Revenue Recognition

9 Months Ended

Sep. 30, 2021

Revenue Recognition

Revenue Recognition

3. Revenue Recognition:

Disaggregation of Revenue

The Company views its segment results to be the best view of disaggregated revenue, including related party sales. Refer to note 4, “Segments.”

Remaining Performance Obligations

The remaining performance obligation (“RPO”) represents the aggregate amount of contractual deliverables yet to be recognized as revenue at the end of the reporting period. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed. The customer is not considered committed when it is able to terminate for convenience without payment of a substantive penalty. The RPO also includes estimates of variable consideration. Additionally, as a practical expedient, the Company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

At September 30, 2021, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $51.1 billion. Approximately 53 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 36 percent in subsequent years three through five years, and the balance thereafter.

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

During the three and nine months ended September 30, 2021 the Company reduced revenue by $12 million and $15 million, respectively, related to performance obligations satisfied (or partially satisfied) in previous periods, mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Contract Balances

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

(Dollars in millions)	At September 30, 2021		At December 31, 2020
Accounts receivable (net of allowances of $58 in 2021 and $91 in 2020)	$	1,746	$	1,444
Contract assets *		80		72
Deferred income (current)		875		854
Deferred income (noncurrent)		520		543

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

The amount of revenue recognized during the three and nine months ended September 30, 2021 that was included within the deferred income balance at June 30, 2021 and December 31, 2020 was $478 million and $726 million, respectively.

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

	Nine Months Ended		Year Ended
(Dollars in millions)	September 30, 2021		December 31, 2020
Beginning balance	$	91	$	82
Additions (releases)		(27)		25
Write-offs		(5)		(7)
Other *		(1)		(9)
Ending balance	$	58	$	91

* Primarily represents translation adjustments and reclassifications.

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

Deferred Costs

Costs to acquire and fulfill customer contracts are deferred and amortized over the contract period or expected customer relationship life. The expected customer relationship period is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years. For contracts with an estimated amortization period of less than one year, we elected the practical expedient to expense incremental costs immediately.

The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at September 30, 2021 and December 31, 2020:

	At September 30,		At December 31,
(Dollars in millions)	2021		2020
Capitalized costs to obtain a contract	$	285	$	269
Deferred costs to fulfill a contract
Deferred transition and setup costs		1,195		1,369
Other deferred fulfillment costs *		1,016		1,006
Total deferred costs **	$	2,496	$	2,646

* Includes related party cost of $78 million at September 30, 2021 and $94 million at December 31, 2020.

** Of the total deferred costs, $1,142 million was current (related party $66 million) and $1,354 million was noncurrent (related party $12 million) at September 30, 2021, and $1,205 million was current (related party $76 million) and $1,441 million was noncurrent (related party $18 million) at December 31, 2020.

The amount of total deferred costs amortized during the third quarter of 2021 was $447 million, composed of $215 million of amortization of prepaid software, $97 million of amortization of transition and setup costs, and $135 million of other deferred fulfillment costs. The amount of total deferred costs amortized during the first nine months of 2021 was $1,427 million, composed of $685 million of amortization of prepaid software, $291 million of amortization of transition and setup costs, and $451 million of other deferred fulfillment costs.