What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-05-30 compared with 2023-05-26 · 446 added, 467 removed, 1246 unchanged (42% of the section changed)

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

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

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

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

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

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

Consolidated Income Statement for the Years Ended March 31, 2024 and 2023, and December 31, 2021 and the Three Months Ended March 31, 2022

Consolidated Statement of Comprehensive Income (Loss) for the Years Ended March 31, 2024 and 2023, and December 31, 2021 and the Three Months Ended March 31, 2022

Consolidated Balance Sheet as of March 31, 2024 and 2023

Consolidated Statement of Cash Flows for the Years Ended March 31, 2024 and 2023, and December 31, 2021 and the Three Months Ended March 31, 2022

Consolidated Statement of Equity for the Years Ended March 31, 2024 and 2023, and December 31, 2021 and the Three Months Ended March 31, 2022

Notes to Consolidated Financial Statements

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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”).

and its subsidiaries (the “Company”) as of March 31, 2024 and 2023, and the related consolidated statements of income, of comprehensive income (loss), of equity and of cash flows for each of the two years in the period ended March 31, 2024, for the three months ended March 31, 2022 and for the year ended December 31, 2021, 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, 2024, 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.

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, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2024, for the three months ended March 31, 2022 and for the year ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to certain information technology general controls, specifically ineffective (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel;

(ii) program development and change management controls;

and (iii) certain computer operations controls.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.

We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

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.

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 referred to above.

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.

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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.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial 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.

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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 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.

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

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

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

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

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

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

Reporting Unit Goodwill Impairment Assessment - 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.

Revenue Recognition for Certain Services

As described in Notes 1 and 3 to the consolidated financial statements, the Company recorded total revenues of $16,052 million for the year ended March 31, 2024, of which a majority relates to services that are single performance obligations comprised of a series of distinct services.

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.

Revenue is recognized when, or as, control of a promised service transfers to a client, in an amount that reflects the consideration to which management expects to be entitled in exchange for transferring those services.

If the consideration promised in a contract includes a variable amount, management estimates the amount to which it expects to be entitled using either the expected value or most likely amount method.

The principal consideration for our determination that performing procedures relating to revenue recognition for certain services is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition.

As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified that impacted the procedures performed related to revenue recognition.

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

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

These procedures included testing the effectiveness of controls relating to the revenue recognition process.

These procedures also included, among others (i) evaluating the Company’s accounting policies related to the recognition of revenue for services;

(ii) testing the completeness, accuracy, and

occurrence of revenue recognized for a sample of certain services revenue transactions by obtaining and inspecting source documents such as master services agreements, individual statements of work, invoices, and cash receipts;

and (iii) confirming, on a sample basis, outstanding customer invoice balances as of year-end and, for confirmations not returned, obtaining and inspecting source documents, such as invoices and subsequent cash receipts, where applicable.

/s/ PricewaterhouseCoopers LLP

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(In millions, except per share amounts)

Year Ended December 31,

Year Ended March 31,

Cost of services **

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Workforce rebalancing charges

Transaction-related costs

Transaction-related costs (benefits)

Impairment expense

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Weighted-average diluted shares outstanding

* 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

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

** 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, and $ 3,979 for the year ended December 31, 2021

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

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(Dollars in millions)

Year Ended December 31,

Year Ended March 31,

Net income (loss)

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Foreign currency translation adjustments:

Foreign currency translation adjustments

Unrealized losses on net investment hedges

Total foreign currency translation adjustments

Unrealized gains (losses) on cash flow hedges:

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Restricted cash

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

Accounts receivable (net of allowances for credit losses of $ 22 at March 31, 2024 and $ 32 at March 31, 2023)

Deferred costs (current portion)

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shares issued:

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

March 31, 2024 – 233.7 , March 31, 2023 – 229.6 )

Accumulated deficit

Treasury stock, at cost (shares:

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

March 31, 2024 – 3.3 , March 31, 2023 – 1.9 )

Accumulated other comprehensive income (loss)

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Total liabilities and equity

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

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

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

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(Dollars in millions)

Year Ended December 31,

Year Ended March 31,

Cash flows from operating activities:

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Amortization of capitalized contract costs

Amortization of intangible assets

Amortization of acquisition-related intangible assets

Goodwill impairment

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Accounts payable

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

Taxes (including items settled with former Parent in 2021 period)

Other assets and other liabilities

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Other comprehensive income (loss), net of tax

Net transfers from Parent

Issuance of common stock and reclassification of net transfers from Parent

Common stock issued under employee plans

Purchases of treasury stock

Changes in non-controlling interests

Equity - December 31, 2021

Common Stock and

Paid-In Capital

Comprehensive

Income (Loss)

Equity - January 1, 2021

Net income (loss)

Other comprehensive income (loss), net of tax

Issuance of common stock and reclassification of net transfers from Parent

Common stock issued under employee plans

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Changes in non-controlling interests

Equity - December 31, 2021

Common Stock and

Paid-In Capital

Comprehensive

Income (Loss)

Equity - January 1, 2022

Equity - March 31, 2022

Net income (loss)

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Equity – March 31, 2023

Common Stock and

Paid-In Capital

Comprehensive

Income (Loss)

Equity – April 1, 2022

Net income (loss)

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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.

In November 2021, our former Parent effected the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit of its Global Technology Services segment through the distribution of shares of Kyndryl’s common stock representing 80.1 % of total shares outstanding to IBM stockholders.

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.

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

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.

Our purpose is to design, build and manage secure and responsive private, public and multi-cloud 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.

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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.

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

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

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

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

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 income tax provision included in these consolidated financial statements for the pre-Separation period 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;

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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’s 2023 fiscal year began on April 1, 2022 and ended March 31, 2023, and the Company’s 2024 fiscal year began on April 1, 2023 and ended March 31, 2024.

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.

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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.

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

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

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

Accordingly, the Parent had reported the

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

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

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

All significant intercompany transactions during the pre-Separation period 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.

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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.

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

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.

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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.

total conditional contract assets of $ 30 million at March 31, 2024 and 2023 are included in prepaid expenses and other current assets in the Consolidated Balance Sheet.

Total unconditional contract assets (“unbilled accounts receivable”) of $ 377 million and $ 384 million at March 31, 2024 and 2023, respectively, are included in accounts receivable in the Consolidated Balance Sheet.

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

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

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

For OEM 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.

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

For distinct OEM hardware sales, revenue is

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

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

Cost of Services

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If 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.

Refer to Note 3 – Revenue Recognition for the amount of deferred costs to fulfill a contract at March 31, 2024 and 2023.

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.

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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.

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)

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

Expenses of promoting and selling services are classified as selling

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

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

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

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

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.

Total RD&E costs were $ 58 million, $ 79 million, $ 23 million, and $ 63 million for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021, 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.

Advertising and promotional expense, which includes media, agency and promotional expense directly incurred by the Company was $ 115 million, $ 136 million, $ 54 million, and $ 56 million for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021, respectively.

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

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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.

Also included are gains and losses from foreign currency transactions.

Defined Benefit Pension and Nonpension Postretirement Benefit Plans

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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.

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.

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

Those actuarial (gains) losses and prior service

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

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

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

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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.

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 actual 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.

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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 the performance-conditioned stock units is determined on the grant date based on Kyndryl’s stock price and subsequently adjusted based on the probability of attainment.

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.

Prior to the Separation, the Company participated in various IBM stock-based compensation plans, including incentive compensation plans.

All awards granted under the plans were based on IBM’s common shares and, as such, were reflected in the former Parent’s Consolidated Statement of Stockholders’ Equity.

For the pre-Separation period, stock-based compensation cost is based on the awards and terms previously granted by the former Parent to employees who exclusively supported Kyndryl operations.

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.

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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.

After the Separation, the Company started using derivative financial instruments 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.

Derivative financial instruments that qualify for hedge accounting are designated as either cash flow hedges or net investment hedges.

Additionally, the Company may enter into derivative contracts that economically hedge certain 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.

Changes in the fair value of derivatives designated as cash flow hedges 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.

Derivatives designated as net investment hedges are accounted for using the spot method, with changes in the fair value of the derivatives attributable to changes in spot rates recorded within foreign currency translation (“CTA”) as a component of other comprehensive income (loss) and remaining there until the hedged net investments are sold or substantially liquidated.

The changes in the fair value of the derivatives that are attributable to changes in the difference between the forward rate and spot rate are excluded from the assessment of hedge effectiveness.

The changes in fair value that are attributable to the excluded components are initially recorded in CTA and then recognized in interest expense on the Consolidated Income Statement over the life of the derivative instruments.

Changes in fair value of derivatives not designated as hedges are reported in other expense in the Consolidated Income Statement.

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.

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

Cash flows from derivatives designated as net

investment hedges are reported as cash flows from investing activities in the Consolidated Statement of Cash Flows, except for cash flows from the periodic interest settlements of cross-currency interest rate swaps designated as net investment hedges, which are reported as cash flows from operating activities in the Consolidated Statement of Cash Flows.

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

Translation of Non-U.S.

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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 Company has 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 first agreement, which was executed in November 2021 and subsequently amended, enabled us to sell certain of our trade receivables to the counterparty.

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 either party elects not to extend.

The second agreement was executed in June 2022 with a separate third-party financial institution and renews automatically on its anniversary date.

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.

Gross proceeds from receivables sold to third parties and the financing division of our former Parent were $ 3.6 billion, $ 3.1 billion, $ 485 million, and $ 2.5 billion for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022, and the year ended December 31, 2021, respectively.

The fees associated with the transfers of receivables were $ 49 million for the year ended March 31, 2024, $ 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 year ended December 31, 2021.

Fair Value Measurement

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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.

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The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy.

Supplier Financing Program

In the year ended March 31, 2024, the Company initiated a supplier financing program with a third-party financial institution under which the Company agrees to pay the financial institution the stated amounts of invoices from participating suppliers on the originally invoiced due date, which have an average term of 90 to 120 days .

The financial institution offers earlier payment of the invoices at the sole discretion of the supplier for a discounted amount.

The Company does not provide secured legal assets or other forms of guarantees under the arrangements.

The Company is not a party to the arrangement between its suppliers and the financial institution.

The Company or the financial institution may terminate the agreement upon at least 180 days notice.

The Company’s obligations under this program continue to be recognized as accounts payable in the Consolidated Balance Sheet.

The obligations outstanding under this program at March 31, 2024 were immaterial.

When procuring goods or services, the Company determines whether an arrangement contains a lease at its inception.

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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.

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 former Parent’s incremental borrowing rate, since they were negotiated by the former Parent prior to Separation.

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

The ROU asset equals the lease liability adjusted for any

initial direct costs, prepaid rent and lease incentives.

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

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

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

Operating leases are included in operating right-of-use assets net, operating lease liabilities (current and non-current) 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.

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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.

Goodwill inherited from the former Parent pre-Separation represents the historical goodwill balances in 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.

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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.

Costs incurred during application development stage are capitalized and included in intangibles and amortized over the estimated useful life of the software.

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.

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.

Transaction-Related Costs (Benefits)

The Company classifies certain expenses and benefits related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs (benefits)” in the Consolidated Income Statement.

Transaction-related 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, costs and benefits resulting from settlements with our former Parent associated with pre-Separation and Separation-related matters, and other costs related to contract and supplier novation and integration.

Workforce Rebalancing and Site-Rationalization Charges

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

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

We record a liability for employee termination benefits either when it is probable that an employee is entitled to it 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.

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

In March 2024, the Company completed its assessment of the useful lives of its information technology equipment.

Based on our usage experience and data analysis, the Company determined it should increase the estimated useful lives of its information technology equipment from five to six years .

This change in accounting estimate will be effective beginning April 1, 2024 and applied on a prospective basis to these assets on the Company’s balance sheet as of March 31, 2024, as well as future asset purchases.

Based on the net carrying value of information technology equipment, in the Company’s Consolidated Balance Sheet as of March 31, 2024, the Company estimates this change will decrease non-cash depreciation expense for fiscal year 2025 by approximately $ 180 million.

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

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2 to 20 years

Information technology equipment

Information technology equipment (acquired as used)

1.5 to 3 years

Information technology equipment (acquired as new)**

* Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 10 years .

** Extended to six years effective April 1, 2024.

Environmental

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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.

federal and certain state and local and foreign income tax returns filed by our former Parent.

The Company also filed 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.

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

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

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

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

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

The calculation of basic and diluted earnings per share for any of the periods presented prior to 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.

The calculation of basic and diluted earnings per share for the pre-Separation period was based on the number of shares outstanding on November 4, 2021.

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

ACCOUNTING CHANGES

ACCOUNTING PRONOUNCEMENTS

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

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.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published.

The FASB 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.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , deferring the sunset date of Topic 848 to December 31, 2024.

In June 2023, the Company modified its contracts that use LIBOR, transitioning from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The use of SOFR became effective in modified contracts beginning on July 1, 2023.

The change of reference rate did not result in any material impact to the Company’s consolidated financial statements.

In September 2022, the FASB issued ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations , which 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.

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

The Company adopted the guidance at the beginning of fiscal year 2024.

The guidance did not have a material impact to the Company’s consolidated financial statements or disclosures, as the Company did not have material supplier finance programs.

For additional information, see Note 1 – Significant Accounting Policies.

Recent Pronouncements

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.

This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted.

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

In August 2023, the FASB issued ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60):

Recognition and Initial Measurement , which requires a joint venture to measure all contributions received upon its formation at fair value.

This guidance should be applied prospectively, effective for all newly-formed joint venture entities with a formation date on or after January 1, 2025.

Early adoption is permitted.

The Company has evaluated the impact of the guidance and does not expect it to have a material impact on the Company’s consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures , which is intended to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses.

The guidance should be applied retrospectively, effective for

fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of this guidance on the disclosures in its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures , which is intended to enhance the transparency and usefulness of income tax disclosures through improved reporting related to the rate reconciliation and income taxes paid.

The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of this guidance on the disclosures in its consolidated financial statements.

REVENUE RECOGNITION

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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.

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(Dollars in millions)

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

Accounts receivable (net of allowances for credit losses of $ 22 at March 31, 2024 and $ 32 at March 31, 2023) *

Contract assets **

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Deferred income (noncurrent)

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

Including unbilled receivable balances of $ 377 million at March 31, 2024 and $ 384 million at March 31, 2023.

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.

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The amount of revenue recognized during the year ended March 31, 2024 that was included within the deferred income balance at March 31, 2023 was $ 794 million.

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

Year Ended December 31,

The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021:

Year Ended March 31,

(Dollars in millions)

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Ending balance

* Primarily represents translation adjustments and reclassifications .

* Primarily represents translation adjustments .

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.

No single client represented more than 10 percent of the Company’s total revenue during the years ended March 31, 2024 and 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 year ended December 31, 2021.

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, 2024 and 2023, respectively.

Deferred Costs

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

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

The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at March 31, 2024 and 2023:

(Dollars in millions)

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Total deferred costs *

* 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.

* Of the total deferred costs, $ 1,081 million was current and $ 920 million was noncurrent at March 31, 2024, and $ 1,070 million was current and $ 1,166 million was noncurrent at March 31, 2023.

The amount of total deferred costs amortized during the year ended March 31, 2024 was $ 1.8 billion, composed of $ 335 million of amortization of deferred transition costs, $ 921 million of amortization of prepaid software and $ 531 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 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.

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

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

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

Adjusted EBITDA is defined as net income (loss) excluding income taxes, 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 and benefits, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges incurred prior to March 31, 2024, impairment expense, significant litigation costs, and currency impacts of highly inflationary countries.

The use 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.

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The following table reflects the results of the Company’s segments:

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

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Total segment adjusted EBITDA

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

Year Ended December 31,

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

Year Ended March 31,

(Dollars in millions)

Pretax income (loss)

Segment adjusted EBITDA

Workforce rebalancing charges

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

Transaction-related costs

Transaction-related (costs) benefits

Stock-based compensation expense

5 unchanged sentences

Other adjustments*

Segment adjusted EBITDA

* 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.

Pretax income (loss)

* Other adjustments represent pension expenses other than pension servicing costs and multi-employer plan costs, significant litigation costs, currency impacts of highly inflationary countries, and an adjustment to reduce amortization expense for the amount already included in transaction-related (costs) benefits above.

Segment Assets and Other Items

3 unchanged sentences

Refer to Note 8 – Property and Equipment and Note 9 – Leases for more information on allocation methodologies.

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

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* Includes corporate and other.

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.

For the period prior to the Separation, income taxes have been calculated as if we filed income tax returns for the Company on a standalone basis, although the Company’s operations historically have been included in the income tax returns of its former Parent.

Income (loss) before income taxes by geography was as follows:

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

2 unchanged sentences

The components of the provision for income taxes by taxing jurisdiction were as follows:

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

3 unchanged sentences

federal tax rate to the Company’s effective tax rate from continuing operations was as follows:

Year Ended December 31,

Year Ended March 31,

Statutory rate

8 unchanged sentences

Goodwill impairment

Basis adjustment

Return to provision

1 unchanged sentence

Effective tax rate

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

* Includes intercompany prepayment of 0.5 % in 2021.

The provision for income taxes for the year ended March 31, 2024 was $ 172 million as compared to $ 524 million for the year ended March 31, 2023.

The decrease in income tax expense was primarily driven by valuation allowances established in fiscal year 2023, changes in uncertain tax positions during fiscal year 2024 as a result of audit settlements and statute of limitations lapsing, offset by increases in taxes on foreign operations.

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

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

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

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

The Company’s effective tax rate for the year ended March 31, 2024 was lower (more negative) than the Company’s statutory tax rate primarily due to the Company’s pretax loss being significantly lower in fiscal year 2024 and current year losses not benefitted due to the existing valuation allowances.

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.

1 unchanged sentence

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 Organization for Economic Cooperation and Development (“OECD”) is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%.

While many jurisdictions in which the Company operates have adopted the relevant legislation effective for tax years beginning on or after January 1, 2024, the legislation did not result in a material change to the Company’s income tax provision for the year ended March 31, 2024.

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

21 unchanged sentences

Gross deferred tax liabilities

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.

As of March 31, 2024, the Company had tax-affected U.S.

and foreign net operating loss deferred tax assets of $ 441 million and $ 66 million, respectively.

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

and foreign net

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

If not utilized, the U.S.

1 unchanged sentence

federal net operating loss can be carried forward indefinitely.

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

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

$ 555 million.

The valuation allowances as of March 31, 2024 and 2023 were $ 748 million and $ 620 million, respectively.

The increase in valuation allowances from March 31, 2023 to March 31, 2024 was $ 128 million.

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

2 unchanged sentences

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.

federal and certain state, local and foreign income tax returns filed by its former Parent.

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 its former Parent 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, 2024, 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.

1 unchanged sentence

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

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

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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.

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

Pursuant to the terms of the Separation, 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, 2024, the Company is not aware of any material open income tax audits that would result in a liability owed by the Company.

4 unchanged sentences

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.

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

Pursuant to the terms of the Separation, 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 pay to our former Parent as the tax benefits are realized.

As of March 31, 2024, the Company estimated the amount of our obligations to our former Parent related to these tax refunds and tax benefits to be approximately $ 13

million, where $ 4 million is recorded in other accrued expenses and liabilities expected to be paid within one year, and $ 9 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 the Company related to income tax liabilities attributable to tax periods (or portions thereof) ending on or before November 3, 2021, to be approximately $ 27 million, which is recorded in prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet.

At March 31, 2024, the Company’s undistributed earnings from non-U.S.

subsidiaries were not indefinitely reinvested.

2 unchanged sentences

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.

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.

Year Ended December 31,

The following table provides the computation of basic and diluted earnings per share of common stock for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021.

Year Ended March 31,

(In millions, except per share amounts)

3 unchanged sentences

Diluted earnings (loss) per share

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.

For the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period), and the year ended December 31, 2021, 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:

Year Ended March 31,

(In millions)

3 unchanged sentences

Stock options issued and outstanding

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

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

FINANCIAL ASSETS AND LIABILITIES

Financial Assets and Liabilities Measured at Fair Value

The 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.

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, 2024 and 2023.

At March 31, 2024

At March 31, 2023

At December 31, 2021

(Dollars in millions)

1 unchanged sentence

Foreign exchange contracts

Cross-currency swap contracts

Derivatives not designated as hedging instruments:

Foreign exchange contracts

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

The gross balances of derivative assets, including accrued interest, are contained within prepaid expenses and other current assets, and the gross balances of derivative liabilities are contained within other accrued expenses and liabilities, or other noncurrent 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.

There was no netting of derivative assets against liabilities in the Consolidated Balance Sheet at March 31, 2024 and 2023.

The Company manages counterparty risk by seeking counterparties of high credit quality and by monitoring credit ratings, credit spreads and other relevant public information about its counterparties.

The Company does not anticipate nonperformance by any of the counterparties.

Financial Assets and Liabilities Not Measured at Fair Value

5 unchanged sentences

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.

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, 2024 and 2023 was $ 828 million and $ 814 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).

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, or 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.

See Note 11 – Borrowings for additional information.

Our outstanding debt (excluding finance lease obligations) had a carrying value of $ 2.9 billion and $ 3.0 billion as of March 31, 2024 and 2023, respectively.

The debt had an estimated fair value of $ 2.6 billion and $ 2.5 billion as of March 31, 2024 and 2023, respectively.

Derivative Financial Instruments

The following table summarizes the notional amounts of the Company’s outstanding derivatives:

At March 31, 2024

At March 31, 2023

(Dollars in millions)

Foreign Exchange Contracts

Cross-currency Swap Contracts

Foreign Exchange Contracts

Cross-currency Swap Contracts

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.

Cash flow hedges

Net investment hedges

Derivatives not designated as hedging instruments

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.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

Through the pre-Separation period, 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.

For additional information, see Note 1 – Significant Accounting Policies.

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

At March 31, 2024 and 2023, the weighted-average remaining maturity of these instruments was approximately 0.5 years.

At March 31, 2024 and 2023, in connection with cash flow hedges of foreign currency cost transactions, the Company had unrealized gains of $ 2 million and $ 1 million (each before taxes), respectively, in AOCI.

The Company estimates that $ 2 million (before taxes) of deferred net gains on derivatives in AOCI at March 31, 2024 will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

Net Investment Hedges

The Company has entered into and designated cross-currency interest rate swap contracts as net investment hedges to mitigate foreign exchange exposure related net investments.

Under the terms of the cross-currency swaps, the Company makes fixed-rate payments in foreign currencies and receives fixed-rate amounts in U.S.

dollars, with the exchange of the underlying notional amounts at maturity whereby the Company will receive U.S.

dollars and pay foreign currencies at exchange rates which are determined at contract inception.

At March 31, 2024, the remaining maturity of these instruments was approximately 10 years .

At March 31, 2024, the Company had unrealized losses of $ 11 million (before taxes) in AOCI related to net investment hedges.

There were no net investment hedges in fiscal year 2023.

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.

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

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

Income Statement

(Dollars in millions)

Derivative instruments not designated as hedging instruments:

Recognized on Derivatives

Foreign exchange contracts

Other expense

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

5 unchanged sentences

Foreign exchange contracts

Derivative instruments in net investment hedges:

Cross-currency swaps **

Consolidated Income Statement line item

1 unchanged sentence

Cost of services

Selling, general and administrative expenses

* 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;

Interest expenses **

* Pre-Separation, the effects of hedging activity were allocated from the former Parent directly to the Company’s 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, 2024, the Company recognized a gain of $ 1 million in interest expense on components excluded from the assessment of the hedge effectiveness for net investment hedges.

There were no net investment hedges in the year ended March 31, 2023, the three months ended March 31, 2022 and the year ended December 31, 2021.

For the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 and the year ended December 31, 2021, 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.

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

Gain (Loss) Recognized in Consolidated Income Statement

Income Statement

(Dollars in millions)

Derivative instruments not designated as hedging instruments:

Foreign exchange contracts

Other expense

PROPERTY AND EQUIPMENT

8 unchanged sentences

Property and equipment, net

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

December 31, 2021, and 2020, respectively.

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

The unpaid property and equipment balance included in accounts payable and accrued expenses was $ 29 million and $ 62 million at March 31, 2024 and 2023, respectively.

Depreciation of property and equipment was $ 801 million, $ 900 million, $ 246 million, and $ 1.3 billion for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (the transition period) and the year ended December 31, 2021, respectively.

Additionally, as part of the site-rationalization program, the Company recognized $ 21 million and $ 7 million of accelerated depreciation related to ceasing to use certain owned fixed assets for the years ended March 31, 2024 and 2023, respectively.

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

The following table presents the various components of lease costs:

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

5 unchanged sentences

Total lease costs

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.

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

1 unchanged sentence

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.

During the fiscal years of 2024 and 2023, we identified and ceased use of 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 $ 14 million and $ 69 million (representing the remaining carrying value of the identified right-of-use assets, not included in the operating lease costs in the table above) for the years ended March 31, 2024 and 2023, respectively.

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

The Company had no sale and leaseback transactions for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 and the year ended December 31, 2021.

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.

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

13 unchanged sentences

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,

(Dollars in millions)

2 unchanged sentences

* 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:

2 unchanged sentences

Lease liabilities:

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

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

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

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

INTANGIBLE ASSETS INCLUDING GOODWILL

Business Combinations

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

In February 2022, the Company completed two transactions that were considered 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.

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.

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

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

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

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

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

(Dollars in millions)

Cash consideration

Non-controlling interest

Total enterprise value

Cash acquired

Net liabilities assumed, excluding cash

Deferred tax liabilities arising from acquired intangibles

Intangible Assets

Total purchase price allocation

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

Intangible Assets

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

At March 31, 2024

Gross Carrying

(Dollars in millions)

Capitalized software

Customer relationships*

Completed technology

Patents and trademarks*

At March 31, 2023

Gross Carrying

(Dollars in millions)

Capitalized software

Customer relationships*

Completed technology

Patents and trademarks*

At December 31, 2021

Gross Carrying

6 unchanged sentences

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

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

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

The net carrying amount of intangible assets increased by $ 17 million during the year ended March 31, 2024, primarily due to additions of capitalized software, partially offset by amortization and retirements.

The aggregate intangible asset amortization expense was $ 63 million, $ 46 million, $ 7 million and $ 37 million for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 and year ended December 31, 2021, respectively.

The aggregate amortization expense in fiscal year 2024 included amortization of capitalized software of $ 33 million, which was reported in “Depreciation of property, equipment and capitalized software” on the Consolidated Statement of Cash Flows.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at March 31, 2024:

2 unchanged sentences

Year ending March 31:

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

Re-allocation

The following table presents a roll-forward of goodwill balances by segment for the years ended March 31, 2024 and 2023:

United States

3 unchanged sentences

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.

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

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

flows will be realized.

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

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

There were no goodwill impairment losses recorded for the year ended March 31, 2024.

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 %.

We prepared our impairment test as of January 1, 2024.

For the reporting units subject to quantitative tests, we concluded that their fair values exceeded carrying values by over 100 %.

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

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

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

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Unsecured floating-rate term loan

November 2024

Commercial loan agreement

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Unsecured senior notes due 2034

Finance lease obligations **

February 2034

Unsecured senior notes due 2041

Finance lease and other obligations

Unamortized discount

Unamortized debt issuance costs

Current maturities of long-term debt

Current portion of long-term debt

Total long-term debt

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

dollar LIBOR plus 1.125 %.

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

* Including the cross-currency swaps that the Company entered into subsequent to the issuance of the unsecured senior notes due 2034, the effective interest rate on such notes was approximately 3.84 % for the quarter ended March 31,2024.

For more information, see Note 7 – Financial Assets and Liabilities.

** Weighted-average discount rate

Contractual obligations of long-term debt outstanding at March 31, 2024, exclusive of finance lease obligations, were as follows:

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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.

In October 2021, in preparation for our Spin-off, we completed the offering of $ 2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes as follows:

The Initial 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.

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

In February 2024, we completed a registered offering of $ 500 million in aggregate principal amount of 6.35 % senior unsecured notes due 2034 (the “2034 Notes”).

We received proceeds of $ 494 million, net of debt issuance costs and discounts, which were capitalized as a reduction to the carrying value of debt and are being amortized as interest expense over the term of the notes.

The 2034 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s other existing and future senior unsecured indebtedness.

If measured at fair value in the consolidated financial statements, all of the Company’s senior unsecured notes would be classified as Level 1 in the fair value hierarchy.

The Initial Notes and the 2034 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.

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 October 2021, we entered into a $ 500 million three-year variable rate term loan credit agreement (the “Term Loan Credit Agreement”), which was scheduled to mature in November 2024.

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.

The interest rate on this term loan was equal to one-month U.S.

Dollar London Interbank Offered Rate (“LIBOR”) plus a margin of 1.125 %.

In June 2023, we amended the Term Loan Credit Agreement by replacing LIBOR with the Secured Overnight Financing Rate (“SOFR”).

The first repricing date using SOFR was in July 2023.

In February 2024, the Company used the net proceeds from the offering of the 2034 Notes, together with cash on hand, to prepay the full amount outstanding under the Term Loan Credit Agreement, at no penalty.

In October 2021, we entered into a $ 3.15 billion multi-currency revolving credit agreement (the “Revolving Credit Agreement”), which expires, unless extended, in October 2026.

The Revolving Credit Agreement was amended in June 2023, replacing LIBOR with SOFR.

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

The total facility fees recorded by the Company for the Revolving Credit Agreement were $ 5 million for the years ended March 31, 2024 and 2023.

Facility fees were immaterial for the three months ended March 31, 2022 and the year ended December 31, 2021.

As of March 31, 2024, there has been no drawdown on the Revolving Credit Agreement.

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

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

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

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

The Credit Agreements include certain customary mandatory prepayment provisions.

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

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

The Revolving Credit Agreement includes certain customary mandatory prepayment provisions.

In addition, it includes customary events of default and affirmative and negative covenants as well as a maintenance covenant that will require that the ratio of our indebtedness for borrowed money to consolidated EBITDA (as defined in the Revolving Credit Agreement) 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.

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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.

The amortizing loan 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.

OTHER LIABILITIES

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

At December 31,

The following table provides the components of other liabilities at March 31, 2024 and 2023.

(Dollars in millions)

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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, 2024 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.

Pursuant to the terms of the Separation, the Company may 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.

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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.

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, 2024 and 2023 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 .

The Company has determined that these commitments may exceed the Company’s needs over the next two to three 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, 2024, we had short-term (April 2024 through March 2025), mid-term (April 2025 through March 2027) and long-term (April 2027 onward) purchase commitments in the amount of $ 0.6 billion, $ 0.4 billion and $ 0.4 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.

As a Fortune 500 company with customers and employees 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.

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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.

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

In May 2022, the trial court entered a judgment

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

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

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

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

In May 2022, the trial court entered a judgment against IBM and awarded BMC $ 717 million in direct damages and $ 717 million in punitive damages, plus interest, for which IBM might have tried to seek an indemnity from the Company.

However, IBM appealed the judgment, and in April 2024, the court of appeals overturned the judgment against IBM.

Accordingly, we do not expect to have any liability related to this judgment.

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.

The Company anticipates that certain of these matters will be concluded in fiscal year 2025, while others are in preliminary stages.

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

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

The following tables present reclassifications and taxes related to items of other comprehensive income (loss) for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 (transition period) and the year ended December 31, 2021:

(Dollars in millions)

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Foreign currency translation adjustments:

Foreign currency translation adjustments

Unrealized losses on net investment hedges

Total foreign currency translation adjustments

Unrealized gains (losses) on cash flow hedges:

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Tax (Expense)

For the three months ended March 31, 2022:

For the year ended March 31, 2023

Foreign currency translation adjustments

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Retirement-related benefit plans*:

Prior service (credits) costs

Net gains (losses) arising during the period

Curtailments and settlements

Amortization of prior service (credits) costs

Amortization of net (gains) losses

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Tax (Expense)

For the year ended December 31, 2021:

For the three months ended March 31, 2022:

Foreign currency translation adjustments

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Retirement-related benefit plans*:

Prior service (credits) costs

Net gains (losses) arising during the period

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Foreign currency translation adjustments

Unrealized gains (losses) on cash flow hedges

Unrealized gains (losses) arising during the period

Reclassification of (gains) losses to net income

Total unrealized gains (losses) on cash flow hedges

Retirement-related benefit plans*:

Prior service (credits) costs

Net gains (losses) arising during the period

Amortization of prior service (credits) costs

Curtailments and settlements

Amortization of net (gains) losses

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Foreign Currency

Net Change in

Accumulated Other

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December 31, 2020

Other comprehensive income (loss)

December 31, 2020

Net transfers from Parent

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March 31, 2023

Other comprehensive income (loss)

March 31, 2024

Foreign currency translation adjustments are presented gross.

STOCK-BASED COMPENSATION

The following table presents stock-based compensation cost which is included in net income (loss).

Year Ended December 31

Stock-based incentive awards are granted to employees under the terms of Kyndryl’s employment and the Kyndryl Plan (see Note 1 – Significant Accounting Policies).

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.

The following table summarizes stock-based compensation cost, which is included in net income (loss).

Year Ended March 31,

(Dollars in millions)

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Selling, general and administrative expense

Pretax stock-based compensation cost

Pretax stock-based compensation expense

Income tax benefits

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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.

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

The following table summarizes the activity related to Kyndryl’s RSUs, market-conditioned stock units and performance-conditioned stock units:

Market-Conditioned

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Nonvested balance at March 31, 2023

Awards granted

Awards vested

Awards canceled/forfeited

Nonvested balance at March 31, 2024

* The grant-date fair value of performance-conditioned stock units issued was determined using the stock price at the grant date.

The Company used the following assumptions in the Monte-Carlo simulation pricing model to estimate the grant-date fair values of the market-conditioned stock units granted within each of the following fiscal years.

No market-conditioned stock units were granted for the transition quarter ended March 31, 2022.

Market-conditioned Stock Units:

Expected volatility*

Risk-free interest rate

4.57 % - 5.38 %

0.26 % - 0.92 %

Dividend yield

* Based on the average unadjusted three-year historic volatility across a group of peer companies.

Prior to the Separation, the weighted-average grant-date fair value of RSUs and PSUs granted by our former Parent was $ 126.01 for the pre-Separation period in the year ended December 31, 2021, which was 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.

Stock Options

The following table summarizes the activity related to Kyndryl’s stock options:

Stock Options

Exercise Price

(in millions)

Outstanding balance at December 31, 2021

Awards granted

Awards exercised

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Outstanding balance at March 31, 2022

Awards granted

Awards exercised

1 unchanged sentence

Outstanding balance at March 31, 2023

The weighted-average grant-date fair value of RSUs granted by Kyndryl for the years ended March 31, 2023, the three months ended March 31, 2022 (transition period) and the post-Separation period in the year ended December 31, 2021 was $ 10.80 , $ 17.61 and $ 18.20 , respectively.

Prior to the Separation, the weighted-average grant-date fair value of RSUs and PSUs granted by our former Parent was $ 126.01 and $ 114.70 for the pre-Separation period in the year ended December 31, 2021 and for the year ended December 31, 2020, respectively, which were derived from our former Parent’s stock price at their grant dates.

On the Separation date, such awards were converted to Kyndryl awards, resulting in a weighted-average grant-date fair value of $ 28.78 per share.

The grant date fair value of the market-conditioned stock units issued during the years ended March 31, 2023 and December 31, 2021 were determined using Monte Carlo simulation models which estimate the probability of satisfying market conditions.

The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended March 31, 2023 were a share price of $ 10.89 , a risk-free rate of 2.85 %, no dividend yield, and a volatility of 39 %.

The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended December 31, 2021 were a share price of $ 18.31 , a term structure of risk-free rates of 0.26 % for one year, 0.64 % for two years and 0.92 % for three years, no dividend yield, and a volatility of 35 %.

For the year ended March 31, 2023 and December 31, 2021, the volatility assumptions used in the Monte Carlo simulations were based on the average unadjusted three-year historic volatility across a group of peer companies.

The grant date fair value of performance-conditioned stock units issued during the year ended March 31, 2023 was $ 10.62 , determined using the stock price at the grant date, and is recognized as stock-based compensation expense based upon the probability of achievement of performance targets at each reporting period over the vesting period.

The total fair value of RSUs, market-conditioned stock units and performance-conditioned stock units that vested during the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020 was $ 127 million, $ 15 million, $ 45 million and $ 36 million, respectively.

The weighted-average grant date fair value of stock options granted during the year ended December 31, 2021 was $ 6.54 per share.

No stock options were granted in any other period presented.

The weighted-average remaining contractual term for stock options outstanding at March 31, 2023 and March 31, 2022 was 8.7 and 9.7 , respectively, with immaterial aggregate intrinsic value.

The weighted-average remaining contractual term for stock options exercisable at March 31, 2023 and 2022 was 2.1 and 3.1 years, respectively.

During the year ended March 31, 2023, the total fair value of shares vested was $ 6 million.

There was no vesting during the three months ended March 31, 2022 or during the years ended December 31, 2021 or 2020.

No stock options were exercised during any period presented.

At March 31, 2023, there were 1.1 million stock options that were vested and exercisable with an immaterial aggregate intrinsic value.

The method used to determine the fair value of the stock options granted during the year ended December 31, 2021 was a Black-Scholes model on the grant date.

The assumptions used to produce the fair value of stock options issued during the year ended December 31, 2021 were the share price on the date of issuance, weighted-average expected option term of 6.25 years, no dividend yield, volatility of 35 % and a risk-free interest rate of 1.4 %.

The volatility assumption used was based on the average unadjusted historic volatility of common shares across a group of peer companies.

Awards exercised

Awards canceled/forfeited

Outstanding balance at March 31, 2024

Options vested and exercisable at March 31, 2024

The Company used the following assumptions in the Black-Scholes option pricing model to estimate the fair value of the employee stock options granted in the year ended December 31, 2021.

No stock options were granted in any other periods presented.

Employee Stock Options:

Fair value of common stock per share

Expected term (in years)*

Expected volatility**

Risk-free interest rate

Dividend yield

* The Company utilized the simplified method to estimate the weighted-average option term due to a lack of relevant historical data.

** Based on the average unadjusted historic volatility of common shares across a group of peer companies.

RETIREMENT-RELATED BENEFITS

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Benefit obligation at beginning of period

Service cost*

Interest cost

Plan participants’ contributions

Benefit obligation assumed from former Parent**

Actuarial losses (gains)*

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Direct benefit payments

Business combination/divestiture

Foreign exchange impact

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Benefit obligation at end of period

Accumulated benefit obligation

Change in plan assets

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Benefits paid from trust

Business combination/divestiture

Foreign exchange impact

1 unchanged sentence

Funded status at end of period

Accumulated benefit obligation***

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 year-over-year change was primarily driven by lower inflation rates and demographic factors.

Due to the separation of a pension plan that used to be co-sponsored by Kyndryl and the former Parent.

The following table presents the amounts recorded in the Consolidated Balance Sheet for the defined benefit pension plans.

At December 31,

(Dollars in millions)

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At March 31, 2023

At December 31, 2021

(Dollars in millions)

PBO in excess of plan assets

ABO in excess of plan assets

Plan assets in excess of PBO

Plans with PBO in excess of plan assets

Plans with ABO in excess of plan assets

Plans with plan assets in excess of PBO

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.

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Amortization of net loss included in net periodic benefit cost

Separation-related transfers from Parent **

Net loss (gain) at end of period

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Amortization for prior service costs (credits) included in net periodic benefit cost

Separation-related transfers from Parent **

Prior service costs (credits) at end of period

1 unchanged sentence

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.

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.

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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.

The weighted-average target allocation for the defined benefit plans is 27 % equity securities, 46 % fixed-income securities, 6 % real estate, 15 % insurance contracts and 6 % 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.

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.

The following table presents the Company’s defined benefit pension plans’ asset classes and their associated fair value at March 31, 2024 and 2023.

At March 31, 2024

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Fair value of plan assets

At December 31, 2021

(Dollars in millions)

Equity securities

Government and related (1)

Corporate bonds

Insurance contracts

Cash and short-term investments (2)

Derivative assets (3)

Investments measured at net asset value using NAV as a practical expedient (4)

Fair value of plan assets

Includes debt issued by national, state and local governments and agencies.

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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 contributed $ 14 million, $ 27 million, $ 2 million, and $ 25 million to the defined benefit pension plans during the years ended March 31, 2024 and 2023, the three months ended March 31, 2022, and the year ended December 31, 2021, respectively.

Additionally, the Company made direct payments of $ 46 million, $ 37 million, $ 11 million, and $ 33 million to participants of the defined benefit pension plans during the years ended March 31, 2024 and 2023, the three months ended March 31, 2022, and the year ended December 31, 2021, respectively.

The Company estimates contributions to its defined benefit pension plans in fiscal year 2025 to be approximately $ 16 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.

Financial market performance in fiscal year 2025 could increase or decrease 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.

The following table presents the total expected benefit payments to participants of the defined benefit pension plans.

(Dollars in millions)

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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.

The Company’s contribution expense associated with employer matching benefits was $ 140 million, $ 142 million, $ 35 million, and $ 165 million for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.

Nonpension Postretirement Benefit Plans and Multi-Employer Plans

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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.

The weighted-average discount rate used to measure the nonpension postretirement benefit plan obligation was 2.89 %, 3.02 %, 1.23 %, and 1.04 % for the years ended March 31, 2024 and 2023, the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.

There were no plan assets in the nonpension postretirement benefit plans for any period presented.

As a result, the noncurrent liability related to these plans represented the accumulated postretirement benefit obligation in excess of plan assets for each period presented.

Future expected benefit payments to participants of the nonpension postretirement benefit plans are not expected to be material, and the Company expects contributions to the multi-employer and nonpension postretirement benefits plans to be not material in fiscal year 2024.

TRANSACTIONS WITH FORMER PARENT

Change in Beneficial Ownership

IBM transferred all of its 19.9 % retained interest in Kyndryl common stock to a third-party financial institution through exchange agreements in May and August 2022.

IBM transferred all of its 19.9 % initially 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.

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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.

While IBM was a related party, Kyndryl provided 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 and $ 704 million for the year ended March 31, 2023, the three months ended March 31, 2022 and the year ended December 31, 2021, 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

three months ended March 31, 2022, and the years ended December 31, 2021 and 2020, respectively.

During the year ended March 31, 2024, the Company reached an agreement to collect previously reserved receivables from our former Parent, which resulted in a gain recorded within transaction-related costs (benefits).

While IBM was a related party, Kyndryl utilized 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 and $ 4.0 billion for the year ended March 31, 2023, the three months ended March 31, 2022, and the year ended December 31, 2021, 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.

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, and $ 299 million for the year ended March 31, 2023, the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.

Additionally, as part of the Separation, IBM 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.

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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.

The Company intends to recognize depreciation expense related to such equipment over its useful life in accordance with the Company’s depreciation policy, as described in Note 1 – Significant Accounting Policies.

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.

therefore, no related amounts were reflected on the Company’s financial statements for the years ended March 31, 2024 and 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.

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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.

All such amounts were 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.

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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.

As such, there was no balance in net Parent investment at December 31, 2021, March 31, 2022, March 31, 2023 and March 31, 2024, and there was no activity within the account during the three months ended March 31, 2022 and the years ended March 31, 2023 and 2024.

The total net effect of these settlement transactions was reflected as Net transfers (to) from Parent in the financing activities section in the Consolidated Statement of Cash Flows for the year ended December 31, 2021.

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

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.

Kyndryl has lease agreements with third parties with an estimated aggregate lease liability of $ 79 million that were guaranteed by IBM as of March 31, 2023.

Lease agreements guaranteed by IBM were immaterial as of March 31, 2024.

TRANSITION PERIOD

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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.

During the year ended March 31, 2023, the Company initiated actions to reduce our overall cost structure and increase our operating efficiency, which continued through the fiscal year ended March 31, 2024.

These actions resulted in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and lease termination charges (collectively, the “charges”).

Total charges for this program through March 31, 2024 were $ 310 million, consisting of approximately 60 % for workforce rebalancing charges and approximately 40 % for 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.

We will continue to seek

opportunities to increase our 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 years ended March 31, 2024 and 2023.

Costs Incurred

(Dollars in millions)

March 31, 2024

March 31, 2023

United States

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Total charges

The following table presents the classification of workforce rebalancing and site-rationalization activity in the Consolidated Income Statement during the year ended March 31, 2023.

The following table presents the classification of workforce rebalancing and site-rationalization activity in the Consolidated Income Statement during the years ended March 31, 2024 and 2023.

Costs Incurred

(Dollars in millions)

March 31, 2024

March 31, 2023

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges (benefits)

Workforce rebalancing charges

Total charges

The following table presents the components of and changes in our workforce rebalancing and site-rationalization charges accrual during the year ended March 31, 2023.

* Excludes $ 4 million liability adjustment related to workforce rebalancing actions taken by the former Parent prior to Separation.

The following table presents the components of and changes in our workforce rebalancing and site-rationalization charges accrual during the years ended March 31, 2024 and 2023.

Ceasing to Use

Company-owned

Ceasing to Use

(Dollars in millions)

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Balance at March 31, 2023

* Excludes workforce rebalancing liabilities inherited from the former Parent of $ 57 million as of March 31, 2022, charges of $ 16 million related to one-off terminations, cash payments of $ 32 million, and ending balance of $ 42 million as of March 31, 2023.

Charges (benefits)

Cash payments

Non-cash adjustments

Balance at March 31, 2024

Prior-year movement 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.

Current-year movement excludes additional charges of $ 4 million, cash payments of $ 15 million and ending balance of $ 29 million related to actions initiated by the former Parent.

Workforce rebalancing liabilities are recorded within Other Liabilities;

refer to Note 12 – Other Liabilities for further details.

SUBSEQUENT EVENTS

On April 26, 2024, the Company completed its acquisition of Skytap, Inc.

for $ 51 million of cash consideration, reflecting customary closing adjustments.

The acquisition will be accounted for using the acquisition method and the

results of the acquired business will be included in the Company’s results of operations from the acquisition date.

The purchase price allocation is subject to adjustments as we obtain additional information during the measurement period.

We are currently in the process of completing the accounting for this transaction and expect to have our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed in the first half of fiscal year 2025.

In May 2024, the Company entered into a definitive agreement to divest its Securities Industry Services (SIS) business for approximately $ 200 million.

The Company has determined the assets associated with the business to be held-for-sale as of the first quarter of our 2025 fiscal year.

Closing of the transaction is subject to customary closing conditions, including regulatory approval.

The Company is currently evaluating the accounting impact resulting from the disposal, which it expects to include in its financial results in the first quarter of 2025.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data