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

The level of an asset or liability within the fair value hierarchy is determined based on the lowest level of any input that is significant to the fair value measurement.

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

●

Counterparty credit risk adjustments are applied to certain 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 certain liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s credit risk as observed in the credit default swap market.

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are recorded at fair value or at cost, as appropriate, in the period they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The impairment models used for non-financial assets depend on the type of asset. The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy.

We perform a qualitative assessment of asset impairments on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value is less than carrying value.

Financial Assets and Liabilities Measured at Fair Value

The gross balances of derivative assets contained within prepaid expenses and other current assets in the Consolidated Balance Sheet were $32 million at December 31, 2022 and $9 million at March 31, 2022. The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other noncurrent liabilities in the Consolidated Balance Sheet were $9 million at December 31, 2022 and $2 million at March 31, 2022. The fair value of derivatives is the difference between the contractual forward price and the current available forward price for the residual maturity of the contract using observable market rates and is categorized as Level 2 in the fair value hierarchy.

The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Balance Sheet, the Company does not offset derivative assets against liabilities with counterparties in master netting arrangements by counterparty, and there was no derivative instruments activity impacted by master netting agreements at December 31, 2022 and March 31, 2022.

Financial Assets and Liabilities Not Measured at Fair Value

Accounts receivable are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. If measured at fair value in the consolidated 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.

The Company has time deposits that have maturities of 90 days or less, and their carrying values approximate fair value. The balance of these time deposits with maturities of 90 days or less contained within cash and cash equivalents in the Consolidated Balance Sheet at December 31, 2022 and March 31, 2022 was $775 million and $972 million, respectively. If measured at fair value in the consolidated financial statements, time deposits with maturities of 90 days or less would be categorized as Level 2 in the fair value hierarchy.

The fair value of our outstanding debt (excluding finance lease obligations) is based on various methodologies, including quoted prices in active markets for identical debt instruments, which is a Level 1 measurement, and calculated fair value using an expected present value technique that uses rates currently available to the Company for debt in active

markets with similar terms and remaining maturities, which is a Level 2 measurement. Our outstanding debt (excluding finance lease obligations) had a carrying value of $3.0 billion as of each of December 31, 2022 and March 31, 2022, and an estimated fair value of $2.3 billion and $2.7 billion as of December 31, 2022 and March 31, 2022, respectively.

Financial assets are measured for impairment on a recurring basis by comparing their fair value with their amortized cost basis. There were no impairments of financial assets recognized for any of the periods presented.

Transfers of Financial Assets

The Company has entered into agreements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized at the time of the transfer. An agreement with third-party financial institutions executed in November 2021 enabled us to sell, at any one time, on a revolving basis, up to $1.1 billion of our trade receivables with payment terms from three to nine months and was subsequently amended to decrease such amount to $1.0 billion. This agreement was further amended during the quarter ended December 31, 2022 to provide that we may sell an additional amount of trade receivables with payment terms of less than three months, contingent on the approval of the counterparty to purchase such receivables, with no defined limit on such sales. In the quarter ended June 30, 2022, the Company entered into a separate agreement, in which the sale of receivables is contingent on the approval of the counterparty with no defined facility limit.

The net proceeds from these arrangements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under this program were $930 million and $2.3 billion for the three and nine months ended December 31, 2022, respectively. Gross proceeds from receivables sold to third parties and the financing division of our former Parent were $472 million and $1.7 billion for the three and nine months ended December 31, 2021, respectively. The fees associated with the transfers of receivables were $14 million and $34 million for the three and nine months ended December 31, 2022, respectively, and immaterial for the three and nine months ended December 31, 2021, respectively.

Derivative Financial Instruments

Foreign Exchange Risk

Anticipated Cost Transactions

The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage foreign currency risk. Changes in fair value of derivatives designated as cash flow hedges are recorded, net of applicable taxes, in other comprehensive income and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings. The cash flows associated with derivatives designated as cash flow hedges are reported in cash flows from operating activities in the Consolidated Statement of Cash Flows. Through the pre-Separation periods, derivatives designated as cash flow hedges were deemed to be associated with the Company’s operations and were allocated to the Company’s Consolidated Income Statement based on its pro rata share of the underlying items hedged, where applicable, with the remainder allocated on a pro rata basis of revenue.

At December 31, 2022 and March 31, 2022, the total notional amount of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $285 million and $216 million, respectively. The notional amounts of derivative instruments do not necessarily represent the amounts exchanged by the Company with third parties and are not necessarily a direct measure of the financial exposure. The maximum remaining length of time over which the Company hedged its exposure is approximately one year. At December 31, 2022 and March 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.5 years.

At December 31, 2022, in connection with cash flow hedges of foreign currency cost transactions, the Company had net deferred losses of $5 million (before taxes) in accumulated other comprehensive income (“AOCI”). At March 31, 2022, in connection with cash flow hedges of foreign currency cost transactions, the Company had net deferred gains of $3 million (before taxes) in AOCI. The Company estimates that $5 million (before taxes) of deferred net losses on derivatives in AOCI at December 31, 2022 will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

Subsidiary Cash and Foreign Currency Asset / Liability Management

The Company uses global treasury centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. Changes in fair value of derivatives not designated as hedges are reported in earnings in other (income) and expense. Cash flows from derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. The terms of these swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At December 31, 2022 and March 31, 2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $1.7 billion and $945 million, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of cash flow 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) from
(Dollars in millions)	Total				Hedge Activity
For the three months ended December 31:	2022		2021		2022		2021
Cost of services	$	3,596	$	3,999	$	(2)	$	1
Other expense (income)		30		19		43		4

Gain (Loss) Recognized in Consolidated Income Statement

(Dollars in millions)

Consolidated

Recognized on

Attributable to Risk

For the three months

Income Statement

Derivatives

Being Hedged

ended December 31:

Line Item

2022

2021

2022

2021

Derivative instruments not designated as hedging instruments:

Foreign exchange contracts

Other expense (income)

Total

—


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)	Recognized				Consolidated	Reclassified
For the three months	in OCI				Income Statement	from AOCI
ended December 31:	2022		2021		Line Item	2022		2021
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(4)	$	4	Cost of services	$	(2)	$	1
Total	$	(4)	$	4		$	(2)	$	1

NA - not applicable


					Gains (Losses) from
(Dollars in millions)	Total				Hedge Activity
For the nine months ended December 31:	2022		2021		2022		2021
Cost of services	$	10,886	$	12,233	$	(1)	$	1
Other expense (income)		16		13		27		4

Gain (Loss) Recognized in Consolidated Income Statement

(Dollars in millions)

Consolidated

Recognized on

Attributable to Risk

For the nine months

Income Statement

Derivatives

Being Hedged

ended December 31:

Line Item

2022

2021

2022

2021

Derivative instruments not designated as hedging instruments:

Foreign exchange contracts

Other expense (income)

Total

—


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)	Recognized				Consolidated	Reclassified
For the nine months	in OCI				Income Statement	from AOCI
ended December 31:	2022		2021		Line Item	2022		2021
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(9)	$	4	Cost of services	$	(1)	$	1
Total	$	(9)	$	4		$	(1)	$	1

NA - not applicable

For the three and nine months ended December 31, 2022 and 2021, there were no gains or losses excluded from the assessment of hedge effectiveness for cash flow hedges, or associated with an underlying exposure that did not or was not expected to occur, nor are there any anticipated in the normal course of business. For the three and nine months ended December 31, 2022 and 2021, amounts recognized in OCI and reclassified from AOCI were immaterial, as the gains and losses from maturing and revalued cash flow hedges on various currencies offset each other.

Prior to the third quarter of 2021, Kyndryl did not independently execute derivative financial instruments to manage its foreign currency risk and instead participated in a centralized foreign currency hedging program administered by IBM. The hedging activity allocated to Kyndryl was for the former Parent’s forecasted currency exposures. In the third quarter of 2021, we began to execute trades to hedge certain of the Company’s foreign exchange exposures.