RELATED PARTY TRANSACTIONS	6 Months Ended
Sep. 30, 2022
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS	NOTE 13. RELATED-PARTY TRANSACTIONS Change in Beneficial Ownership Based on IBM’s Quarterly Reports filed with the SEC on July 25, 2022 and October 25, 2022, IBM transferred all of its 19.9% retained interest in Kyndryl common stock to a third-party financial institution through two transactions pursuant to exchange agreements on May 19, 2022 and August 11, 2022. Effective August 11, 2022, IBM ceased to be a related party of Kyndryl. Transactions conducted on arms-length basis between Kyndryl and IBM after August 11, 2022 are no longer reported as related-party activities. 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 Company’s Consolidated Income Statement. Revenue generated from these services was $82 million and $144 million for the three months ended September 30, 2022 and 2021, respectively. Revenue generated from these services was $287 million and $291 million for the six months ended September 30, 2022 and 2021, respectively. Kyndryl utilizes various IBM products and services, recognized as costs of services, in the fulfillment of services contracts. Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $421 million and $966 million for the three months ended September 30, 2022 and 2021, respectively. Related-party cost of $421 million for the current quarter includes outsourcing goods and services provided by the former Parent to Kyndryl’s customers post-Separation. Related-party cost of $966 million for the quarter ended September 30, 2021 was related to pre-Separation services, including costs incurred by Kyndryl to provide services to the former Parent for networking and IT services of $114 million; costs for the usage of IBM-branded software allocated to Kyndryl by the former Parent of $739 million; and depreciation charges related to IBM hardware allocated to Kyndryl of $114 million. Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $1,382 million and $1,872 million for the six months ended September 30, 2022 and 2021, respectively. Related-party cost of $1,382 million for the current six-month period includes outsourcing goods and services provided by the former Parent to Kyndryl’s customers post-Separation. Related-party cost of $1,872 million for the six months ended September 30, 2021 was related to pre-Separation services, including costs incurred by Kyndryl to provide services to the former Parent for networking and IT services of $229 million; costs for the usage of IBM-branded software allocated to Kyndryl by the former Parent of $1,420 million; and depreciation charges related to IBM hardware allocated to Kyndryl of $223 million. Capital Expenditures with Former Parent Capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Company’s Consolidated Statement of Cash Flows in the amounts of $89 million and $197 million for the six months ended September 30, 2022 and 2021, respectively. Additionally, as part of the Separation, IBM has committed to provide Kyndryl, at no cost, approximately $265 million of upgraded hardware over a two-year period. The amounts committed by IBM are reflected within other assets (noncurrent) within the Consolidated Balance Sheet. For the three and six months ended September 30, 2022, $21 million of the upgraded hardware committed by IBM was delivered to Kyndryl. Accordingly, such balance was derecognized in other assets (noncurrent) and recognized as property and equipment on the Balance Sheet and non-cash investing activity. The Company intends to recognize depreciation expense related to such equipment over its useful life of five years, consistent with our depreciation policy. Related Party Agreements On November 2, 2021, in connection with the Separation, the Company entered into several agreements with IBM that govern the relationship of the parties following the Separation. Such agreements were described in our 2021 Annual Report. Allocation of Corporate Expenses Post-Separation, general corporate expenses from IBM were no longer allocated to Kyndryl; therefore, no related amounts were reflected on the Company’s financial statements for the three and six months ended September 30, 2022. Prior to the Separation, IBM allocated certain general corporate expenses that would have been incurred by Kyndryl had it been a separate, standalone company. These allocated general corporate expenses from IBM were recorded in the historical Consolidated Income Statement, Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows. Allocations for management costs and corporate support services provided to Kyndryl for the three months ended September 30, 2021 totaled $310 million, consisting of $2 million of allocated other (income) and expense, $17 million of allocated interest expense and $291 million of allocated selling, general and administrative expense, which primarily represents expenses for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. Allocations for management costs and corporate support services provided to Kyndryl for the six months ended September 30, 2021 totaled $640 million, consisting of $3 million of allocated other (income) and expense, $32 million of allocated interest expense and $604 million of allocated selling, general and administrative expense, which primarily represents expenses for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. All such amounts have been deemed to have been incurred and settled by Kyndryl through net Parent investment in the period in which the costs were recorded. These costs were allocated based on direct usage as applicable, with the remainder allocated on a pro-rata basis of gross profit, headcount, assets or other measures. Net Parent Investment As a result of the Separation, net Parent investment in the Consolidated Balance Sheet and Consolidated Statement of Equity was fully settled on November 3, 2021. As such, there was no balance in net Parent investment at March 31, 2022, and there was no activity within the account during the three and six months ended September 30, 2022. Prior to the Separation, net Parent investment in the historical Balance Sheet and Statement of Equity represented IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM, and Kyndryl’s accumulated earnings. The net Parent investment balance at September 30, 2021 was $7.0 billion. The amount of transfer activities from Parent recorded within net Parent investment during the three months ended September 30, 2021 was $1.8 billion, which included cash pooling and general financing activities, allocation of IBM’s corporate expenses, related party sales and purchases, related party intangible asset fees and income taxes. During the three months ended September 30, 2021, there were $660 million of non-cash transfers from Parent, including income taxes, allocation of Parent’s stock-based compensation, depreciation and other non-cash items. The amount of transfer activities from Parent recorded within net Parent investment during the six months ended September 30, 2021 was $2.2 billion, which included cash pooling and general financing activities, allocation of IBM’s corporate expenses, related party sales and purchases, related party intangible asset fees and income taxes. During the six months ended September 30, 2021, there were $820 million of non-cash transfers from Parent, including income taxes, allocation of Parent’s stock-based compensation, depreciation and other non-cash items. This resulted in a net transfer from Parent of $1.3 billion on the historical Statement of Cash Flows. Lease Guarantees Kyndryl has 59 lease agreements with third parties with an estimated aggregate lease liability of $122 million that are guaranteed by IBM as of September 30, 2022.

RELATED PARTY TRANSACTIONS

6 Months Ended

Sep. 30, 2022

NOTE 13. RELATED-PARTY TRANSACTIONS

Change in Beneficial Ownership

Based on IBM’s Quarterly Reports filed with the SEC on July 25, 2022 and October 25, 2022, IBM transferred all of its 19.9% retained interest in Kyndryl common stock to a third-party financial institution through two transactions pursuant to exchange agreements on May 19, 2022 and August 11, 2022. Effective August 11, 2022, IBM ceased to be a related party of Kyndryl. Transactions conducted on arms-length basis between Kyndryl and IBM after August 11, 2022 are no longer reported as related-party activities.

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 Company’s Consolidated Income Statement. Revenue generated from these services was $82 million and $144 million for the three months ended September 30, 2022 and 2021, respectively. Revenue generated from these services was $287 million and $291 million for the six months ended September 30, 2022 and 2021, respectively.

Kyndryl utilizes various IBM products and services, recognized as costs of services, in the fulfillment of services contracts. Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $421 million and $966 million for the three months ended September 30, 2022 and 2021, respectively. Related-party cost of $421 million for the current quarter includes outsourcing goods and services provided by the former Parent to Kyndryl’s customers post-Separation. Related-party cost of $966 million for the quarter ended September 30, 2021 was related to pre-Separation services, including costs incurred by Kyndryl to provide services to the former Parent for networking and IT services of $114 million; costs for the usage of IBM-branded software allocated to Kyndryl by the former Parent of $739 million; and depreciation charges related to IBM hardware allocated to Kyndryl of $114 million. Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $1,382 million and $1,872 million for the six months ended September 30, 2022 and 2021, respectively. Related-party cost of $1,382 million for the current six-month period includes outsourcing goods and services provided by the former Parent to Kyndryl’s customers post-Separation. Related-party cost of $1,872 million for the six months ended September 30, 2021 was related to pre-Separation services, including costs incurred by Kyndryl to provide services to the former Parent for networking and IT services of $229 million; costs for the usage of IBM-branded software allocated to Kyndryl by the former Parent of $1,420 million; and depreciation charges related to IBM hardware allocated to Kyndryl of $223 million.

Capital Expenditures with Former Parent

Capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Company’s Consolidated Statement of Cash Flows in the amounts of $89 million and $197 million for the six months ended September 30, 2022 and 2021, respectively. Additionally, as part of the Separation, IBM has committed to provide Kyndryl, at no cost, approximately $265 million of upgraded hardware over a two-year period. The amounts committed by IBM are reflected within other assets (noncurrent) within the Consolidated Balance Sheet. For the three and six months ended September 30, 2022, $21 million of the upgraded hardware committed by IBM was delivered to Kyndryl. Accordingly, such balance was derecognized in other assets (noncurrent) and recognized as property and equipment on the Balance Sheet and non-cash investing activity. The Company intends to recognize depreciation expense related to such equipment over its useful life of five years, consistent with our depreciation policy.

Related Party Agreements

On November 2, 2021, in connection with the Separation, the Company entered into several agreements with IBM that govern the relationship of the parties following the Separation. Such agreements were described in our 2021 Annual Report.

Allocation of Corporate Expenses

Post-Separation, general corporate expenses from IBM were no longer allocated to Kyndryl; therefore, no related amounts were reflected on the Company’s financial statements for the three and six months ended September 30, 2022.

Prior to the Separation, IBM allocated certain general corporate expenses that would have been incurred by Kyndryl had it been a separate, standalone company. These allocated general corporate expenses from IBM were recorded in the historical Consolidated Income Statement, Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows. Allocations for management costs and corporate support services provided to Kyndryl for the three months ended September 30, 2021 totaled $310 million, consisting of $2 million of allocated other (income) and expense, $17 million of allocated interest expense and $291 million of allocated selling, general and administrative expense, which primarily represents expenses for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. Allocations for management costs and corporate support services provided to Kyndryl for the six months ended September 30, 2021 totaled $640 million, consisting of $3 million of allocated other (income) and expense, $32 million of allocated interest expense and $604 million of allocated selling, general and administrative expense, which primarily

represents expenses for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology and other shared services. All such amounts have been deemed to have been incurred and settled by Kyndryl through net Parent investment in the period in which the costs were recorded. These costs were allocated based on direct usage as applicable, with the remainder allocated on a pro-rata basis of gross profit, headcount, assets or other measures.

Net Parent Investment

As a result of the Separation, net Parent investment in the Consolidated Balance Sheet and Consolidated Statement of Equity was fully settled on November 3, 2021. As such, there was no balance in net Parent investment at March 31, 2022, and there was no activity within the account during the three and six months ended September 30, 2022.

Prior to the Separation, net Parent investment in the historical Balance Sheet and Statement of Equity represented IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM, and Kyndryl’s accumulated earnings. The net Parent investment balance at September 30, 2021 was $7.0 billion. The amount of transfer activities from Parent recorded within net Parent investment during the three months ended September 30, 2021 was $1.8 billion, which included cash pooling and general financing activities, allocation of IBM’s corporate expenses, related party sales and purchases, related party intangible asset fees and income taxes. During the three months ended September 30, 2021, there were $660 million of non-cash transfers from Parent, including income taxes, allocation of Parent’s stock-based compensation, depreciation and other non-cash items. The amount of transfer activities from Parent recorded within net Parent investment during the six months ended September 30, 2021 was $2.2 billion, which included cash pooling and general financing activities, allocation of IBM’s corporate expenses, related party sales and purchases, related party intangible asset fees and income taxes. During the six months ended September 30, 2021, there were $820 million of non-cash transfers from Parent, including income taxes, allocation of Parent’s stock-based compensation, depreciation and other non-cash items. This resulted in a net transfer from Parent of $1.3 billion on the historical Statement of Cash Flows.

Lease Guarantees

Kyndryl has 59 lease agreements with third parties with an estimated aggregate lease liability of $122 million that are guaranteed by IBM as of September 30, 2022.