Related Party Transactions

9 Months Ended

Sep. 30, 2021

Related Party Transactions

Related Party Transactions

13. Related Party Transactions:

Related Party Revenue and Purchases

Kyndryl provides various services to IBM, including those related to hosting data centers and servicing IBM’s information technology infrastructure, which are reported as revenue in the Combined Income Statement. Revenues for these services were $144 million and $161 million for the three months ended September 30, 2021 and 2020, respectively, and $445 million and $483 million for the nine months ended September 30, 2021 and 2020, respectively. The costs related to these services are reported in cost of services in Kyndryl’s Combined Income Statement and were

$114 million and $127 million for the three months ended September 30, 2021 and 2020, respectively, and $351 million and $382 million for the nine months ended September 30, 2021 and 2020, respectively.

IBM historically provided its branded and related hardware, software and services to Kyndryl for use in the delivery of services arrangements with Kyndryl customers. The cost of the hardware and software was reflected at a price indicative of what the Company would have incurred had it operated on a standalone basis. These costs and their associated depreciation and amortization were recorded as cost of services in the Company’s Combined Income Statement in the amounts of $845 million and $852 million, for the three months ended September 30, 2021 and 2020, respectively, and $2,504 million and $2,415 million, for the nine months ended September 30, 2021 and 2020, respectively. The capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Combined Statement of Cash Flows in the amounts of $250 million and $381 million, for the first nine months of 2021 and 2020, respectively.

Acquired Intangible Assets

Within the historical periods presented, the Company has been charged a fee for the use of certain acquired intangible assets by IBM for acquisitions which were not specific to Kyndryl. The amounts reflected within cost of services on the Combined Income Statement for these fees were $8 million for the third quarter of both 2021 and 2020, and $23 million for the first nine months of both 2021 and 2020. The amounts for these fees reflected within Selling, general and administrative expense within the Combined Income Statement were $12 million for the third quarter of both 2021 and 2020, and $37 million for the first nine months of both 2021 and 2020.

Allocation of Corporate Expenses

The Combined Income Statement, Combined Statement of Comprehensive Income (Loss) and Combined Statement of Cash Flows include an allocation of general corporate expenses from IBM. The financial information in these combined financial statements does not necessarily include all of the expenses that would have been incurred by Kyndryl had it been a separate, standalone company. It is not practicable to estimate actual costs that would have been incurred had Kyndryl been a standalone company during the periods presented. Allocations for management costs and corporate support services provided to Kyndryl for the three months ended September 30, 2021 and 2020 totaled $310 million and $284 million, respectively, and $977 million and $915 million for the nine months ended September 30, 2021 and 2020, respectively. These amounts include costs for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. All such amounts have been deemed to have been incurred and settled by Kyndryl in the period in which the costs were recorded and are included in the Net Parent investment. These costs were allocated based on direct usage as applicable, with the remainder allocated on a pro-rata basis of gross profit, headcount, asset ownership or other measures determined to be reasonable.

The following table presents the components of the allocation of general corporate expenses from IBM to Kyndryl.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Dollars in millions)	2021		2020		2021		2020
Selling, general and administrative expense	$	292	$	266	$	922	$	860
Research, development and engineering expense		(1)		—		(1)		3
Other (income) and expense		2		2		10		5
Interest expense		17		16		46		47
Total expense and other (income)	$	310	$	284	$	977	$	915

Cash Management and Financing

The Company participates in IBM’s centralized cash management and financing programs. Disbursements are made through centralized accounts payable systems, which are operated by IBM. Cash receipts are transferred to centralized accounts, which are also maintained by IBM. As cash is received and disbursed by IBM, it is accounted for by Kyndryl through Net Parent investment. During the nine months ended September 30, 2021, short- and long-term debt was financed by IBM, and financing decisions were determined by IBM. Refer to note 1, “Background and Basis of Presentation,” for additional information. Kyndryl’s cash that was not included in the centralized cash management and financing programs is classified as Cash and cash equivalents on the Combined Balance Sheet.

Net Parent Investment

Related party transactions between Kyndryl and IBM have been included within Net Parent investment in the Combined Balance Sheet in the historical periods presented as these related party transactions were not settled in cash. Net Parent investment in the Combined Balance Sheet and Combined Statement of Changes in Equity represents IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM, and Kyndryl’s accumulated earnings. Net transfers from IBM are included within Net Parent investment. The components of Net transfers from IBM and the reconciliation to the corresponding amount presented on the Combined Statement of Cash Flows were as follows:

	For the Nine Months Ended September 30,
(Dollars in millions)	2021		2020
Cash pooling and general financing activities/other	$	(1,515)		(2,853)
Allocation of Parent’s corporate expenses/other		1,139		1,204
Related party sales and purchases		2,252		2,130
Related party intangible assets fee		60		60
Income taxes		716		245
Total Net transfers from Parent per Combined Statement of Equity	$	2,652		786
Income taxes		(716)		(245)
Allocation of Parent’s stock-based compensation		(53)		(47)
Other		(89)		(100)
Total Net transfers from Parent per Combined Statement of Cash Flows	$	1,794		394

Assignment of Receivables

A portion of Kyndryl’s receivables with extended payment terms have historically been assigned to IBM’s Global Financing business. These receivables were not recognized on the Company’s Combined Balance Sheet. The gross amounts of Kyndryl receivables assigned to IBM Global Financing were $487 million and $750 million for the third quarter of 2021 and 2020, respectively, and $1,781 million and $2,301 million for the first nine months of 2021 and 2020, respectively. The fees and the net gains and losses associated with the assignment of receivables were not material for any of the periods presented. In October 2021, in preparation for the Separation, the Company entered into a Receivables Purchase Agreement with an unaffiliated bank with similar volumes to the amounts historically financed by IBM.

Lease Guarantees

Kyndryl identified 72 lease agreements with third parties with an estimated aggregate lease liability guaranteed by IBM of $267 million.