10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2019

000-55786

(Commission file number)

IBM CREDIT LLC

(Exact name of registrant as specified in its charter)

Delaware	22-2351962
(State or Other Jurisdiction of Incorporation or Organization)	(IRS employer identification number)

Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-765-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer  ☐
Non-accelerated filer  ☒	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐   No  ☒

All of the limited liability company interests ("Interests") in the registrant are held by an affiliate of the registrant. None of the Interests are publicly traded.

REDUCED DISCLOSURE FORMAT

IBM Credit LLC, an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM), meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

Index

	Page
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statement of Earnings for the three months ended March 31, 2019 and 2018	3
Consolidated Statement of Comprehensive Income for the three months ended March 31, 2019 and 2018	4
Consolidated Statement of Financial Position at March 31, 2019 and December 31, 2018	5
Consolidated Statement of Cash Flows for the three months ended March 31, 2019 and 2018	6
Consolidated Statement of Changes in Member’s Interest for the three months ended March 31, 2019 and 2018	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	34
Item 4. Controls and Procedures	48
Part II - Other Information
Item 1. Legal Proceedings	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	49
Item 6. Exhibits	49

2

Part I— Financial Information

Item 1. Consolidated Financial Statements:

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

	Three Months Ended March 31,
(Dollars in millions)	2019		2018
Revenue
Financing revenue	$	404	$	365
Operating lease revenue		78		84
Total revenue	$	482	$	449
Financing cost (related party cost of $74 in 2019 and $57 in 2018)	$	160	$	102
Depreciation of equipment under operating lease		45		48
Net margin	$	277	$	300
Expense and other (income)
Selling, general and administrative	$	97	$	98
Provision for credit losses		4		9
Other (income) and expense		(18)		1
Total expense and other (income)	$	83	$	109
Income before income taxes	$	193	$	191
Provision for income taxes		150		42
Net income	$	43	$	149

(Amounts may not add due to rounding.)

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

3

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended March 31,
(Dollars in millions)	2019		2018
Net income	$	43	$	149
Other comprehensive income/(loss), before tax:
Foreign currency translation		3		70
Retirement-related benefit plans (1)		0		1
Other comprehensive income/(loss), before tax		3		71
Income tax benefit related to items of other comprehensive income		3		11
Other comprehensive income/(loss), net of tax	$	6	$	82
Total comprehensive income	$	49	$	230

(1) Amounts represented relate to multiple-employer plans.

(Amounts may not add due to rounding.)

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

4

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

	At March 31,		At December 31,
(Dollars in millions)	2019		2018
Assets:
Cash and cash equivalents	$	1,573	$	1,828
Financing receivables		23,431		25,848
(net of allowances of $171 in 2019 and $174 in 2018)
Equipment under operating leases		345		386
(net of accumulated depreciation of $286 in 2019 and $283 in 2018)
Financing receivables from IBM		3,869		3,609
Receivables purchased/participated from IBM		5,331		5,433
(net of allowances of $11 in 2019 and $18 in 2018)
Other receivables from IBM		301		2,019
Other assets		366		373
Total assets	$	35,217	$	39,497
Liabilities:
Accounts payable	$	1,362	$	1,705
Accounts payable to IBM		950		3,044
Debt		10,577		10,954
Debt payable to IBM		18,367		19,580
Taxes		594		547
Other liabilities		203		246
Total liabilities	$	32,053	$	36,076
Member’s interest:
Member's interest		3,191		3,216
Retained earnings		—		238
Accumulated other comprehensive income/(loss)		(27)		(33)
Total member's interest	$	3,164	$	3,420
Total liabilities and member’s interest	$	35,217	$	39,497

(Amounts may not add due to rounding.)

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

5

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
(Dollars in millions)	2019		2018
Cash flows from operating activities:
Net income	$	43	$	149
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		4		9
Depreciation		45		48
Deferred taxes		(2)		(25)
Net (gain)/loss on asset sales and other		(6)		(44)
Change in operating assets and liabilities:
Other assets/other liabilities		4		103
Net cash provided by operating activities	$	88	$	240
Cash flows from investing activities:
Originations of financing receivables	$	(4,219)	$	(4,943)
Collection of financing receivables		4,023		3,751
Short-term financing receivables - net (1)		46		863
Purchase of equipment under operating leases		(20)		(57)
Proceeds from disposition of equipment under operating lease		13		15
Other receivables from IBM - net		1,738		(214)
Other investing activities - net		(10)		(65)
Net cash provided by/(used in) investing activities	$	1,572	$	(650)
Cash flows from financing activities:
Proceeds from issuance of debt from IBM	$	2,545	$	4,841
Principal payments on debt from IBM		(2,388)		(4,299)
Proceeds from issuance of debt		300		2,122
Principal payments on debt		(196)		(247)
Short-term borrowings from/(repayments to) IBM - net (1)		(1,299)		(2,517)
Short-term borrowings/(repayments) - net (1)		(500)		480
Distributions to IBM		(370)		(490)
Net cash used in financing activities	$	(1,910)	$	(111)
Effect of exchange rate changes on cash and cash equivalents	$	(5)	$	11
Net change in cash and cash equivalents	$	(255)	$	(510)
Cash and cash equivalents at January 1		1,828		2,680
Cash and cash equivalents at March 31	$	1,573	$	2,170

(1) Short-term represents original maturities of 90 days or less.

(Amounts may not add due to rounding.)

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

6

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST

(UNAUDITED)

					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member’s
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2019	$	3,216	$	238	$	(33)	$	3,420
Net income plus other comprehensive income/(loss):
Net income				43				43
Other comprehensive income/(loss), net of tax						6		6
Total comprehensive income/(loss)							$	49
Contributions from IBM (1)		64						64
Distributions to IBM		(88)		(282)				(370)
Member’s Interest, March 31, 2019	$	3,191	$	—	$	(27)	$	3,164

(1) Includes $64 million non-cash equity contribution from IBM. Refer to note 9, "Relationship with IBM and Related Party Transactions."

(Amounts may not add due to rounding.)

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

					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member’s
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2018	$	3,101	$	302	$	158	$	3,562
Cumulative effect of change in accounting principle (1)				5		(5)		—
Net income plus other comprehensive income/(loss):
Net income				149				149
Other comprehensive income/(loss), net of tax						82		82
Total comprehensive income/(loss)							$	230
Distributions to IBM		(34)		(456)				(490)
Member’s Interest, March 31, 2018	$	3,067	$	—	$	234	$	3,302

(1) Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

(Amounts may not add due to rounding.)

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

7

Notes to Consolidated Financial Statements:

1. Basis of Presentation:

The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit 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. As a result, actual results may be different from these estimates.

Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Distributions by the company to IBM are considered first to be a return of profit as reflected in retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of member’s interest as reflected in the Consolidated Statement of Financial Position.

Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.

In the first quarter of 2019, the company reported a provision for income taxes of $150 million and an effective tax rate of 77.5 percent, compared to a provision of $42 million and an effective tax rate of 22.0 percent in the first quarter of 2018. The change in the effective tax rate was primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax. In accordance with the previously executed Tax Sharing Agreement between IBM and the company, $64 million of the resulting liability was settled through a non-cash contribution to member’s interest. For additional information, refer to Note 9, “Relationship with IBM and Related Party Transactions.”    

The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.

All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.

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 Consolidated Financial Statements included in the Form 10-K.

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 year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

8

Notes to Consolidated Financial Statements — (continued)

2.  Accounting Changes:

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changed the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020 with early adoption of certain provisions permitted. The company early adopted the provision in the fair value guidance that removed the Level 1/Level 2 transfer disclosures. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact in the consolidated financial results.

In June 2016, with amendments in 2018, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance 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. A cross-functional team was established that is evaluating the financial instruments portfolio and the system, process and policy change requirements and continues to make substantial progress. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020 with one-year early adoption permitted. The company will adopt the guidance as of the effective date and is continuing to evaluate the impact.

Standards Implemented

The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance also made some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company adopted the guidance effective January 1, 2019 using the transition option whereby prior comparative periods were not retrospectively presented in the consolidated financial statements. The company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. There are no material impacts of adoption from a lessee perspective as there are no material lease arrangements in which the company is a lessee. Refer to note 4, “Leases,” for additional information, including further discussion on the impact of adoption. 

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (AOCI) to retained earnings. The guidance was effective January 1, 2019, with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at the actual cessation date. At adoption on January 1, 2018,  $5 million  was reclassified from AOCI to retained earnings.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance was effective January 1, 2019, with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that

9

Notes to Consolidated Financial Statements — (continued)

reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there was no material change to disclosures as a result of the adoption of the guidance.

3. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value 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. Under this guidance, the company is required to classify 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.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

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.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

10

Notes to Consolidated Financial Statements — (continued)

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018.

(Dollars in millions)
At March 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	750	$	—	$	750
Money market funds		5		—		—		5
Total		5		750		—		755
Derivative assets (2)		—		21		—		21	(4)
Total assets	$	5	$	771	$	—	$	776
Liabilities:
Derivative liabilities (3)	$	—	$	23	$	—	$	23	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position.

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $1 million.

(Dollars in millions)
At December 31, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	792	$	—	$	792
Money market funds		5		—		—		5
Total		5		792		—		797
Derivative assets (2)		—		18		—		18	(4)
Total assets	$	5	$	810	$	—	$	815
Liabilities:
Derivative liabilities (3)	$	—	$	37	$	—	$	37	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position. 

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

11

Notes to Consolidated Financial Statements — (continued)

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) 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.

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 March 31, 2019 and December 31, 2018, the difference between the carrying amount and estimated fair value for 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.

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, which includes debt payable to IBM, 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 (including debt payable to IBM) was $17,796 million and $17,276 million and the estimated fair value was $17,829 million and $17,199 million at March 31, 2019 and December 31, 2018, 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.

Derivative Financial Instruments

The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At March 31, 2019, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $21 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $23 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $1 million. At December 31, 2018, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $18 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $37 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

12

Notes to Consolidated Financial Statements — (continued)

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the capital markets to fund its operations. 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 enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2019 and December 31, 2018, the total notional amount of the company's interest rate swap contracts with IBM was $3,350 million at both periods. The weighted average remaining maturity of these instruments at March 31, 2019 and December 31, 2018, was approximately 2.2 years and 2.4 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 March 31, 2019 and December 31, 2018.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2019 and December 31, 2018, the total notional amount of derivative contracts with IBM designated as net investment hedges was $1,356 million and $1,986 million, respectively. The weighted average remaining maturity of these instruments was 0.2 years at both periods.

Foreign Currency Asset/Liability Management

The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows.

There were no foreign exchange derivative contracts with third parties outstanding at March 31, 2019 and December  31, 2018.

The following tables provide a quantitative summary of the derivative instrument-related risk management activity at March 31, 2019 and December 31, 2018, as well as for the three months ended March 31, 2019 and 2018, respectively.

13

Notes to Consolidated Financial Statements — (continued)

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	3/31/2019		12/31/2018		Classification	3/31/2019		12/31/2018
Designated as hedging instruments:
Interest rate contracts with IBM	Other assets	$	11	$	10	Other liabilities	$	23	$	27
Foreign exchange contracts with IBM	Other assets		10		9	Other liabilities		1		11
	Fair value of derivative assets	$	21	$	18	Fair value of derivative liabilities	$	23	$	37
Not designated as hedging instruments:
Foreign exchange contracts	Other assets		—		—	Other liabilities		—		—
	Fair value of derivative assets	$	—	$	—	Fair value of derivative liabilities	$	—	$	—
Total		$	21	$	18		$	23	$	37

As of March 31, 2019 and December 31, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:

	At March 31,		At December 31,
(Dollars in millions)	2019		2018
Debt:
Carrying amount of the hedged item	$	(3,335)	$	(3,310)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		9		34

14

Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value 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 March 31:	2019		2018		2019		2018
Financing cost	$	160	$	102	$	4	$	9
Other (income) and expense		(18)		1		—		1

	Gain/(Loss) Recognized in Earnings
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Statement of	Derivatives				Being Hedged (2)
For the three months ended March 31:	Earnings Line Item	2019		2018		2019		2018
Derivative instruments in fair value hedges (1):
Interest rate contracts with IBM	Financing cost	$	20	$	(21)	$	(25)	$	23
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		—		1		N/A		N/A
Total		$	20	$	(20)	$	(25)	$	23

	Gain/(Loss) Recognized in Earnings and Other Comprehensive Income
					Consolidated
					Statement of	Reclassified				Amounts Excluded from
(Dollars in millions)	Recognized in OCI				Earnings	from AOCI				Effectiveness Testing (3)
For the three months ended March 31:	2019		2018		Line Item	2019		2018		2019		2018
Derivative instruments in net investment hedges:
Foreign exchange contracts with IBM	$	(10)	$	(43)	Financing cost	$	—	$	—	$	10	$	7
Total	$	(10)	$	(43)		$	—	$	—	$	10	$	7

(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.

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

N/A - Not Applicable

For the three months ending March 31, 2019 and 2018, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.

15

Notes to Consolidated Financial Statements — (continued)

4. Leases:

Accounting for leases as a lessee

IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. As such, these arrangements do not represent leases and the company did not record any ROU assets or associated lease liabilities in the Consolidated Statement of Financial Position at January 1, 2019. For additional information, see Note 9, “Relationship with IBM and Related Party Transactions.” The company has no other material lease arrangements in which it is a lessee.

Accounting for leases as lessor

The company enters into leases as a means to provide financing to its clients. Assets under lease include new and used IBM equipment and certain original equipment manufacturers’ (OEM) IT products. Equipment generally consists of IBM Z, Power Systems and Storage Systems.

When entering into a contract with its clients, the company determines whether an arrangement contains a lease at its inception. As part of that evaluation, the company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the client has the right to control that asset.

The company determines whether there is a right to control the use of the asset by assessing the client’s rights to obtain substantially all of the economic benefits from the use of the identified asset and rights to direct the use of the identified asset. The company determines the classification of the lease at the lease commencement date.

Lease payments due to IBM Credit are typically fixed and paid in equal installments over the lease term. The majority of the company’s leases do not contain variable payments that are dependent on an index or a rate. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the company and are reimbursed by the client, are recorded as finance income, along with the related cost, in the period in which collection of these payments is probable. Payments that are made directly by the client to a third party, including certain property taxes and insurance, are not considered part of variable payments and therefore are not recorded by the company. The company has made a policy election to exclude from consideration in contracts all collections from sales and other similar taxes.

The company’s payment terms for leases are typically unconditional. Therefore, while the client could terminate the lease prior to the end of the lease term, the client would be required to pay the remaining lease payments in full. At the end of the lease term, the company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms. With respect to a client purchase of leased assets, the lease agreement would include an option to purchase the equipment at either a stated price or at the then-current fair market value of the equipment at the end of the lease.

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

(Dollars in millions)
For the three months ended March 31:	2019
Financing lease revenue	$	55
Operating lease revenue		78
Variable lease revenue		11
Total lease revenue	$	144

16

Notes to Consolidated Financial Statements — (continued)

Sales-Type and Direct Financing Leases

If a lease is classified as a sales-type or direct financing lease, a net investment in the lease is recorded. For a sales-type lease, the net investment in the lease is measured at commencement date as the sum of the lease receivable and the estimated guaranteed and unguaranteed residual value of the equipment, less unearned income and allowance for credit losses.  At March 31, 2019, the unguaranteed residual value of sales-type and direct financing leases was $472 million. For further information on the company’s investment in leases, including guaranteed and unguaranteed residual values, refer to note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

IBM Credit enters into lease arrangements for the purpose of generating revenue by providing financing. As a result, any profit or loss at the lease commencement date is presented on a net basis within a single line item on the Consolidated Statement of Earnings. Under a net sales-type lease, eligible IDCs are deferred and recognized over the lease term. Over the term of a sales-type lease, the company recognizes financing revenue on the net investment in the lease and any variable lease payments, which are not included in the net investment in the lease. 

For a direct financing lease, the investment in lease is measured similarly to a sales-type lease, however, the net investment in the lease is reduced by any selling profit, which is typically zero. In a direct financing lease, the selling profit and IDCs are deferred at commencement and recognized over the lease term. The company rarely enters into direct financing leases. Prior to the adoption of the new lease guidance, the company’s leases were generally classified as direct financing leases. Due to the changes in the lease classification requirements under the new lease guidance, the company’s leases are generally classified as sales-type leases and presented on a net basis.

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. Estimating residual value is a risk unique to financing activities, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for the IBM products under lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.

The company optimizes the recovery of residual values by extending lease arrangements with existing clients. The company has historically managed residual value risk both through insight into its own product cycles and monitoring of OEM IT product announcements. The company periodically reassesses the realizable value of its lease residual values. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to finance income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing activities. For the three months ended March 31, 2019 and 2018,  impairment of residual values was immaterial.

17

Notes to Consolidated Financial Statements — (continued)

The following table provides a maturity analysis of the lease payments due to IBM Credit on sales-type and direct financing leases over the next five years and thereafter, with the exception of 2019, which presents the undiscounted cash flows for the remaining nine months of the year, as well as a reconciliation of the undiscounted cash flows to the financing receivables recognized in the Consolidated Statement of Financial Position at March 31, 2019:

(Dollars in millions)	Total
2019	$	1,691
2020		1,638
2021		1,018
2022		468
2023		103
Thereafter		6
Total undiscounted cash flows	$	4,923
Present value of lease payments (recognized as financing receivables)		4,536	*
Difference between undiscounted cash flows and discounted cash flows	$	387

*The present value of the lease payments will not equal the financing receivable balance in the Statement of Financial Position due to certain items, including IDCs, allowance for credit losses and residual value, which are included in the financing receivable balance, but are not included in the future lease payments.

Operating Leases

Equipment provided to clients under an operating lease is carried at cost within Equipment under Operating Lease in the Consolidated Statement of Financial Position and depreciated over the lease term using the straight-line method, generally ranging from one to six years. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term. At March 31, 2019, the unguaranteed residual value of equipment under operating leases was $106 million.

At commencement of an operating lease, IDCs are deferred. As lease payments are made, the company records financing revenue over the lease term. IDCs are amortized over the lease term on the same basis as lease income is recorded. 

The following table provides a maturity analysis of the undiscounted lease payments due to IBM Credit on operating leases over the next five years and thereafter, at March 31, 2019, with the exception of 2019, which presents the undiscounted cash flows for the remaining nine months of the year:

(Dollars in millions)	Total
2019	$	162
2020		122
2021		40
2022		2
2023		0
Thereafter		—
Total undiscounted cash flows	$	327

Assets under operating lease are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows, and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values.

5.  Financing Receivables, Receivables Purchased/Participated from IBM:

Financing receivables consist of Client Financing leases, loans and installment payment plans to end-user clients as well as loans to IBM for terms up to seven years. Assets financed are primarily IT products and services where IBM and the company have experience. Client Financing arrangements are priced to achieve a market yield. Financing receivables also include Commercial Financing, which generally consists of working capital financing to suppliers, distributors and

18

Notes to Consolidated Financial Statements — (continued)

resellers of IBM and OEM IT products and services. Payment terms for working capital financing receivables generally range from 30 to 90 days.

The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are primarily for IT-related products and services, which are due within 30 days, and IBM performs all servicing under these arrangements. These receivables are included within the Commercial Financing segment. The company also participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At March 31, 2019:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,923	$	9,902	$	8,988	$	23,814
Unearned income		(387)		(33)		(436)		(856)
Deferred initial direct costs		40		—		66		107
Recorded investment	$	4,576	$	9,869	$	8,619	$	23,065
Allowance for credit losses		(58)		(15)		(98)		(171)
Unguaranteed residual value		472		—		—		472
Guaranteed residual value		65		—		—		65
Total financing receivables, net	$	5,056	$	9,854	$	8,521	$	23,431

	Purchased and
	Participated
(Dollars in millions)	Receivables
At March 31, 2019:	From IBM
Short-term purchased receivables from IBM	$	1,434
Allowance for credit losses		(5)
Total short-term purchased receivables from IBM, net	$	1,430
Long-term participated receivables from IBM	$	3,908
Allowance for credit losses		(6)
Total long-term participated receivables from IBM, net	$	3,902
Total purchased and participated receivables from IBM, net	$	5,331

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At December 31, 2018:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	5,120	$	11,422	$	9,694	$	26,236
Unearned income		(411)		(36)		(453)		(900)
Deferred initial direct costs		46		—		73		119
Recorded investment	$	4,755	$	11,386	$	9,314	$	25,455
Allowance for credit losses		(65)		(11)		(98)		(174)
Unguaranteed residual value		491		—		—		491
Guaranteed residual value		77		—		—		77
Total financing receivables, net	$	5,258	$	11,374	$	9,216	$	25,848

19

Notes to Consolidated Financial Statements — (continued)

	Purchased and
	Participated
(Dollars in millions)	Receivables
At December 31, 2018:	From IBM
Short-term purchased receivables from IBM	$	1,373
Allowance for credit losses		(4)
Total short-term purchased receivables from IBM, net	$	1,369
Long-term participated receivables from IBM	$	4,079
Allowance for credit losses		(14)
Total long-term participated receivables from IBM, net	$	4,065
Total purchased and participated receivables from IBM, net	$	5,433

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $868 million and $710 million at March 31, 2019 and December 31, 2018, respectively.

The company did not have any financing receivables held for sale as of March 31, 2019 and December 31, 2018.

Financing Receivables by Portfolio Segment

The following tables present Client Financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding Commercial Financing receivables and other miscellaneous financing receivables at March 31, 2019 and December 31, 2018.  Commercial Financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

20

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
At March 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,358	$	632	$	586	$	4,576
Loan receivables		5,674		2,100		845		8,619
Participated receivables from IBM		652		1,587		1,669		3,908
Ending balance	$	9,684	$	4,319	$	3,100	$	17,104
Recorded investment collectively evaluated for impairment	$	9,585	$	4,294	$	3,087	$	16,966
Recorded investment individually evaluated for impairment	$	99	$	25	$	13	$	138
Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(3)	$	(9)	$	—	$	(13)
Recoveries		—		0		0		0
Provision		4		(5)		0		(1)
Foreign currency translation adjustment		(1)		—		0		(1)
Other		—		0		0		—
Ending balance at March 31, 2019	$	106	$	38	$	17	$	162
Lease receivables	$	35	$	11	$	11	$	58
Loan receivables	$	70	$	24	$	4	$	98
Participated receivables from IBM	$	1	$	3	$	2	$	6
Related allowance, collectively evaluated for impairment	$	33	$	13	$	4	$	49
Related allowance, individually evaluated for impairment	$	74	$	25	$	13	$	112

Write-offs of lease and loan receivables were $8 million and $5 million, respectively, for the three months ended March 31, 2019. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $1 million, $5 million and a reduction of $7 million, respectively, for the three months ended March 31, 2019.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $98 million, $30 million and $13 million, respectively, for the three months ended March 31, 2019 and $65 million, $39 million and $19 million, respectively, for the three months ended March 31, 2018. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended March 31, 2019 and 2018.

21

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
At December 31, 2018:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,433	$	687	$	635	$	4,755
Loan receivables		6,167		2,231		916		9,314
Participated receivables from IBM		735		1,627		1,717		4,079
Ending balance	$	10,335	$	4,545	$	3,268	$	18,147
Recorded investment collectively evaluated for impairment	$	10,239	$	4,505	$	3,254	$	17,998
Recorded investment individually evaluated for impairment	$	96	$	39	$	13	$	149
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	42	$	6	$	15	$	62
Loan receivables		57		34		4		96
Participated receivables from IBM		9		4		2		14
Total	$	107	$	43	$	21	$	172
Write-offs	$	(6)	$	(1)	$	(8)	$	(16)
Recoveries		0		0		2		2
Provision		11		13		3		27
Foreign currency translation adjustment		(6)		(3)		(1)		(10)
Other		1		1		1		2
Ending balance at December 31, 2018	$	107	$	53	$	17	$	177
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables	$	66	$	28	$	5	$	98
Participated receivables from IBM	$	3	$	8	$	3	$	14
Related allowance, collectively evaluated for impairment	$	38	$	15	$	4	$	56
Related allowance, individually evaluated for impairment	$	69	$	38	$	13	$	120

Write-offs of lease receivables and loan receivables were $13 million and $3 million, respectively, for the year ended December 31, 2018. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $9 million, $6 million and $12 million, respectively, for the year ended December 31, 2018.  

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a clients’ financing receivables past due when an installment is aged over 90 days. The following table summarizes the information about the recorded investment in lease and loan receivables and participated receivables from IBM, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and accruing, and recorded investment not accruing.

22

Notes to Consolidated Financial Statements — (continued)

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At March 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,358	$	280	$	239	$	13	$	41
EMEA		632		38		22		3		16
Asia Pacific		586		14		2		—		11
Total lease receivables	$	4,576	$	331	$	263	$	16	$	68
Americas	$	5,674	$	193	$	128	$	22	$	64
EMEA		2,100		56		10		3		46
Asia Pacific		845		5		2		1		3
Total loan receivables	$	8,619	$	253	$	140	$	26	$	114
Americas	$	652	$	5	$	5	$	3	$	—
EMEA		1,587		6		6		2		—
Asia Pacific		1,669		—		—		—		—
Total participated receivables from IBM	$	3,908	$	11	$	11	$	4	$	—
Total	$	17,104	$	596	$	414	$	47	$	182

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

(2) Of the recorded investment not accruing, $138 million is individually evaluated for impairment with a related allowance of $112 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,433	$	288	$	247	$	18	$	44
EMEA		687		24		9		1		15
Asia Pacific		635		29		19		2		11
Total lease receivables	$	4,755	$	341	$	275	$	21	$	70
Americas	$	6,167	$	217	$	161	$	22	$	61
EMEA		2,231		80		24		3		57
Asia Pacific		916		13		9		1		4
Total loan receivables	$	9,314	$	310	$	194	$	25	$	122
Americas	$	735	$	11	$	11	$	2	$	—
EMEA		1,627		9		4		1		5
Asia Pacific		1,717		—		—		—		—
Total participated receivables from IBM	$	4,079	$	20	$	15	$	3	$	5
Total	$	18,147	$	671	$	484	$	49	$	197

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

(2) Of the recorded investment not accruing, $149 million is individually evaluated for impairment with a related allowance of $120 million.

23

Notes to Consolidated Financial Statements — (continued)

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by clients, as well as other information, 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 client credit ratings.

The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at March 31, 2019 and December 31, 2018.  Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At March 31, 2019:	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	285	$	9	$	45	$	673	$	49	$	102	$	380	$	72	$	68
A1 – A3		761		108		237		859		139		256		76		100		733
Baa1 – Baa3		933		122		118		1,514		604		171		81		800		507
Ba1 – Ba2		673		181		72		1,412		595		208		48		532		295
Ba3 – B1		430		128		60		562		401		56		59		66		36
B2 – B3		197		58		37		511		263		42		8		14		27
Caa – D		44		15		6		75		26		6		—		—		1
Total	$	3,323	$	621	$	575	$	5,605	$	2,076	$	841	$	651	$	1,584	$	1,667

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At December 31, 2018	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	520	$	24	$	49	$	935	$	79	$	71	$	112	$	58	$	134
A1 – A3		617		82		241		1,108		269		351		133		198		659
Baa1 – Baa3		807		214		169		1,450		704		246		174		517		463
Ba1 – Ba2		772		207		102		1,387		681		149		167		500		280
Ba3 – B1		391		90		36		703		297		52		84		218		99
B2 – B3		264		47		26		475		156		37		57		114		70
Caa – D		23		5		3		42		17		5		5		12		9
Total	$	3,395	$	670	$	625	$	6,101	$	2,204	$	912	$	733	$	1,618	$	1,714

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the three months ended March 31, 2019 or for the year ended December 31, 2018.

6.  Segments:

The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.

24

Notes to Consolidated Financial Statements — (continued)

Client Financing provides leases and loan financing to end-user clients, acquires installment payment plans offered to end-user clients by IBM, and acquires participation interests in IBM financing receivables for which the company assumes the IBM client’s credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBM’s hardware, software, and services, as well as OEM IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which IBM uses in external, revenue-producing services contracts.

Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. Commercial Financing also purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the credit risk with IBM’s client.

The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.

IBM Credit and its consolidated subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business.

SEGMENT INFORMATION

	Client		Commercial		Total
(Dollars in millions)	Financing		Financing		Segments
For the three months ended March 31, 2019:
Total revenue	$	322	$	160	$	482
Pre-tax income		117		76		193
Depreciation of equipment under operating lease		45		—		45
Financing cost		107		53		160
Provision for/(benefit from) credit losses		(1)		5		4
For the three months ended March 31, 2018:
Total revenue	$	308	$	142	$	449
Pre-tax income		128		63		191
Depreciation of equipment under operating lease		48		—		48
Financing cost		69		33		102
Provision for/(benefit from) credit losses		10		(1)		9

25

Notes to Consolidated Financial Statements — (continued)

7.  Equity Activity:

IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables:

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 March 31, 2019:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	3	$	3	$	6
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	—	$	—	$	—
Net (losses)/gains arising during the period		0		0		0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	0	$	0	$	0
Other comprehensive income/(loss)	$	3	$	3	$	6

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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 March 31, 2018:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	70	$	11	$	81
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	1	$	0	$	1
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	1	$	0	$	1
Other comprehensive income/(loss)	$	71	$	11	$	82

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2019	$	(23)	$	(10)	$	(33)
Other comprehensive income before reclassification		6		0		6
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		6		0		6
March 31, 2019	$	(17)	$	(10)	$	(27)

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

26

Notes to Consolidated Financial Statements — (continued)

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2018	$	165	$	(7)	$	158
Cumulative effect of a change in accounting principle**		(5)		—		(5)
Other comprehensive income before reclassification		81		0		81
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		81		1		82
March 31, 2018	$	241	$	(7)	$	234

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

**  Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

8.  Retirement-Related Benefits:

IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations.

Multiemployer Plans:

For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings. The amounts of expense attributed to the company by IBM for the three months ended March 31, 2019 and 2018 were not material.

Charges from IBM to the company in relation to these plans (including non-pension, post-retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM.

Multiple-Employer Plans:

For multiple-employer plans (mainly in Germany, Spain and Japan), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.

Any gains or losses recorded to Accumulated Other Comprehensive Income in the three months ended March 31, 2019 and 2018 were not material.

Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings. The total costs for multiple-employer plans for the three months ended March 31, 2019 and 2018 were not material.

9.  Relationship with IBM and Related Party Transactions:

IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client. The following is a description of certain material relationships between IBM Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements.

Support Agreement

Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each

27

Notes to Consolidated Financial Statements — (continued)

of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.

Operating Relationship

The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBM’s hardware, software, and services.

The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all participated receivables from IBM. These receivables earned interest income of $50 million in the three months ended March 31, 2019, an increase of $1 million as compared to the same period in 2018. The interest income is included in the Consolidated Statement of Earnings as financing revenue. For additional information, see note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

The company purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the associated credit risk of IBM’s client. For the three months ended March 31, 2019, finance income earned from these receivables was $15 million, an increase of $2 million as compared to the same period in 2018. The finance income is included in financing revenue in the Consolidated Statement of Earnings. Effective in the second quarter of 2019, IBM and the company have suspended the program under which IBM Credit LLC purchases interests in IBM's trade accounts receivable. For additional information, see note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

In certain countries, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. For the three months ended March 31, 2019, the interest income earned from these receivables was $44 million, an increase of $5 million as compared to the same period in 2018. Interest income is included in financing revenue in the Consolidated Statement of Earnings. The amount of such financings outstanding was $3,869 million at March 31, 2019 and $3,609 million at December 31, 2018.

The amount of other receivables from IBM of $301 million and $2,019 million at March 31, 2019 and December 31, 2018, respectively, primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The company's investment of excess cash with IBM was $282 million at March 31, 2019 and $2,014 million at December 31, 2018.  The decline in the first quarter of 2019 was driven by the company’s decision to utilize its excess cash to retire a portion of its debt with IBM. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and in the investing section of the Consolidated Statement of Cash Flows. Interest income earned from these investments was $8 million and $6 million in the three months ended March 31, 2019 and 2018, respectively. The interest income is included in financing revenue in the Consolidated Statement of Earnings.

In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements for the three months ended March 31, 2019 was $49 million, an increase of $2 million as compared to the same period in 2018. These fees are included in financing

28

Notes to Consolidated Financial Statements — (continued)

revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement.

Borrowing Relationship

The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense incurred on loans from IBM was $74 million and $57 million for the three months ended March 31, 2019 and 2018, respectively. Interest expense is included in financing cost in the Consolidated Statement of Earnings. For additional information on short-term and long-term funding, see note 11, “Borrowings.”

Services and Other Arrangements

The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $48 million and $52 million in the three months ended March 31, 2019 and 2018, respectively.

The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation and multiemployer retirement-related plans expense during the periods reported were not material.

Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party.

The outstanding amount of accounts payable to IBM of $950 million at March 31, 2019, and $3,044 million at December 31, 2018, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business.

The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The company's net profit from sales of returned equipment to IBM was $2 million and $8 million for the three months ended March 31, 2019 and 2018, respectively. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings.

Tax Sharing Agreement

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return.

In the first quarter of 2019, the company reported a provision for income taxes of $150 million and an effective tax rate of 77.5 percent, compared to a provision of $42 million and an effective tax rate of 22.0 percent in the first quarter of 2018. The change in the effective tax rate was primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax. In accordance with

29

Notes to Consolidated Financial Statements — (continued)

the previously executed Tax Sharing Agreement between IBM and the company, $64 million of the resulting liability was settled through a non-cash contribution to member’s interest. This contribution is included in the Consolidated Statement of Changes in Member’s Interest as Contributions from IBM.

10.  Divestiture:

In the fourth quarter of 2018, IBM entered into a definitive agreement to sell certain commercial financing capabilities and assign a number of its commercial financing contracts, excluding related receivables which will be collected as they become due in the normal course of business. The transaction closed in the first quarter of 2019 and resulted in a pre-tax gain of $16 million. The cash proceeds from the divestiture of $20 million are expected to be remitted to the company by IBM in the second quarter of 2019.

11.  Borrowings:

The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. The amount of these secured borrowings is reflected in the following short-term and long-term debt tables below.

Short-Term Debt

	Balance		Balance
(Dollars in millions)	3/31/2019		12/31/2018
Commercial paper	$	2,494	$	2,995
Short-term loans		22		17
Secured borrowings		28		23
Debt	$	2,543	$	3,035
Debt payable to IBM		8,605		10,223
Total	$	11,148	$	13,258

IBM Credit maintains a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper can be used for general corporate purposes, including, among other items, the repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued can vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer.

The weighted-average interest rate for commercial paper was 2.5 percent at March 31, 2019 and December 31, 2018.

The weighted-average interest rate for short-term loans was 7.2 percent and 4.3 percent at March 31, 2019 and December 31, 2018, respectively, and relates primarily to borrowings in Latin America in 2019 and in Asia Pacific in 2018.

The weighted-average interest rate for secured borrowings was 6.8 percent and 6.9 percent at March 31, 2019 and December 31, 2018, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $28 million at March 31, 2019 and $23 million at December 31, 2018.

The weighted-average interest rate for debt payable to IBM was 1.3 percent and 1.6 percent at March 31, 2019 and December 31, 2018, respectively.

30

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

		Balance		Balance
(Dollars in millions)	Maturities	3/31/2019		12/31/2018
Long-term notes (weighted-average interest rate at March 31, 2019)
2.1%	2019	$	1,400	$	1,400
3.3%	2020		1,500		1,500
2.8%	2021		2,850		2,850
2.2%	2022		500		500
3.0%	2023		750		750
		$	7,000	$	7,000
Long-term loans (6.2% weighted-average interest rate at March 31, 2019)	2019-2021		213		276
Secured borrowings (5.1% weighted-average interest rate at March 31, 2019)	2019-2024		840		687
Long-term debt		$	8,053	$	7,964
Less: net unamortized discount			2		2
Less: net unamortized debt issuance costs			7		9
Less: fair value adjustment*			9		34
Debt		$	8,034	$	7,919
Debt payable to IBM (1.4% weighted-average interest rate at March 31, 2019)			9,762		9,357
Total		$	17,796	$	17,276

*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position 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 utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $840 million at March 31, 2019 and $687 million at December 31, 2018.

The company has a shelf registration statement in place with the U.S. Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. The company issued fixed- and floating-rate debt securities in September 2017 in the aggregate amount of $3,000 million with maturity dates ranging from 2019 to 2022. During 2018, the company issued fixed- and floating-rate debt securities in the aggregate amount of $4,000 million with maturity dates ranging from 2020 to 2023. The net proceeds from the issuance of debt securities are utilized for general corporate purposes. This debt is included in the long-term debt table above.

The company’s indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens as such term is defined under the indenture) to 15 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met.

Pre-swap annual contractual obligations of long-term debt and long-term debt payable to IBM outstanding at March 31, 2019 are as follows:

	2019										2024 and
(Dollars in millions)	(Q2-Q4)		2020		2021		2022		2023		beyond		Total
Long-term debt	$	1,775	$	1,898	$	3,063	$	560	$	757	$	0	$	8,053
Debt payable to IBM		3,235		3,068		1,834		1,188		335		102		9,762
Total	$	5,010	$	4,966	$	4,898	$	1,748	$	1,092	$	102	$	17,815

31

Notes to Consolidated Financial Statements — (continued)

Interest on Debt

The company recognized interest expense of $150  million for the three months ended March 31, 2019, of which $74 million was interest expense on debt payable to IBM. The company recognized interest expense of $102 million for the three months ended March 31, 2018, of which $57 million was interest expense on debt payable to IBM.

Lines of Credit

The company has committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.

On July 19, 2018, IBM and the company (the Borrowers) entered into a new $2.5 billion, 364-Day Credit Agreement to replace the maturing $2.5 billion, 364-Day agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year. The new maturity date for the Three-Year Agreement is July 20, 2021. The facility size remains unchanged. The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. 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. As of March 31, 2019, the company had no borrowings outstanding against the Credit Agreements.

The company’s Credit Agreements each contain significant debt 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 IBM’s consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) IBM will not permit the consolidated net interest expense ratio, for any period of four consecutive fiscal quarters taken as a single accounting period, to be less than 2.20 to 1.0; (ii) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (iii) the company’s leverage ratio cannot be greater than 11 to 1 as of the last day of the fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants, and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. For additional information on the Support Agreement , see note 9, “Relationship with IBM and Related Party Transactions.”

12.  Contingencies:

The company is, or may be, involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These may include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning client allegations of wrongful repossession or defamation of credit.

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). In addition, the company also discloses matters based on its consideration of other matters and

32

Notes to Consolidated Financial Statements — (continued)

qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations.

In accordance with the relevant accounting guidance, 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 March 31, 2019 were not material to the Consolidated Financial Statements.

Also 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. As of March 31, 2019, there were no matters for which the likelihood of material loss is at least reasonably possible.

13.  Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $7,635 million and $7,112 million at March 31, 2019 and December 31, 2018, respectively. A portion of these amounts is available to the company’s Commercial Financing clients 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 approximately $384 million and $495 million at March 31, 2019 and December 31, 2018, respectively.

33

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE MONTHS ENDED MARCH 31, 2019

Financial Results Summary - Three Months Ended March 31:

							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2019			2018			Change
Revenue	$	482		$	449		7.4	%
Net margin	$	277		$	300		(7.7)	%
Net margin percentage		57.4	%		66.8	%	(9.4)	pts.
Total expense and other (income)	$	83		$	109		(23.5)	%
Income before income taxes	$	193		$	191		1.4	%
Provision for income taxes	$	150		$	42		NM
Net income	$	43		$	149		(70.8)	%
Net income margin		9.0	%		33.1	%	(24.1)	pts

NM - Not Meaningful

					Yr.-to-Date
	At March 31,		At December 31,		Percent
(Dollars in millions)	2019		2018		Change
Assets	$	35,217	$	39,497	(10.8)	%
Liabilities	$	32,053	$	36,076	(11.2)	%
Member’s interest	$	3,164	$	3,420	(7.5)	%

Debt-to-Equity

	At March 31,		At December 31,
	2019		2018
Debt-to-Equity Ratio *	9.1	x	8.9	x

*The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of member’s interest in the company at the end of the reporting period presented.

Return on Equity

(Dollars in millions)
For the three months ended March 31:	2019			2018
Net income	$	43		$	149
Annualized net income		174			595
Average equity (1)		3,292			3,432
Return on equity (2)		5.3	%		17.3	%

(1) Average of the ending Member’s interest for the last two quarters

(2) The company’s return on equity is calculated by dividing annualized net income by the average ending balance of member’s interest for the last two quarters, for the reporting periods presented.

34

Management Discussion – (continued)

Financial Performance Summary — Three Months Ended March 31:

In the first quarter of 2019, the company delivered revenue of $482 million and net income of $43 million compared to revenue of $449 million and net income of $149 million in the same period of 2018. In the first quarter of 2019, return on equity was 5.3 percent, compared to 17.3 percent in the prior year period. 

Total revenue increased $33 million, or 7.4 percent, in the first quarter of 2019 as compared to the same period in 2018, driven by increases in financing revenue of $39 million, or 10.6 percent, partially offset by declines in operating lease revenue of $6 million, or 6.8 percent. The increase in financing revenue was driven by increases in commercial and client financing yields. Yields from any category of assets are the company’s rate of return on these assets and are calculated by dividing income from these assets by the average assets during the period. The decline in operating lease revenue was driven by a decline in the average asset balance when compared to the prior year.

From a segment perspective, Client Financing revenue of $322 million in the first quarter of 2019 increased 4.7 percent as compared to the prior-year period. The increase was driven by higher asset yields in the current year period. Commercial Financing revenue of $160 million in the first quarter of 2019 increased 13.1 percent as compared to the first quarter of 2018. The increase in revenue was driven by increases in average financing assets and increases in yields.

From a geographic perspective, Americas revenue of $281 million in the first quarter increased 14.8 percent when compared to the prior-year period. EMEA revenue of $127 million declined 0.9 percent and Asia Pacific revenue of $74 million declined 2.7% when compared to the first quarter of 2018.

In the first quarter of 2019, net margin, which is calculated as revenue minus financing costs and depreciation of equipment under operating lease, was $277 million, a decrease of 7.7 percent when compared to the same period in 2018. Increased financing costs of $59 million, or 57.7 percent, were offset by increases in revenues and declines in depreciation expense of $2 million, or 5.2 percent, when compared to the same period in the prior year. The increase in financing cost was due to an increase in interest rates when compared to the same period in 2018. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin percentage of 57.4 percent in the first quarter of 2019 decreased 9.4 points as compared to the net margin percentage in the same period in 2018.

Total expense and other (income) of $83 million in the first quarter of 2019 decreased $26 million, or 23.5 percent, compared to the same period in 2018. The year-to-year decline was driven by an increase in other income and lower provisions for credit losses. 

Pre-tax income of $193 million in the first quarter of 2019 increased 1.4 percent as compared to the first quarter of 2018. The increase in 2019 was primarily driven by increases in other income and lower provisions for credit losses, partially offset by declines in net margin. The pre-tax income margin in the first quarter of 2019 of 40.1 percent decreased on a year-to-year basis by 2.4 points.

The effective tax rate was 77.5 percent in the first quarter of 2019, an increase of 55.5 points compared to the first quarter of 2018. The change in the effective tax rate was driven by discrete tax charges occurring in the first quarter of 2019, primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax.

Net income of $43 million decreased $105 million, or 70.8 percent, in the first quarter of 2019 as compared to the same period in 2018. The decline was primarily driven by the increase in the provision for income taxes. In the first quarter of 2019, net income margin was 9.0 percent, a decrease of 24.1 points on a year-to-year basis.

Return on equity was 5.3 percent in the first quarter of 2019, a decrease of 12.1 points when compared to the prior-year period, driven by the decrease in net income.

The company generated $88 million in cash flow from operating activities in the first quarter of 2019, a decrease of $152 million when compared to the first quarter of 2018. Net cash provided by investing activities of $1,572 million in the

35

Management Discussion – (continued)

first quarter of 2019 increased $2,222 million when compared to the prior-year period, primarily driven by a decrease in the investment of excess cash with IBM. Net cash used for financing activities of $1,910 million in the first quarter of 2019, increased $1,799 million when compared to the first quarter of 2018.

First Quarter in Review

Results of Operations

Segment Details

The following is an analysis of the reportable segment results for the first quarter of 2019  versus the first quarter of 2018. The table below presents each reportable segment’s revenue and net margin results.

							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2019			2018			Change
Client Financing
Revenue	$	322		$	308		4.7	%
Net margin		170			191		(11.2)	%
Net margin percentage		52.7	%		62.2	%	(9.5)	pts.
Pre-tax income	$	117		$	128		(8.6)	%
Pre-tax margin		36.3	%		41.5	%	(5.2)	pts.
Commercial Financing
Revenue	$	160		$	142		13.1	%
Net margin		107			109		(1.6)	%
Net margin percentage		67.0	%		76.7	%	(9.7)	pts.
Pre-tax income	$	76		$	63		21.3	%
Pre-tax margin		47.7	%		44.6	%	3.1	pts.
Total Segments
Revenue	$	482		$	449		7.4	%
Net margin		277			300		(7.7)	%
Net margin percentage		57.4	%		66.8	%	(9.4)	pts.
Pre-tax income	$	193		$	191		1.4	%
Pre-tax margin		40.1	%		42.5	%	(2.4)	pts.

Client Financing

Client Financing revenue of $322 million in the first quarter of 2019 increased $14 million, or 4.7 percent, as compared to the same period in 2018. The improvement was driven by reporting property tax and insurance as cost and the related revenue on a gross basis of $11 million due to the adoption of the new lease standard, along with increases in yields, offset by a lower average financing asset balance and declines in operating lease revenue of $6 million.

Net margin decreased $21 million, or 11.2 percent, as compared to the prior-year period. The decrease was primarily driven by increases in financing cost of $38 million. The increase in financing cost was due to rising interest rates and reporting property tax and insurance as cost and the related revenue on a gross basis, which was partially offset by a lower average debt balance year to year.

Pre-tax income in the first quarter of 2019 decreased $11 million, or 8.6 percent, as compared to the same period in 2018. Declines in net margin and sales of equipment returned from lease were partially offset by lower expense allocations and lower provisions for credit losses when compared to the prior-year period.  

36

Management Discussion – (continued)

Commercial Financing

Commercial Financing revenue of $160 million in the first quarter of 2019 increased $19 million, or 13.1 percent, when compared to the same period in 2018, driven by increases in yields and higher average financing receivable asset balances.

Net margin in the first quarter of 2019 decreased $2 million, or 1.6 percent when compared to the same period in 2018, with increases in interest expense of $20 million offset by the growth in revenue of $19 million.

Pre-tax income in the first quarter of 2019 increased $13 million, or 21.3 percent, as compared to the same period in 2018, driven by a divestiture gain of $16 million.  For additional information on divestitures, see note 10, “Divestiture,” to the Consolidated Financial Statements.

Geographic Revenue

The following table provides revenue performance by geography:

					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2019		2018		Change
Revenue	$	482	$	449	7.4	%
Geographies
Americas	$	281	$	245	14.8	%
Europe/Middle East/Africa (EMEA)		127		128	(0.9)
Asia Pacific		74		76	(2.7)

Total revenue of $482 million increased $33 million, or 7.4 percent, in the first quarter of 2019 compared to the same period in 2018, primarily driven by increased revenue in the Americas.

Americas revenue of $281 million increased $36 million, or 14.8 percent, in the first quarter of 2019 compared to the same period in 2018. Increased financing revenue of $41 million was driven by improvements in commercial financing of $15 million and increases from sales-type lease revenues of $12 million.

EMEA revenue of $127 million decreased $1 million, or 0.9 percent, in the first quarter of 2019 compared to the same period in 2018. Decreases in operating lease revenues and revenues from participated receivables were partially offset by improvements in commercial financing, when compared to the first quarter of 2018.

Asia Pacific revenue of $74 million decreased $2 million, or 2.7 percent, in the first quarter of 2019 when compared to the same period in 2018. The decline was primarily driven by lower revenues from sales-type leases when compared to the same period in the prior year.

37

Management Discussion – (continued)

Expense

Total Expense and Other (Income)

							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2019			2018			Change
Total expense and other (income)
Selling, general and administrative	$	97		$	98		(1.2)	%
Provisions for credit losses		4			9		(57.4)
Other (income) and expense		(18)			1		NM
Total expense and other (income)	$	83		$	109		(23.5)	%
Total expense-to-revenue ratio		17.3	%		24.3	%	(7.0)	pts.

NM - Not Meaningful

Total expense and other (income) of $83 million decreased $26 million, or 23.5 percent, in the first quarter of 2019 as compared to the same period in 2018. For additional information regarding total expense and other (income), see the following analyses by category.

Selling, General and Administrative

					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2019		2018		Change
Selling, general and administrative expense:
Selling, general and administrative - other	$	46	$	43	6.3	%
Contracted services		3		4	(1.7)
Functional support services and other related party expenses		48		52	(7.5)
Total selling, general and administrative expense	$	97	$	98	(1.2)	%

SG&A expense decreased $1 million, or 1.2 percent, in the first quarter of 2019 as compared to the first quarter of 2018. Other SG&A increased $3 million while functional support services and other related party expenses were lower by $4 million when compared to the prior-year period. For additional information on functional support services, see note 9, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Provision for Credit Losses

Provisions for credit losses decreased $5 million in the first quarter of 2019 when compared to the first quarter of 2018, due to lower reserve requirements in Latin America and Middle East/Africa, partially offset by higher reserve requirements in North America and China. For additional information on provisions for credit losses, see note 5, “Financing Receivables, Receivables Purchased/Participated from IBM,” to the Consolidated Financial Statements.

38

Management Discussion – (continued)

Other (Income) and Expense

					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2019		2018		Change
Other (income) and expense:
Foreign currency transaction (gains)/losses	$	1	$	4	(85.0)	%
(Gains)/losses on derivative instruments		—		(1)	NM
(Gains)/losses on sale of equipment upon lease termination		(7)		(16)	(54.4)
Other expense and (income)		(11)		15	NM
Total other (income) and expense	$	(18)	$	1	NM	%

NM - Not Meaningful

Other (income) and expense was $18 million of income in the first quarter of 2019, an increase of $19 million when compared to the same period of 2018. The year-to-year improvement was driven by a pre-tax gain of $16 million from divested commercial financing capabilities which was partially offset by lower gains from sales of equipment returned from lease. For additional information on the divestiture, see note 10, “Divestiture,” to the Consolidated Financial Statements.

Taxes

For the three months ended March 31, 2019, the company recorded a provision for income taxes of $150 million and an effective tax rate of 77.5 percent, compared to a provision of $42 million and an effective tax rate of 22.0 percent for the three months ended March 31, 2018. The year-to-year change in the effective tax rate was driven by discrete tax charges occurring in the first quarter of 2019, primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax.

The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to the company’s U.S. federal and certain state and foreign operations that are included in applicable IBM consolidated tax returns, pursuant to the Tax Sharing Agreement between IBM and the company, any subsequent changes to the company’s income tax liability as a result of valuation allowances and tax examinations are the responsibility of IBM. Therefore, any recognition and subsequent changes in assessment about the sustainability of related tax positions, including interest and penalties, are the responsibility of IBM. As such, there have been no uncertain tax liabilities recorded in the Consolidated Financial Statements for entities that file as part of IBM’s consolidated tax filings as the company bears no risk associated with any subsequent change in the sustainability of uncertain tax positions.

For the company’s separate income tax return filings, the company is generally no longer subject to tax examinations for years prior to 2014. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at March 31, 2019 of $10 million increased $5 million from December 31, 2018.

If the company’s provision for income taxes had been prepared using the separate return method without modification for the benefits-for-loss approach, total taxes included in net income reported for the first quarter of 2019 would have been $13 million higher due to a difference in the calculation of the “Global Intangible Low-Taxed Income” provision resulting from U.S. tax reform. For the period ended March 31, 2018, there was no material difference in the total taxes included in net income using the separate return method without modification for the benefits-for-loss approach. For additional information, see note 1, “Basis of Presentation.”

39

Management Discussion – (continued)

Financial Position Summary

The company’s primary use of funds is to originate financing receivables and operating leases with end-users, suppliers, distributors, resellers and IBM. Financing receivables consist of direct financing leases and loans to end-user clients, purchases of installment payment plans from IBM and working capital financing to suppliers, distributors and resellers. Operating leases are for IBM and OEM IT products. Receivables purchased/participated from IBM include purchased interests in certain of IBM’s trade accounts receivable and IBM receivables that have been participated to IBM Credit. Financing receivables from IBM include loan financing to IBM’s Global Technology Services segment. For additional information relating to financing activities with IBM, see note 9, “Relationship with IBM and Related Party Transactions.”

Total assets of $35,217 million at March 31, 2019 declined $4,280 million (including a decrease of $14 million from currency) as compared to year-end 2018, primarily driven by:

· A decline in total financing receivables of $2,259 million (including a decrease of $19 million from currency), primarily driven by a decline in Commercial Financing receivables of $1,520 million and a decline in Client Financing loans and installment payment receivables of $897 million. These declines are seasonal, resulting from collections of higher year-end balances, and

· A decline in other receivables from IBM of $1,718 million, predominantly due to decreased cash invested with IBM of $1,732 million. The decline in the first quarter of 2019 was driven by the company’s decision to utilize its excess cash to retire a portion of its debt with IBM. For additional information relating to other receivables from IBM originating from excess cash invested with IBM, see note 9, “Relationship with IBM and Related Party Transactions.”

At March 31, 2019, substantially all client and commercial financing assets were IT related assets with no direct exposure to consumers. Approximately 55 percent of the total portfolio, excluding financing receivables from IBM and receivables purchased from IBM, was with investment grade clients. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 16 points to 71  percent.

Total liabilities of $32,053 million at March 31, 2019 decreased $4,024 million (including a decrease of $56 million from currency), as compared to year-end 2018, primarily driven by:

· A decline in accounts payable to IBM of $2,094 million and a decline in accounts payable to third-parties of $343 million, both of which were primarily driven by settlement of fourth-quarter 2018 originations, and

· A decrease in total debt of $1,590 million (including a decrease of $77 million from currency), including a decrease in debt payable to IBM of $1,214 million and a decrease in debt with third parties of $376 million. The decline in the first quarter of 2019 was driven by lower funding requirements associated with financing receivables and the company’s decision to utilize its excess cash to retire a portion of its debt with IBM.

Total member’s interest of $3,164 million at March 31, 2019 decreased $257 million as compared to year-end 2018, primarily driven by:

· A cash distribution to IBM of $370 million; partially offset by

· Net income for the first three months of 2019 of $43 million,

· Foreign currency translation increases of $6 million, and

· A capital contribution from IBM of $64 million.

40

Management Discussion – (continued)

Originations of Financing Receivables and Operating Leases

Originations are management’s estimate of the gross additions for Client Financing and Commercial Financing assets. There are no industry standards or requirements governing the reporting of financing asset originations. Management believes that the estimated values of financing asset originations disclosed in the table below provide insight into the potential future cash flows and earnings of the company.

The Client Financing origination values presented below exclude the company’s loans to IBM’s Global Technology Services segment, which are executed under a loan facility and are not considered originations.

Originations

					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2019		2018		Change
Client Financing	$	3,018	$	3,149	(4.2)	%
Commercial Financing		17,391		17,680	(1.6)	%
Total originations	$	20,409	$	20,829	(2.0)	%

In the first quarter of 2019, the company originated $3,018 million of Client Financing receivables as compared to $3,149 million in the first quarter of 2018, mainly driven by stronger lease volumes in the prior year due to client migration to the IBM z14 mainframe.

In the first quarter of 2019, the company originated $17,391 million of Commercial Financing receivables as compared to $17,680 million in the first quarter of 2018, primarily impacted by the strengthening of the dollar in the current year.

Segment Assets

					Yr.-to-Date
(Dollars in millions)	At March 31,		At December 31,		Percent
Client Financing	2019		2018		Change
Financing receivables, net	$	13,577	$	14,474	(6.2)	%
Equipment under operating leases, net		345		386	(10.7)
Financing receivables from IBM		3,869		3,609	7.2
Receivables purchased/participated from IBM, net		3,902		4,065	(4.0)
Total assets	$	21,692	$	22,533	(3.7)	%

					Yr.-to-Date
(Dollars in millions)	At March 31,		At December 31,		Percent
Commercial Financing	2019		2018		Change
Financing receivables, net	$	9,854	$	11,374	(13.4)	%
Receivables purchased from IBM, net		1,430		1,369	4.4
Total assets	$	11,284	$	12,743	(11.5)	%

The decrease in Client Financing assets of $841 million at March 31, 2019 as compared to December 31, 2018 was primarily driven by cash collections of financing receivables in excess of new originations, as a result of higher year-end balances.

The decrease in Commercial Financing assets of $1,460 million at March 31, 2019 as compared to December 31, 2018 was driven by cash collections exceeding new originations, primarily due to declines from higher year-end balances.

The company’s receivables portfolio at March 31, 2019 represented the following industry profile: Financial (32 percent), Manufacturing (15 percent),  Government (14 percent), Services (12 percent), Retail (7 percent), Communications (7 percent), Healthcare (7 percent) and Other (6 percent).

41

Management Discussion – (continued)

The company’s receivables portfolio at December 31, 2018 represented the following industry profile: Financial (33 percent), Government (14 percent), Manufacturing (14 percent), Services (13 percent), Retail (7 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).

The assets of the company were financed with $28,944 million of total debt at March 31, 2019, as compared to $30,534 million at December 31, 2018.

Financing Receivables and Allowances

The following table presents financing receivables excluding residual values, miscellaneous receivables and loan financing to IBM’s Global Technology Services segment which the company considers collectable and without third party risk.

	At March 31,			At December 31,
(Dollars in millions)	2019			2018
Recorded investment	$	28,408		$	30,906
Specific allowance for credit losses		117			121
Unallocated allowance for credit losses		65			71
Total allowance for credit losses		182			192
Net financing receivables	$	28,225		$	30,714
Allowance for credit losses coverage		0.6	%		0.6	%

Roll Forward of Financing Receivables Allowance for Credit Losses

(Dollars in millions)

January 1, 2019		Additions		Write-offs *		Other **		March 31, 2019
$	192	$	4	$	(13)	$	(1)	$	182

*     Represents reserved receivables that were written off during the period.

**   Represents primarily translation adjustments.

The allowance for credit losses on financing receivables at March 31, 2019 was $182 million, or 0.6 percent of gross financing receivables. At December 31, 2018, the allowance for credit losses on financing receivables was $192 million, or 0.6 percent of gross financing receivables.

Specific reserves were $117 million at March 31, 2019, a decrease of $4 million as compared to year-end 2018, primarily due to write-offs in EMEA, offset with additional reserve requirements in the Americas and China.

Unallocated reserves were $65 million at March 31, 2019, a decrease of $6 million as compared to year-end 2018, with lower unallocated reserve requirements in the Americas and EMEA.

Bad debt expense was $4 million of income for the three months ended March 31, 2019 as compared to $9 million of expense for the same period in 2018. The year-to-year decrease in expense was driven by lower reserve requirements in Latin America and Middle East/Africa, partially offset by higher reserve requirements in North America and China.   

Residual Value

Residual value is a risk of the company’s business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for IBM products and closely monitors OEM IT product announcements. Based upon this product information, the company continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

42

Management Discussion – (continued)

The company optimizes the recovery of residual values by extending lease arrangements with current clients. Assets returned from lease are sold to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early lease termination, IBM will purchase the returned equipment from the company at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value.

The following table presents the recorded amount of unguaranteed residual value for direct financing and operating leases at March 31, 2019 and December 31, 2018. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2019 and December 31, 2018, is expected to be returned to the company.

Unguaranteed Residual Value

	At			At			Estimated Run Out of March 31, 2019 Balance
	December 31,			March 31,									2022 and
(Dollars in millions)	2018			2019			2019		2020		2021		Beyond
Direct financing leases	$	491		$	472		$	85	$	99	$	141	$	146
Operating leases		114			106			44		36		22		4
Total unguaranteed residual value	$	605		$	578		$	129	$	135	$	163	$	151
Related original amount financed	$	10,148		$	9,557
Percentage		6.0	%		6.1	%

Liquidity and Capital Resources

IBM Credit funds current and future obligations through the generation of cash flows from operations and its access to the short-term and long-term capital markets, as well as the support given by IBM’s overall liquidity position and access to capital markets. The debt used to fund the company’s financing assets as of March 31, 2019 was primarily comprised of loans from IBM.

In the company’s 2018 Form 10‑K filed with the SEC on February 27, 2019, the company included information on its liquidity, including a table presenting the company’s cash flow and liquidity trending for the past four years. The table includes net cash provided by operating activities, cash and cash equivalents and cash invested with IBM. For the three months ended, or as of, as applicable, March 31, 2019, those amounts are $88 million for net cash provided by operating activities, $1,573 million of cash and cash equivalents and $282 million in cash invested with IBM.

In early 2017, the company announced an increase in its target debt-to-equity ratio from 7:1 to 9:1. At March 31, 2019, the debt-to-equity ratio was 9.1 to 1 as compared to 8.9 to 1 at December 31, 2018 and 9.4 to 1 at March 31, 2018.  Refer to page 46 regarding the company’s debt-to-equity ratio.

In the first quarter of 2019, IBM made a non-cash contribution to the company in the amount of $64 million. During the first quarter of 2019, the company made a  cash distribution to IBM, including a return of profit, of $370 million. The future amount of third-party debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio of 9 to 1. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.

In 2017, the company established a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. As of March 31, 2019, there was $2,494 million of commercial paper outstanding.

The company and IBM entered into two committed credit facilities in 2017, a $2.5 billion 364‑Day Credit Agreement and a $2.5 billion Three-Year Credit Agreement. On July 19, 2018, the company and IBM entered into a new $2.5 billion, 364‑Day Credit Agreement to replace the maturing $2.5 billion, 364‑Day Credit Agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement. The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year.

43

Management Discussion – (continued)

The new maturity date for the Three-Year Credit Agreement is July 20, 2021. The facility size remains unchanged. As of March 31, 2019, the company has no borrowings outstanding against these Credit Agreements.

The major rating agencies’ ratings on the company’s debt securities at March 31, 2019 appear in the table below. The ratings remain unchanged from December 31, 2018. The company does not have “ratings trigger” provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating.

	STANDARD	MOODY’S
	AND	INVESTORS	FITCH
	POOR’S	SERVICE	RATINGS
Long-term debt	A	A1	A
Commercial paper	A-1	Prime-1	F1

In the normal course of business, the company may be exposed to the impact of foreign currency fluctuations and interest rate changes. Although the company seeks to substantially match fund the term, currency and interest rate variability of its debt against its underlying financing assets, risks may arise from a mismatch between assets and the related liabilities used for funding. The company also employs a rigorous process to optimize portfolio risk management. Portfolio risks include credit and residual value risk. For additional information on the management of these risks by the company, see note A, “Significant Accounting Policies” and note D, “Financial Instruments,” to the Consolidated Financial Statements in the company’s 2018 Form 10‑K filed with the SEC on February 27, 2019.

Cash Flow and Liquidity Trends

(Dollars in millions)
For the three months ended March 31:	2019		2018
Net cash provided by operating activities	$	88	$	240
Net cash provided by/(used in) investing activities		1,572		(650)
Net cash used in financing activities		(1,910)		(111)
At March 31:	2019		2018
Cash and cash equivalents	$	1,573	$	2,170
Cash invested with IBM, available on-demand (1)		282		1,198
Committed credit facilities (2)		5,000		5,000

(1) Excess cash is periodically invested in interest bearing, on-demand accounts with IBM and is presented in other receivables from IBM in the Consolidated Statement of Financial Position and the Consolidated Statement of Cash Flows. For additional information, see note 9, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

(2) The Credit Agreements were entered into and amended on July 19, 2018.

Net cash provided by operating activities in the first three months of 2019 decreased by $152 million as compared to the first three months of 2018 driven by higher net cash income tax payments of $150 million.

Net cash provided by investing activities in the first three months of 2019 increased by $2,222 million as compared to the first three months of 2018 driven by the following factors:

· A decline in the investment of excess cash with IBM of $1,952 million, and

· Lower net originations of financing receivables of $179 million, and

· Lower cash payments relating to derivative contracts of $62 million.

44

Management Discussion – (continued)

Net cash used in financing activities in the first three months of 2019 increased by $1,799 million as compared to the first three months of 2018 driven by the following factors:

· A decrease in net proceeds on total debt of $1,919 million, offset by

· A decrease in net cash distributions to IBM of $120 million.

Debt

	At March 31,		At December 31,
(Dollars in millions)	2019		2018
Short-term debt
Debt	$	2,543	$	3,035
Debt payable to IBM		8,605		10,223
Total short-term debt	$	11,148	$	13,258
Long-term debt
Debt	$	8,034	$	7,919
Debt payable to IBM		9,762		9,357
Total long-term debt	$	17,796	$	17,276
Total debt	$	28,944	$	30,534

Total debt changes generally correspond with the level of Client Financing and Commercial Financing receivables, the level of cash and cash equivalents, the change in payables to IBM and external parties and the change in net investment from IBM.

Total debt was $28,944 million at March 31, 2019, a decrease of $1,590 million from year-end 2018. Total debt payable to IBM was $18,367 million at March 31, 2019, a decrease of $1,214 million from December 31, 2018. Total third-party debt was $10,577 million at March 31, 2019,  a decrease of $376 million from December 31, 2018. The decrease in total debt during the first three months of 2019 was primarily due to lower funding requirements associated with financing receivables and thecompany’s decision to utilize its excess cash to retire a portion of its debt with IBM, while continuing to maintain the company’s targeted debt-to-equity ratio of 9 to 1.

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for these borrowings was $868 million at March 31, 2019 and $710 million at December 31, 2018.

The company’s interest rate and foreign currency rate risk management policies and procedures are discussed in note 3, “Financial Instruments.”

Interest on Debt

The company recognized interest expense of $150 million in the three months ended March 31, 2019, of which $74 million was interest expense on debt payable to IBM. The company recognized interest expense of $102 million in the three months ended March 31, 2018, of which $57 million was interest expense on debt payable to IBM.

The increase in interest expense in the first three months of 2019 versus the same period in 2018 was driven by an increase in interest rates on both internal and external borrowings. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings.

For additional information on interest expense, see note 11, “Borrowings.”

45

Management Discussion – (continued)

Debt-to-Equity

The debt-to-equity ratio as reported in the following table is the ratio of total debt to total member’s interest.

	At March 31,		At December 31,
	2019		2018
Debt-to-Equity Ratio *	9.1	x	8.9	x

*The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of member’s interest in the company at the end of the reporting period presented.

The company’s debt-to-equity ratio was 9.1 to 1 at March 31, 2019, as compared to the debt-to-equity ratio of 8.9 to 1 at December 31, 2018. Total member’s interest of $3,164 million declined by $257 million, or 7.5 percent, while debt of $28,944 million decreased $1,590 million, or 5.2 percent. The debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.

Looking Forward

In 2017, IGF’s legal entity structure was reorganized globally to consolidate Client Financing and Commercial Financing under IBM Credit which drives operational benefits. The company has access to the short-term and long-term debt markets as an issuer in the capital markets and as a borrower from IBM. In 2019, the company issued third-party debt and made distributions to IBM of $370 million, including a return of profit. The company will continue to target a debt-to-equity ratio of 9 to 1. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations. The future amount of third-party debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio. Absent other funding alternatives, a protracted period where the company or IBM could not access the capital markets would likely lead to a slowdown in originations. Financing originations, which determine the asset base of the company’s annuity-like business, are also dependent upon the demand for IT products and services as well as client participation rates.

The company’s financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. As a captive finance company, the company’s financing assets result primarily from the financing of IBM products and services, but also include OEM IT products and services to meet the total financing requirements of the company’s and IBM’s clients. Substantially all of the company’s financing assets are IT-related, which provide a stable base of business. The company’s financing offerings are competitive and available to clients as a result of factors including the company’s borrowing cost, financing incentive programs and access to the capital markets.

In 2019, the company will wind down the portion of its Commercial Financing operations that provides short-term working capital solutions for OEM IT suppliers, distributors and resellers. This wind-down will start in the second quarter and is expected to conclude by the end of the year, as the receivables are collected in the normal course of business. The company’s borrowings will decline at a similar rate, consistent with the targeted 9:1 debt-to-equity ratio. The company had receivables of $8.5 billion as of December 31, 2018 and $8.1 billion as of March 31, 2019 relating to the financing of OEM IT suppliers, distributors, and resellers. The company will continue to provide differentiated end-to-end financing solutions, including commercial financing in support of IBM partner relationships.

Effective in the second quarter of 2019, IBM and the company have suspended the program under which IBM Credit LLC purchases interests in IBM's trade accounts receivable. These receivables generated financing income of $42 million in 2018 and $15 million in the first quarter of 2019 and represented an asset balance of $1,369 million and $1,430 million in the Statement of Financial Position as of December 31, 2018 and March 31, 2019 respectively. 

IBM Credit has policies in place designed to manage the risks involved in financing, including credit losses, residual values, liquidity, currency and interest rates.

46

Management Discussion – (continued)

The economy could impact the credit quality of the company’s receivables portfolio and therefore the level of provision for credit losses. IBM Credit will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio and will take risk mitigation actions when necessary.

The company has historically been able to manage residual value risk both through insight into IBM’s product cycles and monitoring of OEM IT product announcements.

Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and net margin. Interest rates directly impact the company by increasing or decreasing financing revenue and associated borrowing costs. The company’s interest rate risk management policy, combined with its pricing strategy, should mitigate margin erosion due to changes in interest rates.

The company’s geographically diverse client base, product and client knowledge, and strategy to substantially match fund the term, currency and interest rate variability of its debt to the underlying financing assets should enable prudent management of the business going forward, even during periods of uncertainty with respect to the global economy.

Forward-looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10‑Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: the company’s financial condition being in large part dependent upon IBM; a downturn in the economic environment; innovations in the technology sector impacting clients’ propensity to enter in financing arrangements; the company’s reliance on partner relationships; client credit risk and an inability to collect receivables in a timely manner, which could impact financial results; changes to residual value, which could affect the profitability of lease transactions; impact of exposure to currency and financing risks and changes in market liquidity conditions; changes in financial regulation, supervision and licensing laws and regulations; changes in local legal, economic, political and health conditions; cybersecurity and data privacy considerations; risks from legal proceedings and investigatory risks; adverse effects from tax matters; impacts of business with government clients; the company’s use of accounting estimates; ineffective internal controls; and other risks, uncertainties and factors discussed in Item 1A, “Risk Factors” in the company’s Annual Report Form 10‑K filed on February 27, 2019 with the SEC or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.

47

Item 4. Controls and Procedures

The company’s management evaluated, with the participation of the Chairman and President, and the Vice President of Finance, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chairman and President, and the Vice President of Finance have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

48

Part II. Other Information

Item 1. Legal Proceedings

Refer to note 12, “Contingencies,” on page 32 of this Form 10‑Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

Not applicable.

Item 6. Exhibits

Exhibit Number	Description
31.1	Certification by principal executive officer pursuant to Rule 13‑A‑14(a) or 15‑D‑14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by principal financial officer pursuant to Rule 13A‑14(1) or 15D‑14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

49

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		IBM CREDIT LLC
		(Registrant)
Date:	April 30, 2019
		By:	/s/ Adam Wilson
			Adam Wilson
			Vice President, Finance

50

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, William J. Smith III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IBM Credit LLC;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2019

/s/ William J. Smith III

William J. Smith III

Chairman and President

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Adam Wilson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IBM Credit LLC;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2019

/s/ Adam Wilson

Adam Wilson

Vice President, Finance

EX-32.1

EXHIBIT 32.1

IBM CREDIT LLC

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of IBM Credit LLC (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Smith III, Chairman and President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William J. Smith III

William J. Smith III

Chairman and President

April 30, 2019

A signed original of this written statement required by Section 906 has been provided to IBM Credit LLC and will be retained by IBM Credit LLC and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

IBM CREDIT LLC

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of IBM Credit LLC (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Adam Wilson, Vice President, Finance of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Adam Wilson

Adam Wilson

Vice President, Finance

April 30, 2019

A signed original of this written statement required by Section 906 has been provided to IBM Credit LLC and will be retained by IBM Credit LLC and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2019 shares
Document and Entity Information
Entity Registrant Name	IBM CREDIT LLC
Entity Central Index Key	0001225307
Document Type	10-Q
Document Period End Date	Mar. 31, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding	0
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

XML

CONSOLIDATED STATEMENT OF EARNINGS - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Revenue
Financing revenue	$ 404	$ 365
Operating lease revenue	78
Operating lease revenue		84
Total revenue	482	449
Financing cost (related party cost of $74 in 2019 and $57 in 2018)	160	102
Depreciation of equipment under operating lease	45
Depreciation of equipment under operating lease		48
Net margin	277	300
Expense and other (income)
Selling, general and administrative	97	98
Provision for credit losses	4	9
Other (income) and expense	(18)	1
Total expense and other (income)	83	109
Income before income taxes	193	191
Provision for income taxes	150	42
Net income	$ 43	$ 149

XML

CONSOLIDATED STATEMENT OF EARNINGS (Parenthetical) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CONSOLIDATED STATEMENT OF EARNINGS
Financing cost - related party	$ 74	$ 57

XML

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2019	Mar. 31, 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income		$ 43	$ 149
Other comprehensive income/(loss), before tax:
Foreign currency translation		3	70
Retirement-related benefit plans	[1]	0	1
Other comprehensive income/(loss), before tax		3	71
Income tax benefit related to items of other comprehensive income		3	11
Other comprehensive income/(loss), net of tax		6	82
Total comprehensive income		$ 49	$ 230

[1] Amounts represented relate to multiple-employer plans.

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Assets:
Cash and cash equivalents	$ 1,573	$ 1,828
Equipment under operating leases (net of accumulated depreciation of $286 in 2019 and $283 in 2018)	345
Equipment under operating leases (net of accumulated depreciation of $286 in 2019 and $283 in 2018)		386
Other receivables from IBM	301	2,019
Other assets	366	373
Total assets	35,217	39,497
Liabilities:
Accounts payable	1,362	1,705
Accounts payable to IBM	950	3,044
Debt	10,577	10,954
Debt payable to IBM	18,367	19,580
Taxes	594	547
Other liabilities	203	246
Total liabilities	32,053	36,076
Member's interest:
Member's interest	3,191	3,216
Retained earnings		238
Accumulated other comprehensive income/(loss)	(27)	(33)
Total member's interest	3,164	3,420
Total liabilities and member's interest	35,217	39,497
Financing Receivable Portfolio
Assets:
Financing receivables	23,431	25,848
Financing receivables from IBM
Assets:
Financing receivables	3,869	3,609
Purchased and participated receivables from IBM
Assets:
Financing receivables	$ 5,331	$ 5,433

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Parenthetical) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Equipment under operating leases - accumulated depreciation	$ 286
Equipment under operating leases - accumulated depreciation		$ 283
Financing Receivable Portfolio
Receivables - allowances	171	174
Purchased and participated receivables from IBM
Receivables - allowances	$ 11	$ 18

XML

CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2019	Mar. 31, 2018
Cash flows from operating activities:
Net income		$ 43	$ 149
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		4	9
Depreciation		45
Depreciation			48
Deferred taxes		(2)	(25)
Net (gain)/loss on asset sales and other		(6)	(44)
Change in operating assets and liabilities:
Other assets/other liabilities		4	103
Net cash provided by operating activities		88	240
Cash flows from investing activities:
Originations of financing receivables		(4,219)	(4,943)
Collection of financing receivables		4,023	3,751
Short-term financing receivables - net	[1]	46	863
Purchase of equipment under operating leases		(20)	(57)
Proceeds from disposition of equipment under operating lease		13	15
Other receivables from IBM - net		1,738	(214)
Other investing activities - net		(10)	(65)
Net cash provided by/(used in) investing activities		1,572	(650)
Cash flows from financing activities:
Proceeds from issuance of debt from IBM		2,545	4,841
Principal payments on debt from IBM		(2,388)	(4,299)
Proceeds from issuance of debt		300	2,122
Principal payments on debt		(196)	(247)
Short-term borrowings from/(repayments to) IBM - net	[1]	(1,299)	(2,517)
Short-term borrowings/(repayments) - net	[1]	(500)	480
Distributions to IBM		(370)	(490)
Net cash used in financing activities		(1,910)	(111)
Effect of exchange rate changes on cash and cash equivalents		(5)	11
Net change in cash and cash equivalents		(255)	(510)
Cash and cash equivalents at beginning of period		1,828	2,680
Cash and cash equivalents at end of period		$ 1,573	$ 2,170

[1] Short-term represents original maturities of 90 days or less.

XML

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST - USD ($) $ in Millions			3 Months Ended
		Jan. 01, 2018	Mar. 31, 2019	Mar. 31, 2018
Member's Interest
Balance at the beginning of the period		$ 3,562	$ 3,420	$ 3,562
Net income			43	149
Other comprehensive income/(loss), net of tax			6	82
Total comprehensive income			49	230
Contributions from IBM	[1]		64
Distributions to IBM			(370)	(490)
Balance at the end of the period			3,164	3,302
Member's Interest
Member's Interest
Balance at the beginning of the period		3,101	3,216	3,101
Contributions from IBM	[1]		64
Distributions to IBM			(88)	(34)
Balance at the end of the period			3,191	3,067
Retained Earnings
Member's Interest
Balance at the beginning of the period		302	238	302
Cumulative effect of change in accounting principle		5		5	[2]
Net income			43	149
Distributions to IBM			(282)	(456)
Accumulated Other Comprehensive Income/(Loss)
Member's Interest
Balance at the beginning of the period		158	(33)	158
Cumulative effect of change in accounting principle		$ (5)		(5)	[2]
Other comprehensive income/(loss), net of tax			6	82
Balance at the end of the period			$ (27)	$ 234

[1] Includes $64 million non-cash equity contribution from IBM. Refer to note 9, "Relationship with IBM and Related Party Transactions."

[2] Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

XML

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST (Parenthetical) $ in Millions	3 Months Ended
	Mar. 31, 2019 USD ($)
IBM
Non-cash equity contribution received	$ 64

XML

Basis of Presentation

3 Months Ended

Mar. 31, 2019

Basis of Presentation:

Basis of Presentation:

1. Basis of Presentation:

The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit 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. As a result, actual results may be different from these estimates.

Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Distributions by the company to IBM are considered first to be a return of profit as reflected in retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of member’s interest as reflected in the Consolidated Statement of Financial Position.

Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.

In the first quarter of 2019, the company reported a provision for income taxes of $150 million and an effective tax rate of 77.5 percent, compared to a provision of $42 million and an effective tax rate of 22.0 percent in the first quarter of 2018. The change in the effective tax rate was primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax. In accordance with the previously executed Tax Sharing Agreement between IBM and the company, $64 million of the resulting liability was settled through a non-cash contribution to member’s interest. For additional information, refer to Note 9, “Relationship with IBM and Related Party Transactions.”    

The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.

All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.

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 Consolidated Financial Statements included in the Form 10-K.

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 year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

XML

Accounting Changes

3 Months Ended

Mar. 31, 2019

Accounting Changes:

Accounting Changes:

2.  Accounting Changes:

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changed the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020 with early adoption of certain provisions permitted. The company early adopted the provision in the fair value guidance that removed the Level 1/Level 2 transfer disclosures. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact in the consolidated financial results.

In June 2016, with amendments in 2018, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance 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. A cross-functional team was established that is evaluating the financial instruments portfolio and the system, process and policy change requirements and continues to make substantial progress. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020 with one-year early adoption permitted. The company will adopt the guidance as of the effective date and is continuing to evaluate the impact.

Standards Implemented

The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance also made some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company adopted the guidance effective January 1, 2019 using the transition option whereby prior comparative periods were not retrospectively presented in the consolidated financial statements. The company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. There are no material impacts of adoption from a lessee perspective as there are no material lease arrangements in which the company is a lessee. Refer to note 4, “Leases,” for additional information, including further discussion on the impact of adoption. 

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (AOCI) to retained earnings. The guidance was effective January 1, 2019, with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at the actual cessation date. At adoption on January 1, 2018,  $5 million  was reclassified from AOCI to retained earnings.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance was effective January 1, 2019, with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there was no material change to disclosures as a result of the adoption of the guidance.

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Financial Instruments

3 Months Ended

Mar. 31, 2019

Financial Instruments:

Financial Instruments:

3. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value 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. Under this guidance, the company is required to classify 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.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

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.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018.

(Dollars in millions)
At March 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	750	$	—	$	750
Money market funds		5		—		—		5
Total		5		750		—		755
Derivative assets (2)		—		21		—		21	(4)
Total assets	$	5	$	771	$	—	$	776
Liabilities:
Derivative liabilities (3)	$	—	$	23	$	—	$	23	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position.

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $1 million.

(Dollars in millions)
At December 31, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	792	$	—	$	792
Money market funds		5		—		—		5
Total		5		792		—		797
Derivative assets (2)		—		18		—		18	(4)
Total assets	$	5	$	810	$	—	$	815
Liabilities:
Derivative liabilities (3)	$	—	$	37	$	—	$	37	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position. 

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) 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.

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 March 31, 2019 and December 31, 2018, the difference between the carrying amount and estimated fair value for 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.

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, which includes debt payable to IBM, 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 (including debt payable to IBM) was $17,796 million and $17,276 million and the estimated fair value was $17,829 million and $17,199 million at March 31, 2019 and December 31, 2018, 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.

Derivative Financial Instruments

The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At March 31, 2019, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $21 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $23 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $1 million. At December 31, 2018, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $18 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $37 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the capital markets to fund its operations. 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 enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2019 and December 31, 2018, the total notional amount of the company's interest rate swap contracts with IBM was $3,350 million at both periods. The weighted average remaining maturity of these instruments at March 31, 2019 and December 31, 2018, was approximately 2.2 years and 2.4 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 March 31, 2019 and December 31, 2018.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2019 and December 31, 2018, the total notional amount of derivative contracts with IBM designated as net investment hedges was $1,356 million and $1,986 million, respectively. The weighted average remaining maturity of these instruments was 0.2 years at both periods.

Foreign Currency Asset/Liability Management

The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows.

There were no foreign exchange derivative contracts with third parties outstanding at March 31, 2019 and December  31, 2018.

The following tables provide a quantitative summary of the derivative instrument-related risk management activity at March 31, 2019 and December 31, 2018, as well as for the three months ended March 31, 2019 and 2018, respectively.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	3/31/2019		12/31/2018		Classification	3/31/2019		12/31/2018
Designated as hedging instruments:
Interest rate contracts with IBM	Other assets	$	11	$	10	Other liabilities	$	23	$	27
Foreign exchange contracts with IBM	Other assets		10		9	Other liabilities		1		11
	Fair value of derivative assets	$	21	$	18	Fair value of derivative liabilities	$	23	$	37
Not designated as hedging instruments:
Foreign exchange contracts	Other assets		—		—	Other liabilities		—		—
	Fair value of derivative assets	$	—	$	—	Fair value of derivative liabilities	$	—	$	—
Total		$	21	$	18		$	23	$	37

As of March 31, 2019 and December 31, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:

	At March 31,		At December 31,
(Dollars in millions)	2019		2018
Debt:
Carrying amount of the hedged item	$	(3,335)	$	(3,310)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		9		34

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value 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 March 31:	2019		2018		2019		2018
Financing cost	$	160	$	102	$	4	$	9
Other (income) and expense		(18)		1		—		1

	Gain/(Loss) Recognized in Earnings
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Statement of	Derivatives				Being Hedged (2)
For the three months ended March 31:	Earnings Line Item	2019		2018		2019		2018
Derivative instruments in fair value hedges (1):
Interest rate contracts with IBM	Financing cost	$	20	$	(21)	$	(25)	$	23
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		—		1		N/A		N/A
Total		$	20	$	(20)	$	(25)	$	23

	Gain/(Loss) Recognized in Earnings and Other Comprehensive Income
					Consolidated
					Statement of	Reclassified				Amounts Excluded from
(Dollars in millions)	Recognized in OCI				Earnings	from AOCI				Effectiveness Testing (3)
For the three months ended March 31:	2019		2018		Line Item	2019		2018		2019		2018
Derivative instruments in net investment hedges:
Foreign exchange contracts with IBM	$	(10)	$	(43)	Financing cost	$	—	$	—	$	10	$	7
Total	$	(10)	$	(43)		$	—	$	—	$	10	$	7

(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.

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

N/A - Not Applicable

For the three months ending March 31, 2019 and 2018, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.

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Leases

3 Months Ended

Mar. 31, 2019

Leases:

Leases:

4. Leases:

Accounting for leases as a lessee

IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. As such, these arrangements do not represent leases and the company did not record any ROU assets or associated lease liabilities in the Consolidated Statement of Financial Position at January 1, 2019. For additional information, see Note 9, “Relationship with IBM and Related Party Transactions.” The company has no other material lease arrangements in which it is a lessee.

Accounting for leases as lessor

The company enters into leases as a means to provide financing to its clients. Assets under lease include new and used IBM equipment and certain original equipment manufacturers’ (OEM) IT products. Equipment generally consists of IBM Z, Power Systems and Storage Systems.

When entering into a contract with its clients, the company determines whether an arrangement contains a lease at its inception. As part of that evaluation, the company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the client has the right to control that asset.

The company determines whether there is a right to control the use of the asset by assessing the client’s rights to obtain substantially all of the economic benefits from the use of the identified asset and rights to direct the use of the identified asset. The company determines the classification of the lease at the lease commencement date.

Lease payments due to IBM Credit are typically fixed and paid in equal installments over the lease term. The majority of the company’s leases do not contain variable payments that are dependent on an index or a rate. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the company and are reimbursed by the client, are recorded as finance income, along with the related cost, in the period in which collection of these payments is probable. Payments that are made directly by the client to a third party, including certain property taxes and insurance, are not considered part of variable payments and therefore are not recorded by the company. The company has made a policy election to exclude from consideration in contracts all collections from sales and other similar taxes.

The company’s payment terms for leases are typically unconditional. Therefore, while the client could terminate the lease prior to the end of the lease term, the client would be required to pay the remaining lease payments in full. At the end of the lease term, the company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms. With respect to a client purchase of leased assets, the lease agreement would include an option to purchase the equipment at either a stated price or at the then-current fair market value of the equipment at the end of the lease.

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

(Dollars in millions)
For the three months ended March 31:	2019
Financing lease revenue	$	55
Operating lease revenue		78
Variable lease revenue		11
Total lease revenue	$	144

Sales-Type and Direct Financing Leases

If a lease is classified as a sales-type or direct financing lease, a net investment in the lease is recorded. For a sales-type lease, the net investment in the lease is measured at commencement date as the sum of the lease receivable and the estimated guaranteed and unguaranteed residual value of the equipment, less unearned income and allowance for credit losses.  At March 31, 2019, the unguaranteed residual value of sales-type and direct financing leases was $472 million. For further information on the company’s investment in leases, including guaranteed and unguaranteed residual values, refer to note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

IBM Credit enters into lease arrangements for the purpose of generating revenue by providing financing. As a result, any profit or loss at the lease commencement date is presented on a net basis within a single line item on the Consolidated Statement of Earnings. Under a net sales-type lease, eligible IDCs are deferred and recognized over the lease term. Over the term of a sales-type lease, the company recognizes financing revenue on the net investment in the lease and any variable lease payments, which are not included in the net investment in the lease. 

For a direct financing lease, the investment in lease is measured similarly to a sales-type lease, however, the net investment in the lease is reduced by any selling profit, which is typically zero. In a direct financing lease, the selling profit and IDCs are deferred at commencement and recognized over the lease term. The company rarely enters into direct financing leases. Prior to the adoption of the new lease guidance, the company’s leases were generally classified as direct financing leases. Due to the changes in the lease classification requirements under the new lease guidance, the company’s leases are generally classified as sales-type leases and presented on a net basis.

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. Estimating residual value is a risk unique to financing activities, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for the IBM products under lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.

The company optimizes the recovery of residual values by extending lease arrangements with existing clients. The company has historically managed residual value risk both through insight into its own product cycles and monitoring of OEM IT product announcements. The company periodically reassesses the realizable value of its lease residual values. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to finance income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing activities. For the three months ended March 31, 2019 and 2018,  impairment of residual values was immaterial.

The following table provides a maturity analysis of the lease payments due to IBM Credit on sales-type and direct financing leases over the next five years and thereafter, with the exception of 2019, which presents the undiscounted cash flows for the remaining nine months of the year, as well as a reconciliation of the undiscounted cash flows to the financing receivables recognized in the Consolidated Statement of Financial Position at March 31, 2019:

(Dollars in millions)	Total
2019	$	1,691
2020		1,638
2021		1,018
2022		468
2023		103
Thereafter		6
Total undiscounted cash flows	$	4,923
Present value of lease payments (recognized as financing receivables)		4,536	*
Difference between undiscounted cash flows and discounted cash flows	$	387

*The present value of the lease payments will not equal the financing receivable balance in the Statement of Financial Position due to certain items, including IDCs, allowance for credit losses and residual value, which are included in the financing receivable balance, but are not included in the future lease payments.

Operating Leases

Equipment provided to clients under an operating lease is carried at cost within Equipment under Operating Lease in the Consolidated Statement of Financial Position and depreciated over the lease term using the straight-line method, generally ranging from one to six years. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term. At March 31, 2019, the unguaranteed residual value of equipment under operating leases was $106 million.

At commencement of an operating lease, IDCs are deferred. As lease payments are made, the company records financing revenue over the lease term. IDCs are amortized over the lease term on the same basis as lease income is recorded. 

The following table provides a maturity analysis of the undiscounted lease payments due to IBM Credit on operating leases over the next five years and thereafter, at March 31, 2019, with the exception of 2019, which presents the undiscounted cash flows for the remaining nine months of the year:

(Dollars in millions)	Total
2019	$	162
2020		122
2021		40
2022		2
2023		0
Thereafter		—
Total undiscounted cash flows	$	327

Assets under operating lease are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows, and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values.

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Financing Receivables, Receivables Purchased/Participated from IBM

3 Months Ended

Mar. 31, 2019

Financing Receivables, Receivables Purchased/Participated from IBM:

Financing Receivables, Receivables Purchased/Participated from IBM:

5.  Financing Receivables, Receivables Purchased/Participated from IBM:

Financing receivables consist of Client Financing leases, loans and installment payment plans to end-user clients as well as loans to IBM for terms up to seven years. Assets financed are primarily IT products and services where IBM and the company have experience. Client Financing arrangements are priced to achieve a market yield. Financing receivables also include Commercial Financing, which generally consists of working capital financing to suppliers, distributors and resellers of IBM and OEM IT products and services. Payment terms for working capital financing receivables generally range from 30 to 90 days.

The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are primarily for IT-related products and services, which are due within 30 days, and IBM performs all servicing under these arrangements. These receivables are included within the Commercial Financing segment. The company also participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At March 31, 2019:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,923	$	9,902	$	8,988	$	23,814
Unearned income		(387)		(33)		(436)		(856)
Deferred initial direct costs		40		—		66		107
Recorded investment	$	4,576	$	9,869	$	8,619	$	23,065
Allowance for credit losses		(58)		(15)		(98)		(171)
Unguaranteed residual value		472		—		—		472
Guaranteed residual value		65		—		—		65
Total financing receivables, net	$	5,056	$	9,854	$	8,521	$	23,431

	Purchased and
	Participated
(Dollars in millions)	Receivables
At March 31, 2019:	From IBM
Short-term purchased receivables from IBM	$	1,434
Allowance for credit losses		(5)
Total short-term purchased receivables from IBM, net	$	1,430
Long-term participated receivables from IBM	$	3,908
Allowance for credit losses		(6)
Total long-term participated receivables from IBM, net	$	3,902
Total purchased and participated receivables from IBM, net	$	5,331

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At December 31, 2018:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	5,120	$	11,422	$	9,694	$	26,236
Unearned income		(411)		(36)		(453)		(900)
Deferred initial direct costs		46		—		73		119
Recorded investment	$	4,755	$	11,386	$	9,314	$	25,455
Allowance for credit losses		(65)		(11)		(98)		(174)
Unguaranteed residual value		491		—		—		491
Guaranteed residual value		77		—		—		77
Total financing receivables, net	$	5,258	$	11,374	$	9,216	$	25,848

	Purchased and
	Participated
(Dollars in millions)	Receivables
At December 31, 2018:	From IBM
Short-term purchased receivables from IBM	$	1,373
Allowance for credit losses		(4)
Total short-term purchased receivables from IBM, net	$	1,369
Long-term participated receivables from IBM	$	4,079
Allowance for credit losses		(14)
Total long-term participated receivables from IBM, net	$	4,065
Total purchased and participated receivables from IBM, net	$	5,433

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $868 million and $710 million at March 31, 2019 and December 31, 2018, respectively.

The company did not have any financing receivables held for sale as of March 31, 2019 and December 31, 2018.

Financing Receivables by Portfolio Segment

The following tables present Client Financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding Commercial Financing receivables and other miscellaneous financing receivables at March 31, 2019 and December 31, 2018.  Commercial Financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

(Dollars in millions)
At March 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,358	$	632	$	586	$	4,576
Loan receivables		5,674		2,100		845		8,619
Participated receivables from IBM		652		1,587		1,669		3,908
Ending balance	$	9,684	$	4,319	$	3,100	$	17,104
Recorded investment collectively evaluated for impairment	$	9,585	$	4,294	$	3,087	$	16,966
Recorded investment individually evaluated for impairment	$	99	$	25	$	13	$	138
Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(3)	$	(9)	$	—	$	(13)
Recoveries		—		0		0		0
Provision		4		(5)		0		(1)
Foreign currency translation adjustment		(1)		—		0		(1)
Other		—		0		0		—
Ending balance at March 31, 2019	$	106	$	38	$	17	$	162
Lease receivables	$	35	$	11	$	11	$	58
Loan receivables	$	70	$	24	$	4	$	98
Participated receivables from IBM	$	1	$	3	$	2	$	6
Related allowance, collectively evaluated for impairment	$	33	$	13	$	4	$	49
Related allowance, individually evaluated for impairment	$	74	$	25	$	13	$	112

Write-offs of lease and loan receivables were $8 million and $5 million, respectively, for the three months ended March 31, 2019. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $1 million, $5 million and a reduction of $7 million, respectively, for the three months ended March 31, 2019.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $98 million, $30 million and $13 million, respectively, for the three months ended March 31, 2019 and $65 million, $39 million and $19 million, respectively, for the three months ended March 31, 2018. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended March 31, 2019 and 2018.

(Dollars in millions)
At December 31, 2018:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,433	$	687	$	635	$	4,755
Loan receivables		6,167		2,231		916		9,314
Participated receivables from IBM		735		1,627		1,717		4,079
Ending balance	$	10,335	$	4,545	$	3,268	$	18,147
Recorded investment collectively evaluated for impairment	$	10,239	$	4,505	$	3,254	$	17,998
Recorded investment individually evaluated for impairment	$	96	$	39	$	13	$	149
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	42	$	6	$	15	$	62
Loan receivables		57		34		4		96
Participated receivables from IBM		9		4		2		14
Total	$	107	$	43	$	21	$	172
Write-offs	$	(6)	$	(1)	$	(8)	$	(16)
Recoveries		0		0		2		2
Provision		11		13		3		27
Foreign currency translation adjustment		(6)		(3)		(1)		(10)
Other		1		1		1		2
Ending balance at December 31, 2018	$	107	$	53	$	17	$	177
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables	$	66	$	28	$	5	$	98
Participated receivables from IBM	$	3	$	8	$	3	$	14
Related allowance, collectively evaluated for impairment	$	38	$	15	$	4	$	56
Related allowance, individually evaluated for impairment	$	69	$	38	$	13	$	120

Write-offs of lease receivables and loan receivables were $13 million and $3 million, respectively, for the year ended December 31, 2018. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $9 million, $6 million and $12 million, respectively, for the year ended December 31, 2018.  

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a clients’ financing receivables past due when an installment is aged over 90 days. The following table summarizes the information about the recorded investment in lease and loan receivables and participated receivables from IBM, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and accruing, and recorded investment not accruing.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At March 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,358	$	280	$	239	$	13	$	41
EMEA		632		38		22		3		16
Asia Pacific		586		14		2		—		11
Total lease receivables	$	4,576	$	331	$	263	$	16	$	68
Americas	$	5,674	$	193	$	128	$	22	$	64
EMEA		2,100		56		10		3		46
Asia Pacific		845		5		2		1		3
Total loan receivables	$	8,619	$	253	$	140	$	26	$	114
Americas	$	652	$	5	$	5	$	3	$	—
EMEA		1,587		6		6		2		—
Asia Pacific		1,669		—		—		—		—
Total participated receivables from IBM	$	3,908	$	11	$	11	$	4	$	—
Total	$	17,104	$	596	$	414	$	47	$	182

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

(2) Of the recorded investment not accruing, $138 million is individually evaluated for impairment with a related allowance of $112 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,433	$	288	$	247	$	18	$	44
EMEA		687		24		9		1		15
Asia Pacific		635		29		19		2		11
Total lease receivables	$	4,755	$	341	$	275	$	21	$	70
Americas	$	6,167	$	217	$	161	$	22	$	61
EMEA		2,231		80		24		3		57
Asia Pacific		916		13		9		1		4
Total loan receivables	$	9,314	$	310	$	194	$	25	$	122
Americas	$	735	$	11	$	11	$	2	$	—
EMEA		1,627		9		4		1		5
Asia Pacific		1,717		—		—		—		—
Total participated receivables from IBM	$	4,079	$	20	$	15	$	3	$	5
Total	$	18,147	$	671	$	484	$	49	$	197

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

(2) Of the recorded investment not accruing, $149 million is individually evaluated for impairment with a related allowance of $120 million.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by clients, as well as other information, 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 client credit ratings.

The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at March 31, 2019 and December 31, 2018.  Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At March 31, 2019:	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	285	$	9	$	45	$	673	$	49	$	102	$	380	$	72	$	68
A1 – A3		761		108		237		859		139		256		76		100		733
Baa1 – Baa3		933		122		118		1,514		604		171		81		800		507
Ba1 – Ba2		673		181		72		1,412		595		208		48		532		295
Ba3 – B1		430		128		60		562		401		56		59		66		36
B2 – B3		197		58		37		511		263		42		8		14		27
Caa – D		44		15		6		75		26		6		—		—		1
Total	$	3,323	$	621	$	575	$	5,605	$	2,076	$	841	$	651	$	1,584	$	1,667

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At December 31, 2018	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	520	$	24	$	49	$	935	$	79	$	71	$	112	$	58	$	134
A1 – A3		617		82		241		1,108		269		351		133		198		659
Baa1 – Baa3		807		214		169		1,450		704		246		174		517		463
Ba1 – Ba2		772		207		102		1,387		681		149		167		500		280
Ba3 – B1		391		90		36		703		297		52		84		218		99
B2 – B3		264		47		26		475		156		37		57		114		70
Caa – D		23		5		3		42		17		5		5		12		9
Total	$	3,395	$	670	$	625	$	6,101	$	2,204	$	912	$	733	$	1,618	$	1,714

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the three months ended March 31, 2019 or for the year ended December 31, 2018.

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Segments

3 Months Ended

Mar. 31, 2019

Segments:

Segments:

6.  Segments:

The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.

Client Financing provides leases and loan financing to end-user clients, acquires installment payment plans offered to end-user clients by IBM, and acquires participation interests in IBM financing receivables for which the company assumes the IBM client’s credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBM’s hardware, software, and services, as well as OEM IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which IBM uses in external, revenue-producing services contracts.

Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. Commercial Financing also purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the credit risk with IBM’s client.

The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.

IBM Credit and its consolidated subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business.

SEGMENT INFORMATION

	Client		Commercial		Total
(Dollars in millions)	Financing		Financing		Segments
For the three months ended March 31, 2019:
Total revenue	$	322	$	160	$	482
Pre-tax income		117		76		193
Depreciation of equipment under operating lease		45		—		45
Financing cost		107		53		160
Provision for/(benefit from) credit losses		(1)		5		4
For the three months ended March 31, 2018:
Total revenue	$	308	$	142	$	449
Pre-tax income		128		63		191
Depreciation of equipment under operating lease		48		—		48
Financing cost		69		33		102
Provision for/(benefit from) credit losses		10		(1)		9

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Equity Activity

3 Months Ended

Mar. 31, 2019

Equity Activity:

Equity Activity:

7.  Equity Activity:

IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables:

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 March 31, 2019:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	3	$	3	$	6
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	—	$	—	$	—
Net (losses)/gains arising during the period		0		0		0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	0	$	0	$	0
Other comprehensive income/(loss)	$	3	$	3	$	6

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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 March 31, 2018:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	70	$	11	$	81
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	1	$	0	$	1
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	1	$	0	$	1
Other comprehensive income/(loss)	$	71	$	11	$	82

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2019	$	(23)	$	(10)	$	(33)
Other comprehensive income before reclassification		6		0		6
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		6		0		6
March 31, 2019	$	(17)	$	(10)	$	(27)

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

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2018	$	165	$	(7)	$	158
Cumulative effect of a change in accounting principle**		(5)		—		(5)
Other comprehensive income before reclassification		81		0		81
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		81		1		82
March 31, 2018	$	241	$	(7)	$	234

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

**  Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

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Retirement-Related Benefits

3 Months Ended

Mar. 31, 2019

Retirement-Related Benefits:

Retirement-Related Benefits:

8.  Retirement-Related Benefits:

IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations.

Multiemployer Plans:

For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings. The amounts of expense attributed to the company by IBM for the three months ended March 31, 2019 and 2018 were not material.

Charges from IBM to the company in relation to these plans (including non-pension, post-retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM.

Multiple-Employer Plans:

For multiple-employer plans (mainly in Germany, Spain and Japan), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.

Any gains or losses recorded to Accumulated Other Comprehensive Income in the three months ended March 31, 2019 and 2018 were not material.

Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings. The total costs for multiple-employer plans for the three months ended March 31, 2019 and 2018 were not material.

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Relationship with IBM and Related Party Transactions

3 Months Ended

Mar. 31, 2019

Relationship with IBM and Related Party Transactions:

Relationship with IBM and Related Party Transactions:

9.  Relationship with IBM and Related Party Transactions:

IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client. The following is a description of certain material relationships between IBM Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements.

Support Agreement

Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.

Operating Relationship

The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBM’s hardware, software, and services.

The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all participated receivables from IBM. These receivables earned interest income of $50 million in the three months ended March 31, 2019, an increase of $1 million as compared to the same period in 2018. The interest income is included in the Consolidated Statement of Earnings as financing revenue. For additional information, see note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

The company purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the associated credit risk of IBM’s client. For the three months ended March 31, 2019, finance income earned from these receivables was $15 million, an increase of $2 million as compared to the same period in 2018. The finance income is included in financing revenue in the Consolidated Statement of Earnings. Effective in the second quarter of 2019, IBM and the company have suspended the program under which IBM Credit LLC purchases interests in IBM's trade accounts receivable. For additional information, see note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

In certain countries, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. For the three months ended March 31, 2019, the interest income earned from these receivables was $44 million, an increase of $5 million as compared to the same period in 2018. Interest income is included in financing revenue in the Consolidated Statement of Earnings. The amount of such financings outstanding was $3,869 million at March 31, 2019 and $3,609 million at December 31, 2018.

The amount of other receivables from IBM of $301 million and $2,019 million at March 31, 2019 and December 31, 2018, respectively, primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The company's investment of excess cash with IBM was $282 million at March 31, 2019 and $2,014 million at December 31, 2018.  The decline in the first quarter of 2019 was driven by the company’s decision to utilize its excess cash to retire a portion of its debt with IBM. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and in the investing section of the Consolidated Statement of Cash Flows. Interest income earned from these investments was $8 million and $6 million in the three months ended March 31, 2019 and 2018, respectively. The interest income is included in financing revenue in the Consolidated Statement of Earnings.

In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements for the three months ended March 31, 2019 was $49 million, an increase of $2 million as compared to the same period in 2018. These fees are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement.

Borrowing Relationship

The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense incurred on loans from IBM was $74 million and $57 million for the three months ended March 31, 2019 and 2018, respectively. Interest expense is included in financing cost in the Consolidated Statement of Earnings. For additional information on short-term and long-term funding, see note 11, “Borrowings.”

Services and Other Arrangements

The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $48 million and $52 million in the three months ended March 31, 2019 and 2018, respectively.

The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation and multiemployer retirement-related plans expense during the periods reported were not material.

Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party.

The outstanding amount of accounts payable to IBM of $950 million at March 31, 2019, and $3,044 million at December 31, 2018, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business.

The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The company's net profit from sales of returned equipment to IBM was $2 million and $8 million for the three months ended March 31, 2019 and 2018, respectively. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings.

Tax Sharing Agreement

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return.

In the first quarter of 2019, the company reported a provision for income taxes of $150 million and an effective tax rate of 77.5 percent, compared to a provision of $42 million and an effective tax rate of 22.0 percent in the first quarter of 2018. The change in the effective tax rate was primarily attributable to an additional tax expense of $116 million related to guidance issued by the U.S. Treasury in January 2019 regarding U.S. tax reform repatriation tax. In accordance with the previously executed Tax Sharing Agreement between IBM and the company, $64 million of the resulting liability was settled through a non-cash contribution to member’s interest. This contribution is included in the Consolidated Statement of Changes in Member’s Interest as Contributions from IBM.

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Divestiture

3 Months Ended

Mar. 31, 2019

Divestiture:

Divestiture:

10.  Divestiture:

In the fourth quarter of 2018, IBM entered into a definitive agreement to sell certain commercial financing capabilities and assign a number of its commercial financing contracts, excluding related receivables which will be collected as they become due in the normal course of business. The transaction closed in the first quarter of 2019 and resulted in a pre-tax gain of $16 million. The cash proceeds from the divestiture of $20 million are expected to be remitted to the company by IBM in the second quarter of 2019.

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Borrowings

3 Months Ended

Mar. 31, 2019

Borrowings:

Borrowings:

11.  Borrowings:

The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. The amount of these secured borrowings is reflected in the following short-term and long-term debt tables below.

Short-Term Debt

	Balance		Balance
(Dollars in millions)	3/31/2019		12/31/2018
Commercial paper	$	2,494	$	2,995
Short-term loans		22		17
Secured borrowings		28		23
Debt	$	2,543	$	3,035
Debt payable to IBM		8,605		10,223
Total	$	11,148	$	13,258

IBM Credit maintains a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper can be used for general corporate purposes, including, among other items, the repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued can vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer.

The weighted-average interest rate for commercial paper was 2.5 percent at March 31, 2019 and December 31, 2018.

The weighted-average interest rate for short-term loans was 7.2 percent and 4.3 percent at March 31, 2019 and December 31, 2018, respectively, and relates primarily to borrowings in Latin America in 2019 and in Asia Pacific in 2018.

The weighted-average interest rate for secured borrowings was 6.8 percent and 6.9 percent at March 31, 2019 and December 31, 2018, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $28 million at March 31, 2019 and $23 million at December 31, 2018.

The weighted-average interest rate for debt payable to IBM was 1.3 percent and 1.6 percent at March 31, 2019 and December 31, 2018, respectively.

Long-Term Debt

		Balance		Balance
(Dollars in millions)	Maturities	3/31/2019		12/31/2018
Long-term notes (weighted-average interest rate at March 31, 2019)
2.1%	2019	$	1,400	$	1,400
3.3%	2020		1,500		1,500
2.8%	2021		2,850		2,850
2.2%	2022		500		500
3.0%	2023		750		750
		$	7,000	$	7,000
Long-term loans (6.2% weighted-average interest rate at March 31, 2019)	2019-2021		213		276
Secured borrowings (5.1% weighted-average interest rate at March 31, 2019)	2019-2024		840		687
Long-term debt		$	8,053	$	7,964
Less: net unamortized discount			2		2
Less: net unamortized debt issuance costs			7		9
Less: fair value adjustment*			9		34
Debt		$	8,034	$	7,919
Debt payable to IBM (1.4% weighted-average interest rate at March 31, 2019)			9,762		9,357
Total		$	17,796	$	17,276

*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position 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 utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $840 million at March 31, 2019 and $687 million at December 31, 2018.

The company has a shelf registration statement in place with the U.S. Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. The company issued fixed- and floating-rate debt securities in September 2017 in the aggregate amount of $3,000 million with maturity dates ranging from 2019 to 2022. During 2018, the company issued fixed- and floating-rate debt securities in the aggregate amount of $4,000 million with maturity dates ranging from 2020 to 2023. The net proceeds from the issuance of debt securities are utilized for general corporate purposes. This debt is included in the long-term debt table above.

The company’s indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens as such term is defined under the indenture) to 15 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met.

Pre-swap annual contractual obligations of long-term debt and long-term debt payable to IBM outstanding at March 31, 2019 are as follows:

	2019										2024 and
(Dollars in millions)	(Q2-Q4)		2020		2021		2022		2023		beyond		Total
Long-term debt	$	1,775	$	1,898	$	3,063	$	560	$	757	$	0	$	8,053
Debt payable to IBM		3,235		3,068		1,834		1,188		335		102		9,762
Total	$	5,010	$	4,966	$	4,898	$	1,748	$	1,092	$	102	$	17,815

Interest on Debt

The company recognized interest expense of $150  million for the three months ended March 31, 2019, of which $74 million was interest expense on debt payable to IBM. The company recognized interest expense of $102 million for the three months ended March 31, 2018, of which $57 million was interest expense on debt payable to IBM.

Lines of Credit

The company has committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.

On July 19, 2018, IBM and the company (the Borrowers) entered into a new $2.5 billion, 364-Day Credit Agreement to replace the maturing $2.5 billion, 364-Day agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year. The new maturity date for the Three-Year Agreement is July 20, 2021. The facility size remains unchanged. The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. 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. As of March 31, 2019, the company had no borrowings outstanding against the Credit Agreements.

The company’s Credit Agreements each contain significant debt 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 IBM’s consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) IBM will not permit the consolidated net interest expense ratio, for any period of four consecutive fiscal quarters taken as a single accounting period, to be less than 2.20 to 1.0; (ii) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (iii) the company’s leverage ratio cannot be greater than 11 to 1 as of the last day of the fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants, and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. For additional information on the Support Agreement , see note 9, “Relationship with IBM and Related Party Transactions.”

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Contingencies

3 Months Ended

Mar. 31, 2019

Contingencies:

Contingencies:

12.  Contingencies:

The company is, or may be, involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These may include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning client allegations of wrongful repossession or defamation of credit.

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). 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, client and employee relations considerations.

In accordance with the relevant accounting guidance, 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 March 31, 2019 were not material to the Consolidated Financial Statements.

Also 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. As of March 31, 2019, there were no matters for which the likelihood of material loss is at least reasonably possible.

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Commitments

3 Months Ended

Mar. 31, 2019

Commitments:

Commitments:

13.  Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $7,635 million and $7,112 million at March 31, 2019 and December 31, 2018, respectively. A portion of these amounts is available to the company’s Commercial Financing clients 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 approximately $384 million and $495 million at March 31, 2019 and December 31, 2018, respectively.

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Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2019

Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit 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. As a result, actual results may be different from these estimates.

Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Distributions by the company to IBM are considered first to be a return of profit as reflected in retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of member’s interest as reflected in the Consolidated Statement of Financial Position.

Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.

The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.

All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.

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 Consolidated Financial Statements included in the Form 10-K.

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 year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

Accounting Changes

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changed the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020 with early adoption of certain provisions permitted. The company early adopted the provision in the fair value guidance that removed the Level 1/Level 2 transfer disclosures. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact in the consolidated financial results.

In June 2016, with amendments in 2018, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance 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. A cross-functional team was established that is evaluating the financial instruments portfolio and the system, process and policy change requirements and continues to make substantial progress. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020 with one-year early adoption permitted. The company will adopt the guidance as of the effective date and is continuing to evaluate the impact.

Standards Implemented

The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance also made some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company adopted the guidance effective January 1, 2019 using the transition option whereby prior comparative periods were not retrospectively presented in the consolidated financial statements. The company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. There are no material impacts of adoption from a lessee perspective as there are no material lease arrangements in which the company is a lessee. Refer to note 4, “Leases,” for additional information, including further discussion on the impact of adoption. 

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (AOCI) to retained earnings. The guidance was effective January 1, 2019, with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at the actual cessation date. At adoption on January 1, 2018,  $5 million  was reclassified from AOCI to retained earnings.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance was effective January 1, 2019, with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there was no material change to disclosures as a result of the adoption of the guidance.

Financial Instruments and Fair Value Measurements

Fair Value Measurements

Accounting guidance defines fair value 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. Under this guidance, the company is required to classify 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.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

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.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) 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.

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

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, which includes debt payable to IBM, 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. 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.

Derivative Financial Instruments

The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the capital markets to fund its operations. 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 enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges).

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar.

Foreign Currency Asset/Liability Management

The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows.

Leases

Accounting for leases as a lessee

IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. As such, these arrangements do not represent leases and the company did not record any ROU assets or associated lease liabilities in the Consolidated Statement of Financial Position at January 1, 2019. For additional information, see Note 9, “Relationship with IBM and Related Party Transactions.” The company has no other material lease arrangements in which it is a lessee.

Accounting for leases as lessor

The company enters into leases as a means to provide financing to its clients. Assets under lease include new and used IBM equipment and certain original equipment manufacturers’ (OEM) IT products. Equipment generally consists of IBM Z, Power Systems and Storage Systems.

When entering into a contract with its clients, the company determines whether an arrangement contains a lease at its inception. As part of that evaluation, the company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the client has the right to control that asset.

The company determines whether there is a right to control the use of the asset by assessing the client’s rights to obtain substantially all of the economic benefits from the use of the identified asset and rights to direct the use of the identified asset. The company determines the classification of the lease at the lease commencement date.

Lease payments due to IBM Credit are typically fixed and paid in equal installments over the lease term. The majority of the company’s leases do not contain variable payments that are dependent on an index or a rate. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the company and are reimbursed by the client, are recorded as finance income, along with the related cost, in the period in which collection of these payments is probable. Payments that are made directly by the client to a third party, including certain property taxes and insurance, are not considered part of variable payments and therefore are not recorded by the company. The company has made a policy election to exclude from consideration in contracts all collections from sales and other similar taxes.

The company’s payment terms for leases are typically unconditional. Therefore, while the client could terminate the lease prior to the end of the lease term, the client would be required to pay the remaining lease payments in full. At the end of the lease term, the company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms. With respect to a client purchase of leased assets, the lease agreement would include an option to purchase the equipment at either a stated price or at the then-current fair market value of the equipment at the end of the lease.

Sales-Type and Direct Financing Leases

If a lease is classified as a sales-type or direct financing lease, a net investment in the lease is recorded. For a sales-type lease, the net investment in the lease is measured at commencement date as the sum of the lease receivable and the estimated guaranteed and unguaranteed residual value of the equipment, less unearned income and allowance for credit losses. For further information on the company’s investment in leases, including guaranteed and unguaranteed residual values, refer to note 5, “Financing Receivables, Receivables Purchased/Participated from IBM.”

IBM Credit enters into lease arrangements for the purpose of generating revenue by providing financing. As a result, any profit or loss at the lease commencement date is presented on a net basis within a single line item on the Consolidated Statement of Earnings. Under a net sales-type lease, eligible IDCs are deferred and recognized over the lease term. Over the term of a sales-type lease, the company recognizes financing revenue on the net investment in the lease and any variable lease payments, which are not included in the net investment in the lease. 

For a direct financing lease, the investment in lease is measured similarly to a sales-type lease, however, the net investment in the lease is reduced by any selling profit, which is typically zero. In a direct financing lease, the selling profit and IDCs are deferred at commencement and recognized over the lease term. The company rarely enters into direct financing leases. Prior to the adoption of the new lease guidance, the company’s leases were generally classified as direct financing leases. Due to the changes in the lease classification requirements under the new lease guidance, the company’s leases are generally classified as sales-type leases and presented on a net basis.

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. Estimating residual value is a risk unique to financing activities, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for the IBM products under lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.

The company optimizes the recovery of residual values by extending lease arrangements with existing clients. The company has historically managed residual value risk both through insight into its own product cycles and monitoring of OEM IT product announcements. The company periodically reassesses the realizable value of its lease residual values. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to finance income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing activities.

Operating Leases

Equipment provided to clients under an operating lease is carried at cost within Equipment under Operating Lease in the Consolidated Statement of Financial Position and depreciated over the lease term using the straight-line method, generally ranging from one to six years. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.

At commencement of an operating lease, IDCs are deferred. As lease payments are made, the company records financing revenue over the lease term. IDCs are amortized over the lease term on the same basis as lease income is recorded.

Assets under operating lease are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows, and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values.

Financing Receivables, Allowance for Credit Losses and Other Credit-Related Policies

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings.

The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Amercias, Europe/Middle East/Africa (EMEA) and Asia Pacific.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a clients’ financing receivables past due when an installment is aged over 90 days.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by clients, as well as other information, 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 client credit ratings.

Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.

Receivables Purchased/Participated from IBM

The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are due within 30 days. These receivables are included within the Commercial Financing segment. The company also participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

Commercial Financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material.

Segments

The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.

The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.

Retirement-Related Benefits

IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations.

Multiemployer Plans:

For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings.

Charges from IBM to the company in relation to these plans (including non-pension, post-retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM.

Multiple-Employer Plans:

For multiple-employer plans (mainly in Germany, Spain and Japan), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.

Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings.

Relationship with IBM and Related Party Transactions

IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client.

Support Agreement

Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.

Operating Relationship

In certain countries, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. Interest income is included in financing revenue in the Consolidated Statement of Earnings.

The amount of other receivables from IBM primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and in the investing section of the Consolidated Statement of Cash Flows. The interest income is included in financing revenue in the Consolidated Statement of Earnings.

The company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement.

Borrowing Relationship

The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM.

Services and Other Arrangements

The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities.

The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM.

Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. The outstanding amount of accounts payable to IBM primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business.

The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings.

Tax Sharing Agreement

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return.

Borrowings

The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings.

Contingencies

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). 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, client and employee relations considerations.

In accordance with the relevant accounting guidance, 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.

Also 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.

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Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2019

Financial Instruments:

Financial assets and financial liabilities measured at fair value on a recurring basis

(Dollars in millions)
At March 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	750	$	—	$	750
Money market funds		5		—		—		5
Total		5		750		—		755
Derivative assets (2)		—		21		—		21	(4)
Total assets	$	5	$	771	$	—	$	776
Liabilities:
Derivative liabilities (3)	$	—	$	23	$	—	$	23	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position.

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $1 million.

(Dollars in millions)
At December 31, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	792	$	—	$	792
Money market funds		5		—		—		5
Total		5		792		—		797
Derivative assets (2)		—		18		—		18	(4)
Total assets	$	5	$	810	$	—	$	815
Liabilities:
Derivative liabilities (3)	$	—	$	37	$	—	$	37	(4)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within other assets in the Consolidated Statement of Financial Position.

(3) Included within other liabilities in the Consolidated Statement of Financial Position. 

(4) If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	3/31/2019		12/31/2018		Classification	3/31/2019		12/31/2018
Designated as hedging instruments:
Interest rate contracts with IBM	Other assets	$	11	$	10	Other liabilities	$	23	$	27
Foreign exchange contracts with IBM	Other assets		10		9	Other liabilities		1		11
	Fair value of derivative assets	$	21	$	18	Fair value of derivative liabilities	$	23	$	37
Not designated as hedging instruments:
Foreign exchange contracts	Other assets		—		—	Other liabilities		—		—
	Fair value of derivative assets	$	—	$	—	Fair value of derivative liabilities	$	—	$	—
Total		$	21	$	18		$	23	$	37

Amounts related to cumulative basis adjustments for fair value hedges

	At March 31,		At December 31,
(Dollars in millions)	2019		2018
Debt:
Carrying amount of the hedged item	$	(3,335)	$	(3,310)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		9		34

Effect of Derivative Instruments in the Consolidated Statement of Earnings

					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2019		2018		2019		2018
Financing cost	$	160	$	102	$	4	$	9
Other (income) and expense		(18)		1		—		1

	Gain/(Loss) Recognized in Earnings
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Statement of	Derivatives				Being Hedged (2)
For the three months ended March 31:	Earnings Line Item	2019		2018		2019		2018
Derivative instruments in fair value hedges (1):
Interest rate contracts with IBM	Financing cost	$	20	$	(21)	$	(25)	$	23
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		—		1		N/A		N/A
Total		$	20	$	(20)	$	(25)	$	23

	Gain/(Loss) Recognized in Earnings and Other Comprehensive Income
					Consolidated
					Statement of	Reclassified				Amounts Excluded from
(Dollars in millions)	Recognized in OCI				Earnings	from AOCI				Effectiveness Testing (3)
For the three months ended March 31:	2019		2018		Line Item	2019		2018		2019		2018
Derivative instruments in net investment hedges:
Foreign exchange contracts with IBM	$	(10)	$	(43)	Financing cost	$	—	$	—	$	10	$	7
Total	$	(10)	$	(43)		$	—	$	—	$	10	$	7

(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.

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

N/A - Not Applicable

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Leases (Tables)

3 Months Ended

Mar. 31, 2019

Leases:

Summary of lease income included in Consolidated Statements of Earnings

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

(Dollars in millions)
For the three months ended March 31:	2019
Financing lease revenue	$	55
Operating lease revenue		78
Variable lease revenue		11
Total lease revenue	$	144

Summary of maturity analysis of sales-type and direct financing lease payments due to IBM Credit and reconciliation of undiscounted cash flows to financing receivables

(Dollars in millions)	Total
2019	$	1,691
2020		1,638
2021		1,018
2022		468
2023		103
Thereafter		6
Total undiscounted cash flows	$	4,923
Present value of lease payments (recognized as financing receivables)		4,536	*
Difference between undiscounted cash flows and discounted cash flows	$	387

*The present value of the lease payments will not equal the financing receivable balance in the Statement of Financial Position due to certain items, including IDCs, allowance for credit losses and residual value, which are included in the financing receivable balance, but are not included in the future lease payments.

Summary of maturity analysis of operating lease payments due to IBM Credit

The following table provides a maturity analysis of the undiscounted lease payments due to IBM Credit on operating leases over the next five years and thereafter, at March 31, 2019, with the exception of 2019, which presents the undiscounted cash flows for the remaining nine months of the year:

(Dollars in millions)	Total
2019	$	162
2020		122
2021		40
2022		2
2023		0
Thereafter		—
Total undiscounted cash flows	$	327

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Financing Receivables, Receivables Purchased/Participated from IBM (Tables)

3 Months Ended

Mar. 31, 2019

Financing Receivables, Receivables Purchased/Participated from IBM:

Components of financing receivables and receivables purchased/participated from IBM

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At March 31, 2019:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,923	$	9,902	$	8,988	$	23,814
Unearned income		(387)		(33)		(436)		(856)
Deferred initial direct costs		40		—		66		107
Recorded investment	$	4,576	$	9,869	$	8,619	$	23,065
Allowance for credit losses		(58)		(15)		(98)		(171)
Unguaranteed residual value		472		—		—		472
Guaranteed residual value		65		—		—		65
Total financing receivables, net	$	5,056	$	9,854	$	8,521	$	23,431

	Purchased and
	Participated
(Dollars in millions)	Receivables
At March 31, 2019:	From IBM
Short-term purchased receivables from IBM	$	1,434
Allowance for credit losses		(5)
Total short-term purchased receivables from IBM, net	$	1,430
Long-term participated receivables from IBM	$	3,908
Allowance for credit losses		(6)
Total long-term participated receivables from IBM, net	$	3,902
Total purchased and participated receivables from IBM, net	$	5,331

					Client Loans and
			Commercial		Installment
(Dollars in millions)	Investment in		Financing		Payments
At December 31, 2018:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	5,120	$	11,422	$	9,694	$	26,236
Unearned income		(411)		(36)		(453)		(900)
Deferred initial direct costs		46		—		73		119
Recorded investment	$	4,755	$	11,386	$	9,314	$	25,455
Allowance for credit losses		(65)		(11)		(98)		(174)
Unguaranteed residual value		491		—		—		491
Guaranteed residual value		77		—		—		77
Total financing receivables, net	$	5,258	$	11,374	$	9,216	$	25,848

	Purchased and
	Participated
(Dollars in millions)	Receivables
At December 31, 2018:	From IBM
Short-term purchased receivables from IBM	$	1,373
Allowance for credit losses		(4)
Total short-term purchased receivables from IBM, net	$	1,369
Long-term participated receivables from IBM	$	4,079
Allowance for credit losses		(14)
Total long-term participated receivables from IBM, net	$	4,065
Total purchased and participated receivables from IBM, net	$	5,433

Schedule of financing receivables by portfolio segment

(Dollars in millions)
At March 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,358	$	632	$	586	$	4,576
Loan receivables		5,674		2,100		845		8,619
Participated receivables from IBM		652		1,587		1,669		3,908
Ending balance	$	9,684	$	4,319	$	3,100	$	17,104
Recorded investment collectively evaluated for impairment	$	9,585	$	4,294	$	3,087	$	16,966
Recorded investment individually evaluated for impairment	$	99	$	25	$	13	$	138
Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(3)	$	(9)	$	—	$	(13)
Recoveries		—		0		0		—
Provision		4		(5)		0		(1)
Foreign currency translation adjustment		(1)		—		0		(1)
Other		—		0		0		—
Ending balance at March 31, 2019	$	106	$	38.36	$	17	$	162
Lease receivables	$	35	$	11	$	11	$	58
Loan receivables	$	70	$	24	$	4	$	98
Participated receivables from IBM	$	1	$	3	$	2	$	6
Related allowance, collectively evaluated for impairment	$	33	$	13	$	4	$	49
Related allowance, individually evaluated for impairment	$	74	$	25	$	13	$	112

(Dollars in millions)
At December 31, 2018:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,433	$	687	$	635	$	4,755
Loan receivables		6,167		2,231		916		9,314
Participated receivables from IBM		735		1,627		1,717		4,079
Ending balance	$	10,335	$	4,545	$	3,268	$	18,147
Recorded investment collectively evaluated for impairment	$	10,239	$	4,505	$	3,254	$	17,998
Recorded investment individually evaluated for impairment	$	96	$	39	$	13	$	149
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	42	$	6	$	15	$	62
Loan receivables		57		34		4		96
Participated receivables from IBM		9		4		2		14
Total	$	107	$	43	$	21	$	172
Write-offs	$	(6)	$	(1)	$	(8)	$	(16)
Recoveries		0		0		2		2
Provision		11		13		3		27
Foreign currency translation adjustment		(6)		(3)		(1)		(10)
Other		1		1		1		2
Ending balance at December 31, 2018	$	107	$	53	$	17	$	177
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables	$	66	$	28	$	5	$	98
Participated receivables from IBM	$	3	$	8	$	3	$	14
Related allowance, collectively evaluated for impairment	$	38	$	15	$	4	$	56
Related allowance, individually evaluated for impairment	$	69	$	38	$	13	$	120

Schedule of past due financing receivables

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At March 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,358	$	280	$	239	$	13	$	41
EMEA		632		38		22		3		16
Asia Pacific		586		14		2		—		11
Total lease receivables	$	4,576	$	331	$	263	$	16	$	68
Americas	$	5,674	$	193	$	128	$	22	$	64
EMEA		2,100		56		10		3		46
Asia Pacific		845		5		2		1		3
Total loan receivables	$	8,619	$	253	$	140	$	26	$	114
Americas	$	652	$	5	$	5	$	3	$	—
EMEA		1,587		6		6		2		—
Asia Pacific		1,669		—		—		—		—
Total participated receivables from IBM	$	3,908	$	11	$	11	$	4	$	—
Total	$	17,104	$	596	$	414	$	47	$	182

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

(2) Of the recorded investment not accruing, $138 million is individually evaluated for impairment with a related allowance of $112 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,433	$	288	$	247	$	18	$	44
EMEA		687		24		9		1		15
Asia Pacific		635		29		19		2		11
Total lease receivables	$	4,755	$	341	$	275	$	21	$	70
Americas	$	6,167	$	217	$	161	$	22	$	61
EMEA		2,231		80		24		3		57
Asia Pacific		916		13		9		1		4
Total loan receivables	$	9,314	$	310	$	194	$	25	$	122
Americas	$	735	$	11	$	11	$	2	$	—
EMEA		1,627		9		4		1		5
Asia Pacific		1,717		—		—		—		—
Total participated receivables from IBM	$	4,079	$	20	$	15	$	3	$	5
Total	$	18,147	$	671	$	484	$	49	$	197

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

(2) Of the recorded investment not accruing, $149 million is individually evaluated for impairment with a related allowance of $120 million.

Schedule of net recorded investment by credit quality indicators

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At March 31, 2019:	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	285	$	9	$	45	$	673	$	49	$	102	$	380	$	72	$	68
A1 – A3		761		108		237		859		139		256		76		100		733
Baa1 – Baa3		933		122		118		1,514		604		171		81		800		507
Ba1 – Ba2		673		181		72		1,412		595		208		48		532		295
Ba3 – B1		430		128		60		562		401		56		59		66		36
B2 – B3		197		58		37		511		263		42		8		14		27
Caa – D		44		15		6		75		26		6		—		—		1
Total	$	3,323	$	621	$	575	$	5,605	$	2,076	$	841	$	651	$	1,584	$	1,667

	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At December 31, 2018	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	520	$	24	$	49	$	935	$	79	$	71	$	112	$	58	$	134
A1 – A3		617		82		241		1,108		269		351		133		198		659
Baa1 – Baa3		807		214		169		1,450		704		246		174		517		463
Ba1 – Ba2		772		207		102		1,387		681		149		167		500		280
Ba3 – B1		391		90		36		703		297		52		84		218		99
B2 – B3		264		47		26		475		156		37		57		114		70
Caa – D		23		5		3		42		17		5		5		12		9
Total	$	3,395	$	670	$	625	$	6,101	$	2,204	$	912	$	733	$	1,618	$	1,714

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Segments (Tables)

3 Months Ended

Mar. 31, 2019

Segments:

Reporting information by segment

	Client		Commercial		Total
(Dollars in millions)	Financing		Financing		Segments
For the three months ended March 31, 2019:
Total revenue	$	322	$	160	$	482
Pre-tax income		117		76		193
Depreciation of equipment under operating lease		45		—		45
Financing cost		107		53		160
Provision for/(benefit from) credit losses		(1)		5		4
For the three months ended March 31, 2018:
Total revenue	$	308	$	142	$	449
Pre-tax income		128		63		191
Depreciation of equipment under operating lease		48		—		48
Financing cost		69		33		102
Provision for/(benefit from) credit losses		10		(1)		9

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Equity Activity (Tables)

3 Months Ended

Mar. 31, 2019

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 March 31, 2019:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	3	$	3	$	6
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	—	$	—	$	—
Net (losses)/gains arising during the period		0		0		0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	0	$	0	$	0
Other comprehensive income/(loss)	$	3	$	3	$	6

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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 March 31, 2018:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	70	$	11	$	81
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	1	$	0	$	1
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	1	$	0	$	1
Other comprehensive income/(loss)	$	71	$	11	$	82

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

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

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2019	$	(23)	$	(10)	$	(33)
Other comprehensive income before reclassification		6		0		6
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		6		0		6
March 31, 2019	$	(17)	$	(10)	$	(27)

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

			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2018	$	165	$	(7)	$	158
Cumulative effect of a change in accounting principle**		(5)		—		(5)
Other comprehensive income before reclassification		81		0		81
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		81		1		82
March 31, 2018	$	241	$	(7)	$	234

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

**  Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2019

Borrowings:

Short-Term Debt

	Balance		Balance
(Dollars in millions)	3/31/2019		12/31/2018
Commercial paper	$	2,494	$	2,995
Short-term loans		22		17
Secured borrowings		28		23
Debt	$	2,543	$	3,035
Debt payable to IBM		8,605		10,223
Total	$	11,148	$	13,258

Long-Term Debt

		Balance		Balance
(Dollars in millions)	Maturities	3/31/2019		12/31/2018
Long-term notes (weighted-average interest rate at March 31, 2019)
2.1%	2019	$	1,400	$	1,400
3.3%	2020		1,500		1,500
2.8%	2021		2,850		2,850
2.2%	2022		500		500
3.0%	2023		750		750
		$	7,000	$	7,000
Long-term loans (6.2% weighted-average interest rate at March 31, 2019)	2019-2021		213		276
Secured borrowings (5.1% weighted-average interest rate at March 31, 2019)	2019-2024		840		687
Long-term debt		$	8,053	$	7,964
Less: net unamortized discount			2		2
Less: net unamortized debt issuance costs			7		9
Less: fair value adjustment*			9		34
Debt		$	8,034	$	7,919
Debt payable to IBM (1.4% weighted-average interest rate at March 31, 2019)			9,762		9,357
Total		$	17,796	$	17,276

*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position 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.

Contractual obligations of long-term debt and long-term debt payable to IBM outstanding

	2019										2024 and
(Dollars in millions)	(Q2-Q4)		2020		2021		2022		2023		beyond		Total
Long-term debt	$	1,775	$	1,898	$	3,063	$	560	$	757	$	0	$	8,053
Debt payable to IBM		3,235		3,068		1,834		1,188		335		102		9,762
Total	$	5,010	$	4,966	$	4,898	$	1,748	$	1,092	$	102	$	17,815

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Basis of Presentation (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Provision for income taxes	$ 150	$ 42
Effective rate on continuing operations	77.50%	22.00%
Additional provisional charge (benefit) resulting from guidance related to U.S. tax reform	$ 116
IBM
Non-cash equity contribution received	$ 64

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Accounting Changes (Details) - USD ($) $ in Millions		3 Months Ended
	Jan. 01, 2018	Mar. 31, 2018	[1]
Accumulated Other Comprehensive Income/(Loss)
Accounting Changes
Reclassification from AOCI to retained earnings for stranded tax effects of U.S. tax reform	$ (5)	$ (5)
Retained Earnings
Accounting Changes
Reclassification from AOCI to retained earnings for stranded tax effects of U.S. tax reform	$ 5	$ 5

[1] Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

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Financial Instruments - Fair Value Measurements (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	$ 21	$ 18
Derivative liabilities	23	37
Recurring
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	755	797
Derivative assets	21	18
Total assets	776	815
Derivative liabilities	23	37
Potential reduction in net position of total derivative assets	1	11
Potential reduction in net position of total derivative liabilities	1	11
Recurring | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	750	792
Recurring | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	5	5
Recurring | Level 1
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	5	5
Total assets	5	5
Recurring | Level 1 | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	5	5
Recurring | Level 2
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	750	792
Derivative assets	21	18
Total assets	771	810
Derivative liabilities	23	37
Recurring | Level 2 | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	$ 750	$ 792

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Financial Instruments - Not Measured at Fair Value (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Long-Term Debt
Carrying amount of long-term debt	$ 17,796	$ 17,276
Fair value of long-term debt	$ 17,829	$ 17,199

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Financial Instruments - Derivatives, Offsetting (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Derivative Financial Instruments
Fair value of derivative assets	$ 21	$ 18
Fair value of derivative liabilities	23	37
IBM
Derivative Financial Instruments
Fair value of derivative assets	21	18
Fair value of derivative liabilities	23	37
Assets included in master netting arrangements	1	11
Liabilities included in master netting arrangements	$ 1	$ 11

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Financial Instruments - Derivatives, Other Information (Details) - USD ($) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Fair value hedges | Interest rate swaps | IBM
Derivative Financial Instruments
Notional amount	$ 3,350	$ 3,350
Average remaining maturity	2 years 2 months 12 days	2 years 4 months 24 days
Cash flow hedges | Interest rate swaps | IBM
Derivative Financial Instruments
Notional amount	$ 0	$ 0
Net investment hedges | Foreign exchange contracts | IBM
Derivative Financial Instruments
Notional amount	$ 1,356	$ 1,986
Average remaining maturity	2 months 12 days	2 months 12 days
Derivative instruments not designated as hedging instruments | Foreign exchange contracts | Maximum
Derivative Financial Instruments
Term of derivative contract	1 year
Derivative instruments not designated as hedging instruments | Foreign exchange contracts | Third parties
Derivative Financial Instruments
Notional amount	$ 0	$ 0

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Financial Instruments - Derivatives, Fair Value (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Fair Values of Derivative Instruments
Fair value of derivative assets	$ 21	$ 18
Fair value of derivative liabilities	23	37
Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of derivative assets	21	18
Fair value of derivative liabilities	23	37
IBM
Fair Values of Derivative Instruments
Fair value of derivative assets	21	18
Fair value of derivative liabilities	23	37
Interest rate contracts | IBM | Designated as hedging instruments | Other assets
Fair Values of Derivative Instruments
Fair value of derivative assets	11	10
Interest rate contracts | IBM | Designated as hedging instruments | Other liabilities
Fair Values of Derivative Instruments
Fair value of derivative liabilities	23	27
Foreign exchange contracts | IBM | Designated as hedging instruments | Other assets
Fair Values of Derivative Instruments
Fair value of derivative assets	10	9
Foreign exchange contracts | IBM | Designated as hedging instruments | Other liabilities
Fair Values of Derivative Instruments
Fair value of derivative liabilities	$ 1	$ 11

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Financial Instruments - Cumulative Basis Adjustment for Fair Value Hedges (Details) - Debt - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Fair Values of Derivative Instruments
Carrying Amount of the Hedged Item Assets/(Liabilities)	$ (3,335)	$ (3,310)
Carrying Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Assets/(Liabilities)	$ 9	$ 34

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Financial Instruments - Effect of Hedge Activity on Income and Expense (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Loss (income) from continuing operations before income taxes	$ (193)	$ (191)
Financing cost
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Loss (income) from continuing operations before income taxes	160	102
Gains/(losses) of Total hedge activity	4	9
Other (income) and expense
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Loss (income) from continuing operations before income taxes	$ (18)	1
Gains/(losses) of Total hedge activity		$ 1

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Financial Instruments - Derivatives, Gains and Losses (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives	$ 20	$ (20)
Gain/(Loss) Recognized in Earnings, Attributable to Risk Being Hedged	(25)	23
Gains (losses) excluded from the assessment of hedge effectiveness for fair value hedges
Net investment hedges
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI	(10)	(43)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing	10	7
Interest rate contracts | IBM | Fair value hedges | Financing cost
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives	20	(21)
Gain/(Loss) Recognized in Earnings, Attributable to Risk Being Hedged	(25)	23
Foreign exchange contracts | IBM | Net investment hedges
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI	(10)	(43)
Foreign exchange contracts | IBM | Net investment hedges | Financing cost
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing	$ 10	7
Foreign exchange contracts | Derivative instruments not designated as hedging instruments | Third parties | Other (income) and expense
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives		$ 1

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Leases - Lease income (Details) $ in Millions	3 Months Ended
	Mar. 31, 2019 USD ($)
Leases:
Lessor, Operating Lease, Existence of Lessee Option to Purchase Underlying Asset [true false]	true
Lessor, Direct Financing Lease, Existence of Lessee Option to Purchase Underlying Asset [true false]	true
Financing lease revenue	$ 55
Operating lease revenue	78
Variable lease revenue	11
Lease income	$ 144

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Leases - Sales and Direct Financing Leases (Details) $ in Millions	Mar. 31, 2019 USD ($)
Leases:
2019	$ 1,691
2020	1,638
2021	1,018
2022	468
2023	103
Thereafter	6
Total undiscounted cash flows	4,923
Present value of lease payments (recognized as financing receivables)	4,536
Difference between undiscounted cash flows and discounted cash flows	387
Unguaranteed residual value	$ 472

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Leases - Operating Leases (Details) $ in Millions	Mar. 31, 2019 USD ($)
Maturity analysis of lease payments due
Unguaranteed residual value of operating leases	$ 106
2019	162
2020	122
2021	40
2022	2
2023	0
Total undiscounted cash flows	$ 327
Minimum
Maturity analysis of lease payments due
Lease term	1 year
Maximum
Maturity analysis of lease payments due
Lease term	6 years

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Financing Receivables, Receivables Purchased/Participated from IBM - Net of Allowances (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Financing receivables
Unguaranteed residual value	$ 472
Financing receivables pledged as collateral for borrowings	868	$ 710
Financing receivables held for sale	0	0
Financing Receivable Portfolio
Financing receivables
Financing receivables, gross	23,814	26,236
Unearned income	(856)	(900)
Deferred initial direct costs	107	119
Recorded investment	23,065	25,455
Allowance for credit losses	(171)	(174)
Unguaranteed residual value	472
Unguaranteed residual value		491
Guaranteed residual value	65	77
Net financing receivables	$ 23,431	25,848
Financing Receivable Portfolio | Maximum
Financing receivables
Financing receivable, payment terms	7 years
Lease receivables
Financing receivables
Financing receivables, gross	$ 4,923	5,120
Unearned income	(387)	(411)
Deferred initial direct costs	40	46
Recorded investment	4,576	4,755
Allowance for credit losses	(58)	(65)	$ (62)
Unguaranteed residual value	472
Unguaranteed residual value		491
Guaranteed residual value	65	77
Net financing receivables	5,056	5,258
Commercial financing receivables
Financing receivables
Financing receivables, gross	9,902	11,422
Unearned income	(33)	(36)
Recorded investment	9,869	11,386
Allowance for credit losses	(15)	(11)
Net financing receivables	$ 9,854	11,374
Commercial financing receivables | Minimum
Financing receivables
Financing receivable, payment terms	30 days
Commercial financing receivables | Maximum
Financing receivables
Financing receivable, payment terms	90 days
Loan receivables
Financing receivables
Financing receivables, gross	$ 8,988	9,694
Unearned income	(436)	(453)
Deferred initial direct costs	66	73
Recorded investment	8,619	9,314
Allowance for credit losses	(98)	(98)	(96)
Net financing receivables	8,521	9,216
Purchased and participated receivables from IBM
Financing receivables
Allowance for credit losses	(11)	(18)
Net financing receivables	$ 5,331	5,433
Short-term purchased receivables from IBM
Financing receivables
Financing receivable, payment terms	30 days
Recorded investment	$ 1,434	1,373
Allowance for credit losses	(5)	(4)
Net financing receivables	1,430	1,369
Long-term participated receivables from IBM
Financing receivables
Recorded investment	3,908	4,079
Allowance for credit losses	(6)	(14)	$ (14)
Net financing receivables	$ 3,902	$ 4,065

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Financing Receivables, Receivables Purchased/Participated from IBM - By Portfolio Segment (Details) $ in Millions	3 Months Ended		12 Months Ended
	Mar. 31, 2019 USD ($) item	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($)
Finance leases portfolio and loans receivable and participated loans
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Number of portfolio segments | item	3
Number of classes of financing receivable | item	3
Recorded investment	$ 17,104		$ 18,147
Recorded investment collectively evaluated for impairment	16,966		17,998
Recorded investment individually evaluated for impairment	138		149
Allowance for credit losses:
Allowance for credit losses, beginning balance	177	$ 172	172
Write-offs	(13)		(16)
Recoveries	0		2
Provision	(1)		27
Foreign currency translation adjustment	(1)		(10)
Other			2
Allowance for credit losses, ending balance	162		177
Related allowance, collectively evaluated for impairment	49		56
Related allowance, individually evaluated for impairment	112		120
Interest income recognized on impaired leases and loans
Interest income recognized on a cash basis
Finance leases portfolio and loans receivable and participated loans | Americas
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	9,684		10,335
Recorded investment collectively evaluated for impairment	9,585		10,239
Recorded investment individually evaluated for impairment	99		96
Allowance for credit losses:
Allowance for credit losses, beginning balance	107	107	107
Write-offs	(3)		(6)
Recoveries			0
Provision	4		11
Foreign currency translation adjustment	(1)		(6)
Other			1
Allowance for credit losses, ending balance	106		107
Related allowance, collectively evaluated for impairment	33		38
Related allowance, individually evaluated for impairment	74		69
Average recorded investment of impaired leases and loans	98	65
Finance leases portfolio and loans receivable and participated loans | EMEA
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	4,319		4,545
Recorded investment collectively evaluated for impairment	4,294		4,505
Recorded investment individually evaluated for impairment	25		39
Allowance for credit losses:
Allowance for credit losses, beginning balance	53	43	43
Write-offs	(9)		(1)
Recoveries	0		0
Provision	(5)		13
Foreign currency translation adjustment			(3)
Other	0		1
Allowance for credit losses, ending balance	38		53
Related allowance, collectively evaluated for impairment	13		15
Related allowance, individually evaluated for impairment	25		38
Average recorded investment of impaired leases and loans	30	39
Finance leases portfolio and loans receivable and participated loans | Asia Pacific
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	3,100		3,268
Recorded investment collectively evaluated for impairment	3,087		3,254
Recorded investment individually evaluated for impairment	13		13
Allowance for credit losses:
Allowance for credit losses, beginning balance	17	21	21
Write-offs			(8)
Recoveries	0		2
Provision	0		3
Foreign currency translation adjustment	0		(1)
Other	0		1
Allowance for credit losses, ending balance	17		17
Related allowance, collectively evaluated for impairment	4		4
Related allowance, individually evaluated for impairment	13		13
Average recorded investment of impaired leases and loans	13	19
Lease receivables
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	4,576		4,755
Allowance for credit losses:
Allowance for credit losses, beginning balance	65	62	62
Write-offs	(8)		(13)
Provision	1		9
Allowance for credit losses, ending balance	58		65
Lease receivables | Americas
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	3,358		3,433
Allowance for credit losses:
Allowance for credit losses, beginning balance	38	42	42
Allowance for credit losses, ending balance	35		38
Lease receivables | EMEA
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	632		687
Allowance for credit losses:
Allowance for credit losses, beginning balance	17	6	6
Allowance for credit losses, ending balance	11		17
Lease receivables | Asia Pacific
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	586		635
Allowance for credit losses:
Allowance for credit losses, beginning balance	10	15	15
Allowance for credit losses, ending balance	11		10
Loan receivables
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	8,619		9,314
Allowance for credit losses:
Allowance for credit losses, beginning balance	98	96	96
Write-offs	(5)		(3)
Provision	5		6
Allowance for credit losses, ending balance	98		98
Loan receivables | Americas
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	5,674		6,167
Allowance for credit losses:
Allowance for credit losses, beginning balance	66	57	57
Allowance for credit losses, ending balance	70		66
Loan receivables | EMEA
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	2,100		2,231
Allowance for credit losses:
Allowance for credit losses, beginning balance	28	34	34
Allowance for credit losses, ending balance	24		28
Loan receivables | Asia Pacific
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	845		916
Allowance for credit losses:
Allowance for credit losses, beginning balance	5	4	4
Allowance for credit losses, ending balance	4		5
Long-term participated receivables from IBM
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	3,908		4,079
Allowance for credit losses:
Allowance for credit losses, beginning balance	14	14	14
Provision	(7)		12
Allowance for credit losses, ending balance	6		14
Long-term participated receivables from IBM | Americas
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	652		735
Allowance for credit losses:
Allowance for credit losses, beginning balance	3	9	9
Allowance for credit losses, ending balance	1		3
Long-term participated receivables from IBM | EMEA
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	1,587		1,627
Allowance for credit losses:
Allowance for credit losses, beginning balance	8	4	4
Allowance for credit losses, ending balance	3		8
Long-term participated receivables from IBM | Asia Pacific
FINANCING RECEIVABLES, RECEIVABLES PURCHASED
Recorded investment	1,669		1,717
Allowance for credit losses:
Allowance for credit losses, beginning balance	3	$ 2	2
Allowance for credit losses, ending balance	$ 2		$ 3

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Financing Receivables, Receivables Purchased/Participated from IBM - Past Due (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Finance leases portfolio and loans receivable and participated loans
Past Due Financing Receivables
Total Recorded Investment	$ 17,104	$ 18,147
Recorded Investment > 90 Days and Accruing	414	484
Billed Invoices > 90 Days and Accruing	47	49
Recorded Investment Not Accruing	182	197
Recorded investment, impaired financing receivables with related allowance	138	149
Impaired financing receivables, related allowance	112	120
Finance leases portfolio and loans receivable and participated loans | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	596	671
Finance leases portfolio and loans receivable and participated loans | Americas
Past Due Financing Receivables
Total Recorded Investment	9,684	10,335
Finance leases portfolio and loans receivable and participated loans | EMEA
Past Due Financing Receivables
Total Recorded Investment	4,319	4,545
Finance leases portfolio and loans receivable and participated loans | Asia Pacific
Past Due Financing Receivables
Total Recorded Investment	3,100	3,268
Lease receivables
Past Due Financing Receivables
Total Recorded Investment	4,576	4,755
Recorded Investment > 90 Days and Accruing	263	275
Billed Invoices > 90 Days and Accruing	16	21
Recorded Investment Not Accruing	68	70
Lease receivables | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	331	341
Lease receivables | Americas
Past Due Financing Receivables
Total Recorded Investment	3,358	3,433
Recorded Investment > 90 Days and Accruing	239	247
Billed Invoices > 90 Days and Accruing	13	18
Recorded Investment Not Accruing	41	44
Lease receivables | Americas | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	280	288
Lease receivables | EMEA
Past Due Financing Receivables
Total Recorded Investment	632	687
Recorded Investment > 90 Days and Accruing	22	9
Billed Invoices > 90 Days and Accruing	3	1
Recorded Investment Not Accruing	16	15
Lease receivables | EMEA | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	38	24
Lease receivables | Asia Pacific
Past Due Financing Receivables
Total Recorded Investment	586	635
Recorded Investment > 90 Days and Accruing	2	19
Billed Invoices > 90 Days and Accruing		2
Recorded Investment Not Accruing	11	11
Lease receivables | Asia Pacific | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	14	29
Loan receivables
Past Due Financing Receivables
Total Recorded Investment	8,619	9,314
Recorded Investment > 90 Days and Accruing	140	194
Billed Invoices > 90 Days and Accruing	26	25
Recorded Investment Not Accruing	114	122
Loan receivables | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	253	310
Loan receivables | Americas
Past Due Financing Receivables
Total Recorded Investment	5,674	6,167
Recorded Investment > 90 Days and Accruing	128	161
Billed Invoices > 90 Days and Accruing	22	22
Recorded Investment Not Accruing	64	61
Loan receivables | Americas | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	193	217
Loan receivables | EMEA
Past Due Financing Receivables
Total Recorded Investment	2,100	2,231
Recorded Investment > 90 Days and Accruing	10	24
Billed Invoices > 90 Days and Accruing	3	3
Recorded Investment Not Accruing	46	57
Loan receivables | EMEA | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	56	80
Loan receivables | Asia Pacific
Past Due Financing Receivables
Total Recorded Investment	845	916
Recorded Investment > 90 Days and Accruing	2	9
Billed Invoices > 90 Days and Accruing	1	1
Recorded Investment Not Accruing	3	4
Loan receivables | Asia Pacific | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	5	13
Long-term participated receivables from IBM
Past Due Financing Receivables
Total Recorded Investment	3,908	4,079
Recorded Investment > 90 Days and Accruing	11	15
Billed Invoices > 90 Days and Accruing	4	3
Recorded Investment Not Accruing		5
Long-term participated receivables from IBM | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	11	20
Long-term participated receivables from IBM | Americas
Past Due Financing Receivables
Total Recorded Investment	652	735
Recorded Investment > 90 Days and Accruing	5	11
Billed Invoices > 90 Days and Accruing	3	2
Long-term participated receivables from IBM | Americas | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	5	11
Long-term participated receivables from IBM | EMEA
Past Due Financing Receivables
Total Recorded Investment	1,587	1,627
Recorded Investment > 90 Days and Accruing	6	4
Billed Invoices > 90 Days and Accruing	2	1
Recorded Investment Not Accruing		5
Long-term participated receivables from IBM | EMEA | > 90 days
Past Due Financing Receivables
Recorded Investment, Past Due	6	9
Long-term participated receivables from IBM | Asia Pacific
Past Due Financing Receivables
Total Recorded Investment	$ 1,669	$ 1,717

XML

Financing Receivables, Receivables Purchased/Participated from IBM - Credit Quality Indicators (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Net recorded investment for each class of receivables, by credit quality indicator
Troubled debt restructurings of financing receivables
Lease receivables | Americas
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	3,323	3,395
Lease receivables | Americas | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	285	520
Lease receivables | Americas | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	761	617
Lease receivables | Americas | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	933	807
Lease receivables | Americas | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	673	772
Lease receivables | Americas | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	430	391
Lease receivables | Americas | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	197	264
Lease receivables | Americas | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	44	23
Lease receivables | EMEA
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	621	670
Lease receivables | EMEA | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	9	24
Lease receivables | EMEA | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	108	82
Lease receivables | EMEA | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	122	214
Lease receivables | EMEA | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	181	207
Lease receivables | EMEA | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	128	90
Lease receivables | EMEA | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	58	47
Lease receivables | EMEA | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	15	5
Lease receivables | Asia Pacific
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	575	625
Lease receivables | Asia Pacific | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	45	49
Lease receivables | Asia Pacific | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	237	241
Lease receivables | Asia Pacific | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	118	169
Lease receivables | Asia Pacific | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	72	102
Lease receivables | Asia Pacific | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	60	36
Lease receivables | Asia Pacific | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	37	26
Lease receivables | Asia Pacific | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	6	3
Loan receivables | Americas
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	5,605	6,101
Loan receivables | Americas | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	673	935
Loan receivables | Americas | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	859	1,108
Loan receivables | Americas | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,514	1,450
Loan receivables | Americas | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,412	1,387
Loan receivables | Americas | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	562	703
Loan receivables | Americas | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	511	475
Loan receivables | Americas | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	75	42
Loan receivables | EMEA
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	2,076	2,204
Loan receivables | EMEA | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	49	79
Loan receivables | EMEA | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	139	269
Loan receivables | EMEA | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	604	704
Loan receivables | EMEA | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	595	681
Loan receivables | EMEA | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	401	297
Loan receivables | EMEA | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	263	156
Loan receivables | EMEA | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	26	17
Loan receivables | Asia Pacific
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	841	912
Loan receivables | Asia Pacific | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	102	71
Loan receivables | Asia Pacific | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	256	351
Loan receivables | Asia Pacific | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	171	246
Loan receivables | Asia Pacific | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	208	149
Loan receivables | Asia Pacific | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	56	52
Loan receivables | Asia Pacific | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	42	37
Loan receivables | Asia Pacific | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	6	5
Long-term participated receivables from IBM | Americas
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	651	733
Long-term participated receivables from IBM | Americas | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	380	112
Long-term participated receivables from IBM | Americas | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	76	133
Long-term participated receivables from IBM | Americas | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	81	174
Long-term participated receivables from IBM | Americas | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	48	167
Long-term participated receivables from IBM | Americas | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	59	84
Long-term participated receivables from IBM | Americas | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	8	57
Long-term participated receivables from IBM | Americas | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment		5
Long-term participated receivables from IBM | EMEA
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,584	1,618
Long-term participated receivables from IBM | EMEA | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	72	58
Long-term participated receivables from IBM | EMEA | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	100	198
Long-term participated receivables from IBM | EMEA | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	800	517
Long-term participated receivables from IBM | EMEA | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	532	500
Long-term participated receivables from IBM | EMEA | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	66	218
Long-term participated receivables from IBM | EMEA | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	14	114
Long-term participated receivables from IBM | EMEA | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment		12
Long-term participated receivables from IBM | Asia Pacific
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,667	1,714
Long-term participated receivables from IBM | Asia Pacific | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	68	134
Long-term participated receivables from IBM | Asia Pacific | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	733	659
Long-term participated receivables from IBM | Asia Pacific | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	507	463
Long-term participated receivables from IBM | Asia Pacific | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	295	280
Long-term participated receivables from IBM | Asia Pacific | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	36	99
Long-term participated receivables from IBM | Asia Pacific | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	27	70
Long-term participated receivables from IBM | Asia Pacific | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	$ 1	$ 9

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Segments - Business Segments (Details) $ in Millions	3 Months Ended
	Mar. 31, 2019 USD ($) segment	Mar. 31, 2018 USD ($)
Segment Information
Number of reportable segments | segment	2
Segments, Income statement information
Total revenue	$ 482	$ 449
Pre-tax income	193	191
Depreciation of equipment under operating lease	45
Depreciation of equipment under operating lease		48
Financing cost	160	102
Provision for/(benefit from) credit losses	4	9
Client Financing
Segments, Income statement information
Total revenue	322	308
Pre-tax income	117	128
Depreciation of equipment under operating lease	45
Depreciation of equipment under operating lease		48
Financing cost	107	69
Provision for/(benefit from) credit losses	(1)	10
Commercial Financing
Segments, Income statement information
Total revenue	160	142
Pre-tax income	76	63
Financing cost	53	33
Provision for/(benefit from) credit losses	$ 5	$ (1)

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Equity Activity - Reclassifications and Taxes (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains (losses) on cash flow hedges	$ 0	$ 0
Gains (losses) on available-for-sale-debt securities
Other comprehensive income/(loss), Before Tax Amount	3	71
Other comprehensive income/(loss), Tax (Expense)/Benefit	3	11
Other comprehensive income/(loss), net of tax	6	82
Accumulated Other Comprehensive Income/(Loss)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Other comprehensive income before reclassification	6	81
Reclassification/amortization, Net of Tax Amount	0	0
Other comprehensive income/(loss), Before Tax Amount	3	71
Other comprehensive income/(loss), Tax (Expense)/Benefit	3	11
Other comprehensive income/(loss), net of tax	6	82
Foreign Currency Translation Adjustments
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Other comprehensive income before reclassification	6	81
Other comprehensive income/(loss), Before Tax Amount	3	70
Other comprehensive income/(loss), Tax (Expense)/Benefit	3	11
Other comprehensive income/(loss), net of tax	6	81
Net Change Retirement-Related Benefit Plans
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Other comprehensive income before reclassification	0	0
Reclassification/amortization, Net of Tax Amount	0	0
Other comprehensive income/(loss), Before Tax Amount	0	1
Other comprehensive income/(loss), Tax (Expense)/Benefit	0	0
Other comprehensive income/(loss), net of tax	0	1
Retirement-Related Benefit Plans, Prior Service Costs/(Credits)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassification/amortization, Before Tax Amount	0	0
Reclassification/amortization, Tax (Expense)/Benefit	0	0
Reclassification/amortization, Net of Tax Amount	0	0
Retirement-Related Benefit Plans, Net Gains/(Losses)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Other comprehensive income/(loss), arising during the period, Before Tax Amount	0	(1)
Other comprehensive income/(loss), arising during the period, Tax (Expense)/Benefit	0	0
Other comprehensive income before reclassification	0	(1)
Reclassification/amortization, Before Tax Amount	0	0
Reclassification/amortization, Tax (Expense)/Benefit	0	0
Reclassification/amortization, Net of Tax Amount	$ 0	$ 0

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Equity Activity - AOCI Rollforward (Details) - USD ($) $ in Millions		3 Months Ended
	Jan. 01, 2018	Mar. 31, 2019	Mar. 31, 2018
Accumulated Other Comprehensive Income/(Loss) (net of tax)
Balance at the beginning of the period	$ 3,562	$ 3,420	$ 3,562
Other comprehensive income/(loss), net of tax		6	82
Balance at the end of the period		3,164	3,302
Accumulated Other Comprehensive Income/(Loss)
Accumulated Other Comprehensive Income/(Loss) (net of tax)
Balance at the beginning of the period	158	(33)	158
Cumulative effect of change in accounting principle	(5)		(5)	[1]
Other comprehensive income before reclassification		6	81
Amount reclassified from accumulated other comprehensive income		0	0
Other comprehensive income/(loss), net of tax		6	82
Balance at the end of the period		(27)	234
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Income/(Loss) (net of tax)
Balance at the beginning of the period	165	(23)	165
Cumulative effect of change in accounting principle			(5)
Other comprehensive income before reclassification		6	81
Other comprehensive income/(loss), net of tax		6	81
Balance at the end of the period		(17)	241
Net Change Retirement-Related Benefit Plans
Accumulated Other Comprehensive Income/(Loss) (net of tax)
Balance at the beginning of the period	$ (7)	(10)	(7)
Other comprehensive income before reclassification		0	0
Amount reclassified from accumulated other comprehensive income		0	0
Other comprehensive income/(loss), net of tax		0	1
Balance at the end of the period		$ (10)	$ (7)

[1] Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes."

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Relationship with IBM and Related Party Transactions - Support Agreement (Details) $ in Millions	Mar. 31, 2019 USD ($)
IBM Credit LLC | IBM
Related party transactions
Minimum beneficial ownership of equity voting interest (as a percent)	51.00%
IBM | Support Agreement
Related party transactions
Minimum consolidated tangible net worth to be supported by parent company	$ 50
Maximum debt to equity ratio to be supported by parent company	11

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Relationship with IBM and Related Party Transactions - Operating Relationship (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Disclosures
Other receivables from IBM	$ 301		$ 2,019
Financing revenue
Disclosures
Fee income from related party related to financing incentives to third party	49
Change in fee income	2
Financing receivables from IBM
Disclosures
Net financing receivables	3,869		3,609
Long-term participated receivables from IBM
Disclosures
Net financing receivables	3,902		4,065
Short-term purchased receivables from IBM
Disclosures
Net financing receivables	1,430		1,369
IBM
Disclosures
Other receivables from IBM	301		2,019
IBM | Excess cash in short-term interest-bearing accounts with parent
Disclosures
Other receivables from IBM	282		2,014
IBM | Financing revenue | Excess cash in short-term interest-bearing accounts with parent
Disclosures
Interest income from a related party	8	$ 6
IBM | Financing receivables from IBM
Disclosures
Net financing receivables	3,869		$ 3,609
IBM | Financing receivables from IBM | Financing revenue
Disclosures
Interest income from a related party	44
Increase (decrease) in interest income over the prior year	5
IBM | Long-term participated receivables from IBM | Financing revenue
Disclosures
Interest income from a related party	50
Increase (decrease) in financial services revenue over the prior year	1
IBM | Short-term purchased receivables from IBM | Financing revenue
Disclosures
Financing revenue	15
Increase (decrease) in financial services revenue over the prior year	$ 2

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Relationship with IBM and Related Party Transactions - Borrowing, Services, and Other Arrangements (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Related party transactions
Interest expense incurred on related party borrowings	$ 74	$ 57
Accounts payable to related party	950		$ 3,044
IBM
Related party transactions
Selling, general and administrative expense with related party	48	52
Accounts payable to related party	950		$ 3,044
IBM | Financing cost | Debt payable to IBM
Related party transactions
Interest expense incurred on related party borrowings	74	57
IBM | Sales of returned equipment | Other (income) and expense
Related party transactions
Net profit on transaction with related party	$ 2	$ 8

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Relationship with IBM and Related Party Transactions - Tax Sharing Agreement (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Related party transactions
Provision for income taxes	$ 150	$ 42
Effective rate on continuing operations	77.50%	22.00%
Additional provisional charge (benefit) resulting from guidance related to U.S. tax reform	$ 116
IBM
Related party transactions
Non-cash equity contribution received	$ 64

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Divestiture (Details) - Disposal Group, Disposed of by Sale - Commercial financing business - IBM - USD ($) $ in Millions	3 Months Ended
	Jun. 30, 2019	Mar. 31, 2019
Divestiture
Gain on divestiture		$ 16
Expected
Divestiture
Cash proceeds from divestiture of business	$ 20

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Borrowings - Short-Term Debt (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Short-Term Debt
Short-term debt	$ 11,148	$ 13,258
Short-term financing receivables pledged as collateral for short-term secured borrowings	28	23
Debt
Short-Term Debt
Short-term debt	2,543	3,035
Commercial paper
Short-Term Debt
Short-term debt	2,494	$ 2,995
Maximum aggregate amount permitted to be outstanding at any one time	$ 5,000
Weighted-average interest rates for short-term loans (as a percent)	2.50%	2.50%
Commercial paper | Maximum
Short-Term Debt
Term of debt instrument	364 days
Short-term loans
Short-Term Debt
Short-term debt	$ 22	$ 17
Weighted-average interest rates for short-term loans (as a percent)	7.20%	4.30%
Secured borrowings
Short-Term Debt
Short-term debt	$ 28	$ 23
Weighted-average interest rates for short-term loans (as a percent)	6.80%	6.90%
Debt payable to IBM
Short-Term Debt
Short-term debt	$ 8,605	$ 10,223
Weighted-average interest rates for short-term loans (as a percent)	1.30%	1.60%

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Borrowings - Long-Term Debt, Components (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2017
Borrowings
Long-term debt - gross	$ 17,815
Long-term debt - net	17,796	$ 17,276
Long-term financing receivables pledged as collateral for long-term secured borrowings	$ 840	687
Maximum percent of lien over the net tangible assets	15.00%
Debt
Borrowings
Long-term debt - gross	$ 8,053	7,964
Less: net unamortized discount	2	2
Less: net unamortized debt issuance costs	7	9
Less: fair value adjustment	9	34
Long-term debt - net	8,034	7,919
Long-term notes
Borrowings
Long-term debt - gross	$ 7,000	7,000
Long-term notes maturing in 2019
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	2.10%
Long-term debt - gross	$ 1,400	1,400
Long-term notes maturing in 2020
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	3.30%
Long-term debt - gross	$ 1,500	1,500
Long-term notes maturing in 2021
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	2.80%
Long-term debt - gross	$ 2,850	2,850
Long-term notes maturing in 2022
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	2.20%
Long-term debt - gross	$ 500	500
Long-term notes maturing in 2023
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	3.00%
Long-term debt - gross	$ 750	750
Long-term loans
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	6.20%
Long-term debt - gross	$ 213	276
Secured borrowings
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	5.10%
Long-term debt - gross	$ 840	687
Debt securities issued during 2017
Borrowings
Debt securities, aggregate amount issued			$ 3,000
Debt securities issued during 2018
Borrowings
Debt securities, aggregate amount issued		4,000
Debt payable to IBM
Borrowings
Debt instrument, weighted-average interest rate percentage (as a percent)	1.40%
Long-term debt - gross	$ 9,762
Long-term debt - net	$ 9,762	$ 9,357

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Borrowings - Contractual Maturities (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Contractual maturities of long-term debt
2019 (Q2-Q4)	$ 5,010
2020	4,966
2021	4,898
2022	1,748
2023	1,092
2024 and beyond	102
Total	17,815
Debt
Contractual maturities of long-term debt
2019 (Q2-Q4)	1,775
2020	1,898
2021	3,063
2022	560
2023	757
2024 and beyond	0
Total	8,053	$ 7,964
Debt payable to IBM
Contractual maturities of long-term debt
2019 (Q2-Q4)	3,235
2020	3,068
2021	1,834
2022	1,188
2023	335
2024 and beyond	102
Total	$ 9,762

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Borrowings - Interest on Debt (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Interest on Debt
Interest expense	$ 150	$ 102
Interest expense on debt payable to IBM	$ 74	$ 57

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Borrowings - Lines of Credit (Details) - Lines of Credit $ in Millions			3 Months Ended
	Jul. 19, 2018 USD ($)	Jul. 18, 2018 USD ($)	Mar. 31, 2019 USD ($)
New Credit Agreements
Lines of Credit
Revolving line of credit, amount			$ 5,000
Revolving line of credit, borrowings outstanding			$ 0
Covenants
Limit based on net tangible assets			10.00%
Period for calculation of net interest expense ratio			1 year
Minimum net interest expense ratio			2.20
Financial covenant - minimum tangible net worth			$ 50
Financial covenant - maximum leverage ratio			11
Default provision on credit facility			$ 500
364-Day Credit Agreement, 2018
Lines of Credit
Revolving line of credit, amount	$ 2,500
Revolving line of credit, term	364 days
364-Day Credit Agreement, 2017
Lines of Credit
Revolving line of credit, amount		$ 2,500
Revolving line of credit, term		364 days
Three-Year Credit Agreement
Lines of Credit
Revolving line of credit, amount	$ 2,500
Revolving line of credit, term	3 years
Revolving line of credit, term extension	1 year

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Commitments (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Extended lines of credit
Commitments
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients	$ 7,635	$ 7,112
Financing for client purchase agreements
Commitments
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients	$ 384	$ 495