December 31, ​ Other ​ March 31, ​ Other ​ March 31, Segment ​ 2021 ​ Adjustments* ​ of Goodwill ​ Impairment 2021 Adjustments 2022 Adjustments* 2023 Americas ​ $ 440 ​ $ ( 10 ) ​ $ ( 431 ) ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — EMEA ​ ​ 288 ​ ​ 5 ​ ​ — ​ ​ ( 293 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Asia Pacific ​ ​ 78 ​ ​ ( 16 ) ​ ​ ( 62 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Japan ​ ​ 424 ​ ​ ( 9 ) ​ ​ — ​ ​ — ​ ​ 415 ​ ​ 91 ​ ​ 506 ​ ​ ( 11 ) ​ ​ 495 United States ​ ​ — ​ ​ — ​ ​ 176 ​ ​ ( 176 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Principal Markets ​ — ​ 1 ​ ​ 141 ​ — ​ 142 ​ — ​ 142 ​ — ​ ​ 142 Strategic Markets ​ — ​ — ​ ​ 176 ​ — ​ 176 ​ — ​ 176 ​ — ​ ​ 176 Total ​ $ 1,230 ​ $ ( 29 ) ​ ​ — ​ $ ( 469 ) ​ $ 732 ​ $ 91 ​ $ 823 ​ $ ( 11 ) ​ $ 812 * 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 89 Table of Contents 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 %. 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 53 % . 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. NOTE 11. BORROWINGS Debt The following table presents the components of our debt: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ December 31, (Dollars in millions) ​ Interest Rate ​ Maturity ​ 2023 ​ 2022 ​ 2021 Unsecured floating-rate term loan ​ 5.83 %* ​ November 2024 ​ $ 500 ​ $ 500 ​ $ 500 Commercial loan agreement ​ 3.00 % ​ July 2026 ​ ​ 96 ​ ​ 123 ​ ​ 129 Unsecured senior notes due 2026 ​ 2.05 % ​ October 2026 ​ ​ 700 ​ ​ 700 ​ ​ 700 Unsecured senior notes due 2028 ​ 2.70 % ​ October 2028 ​ ​ 500 ​ ​ 500 ​ ​ 500 Unsecured senior notes due 2031 ​ 3.15 % ​ October 2031 ​ ​ 650 ​ ​ 650 ​ ​ 650 Unsecured senior notes due 2041 ​ 4.10 % ​ October 2041 ​ ​ 550 ​ ​ 550 ​ ​ 550 Finance lease obligations ** ​ 3.36 % ​ 2023-2028 ​ ​ 242 ​ ​ 219 ​ ​ 222 ​ ​ ​ ​ ​ ​ $ 3,238 ​ $ 3,242 ​ $ 3,251 Less: Unamortized discount ​ ​ ​ ​ ​ ​ 5 ​ ​ 5 ​ ​ 5 Less: Unamortized debt issuance costs ​ ​ ​ ​ 13 ​ ​ 15 ​ ​ 15 Less: Current maturities of long-term debt ​ ​ ​ ​ 110 ​ ​ 96 ​ ​ 103 Total long-term debt ​ ​ ​ $ 3,111 ​ $ 3,127 ​ $ 3,128 * 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. 90 Table of Contents Contractual obligations of long-term debt outstanding at March 31, 2023, exclusive of finance lease obligations, were as follows: ​ ​ ​ ​ ​ (Dollars in millions)* Principal Year ending March 31: ​ ​ ​ 2024 ​ $ 28 2025 ​ 529 2026 ​ 29 2027 ​ 710 2028 ​ ​ — Thereafter ​ 1,700 Total ​ $ 2,996 * Contractual obligations approximate scheduled repayments. ​ Senior Unsecured Notes 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. The Notes were offered and sold to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to non-U.S. persons in reliance on Regulation S of the Securities Act. 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 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 ​ In October 2021, we entered into a $ 500 million three-year variable rate term loan credit agreement (the “Term Loan Credit Agreement”). In November 2021, we drew down the full $ 500 million available under the Term Loan Credit Agreement. ​ In October 2021, we entered into a $ 3.15 billion multi-currency revolving credit agreement (the “Revolving Credit Agreement” and, together with the Term Loan Credit Agreement, the “Credit Agreements”) for our future liquidity needs. ​ The Revolving Credit Agreement expires, unless extended, in October 2026, and the Term Loan Credit Agreement matures, unless extended, in November 2024. 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 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 91 Table of Contents 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 In the second quarter of 2021, our former Parent entered into a $ 140 million loan agreement with a bank to finance a purchase of software licenses on behalf of Kyndryl. The loan was transferred to Kyndryl in conjunction with the Separation and is included in the Company’s consolidated financial statements. The carrying amount of the loan approximates fair value. If measured at fair value in the consolidated financial statements, the loan would be classified as Level 2 in the fair value hierarchy. ​ The amortizing loan is secured by collateral and contains covenants, primarily for compliance with the scheduled payments in the loan agreement. Failure to comply with the loan covenants could constitute an event of default and result in the immediate repayment of the principal and interest on the loan. The Company is in compliance with all of the loan covenants and is expected to maintain a credit rating at or above the level outlined in the loan agreement. ​ Interest on Debt 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. 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. ​ NOTE 12. OTHER LIABILITIES ​ The following table provides the components of other liabilities at March 31, 2023, March 31, 2022 and December 31, 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At March 31, ​ At December 31, (Dollars in millions) 2023 2022 2021 Workforce rebalancing (current) ​ $ 75 ​ $ 22 ​ $ 82 Other current accruals ​ ​ 549 ​ ​ 660 ​ ​ 662 Other accrued expenses and liabilities ​ $ 624 ​ $ 682 ​ $ 744 Workforce rebalancing (noncurrent) ​ $ 21 ​ $ 35 ​ $ 51 Deferred taxes ​ ​ 98 ​ ​ 86 ​ ​ 135 Income tax reserve ​ ​ 85 ​ ​ 55 ​ ​ 44 Other ​ ​ 246 ​ ​ 273 ​ ​ 293 Other noncurrent liabilities ​ $ 450 ​ $ 449 ​ $ 522 ​ 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. 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. For more information, see Note 5 – Taxes. 92 Table of Contents NOTE 13. COMMITMENTS AND CONTINGENCIES 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 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. Given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the Company or its clients could become subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of Kyndryl’s scope and scale, the Company is subject to, or could become subject to, actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the Company’s benefit plans), as well as actions with respect to contracts, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, employees, government and regulatory agencies, stockholders and representatives of the locations in which the Company does business. Some of the actions to which the Company is, or may become, party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise. Additionally, the Company is, or may be, a party to agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. The Company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. 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. ​ 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. Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. 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”) 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 93 Table of Contents 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. ​ NOTE 14. EQUITY ​ 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) Pretax Tax (Expense) Net of Tax For the year ended March 31, 2023 Amount Benefit Amount Foreign currency translation adjustments ​ $ ( 186 ) ​ $ — ​ $ ( 186 ) Unrealized gains (losses) on cash flow hedges: ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ $ ( 4 ) ​ $ — ​ $ ( 4 ) Reclassification of (gains) losses to net income ​ ​ 2 ​ ​ — ​ ​ 2 Total unrealized gains (losses) on cash flow hedges ​ $ ( 3 ) ​ $ — ​ $ ( 2 ) Retirement-related benefit plans*: ​ ​ ​ ​ ​ ​ Prior service (credits) costs ​ $ 4 ​ $ — ​ $ 3 Net gains (losses) arising during the period ​ ​ 175 ​ ​ — ​ ​ 175 Curtailments and settlements ​ ​ 10 ​ ​ ( 2 ) ​ ​ 8 Amortization of prior service (credits) costs ​ ​ 1 ​ ​ — ​ ​ 1 Amortization of net (gains) losses ​ ​ 40 ​ ​ ( 11 ) ​ ​ 29 Total retirement-related benefit plans ​ $ 229 ​ $ ( 14 ) ​ $ 215 Other comprehensive income (loss) ​ $ 40 ​ $ ( 14 ) ​ $ 27 ​ * 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) Pretax Tax (Expense) Net of Tax For the three months ended March 31, 2022: Amount Benefit Amount Foreign currency translation adjustments ​ $ ( 51 ) ​ $ — ​ $ ( 51 ) Unrealized gains (losses) on cash flow hedges: ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ ​ 1 ​ ​ — ​ ​ 1 Reclassification of (gains) losses to net income ​ ​ ( 1 ) ​ ​ — ​ ​ ( 1 ) Total unrealized gains (losses) on cash flow hedges ​ $ — ​ $ — ​ $ — Retirement-related benefit plans*: ​ ​ ​ ​ ​ ​ Net gains (losses) arising during the period ​ $ 136 ​ $ ( 45 ) ​ $ 91 Curtailments and settlements ​ ​ 4 ​ ​ ( 1 ) ​ ​ 3 Amortization of net (gains) losses ​ 16 ​ ​ ( 4 ) ​ ​ 12 Total retirement-related benefit plans ​ $ 156 ​ $ ( 50 ) ​ $ 105 Other comprehensive income (loss) ​ $ 105 ​ $ ( 50 ) ​ $ 54 * These AOCI components are included in the computation of net periodic benefit cost. Refer to Note 16 – Retirement-Related Benefits for additional information. 94 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in millions) Pretax Tax (Expense) Net of Tax For the year ended December 31, 2021: Amount Benefit Amount Foreign currency translation adjustments ​ $ 194 ​ $ — ​ $ 194 Unrealized gains (losses) on cash flow hedges ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ ​ 4 ​ ​ — ​ ​ 4 Reclassification of (gains) losses to net income ​ ​ ( 1 ) ​ ​ — ​ ​ ( 1 ) Total unrealized gains (losses) on cash flow hedges ​ $ 3 ​ $ — ​ $ 3 Retirement-related benefit plans*: ​ ​ ​ ​ ​ ​ Prior service (credits) costs ​ $ 1 ​ $ ( 2 ) ​ $ ( 1 ) Net gains (losses) arising during the period ​ ​ 72 ​ ​ ( 17 ) ​ ​ 54 Curtailments and settlements ​ ​ 3 ​ ​ ( 1 ) ​ ​ 2 Amortization of net (gains) losses ​ ​ 51 ​ ​ ( 13 ) ​ ​ 38 Total retirement-related benefit plans ​ $ 127 ​ $ ( 33 ) ​ $ 94 Other comprehensive income (loss) ​ $ 324 ​ $ ( 33 ) ​ $ 292 * 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) Pretax Tax (Expense) Net of Tax For the year ended December 31, 2020: Amount Benefit Amount Foreign currency translation adjustments ​ $ 129 ​ $ — ​ $ 129 Retirement-related benefit plans*: ​ ​ ​ ​ ​ ​ Net gains (losses) arising during the period ​ $ ( 41 ) ​ $ 13 ​ $ ( 28 ) Amortization of prior service (credits) costs ​ ​ ( 1 ) ​ ​ — ​ ​ — Amortization of net (gains) losses ​ 36 ​ ​ ( 12 ) ​ ​ 24 Total retirement-related benefit plans ​ $ ( 6 ) ​ $ 2 ​ $ ( 4 ) Other comprehensive income (loss) ​ $ 123 ​ $ 2 ​ $ 125 * These AOCI components are included in the computation of net periodic benefit cost. Refer to Note 16 – Retirement-Related Benefits for additional information. The following table presents the components of accumulated other comprehensive income (loss), net of taxes: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Unrealized ​ Foreign Currency ​ Net Change ​ Accumulated Other ​ ​ Gains (Losses) ​ Translation ​ Retirement-Related ​ Comprehensive (Dollars in millions) on Cash Flow Hedges ​ Adjustments* Benefit Plans Income (Loss) December 31, 2019 ​ $ — ​ $ ( 1,007 ) ​ $ ( 214 ) ​ $ ( 1,221 ) Other comprehensive income (loss) ​ — ​ 129 ​ ( 4 ) ​ 125 December 31, 2020 ​ $ — ​ $ ( 878 ) ​ $ ( 218 ) ​ $ ( 1,096 ) Net transfers from Parent ​ ​ — ​ ​ — ​ ​ ( 339 ) ​ ​ ( 339 ) Other comprehensive income (loss) ​ ​ 3 ​ ​ 194 ​ ​ 94 ​ ​ 292 December 31, 2021 ​ $ 3 ​ $ ( 684 ) ​ $ ( 463 ) ​ $ ( 1,143 ) Other comprehensive income (loss) ​ ​ — ​ ​ ( 51 ) ​ ​ 105 ​ ​ 54 March 31, 2022 ​ $ 3 ​ $ ( 735 ) ​ $ ( 357 ) ​ $ ( 1,089 ) Other comprehensive income (loss) ​ ​ ( 2 ) ​ ​ ( 186 ) ​ ​ 215 ​ ​ 27 March 31, 2023 ​ $ — ​ $ ( 921 ) ​ $ ( 142 ) ​ $ ( 1,062 ) ​ * Foreign currency translation adjustments are presented gross. ​ ​ 95 Table of Contents NOTE 15. STOCK-BASED COMPENSATION ​ The following table presents stock-based compensation cost which is included in net income (loss). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Ended ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ March 31, ​ Year Ended December 31 (Dollars in millions) 2023 2022 2021 2020 Cost of services ​ $ 21 ​ $ 7 ​ $ 28 ​ $ 26 Selling, general and administrative expense ​ ​ 92 ​ ​ 24 ​ ​ 44 ​ ​ 37 Pretax stock-based compensation cost ​ $ 113 ​ $ 31 ​ $ 71 ​ $ 64 Income tax benefits ​ ​ ( 5 ) ​ ​ ( 5 ) ​ ​ ( 13 ) ​ ​ ( 14 ) Stock-based compensation cost, net of tax ​ $ 108 ​ $ 26 ​ $ 58 ​ $ 49 ​ 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 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 and performance-conditioned stock units are cliff-vested at the end of the performance period if the market or performance conditions have been satisfied. 96 Table of Contents The following table summarizes RSU, market-conditioned stock units, performance-conditioned stock units and stock option activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Market-Conditioned ​ Performance-Conditioned ​ ​ RSUs ​ Stock Units ​ Stock Units ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ Average ​ ​ ​ ​ Average ​ ​ ​ ​ Average ​ Number ​ Grant-Date ​ Number ​ Grant-Date Number ​ Grant-Date ​ ​ of Units ​ Fair Value ​ of Units ​ Fair Value ​ of Units ​ Fair Value ​ (in millions) (per share) (in millions) (per share) (in millions) (per share) Nonvested balance at December 31, 2021 ​ ​ 10.2 ​ $ 26.82 ​ ​ 1.8 ​ $ 15.14 ​ ​ — ​ $ — Awards granted ​ ​ 0.4 ​ ​ 17.61 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Awards vested ​ ​ ( 0.5 ) ​ ​ 28.04 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Awards canceled/forfeited ​ ​ ( 0.2 ) ​ ​ 28.44 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Nonvested balance at March 31, 2022 ​ ​ 9.8 ​ $ 26.36 ​ ​ 1.8 ​ $ 15.14 ​ ​ — ​ $ — Awards granted ​ ​ 5.0 ​ $ 10.80 ​ ​ 0.7 ​ $ 12.51 ​ ​ 2.5 ​ $ 10.62 Awards vested ​ ​ ( 4.9 ) ​ ​ 26.09 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Awards canceled/forfeited ​ ​ ( 0.5 ) ​ ​ 23.09 ​ ​ ( 0.2 ) ​ ​ 14.46 ​ ​ ( 0.1 ) ​ ​ 10.62 Nonvested balance at March 31, 2023 ​ ​ 9.4 ​ $ 18.43 ​ ​ 2.3 ​ $ 14.40 ​ ​ 2.3 ​ $ 10.62 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock Options ​ ​ ​ ​ ​ Weighted- ​ ​ Number ​ Average ​ of Units Exercise Price ​ (in millions) (per share) Outstanding balance at December 31, 2021 ​ ​ 3.8 ​ $ 17.76 Awards granted ​ ​ — ​ ​ — Awards exercised ​ ​ — ​ ​ — Awards canceled/forfeited ​ ​ — ​ ​ — Outstanding balance at March 31, 2022 ​ ​ 3.8 ​ $ 17.76 Awards granted ​ ​ — ​ ​ — Awards exercised ​ ​ — ​ ​ — Awards canceled/forfeited ​ ​ ( 0.2 ) ​ ​ 17.78 Outstanding balance at March 31, 2023 ​ ​ 3.7 ​ $ 17.76 ​ 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. 97 Table of Contents 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. ​ NOTE 16. RETIREMENT-RELATED BENEFITS Defined Benefit Pension Plans The Company sponsors and co-sponsors defined benefit pension plans that cover certain non-U.S. employees and retirees. The defined benefit pension plan benefits are based principally on employees’ years of service and/or compensation levels at or near retirement. These plans are accounted for as defined benefit pension plans for purposes of the consolidated financial statements. 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 following tables present the components of net periodic pension cost for the defined benefit pension plans recognized in the Consolidated Income Statement. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three ​ ​ ​ ​ ​ ​ Year Ended ​ Months Ended ​ Year Ended ​ Year Ended ​ ​ March 31, ​ March 31, ​ December 31, ​ December 31, (Dollars in millions) 2023 2022 ​ 2021 2020 Service cost $ 44 ​ $ 14 $ 81 $ 109 Interest cost* ​ ​ 32 ​ ​ 6 ​ 11 ​ 10 Expected return on plan assets* ​ ​ ( 43 ) ​ ​ ( 10 ) ​ ( 30 ) ​ ( 24 ) Amortization of prior service costs (credits)* ​ ​ 1 ​ ​ — ​ — ​ ( 1 ) Recognized actuarial losses* ​ ​ 40 ​ ​ 16 ​ 51 ​ 36 Curtailments and settlements* ​ ​ 10 ​ ​ 4 ​ 2 ​ — Total net periodic pension cost $ 84 ​ $ 30 $ 115 $ 130 * These components of net periodic pension cost are included in other expense in the Consolidated Income Statement. ​ 98 Table of Contents The following table presents the changes in net benefit obligation and plan assets for the defined benefit pension plans. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ​ Three Months ​ Year ​ ​ Ended ​ Ended ​ Ended ​ ​ March 31, ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Change in benefit obligation ​ ​ Benefit obligation at beginning of period $ 2,024 $ 2,302 $ 1,202 Service cost* 44 14 10 Interest cost 32 6 4 Plan participants’ contributions 4 1 1 Benefit obligation assumed from former Parent** — — 1,178 Actuarial losses (gains) ( 299 ) ( 224 ) ( 43 ) Benefits paid from trust ( 15 ) ( 4 ) ( 2 ) Direct benefit payments ( 37 ) ( 11 ) ( 3 ) Foreign exchange impact ( 66 ) ( 50 ) ( 34 ) Amendments, curtailments, settlements and other ( 29 ) ( 11 ) ( 11 ) Benefit obligation at end of period $ 1,659 $ 2,024 $ 2,302 Change in plan assets ​ ​ ​ Fair value of plan assets at beginning of period $ 1,383 $ 1,496 $ 654 Actual return on plan assets ( 88 ) ( 71 ) 39 Employer contributions 27 2 23 Fair value of plan assets assumed from former Parent** — — 810 Plan participants’ contributions 4 1 1 Benefits paid from trust ( 15 ) ( 4 ) ( 2 ) Foreign exchange impact ( 40 ) ( 34 ) ( 22 ) Settlements ( 44 ) ( 7 ) ( 8 ) Fair value of plan assets at end of period $ 1,226 $ 1,383 $ 1,496 Funded Status at end of period $ ( 433 ) $ ( 641 ) $ ( 807 ) Accumulated benefit obligation*** $ 1,574 $ 1,907 $ 2,181 * Represents service costs attributable to Company-sponsored and co-sponsored plans. ** Represents the impact to benefit obligation and fair value of plan assets resulting from pension assets and liabilities assumed in connection with establishment of certain Kyndryl legal entities . *** Represents the benefit obligation assuming no future participant compensation increases. The following table presents the amounts recorded in the Consolidated Balance Sheet for the defined benefit pension plans. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At March 31, ​ At March 31, ​ At December 31, (Dollars in millions) 2023 2022 ​ 2021 Noncurrent assets – pension assets ​ $ 94 ​ $ 61 ​ $ 58 Current liabilities – accrued compensation and benefits ​ ( 38 ) ​ ( 28 ) ​ ( 28 ) Noncurrent liabilities – retirement and nonpension postretirement benefit obligations ​ ( 489 ) ​ ( 674 ) ​ ( 836 ) Funded status, net ​ $ ( 433 ) ​ $ ( 641 ) ​ $ ( 807 ) ​ 99 Table of Contents 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 ​ ​ Benefit ​ Plan ​ Benefit ​ Plan ​ Benefit ​ Plan (Dollars in millions) Obligation Assets Obligation Assets Obligation Assets PBO in excess of plan assets ​ $ 953 ​ $ 426 ​ $ 1,743 ​ $ 1,040 ​ $ 1,990 ​ $ 1,125 ABO in excess of plan assets ​ 630 ​ 171 ​ 1,553 ​ 962 ​ 1,790 ​ 1,039 Plan assets in excess of PBO ​ 706 ​ 800 ​ 281 ​ 343 ​ 312 ​ 371 ​ 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 defined benefit pension plans. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ​ Three Months ​ Year ​ ​ Ended ​ Ended ​ Ended ​ ​ March 31, ​ March 31, ​ December 31, (Dollars in millions) 2023 2022 2021 Net loss (gain) at beginning of period $ 474 $ 629 $ 314 Current period loss (gain) ​ ​ ( 172 ) ​ ​ ( 135 ) ​ ​ ( 75 ) Curtailments and settlements ​ ​ ( 10 ) ​ ​ ( 4 ) ​ ​ ( 3 ) Amortization of net loss included in net periodic benefit cost ​ ​ ( 39 ) ​ ​ ( 15 ) ​ ​ ( 51 ) Separation-related transfers from Parent ** ​ ​ — ​ ​ — ​ ​ 444 Net loss (gain) at end of period ​ $ 253 ​ $ 474 ​ $ 629 Prior service costs (credits) at beginning of period ​ ​ 9 ​ ​ 9 ​ ​ ( 2 ) Current period prior service costs (credits) ​ ​ — ​ ​ — ​ ​ 3 Amortization for prior service costs (credits) included in net periodic benefit cost ​ ​ ( 1 ) ​ ​ — ​ ​ — Separation-related transfers from Parent ** ​ ​ — ​ ​ — ​ ​ 9 Prior service costs (credits) at end of period ​ $ 8 ​ $ 9 ​ $ 9 Total amounts recognized in accumulated other comprehensive loss (income) * $ 261 $ 484 $ 638 * 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. These transfers are not recognized in OCI; rather they are recognized as transfers into AOCI. See Note 14 – Equity. 100 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three ​ ​ ​ ​ ​ ​ Year Ended ​ Months Ended ​ Year Ended ​ Year Ended ​ ​ March 31, ​ March 31, ​ December 31, ​ December 31, Weighted-average assumptions used to measure 2023 ​ 2022 ​ 2021 ​ 2020 Net periodic pension cost ​ ​ ​ Discount rate 1.88 % ​ 1.19 % ​ 0.62 % ​ 0.86 % Expected long-term returns on plan assets 3.33 % ​ 3.00 % ​ 3.00 % ​ 4.03 % Rate of compensation increase 2.54 % ​ 2.30 % ​ 2.22 % ​ 2.25 % Benefit obligations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Discount rate ​ 3.57 % ​ 1.88 % ​ 1.19 % ​ 0.62 % Rate of compensation increase ​ 2.85 % ​ 2.54 % ​ 2.30 % ​ 2.22 % Interest crediting rate - cash balance plans ​ 1.52 % ​ 1.52 % ​ 1.43 % ​ ​ ​ ​ 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. This is the benchmark for developing the respective discount rates. In developing the expected long-term rate of return on assets, the Company considers the long-term expectations for future returns. 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. 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. Typically the responsibility for determining the target allocation and managing the investments lies with a plan governing board that may include up to 50 percent of members elected by employees and retirees. 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. 101 Table of Contents 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) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity securities ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 9 ​ $ — ​ $ — ​ $ 9 Fixed income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Government and related (1) ​ ​ — ​ ​ 107 ​ ​ — ​ ​ 107 ​ ​ — ​ ​ 147 ​ ​ — ​ ​ 147 Corporate bonds ​ — ​ 20 ​ — ​ 20 ​ ​ — ​ ​ 29 ​ ​ — ​ ​ 29 Insurance contracts ​ ​ — ​ ​ 191 ​ ​ — ​ ​ 191 ​ ​ — ​ ​ 224 ​ ​ — ​ ​ 224 Cash and short-term investments (2) ​ 3 ​ — ​ — ​ 3 ​ ​ 9 ​ ​ 1 ​ ​ — ​ ​ 10 Derivative assets (3) ​ ​ — ​ ​ 5 ​ ​ — ​ ​ 5 ​ ​ 3 ​ ​ 9 ​ ​ — ​ ​ 12 Subtotal ​ $ 3 ​ $ 322 ​ $ — ​ $ 326 ​ $ 21 ​ $ 410 ​ $ — ​ $ 431 Investments measured at net asset value using NAV as a practical expedient (4) ​ — ​ — ​ — ​ 901 ​ ​ — ​ ​ — ​ ​ — ​ ​ 953 Fair value of plan assets ​ $ 3 ​ $ 322 ​ $ — ​ $ 1,226 ​ $ 21 ​ $ 410 ​ $ — ​ $ 1,383 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 (Dollars in millions) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 1 Level 2 Level 3 Total Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 9 ​ $ — ​ $ — ​ $ 9 Fixed income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Government and related (1) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ — ​ ​ 158 ​ ​ — ​ ​ 158 Corporate bonds ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ — ​ 32 ​ — ​ 32 Insurance contracts ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ — ​ 255 ​ — ​ 255 Cash and short-term investments (2) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 14 ​ — ​ — ​ 14 Derivative assets (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3 ​ ​ 12 ​ ​ — ​ ​ 15 Subtotal ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 26 ​ $ 457 ​ $ — ​ $ 483 Investments measured at net asset value using NAV as a practical expedient (4) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ — ​ — ​ — ​ 1,013 Fair value of plan assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 26 ​ $ 457 ​ $ — ​ $ 1,496 (1) Includes debt issued by national, state and local governments and agencies. (2) Includes cash, cash equivalents and short-term marketable securities. (3) Includes forward contracts, interest rate swaps, exchange traded and other over-the-counter derivatives. (4) Investments measured at fair value using the net asset value (NAV) per share (or its equivalent), as a practical expedient. These investments include commingled funds, hedge funds, common collective trusts, private equity partnerships and real estate partnerships. ​ 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. 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. There were no changes in valuation techniques during the periods presented. Equity securities and mutual funds: Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. Mutual funds are typically valued based on quoted market prices. These assets are generally classified as Level 1. 102 Table of Contents Fixed income: Fixed-income securities, other than insurance contracts, are typically valued using the closing price reported on the major market on which the individual securities are traded, if available. Assets fair valued using this methodology are generally classified as Level 2. If market prices are unavailable, the fair value is estimated using pricing models or quoted prices of securities with similar characteristics. Insurance contracts: Fair value is based on the expected value of the insurance benefits of the insurance contracts. The insurance benefits are assessed using the same interest rate and mortality table used to determine the liability. These assets are generally classified as Level 2. Cash and short-term investments: Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are generally classified as Level 1. Derivatives assets: Exchange-traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded. Forward contracts are valued using a mid-close price. Over-the-counter derivatives are valued using pricing models. These models require a variety of inputs, yield curves, credit curves, measures of volatility and foreign exchange rates. Derivative assets are classified as Level 1 or Level 2 depending on availability of quoted market prices. Investments measured at net asset value: Certain investments are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) as a practical expedient. These investments, which may include commingled funds, hedge funds, common collective trusts, private equity partnerships and real estate partnerships, are typically valued using the NAV provided by the administrator of the fund. 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. 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 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 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. The following table presents the expected benefit payments to participants of the defined benefit pension plans. ​ ​ ​ ​ ​ ​ ​ Expected (Dollars in millions) Benefit Payments Fiscal year ending March 31, ​ ​ ​ 2024 ​ $ 109 2025 ​ 115 2026 ​ 113 2027 ​ 115 2028 ​ 123 2029-2033 ​ 647 ​ 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. ​ 103 Table of Contents 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. ​ NOTE 17. 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. 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 $ 1.4 billion, $ 924 million, $ 4.0 billion and $ 3.8 billion for the year ended March 31, 2023, the 104 Table of Contents 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 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 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. ​ Net Parent Investment 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 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 105 Table of Contents Sheet. 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. 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 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. ​ NOTE 18. 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) 2022 2021 (unaudited) Revenues * ​ $ 4,431 ​ $ 4,771 ​ ​ ​ ​ ​ ​ ​ Cost of services ** ​ $ 3,824 ​ $ 4,318 Selling, general and administrative expenses ​ ​ 690 ​ ​ 714 Workforce rebalancing charges ​ ​ — ​ ​ 52 Transaction-related costs ​ ​ 58 ​ ​ 55 Interest expense ​ ​ 21 ​ ​ 14 Other expenses ​ ​ 27 ​ ​ 22 Total costs and expenses ​ $ 4,620 ​ $ 5,175 ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ $ ( 189 ) ​ $ ( 403 ) Provision for income taxes ​ $ 40 ​ $ 91 Net income (loss) ​ $ ( 229 ) ​ $ ( 494 ) ​ ​ ​ ​ ​ ​ ​ Basic earnings (loss) per share ​ $ ( 1.02 ) ​ $ ( 2.20 ) Diluted earnings (loss) per share ​ $ ( 1.02 ) ​ $ ( 2.20 ) ​ ​ ​ ​ ​ ​ ​ Weighted-average basic shares outstanding ​ ​ 224.4 ​ ​ 224.1 Weighted-average diluted shares outstanding ​ ​ 224.4 ​ ​ 224.1 * 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 ​ 106 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, (Dollars in millions) 2022 2021 (unaudited) Cash flows from operating activities: ​ ​ ​ Net income (loss) ​ $ ( 229 ) ​ $ ( 494 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: ​ ​ ​ ​ Depreciation and amortization ​ ​ ​ ​ Depreciation of property and equipment ​ ​ 246 ​ ​ 339 Depreciation of right-of-use assets ​ ​ 103 ​ ​ 99 Amortization of transition costs and prepaid software ​ 319 ​ 323 Amortization of capitalized contract costs ​ ​ 136 ​ ​ 160 Amortization of intangible assets ​ 7 ​ 7 Stock-based compensation ​ ​ 31 ​ ​ 16 Deferred taxes ​ ​ ( 10 ) ​ ​ 17 Net (gain) loss on asset sales and other ​ ​ 12 ​ ​ ( 1 ) Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Deferred costs (excluding amortization) ​ ​ ( 672 ) ​ ​ ( 548 ) Right-of-use assets and liabilities (excluding depreciation) ​ ​ ( 117 ) ​ ​ ( 118 ) Workforce rebalancing liabilities ​ ​ ( 73 ) ​ ​ ( 138 ) Receivables ​ ( 31 ) ​ ( 138 ) Accounts payable ​ ​ 384 ​ ​ ( 99 ) Taxes (including items settled with former Parent in prior-year period) ​ ​ ( 66 ) ​ ​ 74 Other assets and other liabilities ​ 151 ​ 172 Net cash provided by (used in) operating activities ​ $ 189 ​ $ ( 328 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ Payments for property and equipment ​ $ ( 180 ) ​ $ ( 180 ) Proceeds from disposition of property and equipment ​ 9 ​ 93 Other investing activities, net ​ ​ ( 53 ) ​ ​ ( 13 ) Net cash used in investing activities ​ $ ( 225 ) ​ $ ( 100 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ ​ ​ Debt repayments ​ $ ( 28 ) ​ $ ( 17 ) Net transfers from Parent ​ ​ — ​ ​ 460 Common stock repurchases for tax withholdings ​ ( 3 ) ​ — Other financing activities, net ​ ​ ( 12 ) ​ ​ — Net cash provided by (used in) financing activities ​ $ ( 43 ) ​ $ 443 ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash, cash equivalents and restricted cash ​ $ ( 7 ) ​ $ ( 3 ) Net change in cash, cash equivalents and restricted cash ​ $ ( 86 ) ​ $ 13 ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents and restricted cash at January 1 ​ $ 2,240 ​ $ 38 Cash, cash equivalents and restricted cash at March 31 ​ $ 2,154 ​ $ 50 ​ ​ ​ ​ ​ ​ ​ Supplemental data ​ ​ ​ ​ ​ ​ Income taxes paid, net of refunds received ​ $ 47 ​ $ — Interest paid on debt ​ $ 3 ​ $ — ​ 107 Table of Contents NOTE 19. 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. ​ ​ ​ ​ ​ ​ ​ Year Ended (Dollars in millions) March 31, 2023 United States ​ $ 14 Japan ​ ​ 2 Principal Markets ​ ​ 63 Strategic Markets ​ ​ 47 Total charges by segment ​ $ 125 Corporate charges not allocated to the segments ​ ​ 10 Total charges ​ $ 135 ​ 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. ​ ​ ​ ​ ​ ​ ​ Year Ended (Dollars in millions) March 31, 2023 Cost of services ​ $ 71 Selling, general and administrative expenses ​ ​ 9 Workforce rebalancing charges (benefits) ​ ​ 55 Total charges ​ $ 135 ​ 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charges ​ Charges ​ Abandonment ​ ​ ​ ​ ​ Workforce ​ Related to ​ Related to ​ of Certain ​ ​ ​ ​ Rebalancing ​ Ceasing to Use ​ Lease ​ Company-owned ​ ​ (Dollars in millions) Charges* ​ Leased Assets ​ Terminations ​ Fixed Assets ​ Total Balance at March 31, 2022 ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Charges ​ ​ 55 ​ ​ 69 ​ ​ 4 ​ ​ 7 ​ ​ 135 Cash payments ​ ​ — ​ ​ — ​ ​ ( 1 ) ​ ​ — ​ ​ ( 1 ) Non-cash adjustments ​ ​ — ​ ​ ( 69 ) ​ ​ — ​ ​ ( 7 ) ​ ​ ( 76 ) Balance at March 31, 2023 ​ $ 55 ​ $ — ​ $ 3 ​ $ — ​ $ 58 * 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. ​ ​ ​ ​ ​ 108 Table of Contents ​ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None. ​