Item 1. Consolidated Financial Statements:

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions except per share amounts)		2021			2020			2021			2020
Revenue:		​			​		​	​			​
Services	​	$	11,418	​	$	11,180	​	$	34,307	​	$	33,490
Sales	​		5,978	​		6,106	​		19,079	​		18,918
Financing	​		222	​		275	​		706	​		845
Total revenue	​		17,618	​		17,560	​		54,093	​		53,253
Cost:	​			​			​			​
Services	​		7,770	​		7,357	​		23,416	​		22,720
Sales	​		1,513	​		1,601	​		4,792	​		4,964
Financing	​		165	​		172	​		506	​		517
Total cost	​		9,447	​		9,130	​		28,714	​		28,202
Gross profit	​		8,171	​		8,430	​		25,379	​		25,052
Expense and other (income):	​			​			​			​
Selling, general and administrative	​		4,860	​		4,647	​		15,368	​		15,849
Research, development and engineering	​		1,621	​		1,515	​		4,907	​		4,722
Intellectual property and custom development income	​		(153)	​		(134)	​		(435)	​		(453)
Other (income) and expense	​		234	​		253	​		911	​		614
Interest expense	​		291	​		323	​		852	​		971
Total expense and other (income)	​		6,852	​		6,603	​		21,603	​		21,704
Income from continuing operations before income taxes	​		1,319	​		1,827	​		3,776	​		3,348
Provision for/(benefit from) income taxes	​		188	​		128	​		365	​		(888)
Income from continuing operations	​	$	1,130	​	$	1,698	​	$	3,411	​	$	4,237
Income/(loss) from discontinued operations, net of tax	​		—	​		(1)	​		(1)	​		(2)
Net income	​	$	1,130	​	$	1,698	​	$	3,410	​	$	4,234
​	​	​	​	​	​	​	​	​	​	​	​	​
Earnings/(loss) per share of common stock:	​			​			​			​
Assuming dilution:	​			​			​			​
Continuing operations	​	$	1.25	​	$	1.89	​	$	3.77	​	$	4.72
Discontinued operations	​		—	​		0.00	​		0.00	​		0.00
Total	​	$	1.25	​	$	1.89	​	$	3.77	​	$	4.72
Basic:	​			​			​			​
Continuing operations	​	$	1.26	​	$	1.90	​	$	3.81	​	$	4.76
Discontinued operations	​		—	​		0.00	​		0.00	​		0.00
Total	​	$	1.26	​	$	1.90	​	$	3.81	​	$	4.76
​	​	​	​	​	​	​	​	​	​	​	​	​
Weighted-average number of common shares outstanding: (millions)	​			​			​			​
Assuming dilution	​		906.0	​		897.3	​		904.0	​		895.8
Basic	​		897.1	​		891.4	​		895.3	​		889.6

​

(Amounts may not add due to rounding.)

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

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)		2021			2020			2021			2020
Net income	​	$	1,130	​	$	1,698	​	$	3,410	​	$	4,234
Other comprehensive income/(loss), before tax:	​			​			​			​
Foreign currency translation adjustments	​		(114)	​		(439)	​		463	​		(1,354)
Net changes related to available-for-sale securities:	​			​			​			​
Unrealized gains/(losses) arising during the period	​		0	​		(1)	​		0	​		0
Reclassification of (gains)/losses to net income	​		—	​		—	​		—	​		—
Total net changes related to available-for-sale securities	​		0	​		(1)	​		0	​		0
Unrealized gains/(losses) on cash flow hedges:	​			​			​			​
Unrealized gains/(losses) arising during the period	​		109	​		(32)	​		262	​		(249)
Reclassification of (gains)/losses to net income	​		32	​		(69)	​		282	​		(37)
Total unrealized gains/(losses) on cash flow hedges	​		141	​		(101)	​		545	​		(285)
Retirement-related benefit plans:	​			​			​			​
Prior service costs/(credits)	​		0	​		(1)	​		0	​		(5)
Net (losses)/gains arising during the period	​		1	​		0	​		23	​		65
Curtailments and settlements	​		13	​		21	​		46	​		42
Amortization of prior service (credits)/costs	​		3	​		0	​		8	​		1
Amortization of net (gains)/losses	​	​	638	​	​	586	​	​	1,929	​	​	1,722
Total retirement-related benefit plans	​		656	​		607	​		2,006	​		1,826
Other comprehensive income/(loss), before tax	​		683	​		66	​		3,014	​		187
Income tax (expense)/benefit related to items of other comprehensive income	​		(333)	​		106	​		(978)	​		(175)
Other comprehensive income/(loss), net of tax	​		350	​		172	​		2,035	​		12
Total comprehensive income	​	$	1,480	​	$	1,870	​	$	5,446	​	$	4,247

​

(Amounts may not add due to rounding.)

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

​

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

​

ASSETS

​

​	​	​	​	​	​	​
​		At September 30,			At December 31,
(Dollars in millions)	​	2021			2020
Assets:		​			​
Current assets:		​			​
Cash and cash equivalents	​	$	7,455	​	$	13,212
Restricted cash	​		352	​		463
Marketable securities	​		600	​		600
Notes and accounts receivable — trade (net of allowances of $277 in 2021 and $351 in 2020)	​		6,609	​		7,132
Short-term financing receivables (net of allowances of $183 in 2021 and $218 in 2020)	​		7,161	​		10,892
Other accounts receivable (net of allowances of $26 in 2021 and $28 in 2020)	​		899	​		714
Inventory, at lower of average cost or net realizable value:	​		​	​
Finished goods	​		287	​		190
Work in process and raw materials	​		1,604	​		1,649
Total inventory	​		1,891	​		1,839
Deferred costs	​		2,046	​		2,107
Prepaid expenses and other current assets	​		2,954	​		2,206
Total current assets	​		29,967	​		39,165
Property, plant and equipment	​		32,349	​		33,176
Less: Accumulated depreciation	​		23,211	​		23,136
Property, plant and equipment — net	​		9,138	​		10,040
Operating right-of-use assets — net	​		4,253	​		4,686
Long-term financing receivables (net of allowances of $24 in 2021 and $45 in 2020)	​		5,046	​		7,086
Prepaid pension assets	​		8,197	​		7,610
Deferred costs	​		2,248	​		2,449
Deferred taxes	​		8,967	​		9,241
Goodwill	​		61,378	​		59,617
Intangible assets — net	​		13,025	​		13,796
Investments and sundry assets	​		1,996	​		2,282
Total assets	​	$	144,214	​	$	155,971

​

(Amounts may not add due to rounding.)

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

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

(UNAUDITED)

​

LIABILITIES AND EQUITY

​

​	​	​	​	​	​	​
​		At September 30,			At December 31,
(Dollars in millions except per share amounts)	​	2021			2020
Liabilities:	​	​	​	​	​	​
Current liabilities:		​			​
Taxes	​	$	2,159	​	$	3,301
Short-term debt	​		7,575	​		7,183
Accounts payable	​		4,248	​		4,908
Compensation and benefits	​		3,780	​		3,440
Deferred income	​		12,264	​		12,833
Operating lease liabilities	​		1,285	​		1,357
Other accrued expenses and liabilities	​		4,520	​		6,847
Total current liabilities	​		35,832	​		39,869
Long-term debt	​		46,926	​		54,355
Retirement and nonpension postretirement benefit obligations	​		16,764	​		18,248
Deferred income	​		3,965	​		4,301
Operating lease liabilities	​		3,192	​		3,574
Other liabilities	​		15,179	​		14,897
Total liabilities	​		121,858	​		135,244
Equity:	​		​	​
IBM stockholders’ equity:	​		​	​
Common stock, par value $0.20 per share, and additional paid-in capital	​		57,189	​		56,556
Shares authorized: 4,687,500,000	​		​	​
Shares issued: 2021 - 2,247,465,474	​		​	​
2020 - 2,242,969,004	​		​	​
Retained earnings	​		161,747	​		162,717
Treasury stock - at cost	​		(169,406)	​		(169,339)
Shares: 2021 - 1,350,665,124	​		​	​
2020 - 1,350,315,580	​		​	​
Accumulated other comprehensive income/(loss)	​		(27,302)	​		(29,337)
Total IBM stockholders’ equity	​		22,228	​		20,597
Noncontrolling interests	​		129	​		129
Total equity	​		22,357	​		20,727
Total liabilities and equity	​	$	144,214	​	$	155,971

​

(Amounts may not add due to rounding.)

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

​

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

​

​	​	​	​	​	​	​
​	​	Nine Months Ended September 30,
(Dollars in millions)		2021			2020
Cash flows from operating activities:		​			​
Net income	​	$	3,410	​	$	4,234
Adjustments to reconcile net income to cash provided by operating activities	​			​
Depreciation	​		3,139	​		3,138
Amortization of intangibles	​		1,897	​		1,858
Stock-based compensation	​		719	​		658
Net (gain)/loss on asset sales and other	​		(150)	​		80
Changes in operating assets and liabilities, net of acquisitions/divestitures	​		1,238	​		2,370
Net cash provided by operating activities	​		10,252	​		12,337
​	​	​	​	​	​	​
Cash flows from investing activities:	​			​
Payments for property, plant and equipment	​		(1,612)	​		(1,940)
Proceeds from disposition of property, plant and equipment	​		312	​		147
Investment in software	​		(555)	​		(469)
Acquisition of businesses, net of cash acquired	​		(3,018)	​		(37)
Divestitures of businesses, net of cash transferred	​		26	​		510
Non-operating finance receivables — net	​		(1)	​		29
Purchases of marketable securities and other investments	​		(2,654)	​		(5,012)
Proceeds from disposition of marketable securities and other investments	​		2,202	​		4,302
Net cash provided by/(used in) investing activities	​		(5,300)	​		(2,470)
​	​	​	​	​	​	​
Cash flows from financing activities:	​			​
Proceeds from new debt	​		394	​		10,337
Payments to settle debt	​		(7,321)	​		(8,802)
Short-term borrowings/(repayments) less than 90 days — net	​		840	​		(467)
Common stock repurchases for tax withholdings	​		(252)	​		(225)
Financing — other	​		71	​		72
Cash dividends paid	​		(4,395)	​		(4,343)
Net cash provided by/(used in) financing activities	​		(10,662)	​		(3,428)
​	​	​	​	​	​	​
Effect of exchange rate changes on cash, cash equivalents and restricted cash	​		(159)	​		(200)
Net change in cash, cash equivalents and restricted cash	​		(5,868)	​		6,239
​	​	​	​	​	​	​
Cash, cash equivalents and restricted cash at January 1	​		13,675	​		8,314
Cash, cash equivalents and restricted cash at September 30	​	$	7,806	​	$	14,553

​

(Amounts may not add due to rounding.)

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

​

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Common		​	​	​	​	​	​	​	​		​	​	​	​	​	​	​	​	​
​	​	Stock and		​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	Additional		​	​	​	​	​	​	​	Other		​	Total IBM		​	Non-		​	​	​
​	​	Paid-in		​	Retained		​	Treasury		​	Comprehensive		​	Stockholders’		​	Controlling		​	Total
(Dollars in millions except per share amounts)		Capital			Earnings			Stock			Income/(Loss)			Equity			Interests			Equity
Equity - July 1, 2021	​	$	56,912	​	$	162,086	​	$	(169,404)	​	$	(27,652)	​	$	21,942	​	$	125	​	$	22,067
Net income plus other comprehensive income/(loss):	​			​			​			​			​			​			​
Net income	​			​		1,130	​			​			​		1,130	​			​		1,130
Other comprehensive income/(loss)	​			​			​			​		350	​		350	​			​		350
Total comprehensive income/(loss)	​			​			​			​			​	$	1,480	​			​	$	1,480
Cash dividends paid — common stock ($1.64 per share)	​			​		(1,471)	​			​			​		(1,471)	​			​		(1,471)
Common stock issued under employee plans (482,632 shares)	​		277	​			​			​			​		277	​			​		277
Purchases (124,146 shares) and sales (121,792 shares) of treasury stock under employee plans — net	​			​		1	​		(2)	​			​		0	​			​		0
Changes in noncontrolling interests	​			​			​			​			​			​		4	​		4
Equity – September 30, 2021	​	$	57,189	​	$	161,747	​	$	(169,406)	​	$	(27,302)	​	$	22,228	​	$	129	​	$	22,357

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Common			​	​		​	​		​			​	​		​	​		​	​
​	​	Stock and		​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	Additional		​	​	​	​	​	​	​	Other		​	Total IBM		​	Non-		​	​	​
​	​	Paid-in		​	Retained		​	Treasury		​	Comprehensive		​	Stockholders’		​	Controlling		​	Total
(Dollars in millions except per share amounts)	​	Capital		​	Earnings		​	Stock		​	Income/(Loss)		​	Equity		​	Interests		​	Equity
Equity - July 1, 2020	​	$	56,135	​	$	162,559	​	$	(169,386)	​	$	(28,757)	​	$	20,551	​	$	137	​	$	20,688
Net income plus other comprehensive income/(loss):	​			​			​			​			​			​			​
Net income	​			​		1,698	​			​			​		1,698	​			​		1,698
Other comprehensive income/(loss)	​			​			​			​		172	​		172	​			​		172
Total comprehensive income/(loss)	​			​			​			​			​	$	1,870	​			​	$	1,870
Cash dividends paid — common stock ($1.63 per share)	​			​		(1,453)	​			​			​		(1,453)	​			​		(1,453)
Common stock issued under employee plans (429,304 shares)	​		232	​			​			​			​		232	​			​		232
Purchases (110,415 shares) and sales (159,479 shares) of treasury stock under employee plans — net	​			​		2	​		7	​			​		9	​			​		9
Changes in noncontrolling interests	​			​			​			​			​			​		(11)	​		(11)
Equity - September 30, 2020	​	$	56,366	​	$	162,806	​	$	(169,380)	​	$	(28,584)	​	$	21,208	​	$	126	​	$	21,334

​

(Amounts may not add due to rounding.)

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

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY – (CONTINUED)

(UNAUDITED)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Common		​	​	​	​	​	​	​	​		​	​	​	​	​	​	​	​	​
​	​	Stock and		​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	Additional		​	​	​	​	​	​	​	Other		​	Total IBM		​	Non-		​	​	​
​	​	Paid-in		​	Retained		​	Treasury		​	Comprehensive		​	Stockholders’		​	Controlling		​	Total
(Dollars in millions except per share amounts)		Capital			Earnings			Stock			Income/(Loss)			Equity			Interests			Equity
Equity - January 1, 2021	​	$	56,556	​	$	162,717	​	$	(169,339)	​	$	(29,337)	​	$	20,597	​	$	129	​	$	20,727
Net income plus other comprehensive income/(loss):	​			​			​			​			​			​			​
Net income	​			​		3,410	​			​			​		3,410	​			​		3,410
Other comprehensive income/(loss)	​			​			​			​		2,035	​		2,035	​			​		2,035
Total comprehensive income/(loss)	​			​			​			​			​	$	5,446	​			​	$	5,446
Cash dividends paid — common stock ($4.91 per share)	​			​		(4,395)	​			​			​		(4,395)	​			​		(4,395)
Common stock issued under employee plans (4,496,470 shares)	​		632	​			​			​			​		632	​			​		632
Purchases (1,797,733 shares) and sales (1,448,189 shares) of treasury stock under employee plans — net	​			​		15	​		(66)	​			​		(52)	​			​		(52)
Changes in noncontrolling interests	​			​			​			​			​			​		(1)	​		(1)
Equity - September 30, 2021	​	$	57,189	​	$	161,747	​	$	(169,406)	​	$	(27,302)	​	$	22,228	​	$	129	​	$	22,357

​

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Common			​	​		​	​		​			​	​		​	​		​	​
​	​	Stock and		​	​	​	​	​	​	​	Accumulated		​	​	​	​	​	​	​	​	​
​	​	Additional		​	​	​	​	​	​	​	Other		​	Total IBM		​	Non-		​	​	​
​	​	Paid-in		​	Retained		​	Treasury		​	Comprehensive		​	Stockholders’		​	Controlling		​	Total
(Dollars in millions except per share amounts)	​	Capital		​	Earnings		​	Stock		​	Income/(Loss)		​	Equity		​	Interests		​	Equity
Equity - January 1, 2020	​	$	55,895	​	$	162,954	​	$	(169,413)	​	$	(28,597)	​	$	20,841	​	$	144	​	$	20,985
Cumulative effect of change in accounting principle*	​	​	​	​	​	(66)	​	​	​	​	​	​	​	​	(66)	​	​	​	​	​	(66)
Net income plus other comprehensive income/(loss):	​			​			​			​			​			​			​
Net income	​			​		4,234	​			​			​		4,234	​			​		4,234
Other comprehensive income/(loss)	​			​			​			​		12	​		12	​			​		12
Total comprehensive income/(loss)	​			​			​			​			​	$	4,247	​			​	$	4,247
Cash dividends paid — common stock ($4.88 per share)	​			​		(4,343)	​			​			​		(4,343)	​			​		(4,343)
Common stock issued under employee plans (3,661,059 shares)	​		471	​			​			​			​		471	​			​		471
Purchases (1,731,915 shares) and sales (2,017,518 shares) of treasury stock under employee plans — net	​			​		26	​		33	​			​		59	​			​		59
Changes in noncontrolling interests	​			​			​			​			​			​		(18)	​		(18)
Equity - September 30, 2020	​	$	56,366	​	$	162,806	​	$	(169,380)	​	$	(28,584)	​	$	21,208	​	$	126	​	$	21,334

• Reflects the adoption of the FASB guidance on current expected credit losses. Refer to note 2, “Accounting Changes.”

​

(Amounts may not add due to rounding.)

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

​

​

Notes to Consolidated Financial Statements

1. Basis o****f Presentation:

The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances, including the macroeconomic impacts of the COVID-19 pandemic. As a result, actual results may be different from these estimates.

On November 3, 2021, the company completed the previously announced separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. To effect the separation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on October 25, 2021, the record date for the distribution. The company retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. The company’s financial results for the third quarter and nine months ended September 30, 2021 include Kyndryl. With the completion of the separation, the historical results of Kyndryl will be presented as discontinued operations in the company’s Consolidated Financial Statements beginning in the fourth quarter of 2021.

Effective immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes will impact the company’s reportable segments beginning in the fourth quarter of 2021 but will not impact the company’s Consolidated Financial Statements. Since these organizational changes did not occur until the fourth quarter of 2021, the periods presented in this Form 10-Q are reported under the historical segments. See note 4, "Segments" for additional information.

The continuing operations provision for income taxes for the third quarter of 2021 was $188 million, compared to $128 million in the third quarter of 2020. The increase primarily relates to higher discrete tax benefits in the prior year. The provision for income taxes for the third quarter of 2021 includes tax charges related to the Kyndryl separation, partially offset by tax benefits associated with third quarter events that resulted in the expected utilization of U.S. foreign tax credits. The continuing operations provision for income taxes for the first nine months of 2021 was $365 million, compared to a benefit from income taxes of $888 million for the first nine months of 2020. The benefit from income taxes for the first nine months of 2020 was primarily related to the tax impacts of an intra-entity sale of certain of the company’s intellectual property.

​

Noncontrolling interest amounts of $8.3 million and $3.4 million, net of tax, for the three months ended September 30, 2021 and 2020, respectively, and $22.4 million and $14.7 million, net of tax, for the nine months ended September 30, 2021 and 2020, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2020 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.

Notes to Consolidated Financial Statements — (continued)

2. Accounting Changes:

New Standards to be Implemented

​

Revenue Contracts with Customers Acquired in a Business Combination

Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. 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.

Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted.

Effect on Financial Statements or Other Significant Matters–The company is evaluating the impact of the guidance and adoption date.

Lessors-Certain Leases with Variable Lease Payments

Standard/Description–Issuance date: July 2021. This guidance modifies a lessor’s accounting for certain leases with variable lease payments that resulted in the recognition of a day-one loss even if the lessor expected the arrangement to be profitable overall. The amendment requires these types of lease contracts to be classified as operating leases which eliminates any recognition of a day-one loss.

Effective Date and Adoption Considerations–The amendment is effective January 1, 2022 and early adoption is permitted. The company will adopt the guidance on a prospective basis as of the effective date.

Effect on Financial Statements or Other Significant Matters–The company does not expect the guidance to have a material impact in the consolidated financial results.

​

Standards Implemented

​

Simplifying the Accounting for Income Taxes

Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.

Effective Date and Adoption Considerations–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.

Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.

Reference Rate Reform

Standard/Description–Issuance date: March 2020, with amendments in 2021. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.

Effective Date and Adoption Considerations–The guidance is effective as of March 12, 2020 through December 31, 2022.

Effect on Financial Statements or Other Significant Matters–The company made a policy election in the first quarter of 2020 to adopt the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference

Notes to Consolidated Financial Statements — (continued)

rate alternative, without any impact to the Consolidated Income Statement. The company has evaluated the replacement of the LIBOR benchmark on its interest rate risk management activities and does not expect it to have a material impact in the consolidated financial results.

Simplifying the Test for Goodwill Impairment

Standard/Description–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.

Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.

Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.

Financial Instruments–Credit Losses

Standard/Description–Issuance date: June 2016, with amendments in 2018, 2019 and 2020. This changes the guidance for credit losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.

Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 with one-year early adoption permitted. The company adopted the guidance as of the effective date, using the transition methodology whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements.

Effect on Financial Statements or Other Significant Matters–At January 1, 2020, an increase in the allowance for credit losses of $81 million was recorded for accounts receivable–trade and financing receivables (inclusive of its related off-balance sheet commitments). Additionally, net deferred taxes were reduced by $14 million in the Consolidated Balance Sheet, resulting in a cumulative-effect net decrease to retained earnings of $66 million. Refer to note 8, “Financing Receivables,” and note 12, “Commitments,” for additional information.

​

​

​

Notes to Consolidated Financial Statements — (continued)

3. Revenue Recognition:

Disaggregation of Revenue

The following tables provide details of revenue by major products/service offerings and by geography.

Revenue by Major Products/Service Offerings

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		​		​	​			​		​	​
​	​	Three Months Ended September 30,					​	Nine Months Ended September 30,
(Dollars in millions)	​	2021		​	2020		​	2021		​	2020
Cloud & Data Platforms	​	$	3,046	​	$	2,775	​	$	9,032	​	$	8,108	​
Cognitive Applications	​	​	1,314	​	​	1,317	​	​	3,938	​	​	3,745	​
Transaction Processing Platforms	​		1,332	​		1,461	​		4,257	​		4,687	​
Total Cloud & Cognitive Software	​	$	5,692	​	$	5,553	​	$	17,227	​	$	16,540	​
Consulting	​		2,292	​		1,966	​		6,717	​		5,973	​
Application Management	​		1,847	​		1,758	​		5,439	​		5,332	​
Global Process Services	​		287	​		240	​		846	​		687	​
Total Global Business Services	​	$	4,427	​	$	3,965	​	$	13,002	​	$	11,992	​
Infrastructure & Cloud Services	​		4,681	​		4,933	​		14,370	​		14,663	​
Technology Support Services	​		1,473	​		1,528	​		4,496	​		4,582	​
Total Global Technology Services	​	$	6,154	​	$	6,462	​	$	18,866	​	$	19,245	​
Systems Hardware	​		796	​		919	​		3,294	​		3,404	​
Operating Systems Software	​		312	​		338	​		957	​		1,074	​
Total Systems	​	$	1,107	​	$	1,257	​	$	4,251	​	$	4,477	​
Global Financing*	​		220	​		273	​		702	​		837	​
Other	​		18	​		50	​		45	​		163	​
Total revenue	​	$	17,618	​	$	17,560	​	$	54,093	​	$	53,253	​

• Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

​

Revenue by Geography

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Three Months Ended September 30,						Nine Months Ended September 30,					​
(Dollars in millions)	​	2021		​	2020			2021		​	2020		​
Americas	​	$	8,217	​	$	8,139	​	$	25,216	​	$	24,755	​
Europe/Middle East/Africa	​		5,593	​		5,564	​		17,272	​		16,775	​
Asia Pacific	​		3,808	​		3,857	​		11,605	​		11,723	​
Total	​	$	17,618	​	$	17,560	​	$	54,093	​	$	53,253	​

​

Remaining Performance Obligations

The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

Notes to Consolidated Financial Statements — (continued)

At September 30, 2021, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $108 billion. Approximately 60 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 30 percent in the subsequent three to five years and the balance (mostly Infrastructure & Cloud Services) thereafter.

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

For the three and nine months ended September 30, 2021, revenue was reduced by $49 million and $85 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

The following table provides information about notes and accounts receivable – trade, contract assets and deferred income balances:

​

​	​	​	​	​	​	​
​		At September 30,			At December 31,
(Dollars in millions)	​	2021		​	2020
Notes and accounts receivable — trade (net of allowances of $277 in 2021 and $351 in 2020)	​	$	6,609	​	$	7,132
Contract assets*	​		566	​		497
Deferred income (current)	​		12,264	​		12,833
Deferred income (noncurrent)	​		3,965	​		4,301

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

The amount of revenue recognized during the three and nine months ended September 30, 2021 that was included within the deferred income balance at June 30, 2021 and December 31, 2020 was $5.1 billion and $9.5 billion, respectively, and was primarily related to services and software.

The following table provides roll forwards of the notes and accounts receivable – trade allowance for expected credit losses for the nine months ended September 30, 2021 and the year ended December 31, 2020:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)				​			​			​			​
January 1, 2021		​	Additions / (Releases)		​	Write-offs		​	Other*		​	September 30, 2021
$	351	​	$	(44)	​	$	(30)	​	$	0	​	$	277

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
January 1, 2020		​	Additions / (Releases)		​	Write-offs		​	Other*		​	December 31, 2020
$	316	​	$	76	​	$	(46)	​	$	5	​	$	351

• Primarily represents translation adjustments.

​

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

​

4. Segments:

The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income from continuing operations. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments. See note 1, "Basis of Presentation" for additional information about the new operating segments, that will be effective in the fourth quarter of 2021.

​

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Cloud &			Global			Global				​			​			​
​	​	Cognitive		​	Business		​	Technology		​	​	​	​	Global		​	Total
(Dollars in millions)	​	Software		​	Services		​	Services		​	Systems		​	Financing		​	Segments
For the three months ended September 30, 2021:		​			​			​			​			​			​		​
External revenue	​	$	5,692	​	$	4,427	​	$	6,154	​	$	1,107	​	$	220	​	$	17,601	​
Internal revenue	​		764	​		53	​		317	​		176	​		153	​		1,463	​
Total revenue	​	$	6,456	​	$	4,480	​	$	6,471	​	$	1,283	​	$	373	​	$	19,064	​
Pre-tax income/(loss) from continuing operations	​	$	1,675	​	$	587	​	$	383	​	$	(207)	​	$	206	​	$	2,644	​
Revenue year-to-year change	​		0.4	%		11.6	%		(4.5)	%		(14.3)	%		(22.3)	%		(0.7)	%
Pre-tax income year-to-year change	​		(8.7)	%		3.0	%		(4.1)	%		nm	​		5.1	%		(10.7)	%
Pre-tax income/(loss) margin	​		25.9	%		13.1	%		5.9	%		(16.1)	%		55.1	%		13.9	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
For the three months ended September 30, 2020:	​			​			​			​			​			​			​
External revenue	​	$	5,553	​	$	3,965	​	$	6,462	​	$	1,257	​	$	273	​	$	17,510	​
Internal revenue	​		875	​		49	​		312	​		240	​		208	​		1,683	​
Total revenue	​	$	6,428	​	$	4,014	​	$	6,774	​	$	1,497	​	$	480	​	$	19,193	​
Pre-tax income/(loss) from continuing operations	​	$	1,834	​	$	570	​	$	399	​	$	(37)	​	$	196	​	$	2,962	​
Pre-tax income/(loss) margin	​		28.5	%		14.2	%		5.9	%		(2.5)	%		40.7	%		15.4	%

nm – not meaningful

​

Reconciliations to IBM as Reported:

​	​	​	​	​	​	​	​
(Dollars in millions)			​			​
For the three months ended September 30:	​	2021		​	2020
Revenue:		​			​		​
Total reportable segments	​	$	19,064	​	$	19,193	​
Other — divested businesses	​		(3)	​		4	​
Other revenue	​		20	​		46	​
Eliminations of internal transactions	​		(1,463)	​		(1,683)	​
Total consolidated revenue	​	$	17,618	​	$	17,560	​
​	​	​	​	​	​	​	​
Pre-tax income from continuing operations:	​			​			​
Total reportable segments	​	$	2,644	​	$	2,962	​
Amortization of acquired intangible assets	​		(475)	​		(459)	​
Acquisition-related (charges)/income	​		(4)	​		(1)	​
Non-operating retirement-related (costs)/income	​		(328)	​		(291)	​
Separation-related charges	​	​	(277)	​	​	—	​
Elimination of internal transactions	​		(57)	​		(158)	​
Other — divested businesses	​		(10)	​		(20)	​
Unallocated corporate amounts	​		(175)	​		(206)	​
Total pre-tax income from continuing operations	​	$	1,319	​	$	1,827	​

​

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Cloud &			Global			Global				​			​			​
​	​	Cognitive		​	Business		​	Technology		​	​	​	​	Global		​	Total
(Dollars in millions)	​	Software		​	Services		​	Services		​	Systems		​	Financing		​	Segments
For the nine months ended September 30, 2021:		​			​			​			​			​			​		​
External revenue	​	$	17,227	​	$	13,002	​	$	18,866	​	$	4,251	​	$	702	​	$	54,047	​
Internal revenue	​		2,322	​		166	​		956	​		606	​		581	​		4,631	​
Total revenue	​	$	19,549	​	$	13,168	​	$	19,822	​	$	4,857	​	$	1,283	​	$	58,678	​
Pre-tax income/(loss) from continuing operations	​	$	4,822	​	$	1,349	​	$	903	​	$	(33)	​	$	618	​	$	7,659	​
Revenue year-to-year change	​		3.0	%		8.5	%		(1.7)	%		(4.9)	%		(14.3)	%		1.4	%
Pre-tax income year-to-year change	​		7.8	%		12.1	%		91.9	%		nm	​		9.1	%		14.2	%
Pre-tax income/(loss) margin	​		24.7	%		10.2	%		4.6	%		(0.7)	%		48.1	%		13.1	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
For the nine months ended September 30, 2020:	​			​			​			​			​			​			​
External revenue	​	$	16,540	​	$	11,992	​	$	19,245	​	$	4,477	​	$	837	​	$	53,090	​
Internal revenue	​		2,431	​		150	​		911	​		628	​		660	​		4,780	​
Total revenue	​	$	18,971	​	$	12,142	​	$	20,155	​	$	5,106	​	$	1,497	​	$	57,870	​
Pre-tax income/(loss) from continuing operations	​	$	4,475	​	$	1,203	​	$	471	​	$	(7)	​	$	566	​	$	6,708	​
Pre-tax income/(loss) margin	​		23.6	%		9.9	%		2.3	%		(0.1)	%		37.8	%		11.6	%

nm – not meaningful

​

Reconciliations to IBM as Reported:

​

​	​	​	​	​	​	​	​
(Dollars in millions)			​			​
For the nine months ended September 30:	​	2021		​	2020
Revenue:		​			​		​
Total reportable segments	​	$	58,678	​	$	57,870	​
Other — divested businesses	​		(2)	​		36	​
Other revenue	​		47	​		127	​
Eliminations of internal transactions	​		(4,631)	​		(4,780)	​
Total consolidated revenue	​	$	54,093	​	$	53,253	​
​	​	​	​	​	​	​	​
Pre-tax income from continuing operations:	​			​			​
Total reportable segments	​	$	7,659	​	$	6,708	​
Amortization of acquired intangible assets	​		(1,389)	​		(1,404)	​
Acquisition-related (charges)/income	​		(37)	​		(3)	​
Non-operating retirement-related (costs)/income	​		(998)	​		(829)	​
Separation-related charges	​	​	(513)	​	​	—	​
Eliminations of internal transactions	​		(269)	​		(334)	​
Other — divested businesses	​		(34)	​		(17)	​
Unallocated corporate amounts	​		(643)	​		(773)	​
Total pre-tax income from continuing operations	​	$	3,776	​	$	3,348	​

​

​

​

Notes to Consolidated Financial Statements — (continued)

5. Acquisitions & Divestitures:

Acquisitions

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except as otherwise stated, were for 100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash equivalents.

During the nine months ended September 30, 2021, the company completed ten acquisitions at an aggregate cost of $3,049 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.

Acquisition	Segment	Description of Acquired Business
First Quarter
Nordcloud	Global Business Services	Consulting company providing services in cloud implementation, application transformation and managed services
​	​	​
Taos Mountain, LLC (Taos)	Global Business Services	Leading cloud professional and managed services provider
​	​	​
StackRox	Cloud & Cognitive Software	Innovator in container and Kubernetes-native security
Second Quarter	​	​
​	​	​
Turbonomic, Inc. (Turbonomic)	Cloud & Cognitive Software	Application Resource Management and Network Performance Management software provider
​	​	​
ECX Copy Data Management business	Cloud & Cognitive Software	Smart data protection solution
from Catalogic Software, Inc.
​	​	​
Waeg	Global Business Services	Leading Salesforce Consulting Partner
	​	​
myInvenio	Cloud & Cognitive Software	Process mining software company
​	​	​
Third Quarter	​	​
​	​	​
VEVRE Software business from Volta, Inc. ​	Cloud & Cognitive Software	Cloud-native virtual routing engine ​ ​
BoxBoat Technologies	Global Business Services	Premier DevOps consultancy and enterprise Kubernetes certified service provider ​
Bluetab Solutions Group	Global Business Services	Data solutions service provider

​

​

Notes to Consolidated Financial Statements — (continued)

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2021.

​

​	​	​	​	​	​	​	​	​
​	​	Amortization	​	​	​	​	Other
(Dollars in millions)		Life (in years)	​	Turbonomic		​	Acquisitions
Current assets	​	​	​	$	126	​	$	101
Property, plant and equipment/noncurrent assets	​	​	​		—	​		6
Intangible assets:	​	​	​	​	​	​	​	​
Goodwill		N/A	​		1,439	​		912
Client relationships		4-10	​		290			173
Completed technology		4-7	​		117	​		134
Trademarks		1-6	​		18	​		29
Total assets acquired	​	​	​	$	1,990	​	$	1,356
Current liabilities	​	​	​		49	​		59
Noncurrent liabilities	​	​	​		113	​		76
Total liabilities assumed	​	​	​	$	161	​	$	135
Total purchase price	​	​	​	$	1,829	​	$	1,220

N/A – not applicable

​

The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services neither of which qualifies as an amortizable intangible asset.

​

The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected.

​

Turbonomic—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 8.9 years. Goodwill of $1,372 million and $67 million was assigned to the Cloud & Cognitive Software and Global Business Services segments, respectively. It is expected that none of the goodwill will be deductible for tax purposes.

Other acquisitions—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.5 years. Goodwill of $628 million, $283 million and $2 million was assigned to the Global Business Services, Cloud & Cognitive Software and Global Technology Services segments, respectively. It is expected that approximately 9 percent of the goodwill will be deductible for tax purposes.

The identified intangible assets will be 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.

In October 2021, the company entered into a definitive agreement to acquire a privately held application development and cloud computing services company. Upon closing, the acquired business will be integrated into the Global Business Services segment. In October 2021, the company also announced it had entered into a definitive agreement with McDonald’s to acquire McD Tech Labs to further accelerate the development and deployment of its Automated Order Taking (AOT) technology. Upon closing, McD Tech Labs will be integrated into the Cloud & Cognitive Software segment. In November 2021, the company announced it had entered into a definitive agreement to acquire ReaQta, a provider of endpoint security solutions designed to leverage AI to automatically identify and manage threats. Upon closing, ReaQta will be integrated into the Cloud & Cognitive Software segment. All acquisitions are expected to close in the fourth quarter of 2021, subject to customary closing conditions, including regulatory clearance.

​

Notes to Consolidated Financial Statements — (continued)

Divestitures

In the third quarter of 2021, the company completed the sale of its remaining OEM commercial financing capabilities reported within the Global Financing segment. In addition, IBM completed two divestitures in the Cloud & Cognitive Software segment one in the second quarter and one in the third quarter of 2021. The financial terms related to each of these transactions were not material.

In October 2021, the company entered into a definitive agreement to sell certain intelligence analysis capabilities reported within the Cloud & Cognitive Software segment. The transaction is expected to close in the fourth quarter of 2021, subject to the satisfaction of applicable regulatory requirements and customary closing conditions. The financial terms related to this transaction are not expected to have a material impact to IBM's consolidated financial statements.

6. Earnings Per Share of Common Stock:

The following tables provide the computation of basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2021 and 2020.

​

​	​	​	​	​	​	​
(Dollars in millions except per share amounts)	​	​	​	​	​	​
For the three months ended September 30:		2021			2020
Number of shares on which basic earnings per share is calculated:		​			​
Weighted-average shares outstanding during period		​	897,097,073		​	891,381,032
Add — Incremental shares under stock-based compensation plans		​	6,946,467		​	4,595,327
Add — Incremental shares associated with contingently issuable shares		​	1,909,573		​	1,315,874
Number of shares on which diluted earnings per share is calculated		​	905,953,114		​	897,292,233
​	​	​	​	​	​	​
Income from continuing operations	​	$	1,130	​	$	1,698
Income/(loss) from discontinued operations, net of tax	​		—	​		(1)
Net income on which basic earnings per share is calculated	​	$	1,130	​	$	1,698
​	​	​	​	​	​	​
Income from continuing operations	​	$	1,130	​	$	1,698
Net income applicable to contingently issuable shares	​		—	​		—
Income from continuing operations on which diluted earnings per share is calculated	​	$	1,130	​	$	1,698
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated	​		—	​		(1)
Net income on which diluted earnings per share is calculated	​	$	1,130	​	$	1,698
​	​	​	​	​	​	​
Earnings/(loss) per share of common stock:	​			​
Assuming dilution	​			​
Continuing operations	​	$	1.25	​	$	1.89
Discontinued operations	​		—	​		0.00
Total	​	$	1.25	​	$	1.89
Basic	​			​
Continuing operations	​	$	1.26	​	$	1.90
Discontinued operations	​		—	​		0.00
Total	​	$	1.26	​	$	1.90

​

Stock options to purchase 750,990 shares and 1,510,886 shares were outstanding as of September 30, 2021 and 2020, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

Notes to Consolidated Financial Statements — (continued)

​

​	​	​	​	​	​	​
(Dollars in millions except per share amounts)	​	​
For the nine months ended September 30:		2021			2020
Number of shares on which basic earnings per share is calculated:		​			​
Weighted-average shares outstanding during period		​	895,257,004		​	889,595,181
Add — Incremental shares under stock-based compensation plans		​	7,000,190		​	4,875,369
Add — Incremental shares associated with contingently issuable shares		​	1,720,345		​	1,286,300
Number of shares on which diluted earnings per share is calculated		​	903,977,539		​	895,756,850
​	​	​	​	​	​	​
Income from continuing operations	​	$	3,411	​	$	4,237
Income/(loss) from discontinued operations, net of tax	​		(1)	​		(2)
Net income on which basic earnings per share is calculated	​	$	3,410	​	$	4,234
​	​	​	​	​	​	​
Income from continuing operations	​	$	3,411	​	$	4,237
Net income applicable to contingently issuable shares	​		—	​		(2)
Income from continuing operations on which diluted earnings per share is calculated	​	$	3,411	​	$	4,234
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated	​		(1)	​		(2)
Net income on which diluted earnings per share is calculated	​	$	3,410	​	$	4,232
​	​	​	​	​	​	​
Earnings/(loss) per share of common stock:	​			​
Assuming dilution	​			​
Continuing operations	​	$	3.77	​	$	4.72
Discontinued operations	​		0.00	​		0.00
Total	​	$	3.77	​	$	4.72
Basic	​			​
Continuing operations	​	$	3.81	​	$	4.76
Discontinued operations	​		0.00	​		0.00
Total	​	$	3.81	​	$	4.76

​

Stock options to purchase 879,289 shares and 1,386,591 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, 2021 and 2020, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

7. Financial Assets & Liabilities**:**

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company classifies certain assets and liabilities based on the following fair value hierarchy:

	●	Level 1–Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

	●	Level 2–Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

	●	Level 3–Unobservable inputs for the asset or liability.

Notes to Consolidated Financial Statements — (continued)

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

	●	Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

	●	Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in very liquid and highly rated investment grade securities.

The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. No impairments for credit losses and no material non-credit impairments were recorded for the three and nine months ended September 30, 2021 and 2020, respectively.

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three and nine months ended September 30, 2021 and 2020, respectively.

Notes to Consolidated Financial Statements — (continued)

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Fair Value	​	​					​	​
​	​	Hierarchy	​	At September 30, 2021					​	At December 31, 2020
(Dollars in millions)		Level		Assets (7)			Liabilities (8)			Assets (7)			Liabilities (8)
Cash equivalents: (1)	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Time deposits and certificates of deposit (2)	​	2	​	$	3,030	​	$	N/A	​	$	7,668	​	$	N/A
Money market funds	​	1	​	​	130	​	​	N/A	​	​	148	​	​	N/A
U.S. government securities (2)	​	2	​	​	—	​	​	N/A	​	​	500	​	​	N/A
Total cash equivalents	​	​	​	$	3,160	​	$	N/A	​	$	8,316	​	$	N/A
Equity investments (3)	​	1	​	​	0	​	​	N/A	​	​	2	​	​	N/A
Debt securities-current (2)(4)	​	2	​	​	600	​	​	N/A	​	​	600	​	​	N/A
Debt securities-noncurrent (2)(5)	​	2	​	​	6	​	​	N/A	​	​	7	​	​	N/A
Derivatives designated as hedging instruments:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate contracts	​	2	​	​	16	​	​	—	​	​	100	​	​	—
Foreign exchange contracts	​	2	​	​	367	​	​	95	​	​	111	​	​	580
Derivatives not designated as hedging instruments:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Foreign exchange contracts	​	2	​	​	42	​	​	38	​	​	13	​	​	47
Equity contracts (6)	​	1,2	​	​	—	​	​	16	​	​	12	​	​	—
Total	​	​	​	$	4,191	​	$	149	​	$	9,161	​	$	627

(1)	Included within cash and cash equivalents in the Consolidated Balance Sheet.

(2)	Available-for-sale debt securities with carrying values that approximate fair value.

(3)	Included within investments and sundry assets in the Consolidated Balance Sheet.

(4)	U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.

(5)	Primarily includes government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.

(6)	Level 1 includes immaterial amounts related to equity futures contracts.

(7)	The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at September 30, 2021 were $373 million and $52 million, respectively, and at December 31, 2020 were $85 million and $151 million, respectively.

(8)	The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at September 30, 2021 were $69 million and $80 million, respectively, and at December 31, 2020 were $587 million and $40 million, respectively.

​

N/A – not applicable

​

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2021 and December 31, 2020, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt (including long-term finance lease liabilities) for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $46,926 million and $54,355 million, and the estimated fair value was $52,150 million and $61,598 million at September 30, 2021 and December 31, 2020, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

8. Financing Receivables:

Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Client Financing Receivables					​	​	​	​	​	​
​		Client Loan and			Investment in				​			​
​	​	Installment Payment		​	Sales-Type and		​	Commercial		​	​	​
(Dollars in millions)	​	Receivables		​	Direct Financing		​	Financing		​	​	​
At September 30, 2021:	​	(Loans)		​	Leases		​	Receivables		​	Total
Financing receivables, gross	​	$	8,708	​	$	3,216	​	$	727	​	$	12,651
Unearned income	​	​	(355)	​		(228)	​	​	0	​	​	(583)
Residual value*	​	​	—	​		345	​	​	—	​	​	345
Amortized cost	​	$	8,353	​	$	3,333	​	$	727	​	$	12,413
Allowance for credit losses	​	​	(135)	​		(65)	​	​	(6)	​	​	(207)
Total financing receivables, net	​	$	8,218	​	$	3,268	​	$	721	​	$	12,207
Current portion	​	$	5,022	​	$	1,419	​	$	721	​	$	7,161
Noncurrent portion	​	$	3,196	​	$	1,850	​	$	—	​	$	5,046

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Client Financing Receivables					​	​	​	​	​	​
​		Client Loan and			Investment in				​			​
​	​	Installment Payment		​	Sales-Type and		​	Commercial		​	​	​
(Dollars in millions)	​	Receivables		​	Direct Financing		​	Financing		​	​	​
At December 31, 2020:	​	(Loans)		​	Leases		​	Receivables		​	Total
Financing receivables, gross	​	$	12,159	​	$	4,001	​	$	2,419	​	$	18,580
Unearned income	​	​	(488)	​	​	(335)	​	​	0	​	​	(823)
Residual value*	​	​	—	​		485	​	​	—	​	​	485
Amortized cost	​	$	11,671	​	$	4,151	​	$	2,419	​	$	18,242
Allowance for credit losses	​	​	(173)	​		(82)	​	​	(8)	​	​	(263)
Total financing receivables, net	​	$	11,498	​	$	4,069	​	$	2,411	​	$	17,979
Current portion	​	$	6,955	​	$	1,525	​	$	2,411	​	$	10,892
Noncurrent portion	​	$	4,542	​	$	2,544	​	$	—	​	$	7,086

• Includes guaranteed and unguaranteed residual value.

​

Notes to Consolidated Financial Statements — (continued)

The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, with enhanced focus due to the current macroeconomic uncertainty. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.

​

Financing receivables pledged as collateral for nonrecourse borrowings were $396 million and $482 million at September 30, 2021 and December 31, 2020, respectively. These borrowings are included in note 11, “Borrowings.”

​

Transfer of Financial Assets

For the nine months ended September 30, 2021, the company sold $2,970 million of client financing receivables to third parties, consisting of loan and lease receivables of $2,189 million and $781 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale. For the nine months ended September 30, 2020, the company sold $1,610 million of client financing receivables to third parties, consisting of loan and lease receivables of $758 million and $852 million, respectively.

On December 24, 2020, the company entered into an agreement with a third-party investor to sell up to $3,000 million of IBM short-term commercial financing receivables, at any one time, on a revolving basis. The company sold $4,465 million of commercial financing receivables under the agreement for the nine months ended September 30, 2021. In addition, the company included $400 million and $383 million of commercial financing receivables classified as held for sale at September 30, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated Balance Sheet. The carrying value of the receivables classified as held for sale approximates fair value. The company did not have any sales of commercial financing receivables for the nine months ended September 30, 2020.

The transfers of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales are included in cash flows from operating activities and the impacts to the Consolidated Income Statement, including fees and net gain or loss associated with the transfers of these receivables for the nine months ended September 30, 2021 and September 30, 2020, were not material.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis of client financing receivables at September 30, 2021 and December 31, 2020, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.

​

Notes to Consolidated Financial Statements — (continued)

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)			​			​			​			​
At September 30, 2021:	​	Americas		​	EMEA		​	Asia Pacific		​	Total
Amortized cost		$	5,966	​	$	3,616	​	$	2,105	​	$	11,687
Allowance for credit losses:	​			​			​			​
Beginning balance at January 1, 2021	​	$	141	​	$	77	​	$	37	​	$	255
Write-offs	​	$	(6)	​	$	(1)	​	$	(7)	​	$	(14)
Recoveries	​		—	​		—	​	​	1	​	​	1
Additions/(releases)	​		(20)	​		(10)	​	​	(6)	​	​	(36)
Other*	​		(2)	​		(3)	​	​	0	​	​	(5)
Ending balance at September 30, 2021	​	$	113	​	$	64	​	$	24	​	$	201

​

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)			​			​			​			​
At December 31, 2020:	​	Americas		​	EMEA		​	Asia Pacific		​	Total
Amortized cost		$	7,758	​	$	5,023	​	$	3,042	​	$	15,822
Allowance for credit losses:	​			​			​			​
Beginning balance at January 1, 2020	​	$	142	​	$	69	​	$	41	​	$	252
Write-offs	​	$	(28)	​	$	(3)	​	$	(3)	​	$	(34)
Recoveries	​		0	​		0	​	​	2	​	​	3
Additions/(releases)	​		33	​		5	​	​	(4)	​	​	34
Other*	​		(6)	​		6	​	​	1	​	​	1
Ending balance at December 31, 2020	​	$	141	​	$	77	​	$	37	​	$	255

• Primarily represents translation adjustments.

IBM continues to monitor the global impacts from the COVID-19 pandemic as well as its impact on external economic models. The company’s allowance for credit losses at September 30, 2021 and December 31, 2020 reflects the qualitative process which is described further in note A, “Significant Accounting Policies” in the company’s 2020 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

Notes to Consolidated Financial Statements — (continued)

Past Due Financing Receivables

The company summarizes information about the amortized cost basis of client financing receivables, including amortized cost aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost not accruing.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​		Amortized			Billed			Amortized
​	​	Total		​	Amortized		​	Cost		​	Invoices		​	Cost
(Dollars in millions)	​	Amortized		​	Cost		​	> 90 Days and		​	> 90 Days and		​	Not
At September 30, 2021:	​	Cost		​	> 90 Days (1)		​	Accruing (1)		​	Accruing		​	Accruing (2)
Americas	​	$	5,966	​	$	179	​	$	94	​	$	15	​	$	88
EMEA	​		3,616	​	​	89	​	​	3	​	​	2	​	​	89
Asia Pacific	​		2,105	​	​	28	​	​	6	​	​	3	​	​	22
Total client financing receivables	​	$	11,687	​	$	296	​	$	103	​	$	20	​	$	200

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​		Amortized			Billed			Amortized
​	​	Total		​	Amortized		​	Cost		​	Invoices		​	Cost
(Dollars in millions)	​	Amortized		​	Cost		​	> 90 Days and		​	> 90 Days and		​	Not
At December 31, 2020:	​	Cost		​	> 90 Days (1)		​	Accruing (1)		​	Accruing		​	Accruing (2)
Americas	​	$	7,758	​	$	295	​	$	200	​	$	12	​	$	96
EMEA	​		5,023	​	​	119	​	​	28	​	​	5	​	​	95
Asia Pacific	​		3,042	​	​	42	​	​	12	​	​	4	​	​	32
Total client financing receivables	​	$	15,822	​	$	456	​	$	241	​	$	20	​	$	223

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

(2)	Of the amortized cost not accruing, there was a related allowance of $161 million and $178 million at September 30, 2021 and December 31, 2020, respectively. Financing income recognized on these receivables was immaterial for the three and nine months ended September 30, 2021, respectively.

​

Credit Quality Indicators

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

The following tables present the amortized cost basis of client financing receivables by credit quality indicator at September 30, 2021 and December 31, 2020, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduces the risk to IBM.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	Americas						EMEA						Asia Pacific
At September 30, 2021:		Aaa – Baa3			Ba1 – D			Aaa – Baa3			Ba1 – D			Aaa – Baa3			Ba1 – D
Vintage year:		​			​			​			​			​			​
2021	​	$	1,667	​	$	858	​	$	746	​	$	614	​	$	498	​	$	174
2020	​	​	1,177	​	​	481	​	​	663	​	​	427	​	​	411	​	​	102
2019	​		657	​	​	282	​	​	335	​	​	341	​	​	335	​	​	60
2018	​		420	​	​	146	​	​	229	​	​	108	​	​	245	​	​	74
2017	​		137	​	​	59	​	​	23	​	​	62	​	​	100	​	​	23
2016 and prior	​		25	​	​	57	​	​	23	​	​	42	​	​	57	​	​	24
Total	​	$	4,083	​	$	1,883	​	$	2,020	​	$	1,595	​	$	1,647	​	$	458

​

Notes to Consolidated Financial Statements — (continued)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	Americas					​	EMEA					​	Asia Pacific
At December 31, 2020:		Aaa – Baa3			Ba1 – D			Aaa – Baa3			Ba1 – D			Aaa – Baa3			Ba1 – D
Vintage year:		​			​			​			​			​			​
2020	​	$	2,818	​	$	1,449	​	$	1,513	​	$	1,427	​	$	958	​	$	351
2019	​		988	​	​	623	​	​	668	​	​	519	​	​	564	​	​	123
2018	​		829	​	​	360	​	​	329	​	​	245	​	​	419	​	​	167
2017	​		285	​	​	154	​	​	70	​	​	128	​	​	205	​	​	52
2016	​		90	​	​	52	​	​	33	​	​	46	​	​	114	​	​	33
2015 and prior	​		28	​	​	81	​	​	22	​	​	22	​	​	38	​	​	18
Total	​	$	5,038	​	$	2,720	​	$	2,635	​	$	2,387	​	$	2,298	​	$	743

​

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2021 or for the year ended December 31, 2020.

9. Leases:

Accounting for Leases as a Lessor

The following table presents amounts included in the Consolidated Income Statement related to lessor activity:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​		Three Months Ended September 30,					​	Nine Months Ended September 30,
(Dollars in millions)	​	2021			2020		​	2021			2020
Lease income — sales-type and direct financing leases:		​		​	​		​	​		​	​
Sales-type lease selling price	​	$	120	​	$	154	​	$	877	​	$	733
Less: Carrying value of underlying assets*	​		49	​		64	​		211	​		258
Gross profit	​	$	71	​	$	90	​	$	666	​	$	475
Interest income on lease receivables	​		44	​		56	​		142	​		195
Total sales-type and direct financing lease income	​	$	115	​	$	145	​	$	808	​	$	670
Lease income — operating leases	​		38	​		65	​		137	​		204
Variable lease income	​		18	​		25	​		97	​		82
Total lease income	​	$	171	​	$	235	​	$	1,042	​	$	956

• Excludes unguaranteed residual value.

​

Notes to Consolidated Financial Statements — (continued)

10. Intangible Assets Including Goodwill:

Intangible Assets

The following tables present the company's intangible asset balances by major asset class.

​

​	​	​	​	​	​	​	​	​	​
​	​	At September 30, 2021
​		Gross Carrying			Accumulated			Net Carrying
(Dollars in millions)	​	Amount		​	Amortization		​	Amount*
Intangible asset class:	​	​	​	​	​	​	​	​	​
Capitalized software	​	$	1,864	​	$	(881)	​	$	983
Client relationships	​		9,170	​		(2,746)	​		6,423
Completed technology	​		6,077	​		(2,126)	​		3,951
Patents/trademarks	​		2,217	​		(560)	​		1,658
Other**	​		44	​		(33)	​		11
Total	​	$	19,372	​	$	(6,347)	​	$	13,025

​

​	​	​	​	​	​	​	​	​	​
​	​	At December 31, 2020
​		Gross Carrying			Accumulated			Net Carrying
(Dollars in millions)	​	Amount		​	Amortization		​	Amount*
Intangible asset class:	​	​	​	​	​	​	​	​	​
Capitalized software	​	$	1,777	​	$	(814)	​	$	963
Client relationships	​		8,838	​		(2,056)	​		6,783
Completed technology	​		5,957	​		(1,671)	​		4,286
Patents/trademarks	​		2,246	​		(499)	​		1,747
Other**	​		56	​		(39)	​		16
Total	​	$	18,874	​	$	(5,079)	​	$	13,796

• Amounts as of September 30, 2021 and December 31, 2020 included a decrease in net intangible asset balances of $179 million and an increase of $279 million, respectively, due to foreign currency translation.

**	Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

​

The net carrying amount of intangible assets decreased $771 million during the first nine months of 2021, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible asset amortization expense was $646 million and $1,897 million for the third quarter and first nine months of 2021, respectively, compared to $613 million and $1,858 million for the third quarter and first nine months of 2020, respectively. In the first nine months of 2021, the company retired $581 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at September 30, 2021:

​

​	​	​	​	​	​	​	​	​	​
​		Capitalized			Acquired				​
(Dollars in millions)	​	Software		​	Intangibles		​	Total
Remainder of 2021	​	$	171	​	$	474	​	$	645
2022	​		469	​		1,830	​		2,299
2023	​		268	​		1,517	​		1,786
2024	​		74	​		1,467	​		1,541
2025	​		0	​		1,444	​		1,444
Thereafter	​	​	0	​	​	5,310	​		5,310

​

Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the nine months ended September 30, 2021 and for the year ended December 31, 2020 were as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​			​	​	​	​	​	Foreign				​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Currency		​	​	​
​	​	​	​	​	​	​	​	Purchase		​	​	​	​	Translation		​	​	​
(Dollars in millions)	​	Balance		​	Goodwill		​	Price		​	​	​	​	and Other		​	Balance
Segment	​	1/1/2021		​	Additions		​	Adjustments		​	​	Divestitures	​	Adjustments*		​	9/30/2021
Cloud & Cognitive Software	​	$	43,934	​	$	1,655	​	$	8	​	$	(13)	​	$	(374)	​	$	45,210
Global Business Services	​		6,145	​		695	​		(11)	​		—	​		(101)	​		6,727
Global Technology Services	​		7,245	​		2	​		—	​		—	​		(92)	​		7,155
Systems	​		2,293	​		—	​		0	​		—	​		(7)	​		2,286
Total	​	$	59,617	​	$	2,351	​	$	(3)	​	$	(13)	​	$	(575)	​	$	61,378

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​			​	​	​	​	​	Foreign				​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	Currency		​	​	​
​	​	​	​	​	​	​	​	Purchase		​	​	​	​	Translation		​	​	​
(Dollars in millions)	​	Balance		​	Goodwill		​	Price		​	​	​	​	and Other		​	Balance
Segment	​	1/1/2020		​	Additions		​	Adjustments		​	​	Divestitures	​	Adjustments*		​	12/31/2020
Cloud & Cognitive Software	​	$	43,037	​	$	362	​	$	(139)	​	$	—	​	$	675	​	$	43,934
Global Business Services	​		5,775	​		205	​		—	​		—	​		165	​		6,145
Global Technology Services	​		7,141	​		—	​		—	​		—	​		104	​		7,245
Systems	​		2,270	​		8	​		—	​		—	​		15	​		2,293
Total	​	$	58,222	​	$	575	​	$	(139)	​	$	—	​	$	960	​	$	59,617

• Primarily driven by foreign currency translation.

There were no goodwill impairment losses recorded during the first nine months of 2021 or full-year 2020 and the company has no accumulated impairment losses. Purchase price adjustments recorded in the first nine months of 2021 and full-year 2020 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded in the first nine months of 2021 were not material. In full-year 2020, net purchase price adjustments recorded to noncurrent tax assets and liabilities were related to the Red Hat acquisition.

At the date of issuance of the financial statements, the company's annual goodwill impairment analysis which is performed during the fourth quarter is not yet complete. In anticipation of the separation of Kyndryl that occurred on November 3, 2021 and the segment changes immediately prior to the separation, the company began performing the quantitative tests of goodwill impairment for all affected reporting units. Preliminary analysis indicates the fair value of the Infrastructure Services reporting unit which includes Kyndryl and is part of the GTS segment, approximates its carrying amount. This reporting unit had goodwill of $5.8 billion as of September 30, 2021. The final goodwill impairment analysis may differ significantly from the company's preliminary result.

Based on the preliminary analysis, all of the other reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

​

Notes to Consolidated Financial Statements — (continued)

11. Borrowings:

Short-Term Debt

​

​	​	​	​	​	​	​
​		At September 30,			At December 31,
(Dollars in millions)	​	2021		​	2020
Commercial paper	​	$	900	​	$	—
Short-term loans	​	​	43	​	​	130
Long-term debt — current maturities	​		6,632	​		7,053
Total	​	$	7,575	​	$	7,183

​

The weighted-average interest rate for commercial paper at September 30, 2021 was 0.1 percent. The weighted-average interest rate for short-term loans was 3.8 percent and 5.7 percent at September 30, 2021 and December 31, 2020, respectively.

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

​

Pre-Swap Borrowing

​

​	​	​	​	​	​	​	​	​
​				Balance			Balance
(Dollars in millions)	​	Maturities	​	9/30/2021		​	12/31/2020
U.S. dollar debt (weighted-average interest rate at September 30, 2021):*				​			​
0.7%		2021	​	$	1,107	​	$	5,499
2.6%		2022	​		5,682	​		6,233
3.4%		2023	​		1,589	​		2,395
3.3%		2024	​		5,018	​		5,029
6.9%		2025	​		617	​		631
3.3%		2026	​		4,498	​		4,370
3.0%		2027	​		2,222	​		2,219
6.5%		2028	​	​	313	​		313
3.5%	​	2029	​	​	3,250	​	​	3,250
2.0%	​	2030	​	​	1,350	​	​	1,350
5.9%		2032	​		600	​		600
8.0%		2038	​		83	​		83
4.5%		2039	​		2,745	​		2,745
2.9%	​	2040	​	​	650	​	​	650
4.0%		2042	​		1,107	​		1,107
7.0%		2045	​		27	​		27
4.7%		2046	​		650	​		650
4.3%	​	2049	​	​	3,000	​	​	3,000
3.0%	​	2050	​	​	750	​	​	750
7.1%		2096	​		316	​		316
​	​	​	​	$	35,575	​	$	41,218
Other currencies (weighted-average interest rate at September 30, 2021, in parentheses):*			​			​
Euro (1.1%)		2023–2040	​	$	16,222	​	$	18,355
Pound sterling (2.6%)		2022	​		405	​		411
Japanese yen (0.3%)		2022–2026	​		1,304	​		1,409
Other (7.8%)		2021–2025	​		354	​		324
​	​	​	​	$	53,859	​	$	61,718
Finance lease obligations (1.4%)	​	2021–2030	​	​	357	​	​	296
​	​	​	​	$	54,216	​	$	62,013
Less: net unamortized discount			​		849	​		875
Less: net unamortized debt issuance costs			​		136	​		156
Add: fair value adjustment**			​		327	​		426
​	​	​	​	$	53,558	​	$	61,408
Less: current maturities			​		6,632	​		7,053
Total			​	$	46,926	​	$	54,355

• Includes notes, debentures, bank loans and secured borrowings.

**	The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include

Notes to Consolidated Financial Statements — (continued)

a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

In the first quarter of 2020, the company issued an aggregate of $4.1 billion of Euro fixed-rate notes and the proceeds were primarily used to early redeem outstanding fixed-rate debt which was due in 2021 in the aggregate amount of $2.9 billion. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of $49 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion with maturity dates ranging from 2021 to 2023 and deregistered with the U.S. Securities and Exchange Commission. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, 2021, were as follows:

​

​	​	​	​
(Dollars in millions)		Total
Remainder of 2021	​	$	1,189
2022	​		6,889
2023	​		4,973
2024	​		6,497
2025	​		4,142
Thereafter	​		30,526
Total	​	$	54,216

​

Interest on Debt

​

​	​	​	​	​	​	​
(Dollars in millions)			​			​
For the nine months ended September 30:	​	2021		​	2020
Cost of financing	​	$	312	​	$	346
Interest expense	​		852	​		971
Interest capitalized	​		3	​		6
Total interest paid and accrued	​	$	1,167	​	$	1,323

​

Lines of Credit

On June 22, 2021, the company entered into a new $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement to replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit Agreements. The maturity dates for the new Three-Year and Five-Year Credit Agreements (the Credit Agreements) are June 21, 2024, and June 22, 2026, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. In connection with entering into the Credit Agreements, the company also terminated its $2.5 billion 364-Day Credit Agreement which was scheduled to expire on July 1, 2021. Subject to certain conditions stated in the Credit Agreements, the company may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of such agreements. Funds borrowed may be used for the general corporate purposes of the company.

​

Notes to Consolidated Financial Statements — (continued)

Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions.

​

At September 30, 2021, there were no borrowings by the company, or its subsidiaries, under these credit facilities.

​

12. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $1.7 billion and $2.1 billion at September 30, 2021 and December 31, 2020, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $4.5 billion and $5.2 billion at September 30, 2021 and December 31, 2020, respectively. Approximately 35 percent of the future financing commitments reported at September 30, 2021 are in support of IBM’s managed infrastructure services unit, and upon the separation of Kyndryl on November 3, 2021, are no longer obligations of IBM. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note A, “Significant Accounting Policies” in the company’s 2020 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at September 30, 2021.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, 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 September 30, 2021 and December 31, 2020 was not material.

Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.

Notes to Consolidated Financial Statements — (continued)

Standard Warranty Liability

​	​	​	​	​	​	​
(Dollars in millions)		2021			2020
Balance at January 1	​	$	83	​	$	113
Current period accruals	​		50	​		56
Accrual adjustments to reflect actual experience	​		(2)	​		(15)
Charges incurred	​		(66)	​		(73)
Balance at September 30	​	$	66	​	$	80

​

Extended Warranty Liability

​	​	​	​	​	​	​
(Dollars in millions)		2021			2020
Balance at January 1	​	$	425	​	$	477
Revenue deferred for new extended warranty contracts	​		71	​		115
Amortization of deferred revenue	​		(154)	​		(169)
Other*	​		(9)	​		(3)
Balance at September 30	​	$	334	​	$	419
Current portion	​	$	171	​	$	196
Noncurrent portion	​	$	163	​	$	223

• Other primarily consists of foreign currency translation adjustments.

13. Contingencies:

As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company or its clients could become subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended September 30, 2021 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

Notes to Consolidated Financial Statements — (continued)

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

The following is a summary of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the dismissal of all but one of SCO’s remaining claims, which was remanded to the Federal Court in Utah. In August 2021, the parties reached an agreement to settle the case, which has been approved by the bankruptcy court.

On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance benefits programs. The matter was settled in August 2021.

In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to pay approximately $20 million in

Notes to Consolidated Financial Statements — (continued)

damages, plus interest and litigation costs. CISGIL was granted permission to appeal and the matter is now pending at the Court of Appeal in London.

On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. IBM’s claims for breaches of contract and promissory estoppel are proceeding.

​

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

​

Notes to Consolidated Financial Statements — (continued)

14. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

​

​	​	​	​	​	​	​	​	​	​
(Dollars in millions)		Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2021:	​	Amount		​	Benefit		​	Amount
Other comprehensive income/(loss):		​			​			​
Foreign currency translation adjustments	​	$	(114)	​	$	(120)	​	$	(234)
Net changes related to available-for-sale securities:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	0	​	$	0	​	$	0
Reclassification of (gains)/losses to other (income) and expense	​		—	​	​	—	​	​	—
Total net changes related to available-for-sale securities	​	$	0	​	$	0	​	$	0
Unrealized gains/(losses) on cash flow hedges:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	109	​	$	(28)	​	$	82
Reclassification of (gains)/losses to:	​			​			​
Cost of services	​		(12)	​		3	​		(9)
Cost of sales	​		(1)	​		1	​		(1)
Cost of financing	​		6	​		(1)	​		4
SG&A expense	​		1	​		0	​		1
Other (income) and expense	​		22	​		(6)	​		17
Interest expense	​		16	​		(4)	​		12
Total unrealized gains/(losses) on cash flow hedges	​	$	141	​	$	(35)	​	$	106
Retirement-related benefit plans (1):	​			​			​
Prior service costs/(credits)	​	$	0	​	$	0	​	$	0
Net (losses)/gains arising during the period	​	​	1	​	​	0	​	​	1
Curtailments and settlements	​		13	​	​	(4)	​	​	9
Amortization of prior service (credits)/costs	​		3	​	​	0	​	​	3
Amortization of net (gains)/losses	​		638	​	​	(174)	​	​	464
Total retirement-related benefit plans	​	$	656	​	$	(178)	​	$	478
Other comprehensive income/(loss)	​	$	683	​	$	(333)	​	$	350

(1)	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

​	​	​	​	​	​	​	​	​	​
(Dollars in millions)		Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2020:	​	Amount		​	Benefit		​	Amount
Other comprehensive income/(loss):		​			​			​
Foreign currency translation adjustments	​	$	(439)	​	$	247	​	$	(192)
Net changes related to available-for-sale securities:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	(1)	​	$	0	​	$	(1)
Reclassification of (gains)/losses to other (income) and expense	​		—	​	​	—	​	​	—
Total net changes related to available-for-sale securities	​	$	(1)	​	$	0	​	$	(1)
Unrealized gains/(losses) on cash flow hedges:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	(32)	​	$	8	​	$	(24)
Reclassification of (gains)/losses to:	​		​	​		​	​		​
Cost of services	​		(10)	​		2	​		(7)
Cost of sales	​		4	​		(1)	​		3
Cost of financing	​		6	​		(2)	​		5
SG&A expense	​		5	​		(1)	​		4
Other (income) and expense	​		(93)	​		23	​		(70)
Interest expense	​		19	​		(5)	​		14
Total unrealized gains/(losses) on cash flow hedges	​	$	(101)	​	$	26	​	$	(75)
Retirement-related benefit plans (1):	​			​			​
Prior service costs/(credits)	​	$	(1)	​	$	0	​	$	0
Net (losses)/gains arising during the period	​	​	0	​	​	0	​	​	0
Curtailments and settlements	​		21	​	​	(6)	​	​	14
Amortization of prior service (credits)/costs	​		0	​	​	1	​	​	1
Amortization of net (gains)/losses	​		586	​	​	(161)	​	​	425
Total retirement-related benefit plans	​	$	607	​	$	(167)	​	$	440
Other comprehensive income/(loss)	​	$	66	​	$	106	​	$	172

(1)	These AOCI components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

​

​	​	​	​	​	​	​	​	​	​
(Dollars in millions)		Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2021:	​	Amount		​	Benefit		​	Amount
Other comprehensive income/(loss):		​			​			​
Foreign currency translation adjustments	​	$	463	​	$	(304)	​	$	160
Net changes related to available-for-sale securities:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	0	​	$	0	​	$	0
Reclassification of (gains)/losses to other (income) and expense	​		—	​		—	​		—
Total net changes related to available-for-sale securities	​	$	0	​	$	0	​	$	0
Unrealized gains/(losses) on cash flow hedges:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	262	​	$	(66)	​	$	196
Reclassification of (gains)/losses to:	​			​			​
Cost of services	​		(33)	​		8	​		(25)
Cost of sales	​		30	​		(8)	​		23
Cost of financing	​		17	​		(4)	​		13
SG&A expense	​		32	​		(8)	​		24
Other (income) and expense	​		187	​		(47)	​		140
Interest expense	​		48	​		(12)	​		36
Total unrealized gains/(losses) on cash flow hedges	​	$	545	​	$	(138)	​	$	407
Retirement-related benefit plans (1):	​			​			​
Prior service costs/(credits)	​	$	0	​	$	0	​	$	0
Net (losses)/gains arising during the period	​	​	23	​	​	4	​	​	27
Curtailments and settlements	​		46	​		(14)	​		32
Amortization of prior service (credits)/costs	​		8	​		0	​		8
Amortization of net (gains)/losses	​		1,929	​		(526)	​		1,403
Total retirement-related benefit plans	​	$	2,006	​	$	(537)	​	$	1,469
Other comprehensive income/(loss)	​	$	3,014	​	$	(978)	​	$	2,035

(1)	These AOCI components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

​

​	​	​	​	​	​	​	​	​	​
(Dollars in millions)		Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2020:	​	Amount		​	Benefit		​	Amount
Other comprehensive income/(loss):		​			​			​
Foreign currency translation adjustments	​	$	(1,354)	​	$	260	​	$	(1,094)
Net changes related to available-for-sale securities:	​			​		​	​
Unrealized gains/(losses) arising during the period	​	$	0	​	$	0	​	$	0
Reclassification of (gains)/losses to other (income) and expense	​		—	​		—	​		—
Total net changes related to available-for-sale securities	​	$	0	​	$	0	​	$	0
Unrealized gains/(losses) on cash flow hedges:	​			​			​
Unrealized gains/(losses) arising during the period	​	$	(249)	​	$	63	​	$	(186)
Reclassification of (gains)/losses to:	​		​	​		​	​		​
Cost of services	​		(18)	​		5	​		(14)
Cost of sales	​		(14)	​		4	​		(10)
Cost of financing	​		21	​		(5)	​		16
SG&A expense	​		(12)	​		3	​		(9)
Other (income) and expense	​		(74)	​		19	​		(55)
Interest expense	​		60	​		(15)	​		45
Total unrealized gains/(losses) on cash flow hedges	​	$	(285)	​	$	73	​	$	(212)
Retirement-related benefit plans (1):	​			​			​
Prior service costs/(credits)	​	$	(5)	​	$	1	​	$	(3)
Net (losses)/gains arising during the period	​	​	65	​	​	(24)	​	​	41
Curtailments and settlements	​		42	​		(12)	​		30
Amortization of prior service (credits)/costs	​		1	​		2	​		3
Amortization of net (gains)/losses	​		1,722	​		(473)	​		1,249
Total retirement-related benefit plans	​	$	1,826	​	$	(507)	​	$	1,319
Other comprehensive income/(loss)	​	$	187	​	$	(175)	​	$	12

(1)	These AOCI components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

​

Accumulated Other Comprehensive Income/(Loss) (net of tax)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​		Net Change			Net Unrealized				​
​	​	Net Unrealized		​	Foreign		​	Retirement-		​	Gains/(Losses)		​	Accumulated
​	​	Gains/(Losses)		​	Currency		​	Related		​	on Available-		​	Other
​	​	on Cash Flow		​	Translation		​	Benefit		​	For-Sale		​	Comprehensive
(Dollars in millions)	​	Hedges		​	Adjustments*		​	Plans		​	Securities		​	Income/(Loss)
January 1, 2021	​	$	(456)	​	$	(4,665)	​	$	(24,216)	​	$	0	​	$	(29,337)
Other comprehensive income before reclassifications	​		196	​		160	​		26	​		0	​		382
Amount reclassified from accumulated other comprehensive income	​		211	​		—	​		1,442	​		—	​		1,654
Total change for the period	​	$	407	​	$	160	​	$	1,469	​	$	0	​	$	2,035
September 30, 2021	​	$	(49)	​	$	(4,505)	​	$	(22,747)	​	$	(1)	​	$	(27,302)

• Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

Notes to Consolidated Financial Statements — (continued)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​			​			​		Net Change			Net Unrealized				​
​	​	Net Unrealized		​	Foreign		​	Retirement-		​	Gains/(Losses)		​	Accumulated
​	​	Gains/(Losses)		​	Currency		​	Related		​	on Available-		​	Other
​	​	on Cash Flow		​	Translation		​	Benefit		​	For-Sale		​	Comprehensive
(Dollars in millions)	​	Hedges		​	Adjustments*		​	Plans		​	Securities		​	Income/(Loss)
January 1, 2020	​	$	(179)	​	$	(3,700)	​	$	(24,718)	​	$	0	​	$	(28,597)
Other comprehensive income before reclassifications	​		(186)	​		(1,094)	​		37	​		0	​		(1,242)
Amount reclassified from accumulated other comprehensive income	​		(27)	​		—	​		1,281	​		—	​		1,255
Total change for the period	​	$	(212)	​	$	(1,094)	​	$	1,319	​	$	0	​	$	12
September 30, 2020	​	$	(391)	​	$	(4,794)	​	$	(23,399)	​	$	0	​	$	(28,584)

• Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

​

15. Derivative Financial Instruments:

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. The amount recognized in accounts payable for the obligation to return cash collateral was $24 million at September 30, 2021 and no amount was recognized at December 31, 2020. No amount was recognized for the right to reclaim cash collateral at September 30, 2021 and December 31, 2020. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. No amount was rehypothecated at September 30, 2021 and December 31, 2020. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at September 30, 2021 and December 31, 2020, the total derivative asset and liability positions each would have been reduced by $91 million and $213 million, respectively.

In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2021 and December 31, 2020, the total notional amount of the company’s interest-

Notes to Consolidated Financial Statements — (continued)

rate swaps was $0.4 billion and $3.0 billion, respectively. In the first quarter of 2021, in addition to the scheduled swap maturities, the company terminated $1.25 billion of interest-rate swaps concurrent with the early redemption of the underlying hedged fixed-rate debt. The weighted-average remaining maturity of these instruments at September 30, 2021 and December 31, 2020 was approximately 1.5 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at September 30, 2021 and December 31, 2020.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were no instruments outstanding at September 30, 2021 and December 31, 2020.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses of $161 million and $174 million (before taxes) at September 30, 2021 and December 31, 2020, respectively, in AOCI. The company estimates that $18 million (before taxes) of the deferred net losses on derivatives in AOCI at September 30, 2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At September 30, 2021 and December 31, 2020, the carrying value of debt designated as hedging instruments was $15.5 billion and $16.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, 2021 and December 31, 2020, the total notional amount of derivative instruments designated as net investment hedges was $7.5 billion and $7.2 billion, respectively. At September 30, 2021 and December 31, 2020, the weighted-average remaining maturity of these instruments was approximately 0.1 years and 0.3 years, respectively.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum remaining length of time over which the company hedged its exposure is approximately 2.9 years. At September 30, 2021 and December 31, 2020, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $7.5 billion and $8.0 billion, respectively. At September 30, 2021 and December 31, 2020, the weighted-average remaining maturity of these instruments was approximately 0.6 years and 0.7 years, respectively.

At September 30, 2021 and December 31, 2020, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $294 million and net losses of $192 million (before taxes), respectively, in AOCI. The company estimates that $216 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Notes to Consolidated Financial Statements — (continued)

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At September 30, 2021, the maximum length of time remaining over which the company hedged its exposure is approximately 6.4 years. At September 30, 2021 and December 31, 2020, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.5 billion at both periods.

In connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses of $191 million and $236 million (before taxes) at September 30, 2021 and December 31, 2020, respectively, in AOCI. The company estimates that $25 million (before taxes) of deferred net losses on derivatives in AOCI at September 30, 2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At September 30, 2021 and December 31, 2020, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $7.8 billion and $6.8 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At September 30, 2021 and December 31, 2020, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.4 billion and $1.3 billion, respectively.

Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At September 30, 2021 and December 31, 2020, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:

​

​	​	​	​	​	​	​	​
​		September 30,			December 31,
(Dollars in millions)	​	2021		​	2020
Short-term debt:		​			​		​
Carrying amount of the hedged item	​	$	—	​	$	(1,302)	​
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)	​		—	​		(2)	​
Long-term debt:	​			​			​
Carrying amount of the hedged item	​	$	(752)	​	$	(2,097)	​
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	​		(327)	​		(424)	​

• Includes ($314) million and ($353) million of hedging adjustments on discontinued hedging relationships at September 30, 2021 and December 31, 2020, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Gains/(Losses) of
(Dollars in millions)	​	Total					​	Total Hedge Activity
For the three months ended September 30:		2021			2020			2021			2020
Cost of services	​	$	7,770	​	$	7,357	​	$	12	​	$	10	​
Cost of sales	​		1,513	​		1,601	​		1	​		(4)	​
Cost of financing	​		165	​		172	​		(1)	​		3	​
SG&A expense	​		4,860	​		4,647	​		(14)	​		58	​
Other (income) and expense	​		234	​		253	​		(7)	​		101	​
Interest expense	​		291	​		323	​		(2)	​		8	​

​

Notes to Consolidated Financial Statements — (continued)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Gain (Loss) Recognized in Consolidated Income Statement
​	​	Consolidated	​	Recognized on					​	Attributable to Risk
(Dollars in millions)	​	Income Statement	​	Derivatives					​	Being Hedged (2)
For the three months ended September 30:		Line Item		2021			2020			2021			2020
Derivative instruments in fair value hedges (1):				​			​			​			​
Interest rate contracts		Cost of financing	​	$	0	​	$	0	​	$	4	​	$	7
​		Interest expense	​		0	​		0	​		11	​		20
Derivative instruments not designated as hedging instruments:			​			​			​			​
Foreign exchange contracts		Other (income) and expense	​		15	​		8	​		N/A	​		N/A
Equity contracts		SG&A expense	​		(13)	​		63	​		N/A	​		N/A
Total			​	$	3	​	$	71	​	$	15	​	$	27

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)	​	​	​	​	​	​	​	Consolidated	​	Reclassified					​	Amounts Excluded from
For the three months	​	Recognized in OCI					​	Income Statement	​	from AOCI					​	Effectiveness Testing (3)
ended September 30:		2021			2020			Line Item		2021			2020			2021			2020
Derivative instruments in cash flow hedges:		​			​					​			​		​	​			​		​
Interest rate contracts	​	$	—	​	$	—		Cost of financing	​	$	(1)	​	$	(1)	​	$	—	​	$	—	​
​	​	​	​	​	​	​		Interest expense	​		(3)	​		(3)	​		—	​		—	​
Foreign exchange contracts	​		109	​		(32)		Cost of services	​		12	​		10	​		—	​		—	​
​	​	​	​	​	​	​		Cost of sales	​		1	​		(4)	​		—	​		—	​
​	​	​	​	​	​	​		Cost of financing	​		(5)	​		(5)	​	​	—	​	​	—	​
​	​	​	​	​	​	​		SG&A expense	​		(1)	​		(5)	​		—	​		—	​
​	​	​	​	​	​	​		Other (income) and expense	​		(22)	​		93	​		—	​		—	​
​	​	​	​	​	​	​		Interest expense	​		(13)	​		(15)	​	​	—	​	​	—	​
Instruments in net investment hedges (4):	​			​					​			​			​			​			​
Foreign exchange contracts	​		477	​		(983)		Cost of financing	​		—	​		—	​		1	​		2	​
​	​		​	​		​		Interest expense	​		—	​		—	​		3	​		7	​
Total	​	$	587	​	$	(1,015)			​	$	(32)	​	$	69	​	$	5	​	$	9	​

(1)	The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)	The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)	The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)	Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries.

N/A - not applicable

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Gains/(Losses) of
(Dollars in millions)	​	Total					​	Total Hedge Activity
For the nine months ended September 30:		2021			2020			2021			2020
Cost of services	​	$	23,416	​	$	22,720	​	$	33	​	$	18	​
Cost of sales	​		4,792	​		4,964	​		(30)	​		14	​
Cost of financing	​		506	​		517	​		1	​		9	​
SG&A expense	​		15,368	​		15,849	​		88	​		24	​
Other (income) and expense	​		911	​		614	​		(246)	​		92	​
Interest expense	​		852	​		971	​		3	​		24	​

​

Notes to Consolidated Financial Statements — (continued)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Gain (Loss) Recognized in Consolidated Income Statement
​	​	Consolidated	​	Recognized on					​	Attributable to Risk
(Dollars in millions)	​	Income Statement	​	Derivatives					​	Being Hedged (2)
For the nine months ended September 30:	​	Line Item	​	2021			2020		​	2021			2020
Derivative instruments in fair value hedges (1):				​			​			​			​
Interest rate contracts		Cost of financing	​	$	0	​	$	20	​	$	15	​	$	(3)
​		Interest expense	​		(1)	​		57	​		40	​		(9)
Derivative instruments not designated as hedging instruments:			​			​			​			​
Foreign exchange contracts		Other (income) and expense	​		(59)	​		18	​		N/A	​		N/A
Equity contracts		SG&A expense	​		120	​		12	​		N/A	​		N/A
Total			​	$	59	​	$	108	​	$	55	​	$	(13)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)	​	​	​	​	​	​	​	Consolidated	​	Reclassified					​	Amounts Excluded from
For the nine months	​	Recognized in OCI					​	Income Statement	​	from AOCI					​	Effectiveness Testing (3)
ended September 30:		2021			2020			Line Item		2021			2020			2021			2020
Derivative instruments in cash flow hedges:		​			​					​			​		​	​			​		​
Interest rate contracts	​	$	—	​	$	—		Cost of financing	​	$	(4)	​	$	(3)	​	$	—	​	$	—	​
​	​	​	​	​	​	​		Interest expense	​		(10)	​		(10)	​		—	​		—	​
Foreign exchange contracts	​		262	​		(249)		Cost of services	​		33	​		18	​		—	​		—	​
​	​	​	​	​	​	​		Cost of sales	​		(30)	​		14	​		—	​		—	​
​	​	​	​	​	​	​		Cost of financing	​		(14)	​		(18)	​	​	—	​	​	—	​
​	​	​	​	​	​	​		SG&A expense	​		(32)	​		12	​		—	​		—	​
​	​	​	​	​	​	​		Other (income) and expense	​		(187)	​		74	​		—	​		—	​
​	​	​	​	​	​	​		Interest expense	​		(38)	​		(50)	​	​	—	​	​	—	​
Instruments in net investment hedges (4):	​			​					​			​			​			​			​
Foreign exchange contracts	​		1,207	​		(1,033)		Cost of financing	​		—	​		—	​		4	​		13	​
​	​		​	​		​		Interest expense	​		—	​		—	​		11	​		37	​
Total	​	$	1,470	​	$	(1,281)			​	$	(282)	​	$	37	​	$	15	​	$	50	​

(1)	The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)	The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)	The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)	Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries.

N/A - not applicable

​

For the three and nine months ended September 30, 2021 and 2020, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

​

Notes to Consolidated Financial Statements — (continued)

16. Stock-Based Compensation:

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended September 30,					​	Nine Months Ended September 30,
(Dollars in millions)	​	2021		​	2020		​	2021		​	2020
Cost	​	$	45	​	$	42	​	$	127	​	$	109
Selling, general and administrative	​		156	​		129	​		431	​		401
Research, development and engineering	​		61	​		50	​		160	​		147
Pre-tax stock-based compensation cost	​	$	262	​	$	222	​	$	719	​	$	658
Income tax benefits	​		(58)	​		(50)	​		(179)	​		(146)
Total net stock-based compensation cost	​	$	204	​	$	172	​	$	540	​	$	512

​

Pre-tax stock-based compensation cost for the three months ended September 30, 2021 increased $40 million compared to the corresponding period in the prior year. This was due to increases from performance share units ($21 million), conversion of stock options previously issued by acquired entities ($15 million) and restricted stock units ($4 million).

Pre-tax stock-based compensation cost for the nine months ended September 30, 2021 increased $61 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($29 million), restricted stock units ($19 million) and conversion of stock options previously issued by acquired entities ($13 million).

Total unrecognized compensation cost related to non-vested awards at September 30, 2021 was $1.6 billion and is expected to be recognized over a weighted-average period of approximately 2.5 years.

Capitalized stock-based compensation cost was not material at September 30, 2021 and 2020.

In connection with the separation of Kyndryl, as required by the company’s stock-based incentive award plans, the number of shares underlying remaining unvested stock awards will be adjusted. The company will also adjust the exercise price and number of shares underlying outstanding stock options. All adjustments are made with the intent to preserve the intrinsic value of each award immediately before and after the separation.

17. Retirement-Related Benefits:

The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.

​

​	​	​	​	​	​	​	​	​	​
​		​	​			​		Yr. to Yr.
(Dollars in millions)	​	​	​	​	​	​	​	Percent
For the three months ended September 30:	​	2021		​	2020		​	Change
Retirement-related plans — cost:		​			​				​
Defined benefit and contribution pension plans — cost	​	$	647	​	$	610		6.0	%
Nonpension postretirement plans — cost	​		45	​		50		(10.5)	​
Total	​	$	692	​	$	660		4.8	%

​

Notes to Consolidated Financial Statements — (continued)

​	​	​	​	​	​	​	​	​	​
​		​	​			​		Yr. to Yr.
(Dollars in millions)	​	​	​	​	​	​	​	Percent
For the nine months ended September 30:	​	2021		​	2020		​	Change
Retirement-related plans — cost:		​			​				​
Defined benefit and contribution pension plans — cost	​	$	1,972	​	$	1,789		10.2	%
Nonpension postretirement plans — cost	​		134	​		151		(11.8)	​
Total	​	$	2,106	​	$	1,941		8.5	%

​

The following tables provide the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans

​

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	U.S. Plans					​	Non-U.S. Plans
For the three months ended September 30:		2021			2020			2021			2020
Service cost	​	$	—	​	$	—	​	$	94	​	$	99
Interest cost (1)	​		277	​		375	​		109	​		142
Expected return on plan assets (1)	​		(451)	​		(542)	​		(286)	​		(323)
Amortization of prior service costs/(credits) (1)	​		4	​		4	​		(2)	​		(5)
Recognized actuarial losses (1)	​		249	​		207	​		365	​		360
Curtailments and settlements (1)	​		—	​		—	​		13	​		21
Multi-employer plans	​		—	​		—	​		3	​		7
Other costs/(credits) (1)	​		—	​		—	​		7	​		6
Total net periodic pension (income)/cost of defined benefit plans	​	$	80	​	$	44	​	$	303	​	$	307
Cost of defined contribution plans	​		152	​		148	​		112	​		111
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	​	$	232	​	$	192	​	$	415	​	$	418

​

​

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	U.S. Plans					​	Non-U.S. Plans
For the nine months ended September 30:		2021			2020			2021			2020
Service cost	​	$	—	​	$	—	​	$	281	​	$	289
Interest cost (1)	​		832	​		1,126	​		332	​		408
Expected return on plan assets (1)	​		(1,352)	​		(1,627)	​		(867)	​		(943)
Amortization of prior service costs/(credits) (1)	​		12	​		12	​		(8)	​		(14)
Recognized actuarial losses (1)	​		747	​		622	​		1,110	​		1,041
Curtailments and settlements (1)	​		—	​		—	​		46	​		42
Multi-employer plans	​		—	​		—	​		17	​		22
Other costs/(credits) (1)	​		—	​		—	​		21	​		20
Total net periodic pension (income)/cost of defined benefit plans	​	$	239	​	$	133	​	$	933	​	$	865
Cost of defined contribution plans	​		455	​		457	​		345	​		334
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	​	$	694	​	$	590	​	$	1,278	​	$	1,200

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.

Notes to Consolidated Financial Statements — (continued)

The following tables provide the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

​

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	U.S. Plan					​	Non-U.S. Plans
For the three months ended September 30:		2021			2020			2021			2020
Service cost	​	$	2	​	$	2	​	$	1	​	$	1
Interest cost (1)	​		16	​		26	​		8	​		8
Expected return on plan assets (1)	​		—	​		—	​		(1)	​		(1)
Amortization of prior service costs/(credits) (1)	​		1	​		1	​		0	​		0
Recognized actuarial losses (1)	​		13	​		7	​		4	​		5
Curtailments and settlements (1)	​		—	​		—	​		—	​		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	​	$	32	​	$	36	​	$	13	​	$	14

​

​	​	​	​	​	​	​	​	​	​	​	​	​
(Dollars in millions)	​	U.S. Plan					​	Non-U.S. Plans
For the nine months ended September 30:		2021			2020			2021			2020
Service cost	​	$	5	​	$	7	​	$	4	​	$	4
Interest cost (1)	​		49	​		77	​		25	​		26
Expected return on plan assets (1)	​		—	​		—	​		(2)	​		(3)
Amortization of prior service costs/(credits) (1)	​		3	​		3	​		0	​		0
Recognized actuarial losses (1)	​		39	​		22	​		12	​		16
Curtailments and settlements (1)	​		—	​		—	​		0	​		0
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	​	$	96	​	$	109	​	$	38	​	$	43

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.

The company does not anticipate any significant changes to the expected plan contributions in 2021 from the amounts disclosed in the 2020 Annual Report.

The table below includes contributions to the following plans:

​

​	​	​	​	​	​	​
​	​	​
(Dollars in millions)	​	Plan Contributions
For the nine months ended September 30:	​	​	2021		2020
U.S. and non-U.S. nonpension postretirement benefit plans	​	$	269	​	$	265
Non-U.S. DB and multi-employer plans *	​		48	​		127
Total plan contributions	​	$	317	​	$	392

• Amounts reported net of refunds.

​

During the nine months ended September 30, 2021 and 2020, the company contributed $307 million and $315 million of U.S. Treasury Securities, respectively, to the non-U.S. DB plans and U.S. nonpension postretirement benefit plan. Additionally, during the nine months ended September 30, 2021 and 2020, the company contributed $311 million and $160 million in U.S. Treasury securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

​

18. Subsequent Events:

​

On November 3, 2021, the company completed the separation of its managed infrastructure services business into a new public company, Kyndryl. In addition, immediately preceding the separation of Kyndryl, the company made a

Notes to Consolidated Financial Statements — (continued)

number of changes to its organizational structure and management system. Refer to note 1, “Basis of Presentation” for additional information.

​

On October 15, 2021, in preparation for the separation, Kyndryl completed the offering of $2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes with maturities ranging from five to twenty years and coupons ranging from 2.05 to 4.10 percent. On November 1, 2021, Kyndryl entered into a $500 million three-year variable-rate term loan. Cash raised from the debt issuance and term loan was used to fund Kyndryl's opening cash balance, with the remaining proceeds transferred to IBM at separation. Following the completion of the Kyndryl separation on November 3, 2021, the notes and term loan are no longer obligations of IBM.

​

On October 26, 2021, the company announced that the Board of Directors approved a quarterly dividend of $1.64 per common share. The dividend is payable December 10, 2021 to shareholders of record on November 10, 2021.

​

​