Investigations and Out of Period Adjustments

Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments

As previously disclosed, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in its former Managed Services Sector (MSS) segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in the Company's investigation. On January 28, 2011, the Company was notified by the SEC's Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC's Division of Enforcement as well as matters under investigation by the Audit Committee, as further described below. The Company is cooperating in the SEC's investigation.

On May 2, 2011, the Audit Committee commenced an independent investigation into the matters relating to the former MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC's Division of Enforcement, and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants to assist with their work. Independent counsel also represents CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with the investigation by the SEC's Division of Enforcement.

The Audit Committee’s investigation was expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (iii) certain of the Company’s accounting practices that involve the percentage-of-completion accounting method, including the Company’s contract with the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

In addition to the matters noted above, the SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosures and accounting determinations with respect to the Company's contract with the NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are continuing to respond to SEC questions and to cooperate with the SEC's Division of Enforcement in its investigation of prior disclosures and accounting determinations with respect to the Company's contract with the NHS. The SEC's investigative activities are ongoing.

In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company's conclusions relating to the materiality of such adjustments, and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigation being conducted by the SEC's Division of Enforcement and the review of the Company's financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors, irregularities or other areas of review. As a result, we have incurred and may continue to incur significant legal and accounting expenditures. As the Company previously disclosed, certain of its non-U.S. employees and certain of its former employees, including certain former executives in the United States, have received Wells notices from the SEC’s Division of Enforcement in connection with its ongoing investigation of the Company. The Company received a Wells notice from the SEC’s Division of Enforcement on December 11, 2013. A Wells notice is not a formal allegation or a finding of wrongdoing; it is a preliminary determination by the SEC Enforcement Staff to recommend that the Commission file a civil enforcement action or administrative proceeding against the recipient. Under SEC procedures, a recipient of a Wells notice has an opportunity to respond in the form of a Wells submission that seeks to persuade the Commission that such an action should not be brought. The Company has been availing itself of the Wells process by making a Wells submission to explain its views concerning such matters, which are aided by the Company Audit Committee's independent investigation and certain expert opinions of outside professionals. The Company made such a submission on January 14, 2014 and a supplemental submission on April 9, 2014. The Company, through outside counsel, has been in continuing discussions with the SEC Enforcement Staff concerning a potential resolution of the staff’s investigation involving the Company. However, to date those discussions have not resulted in a resolution. The Company is unable to estimate with confidence or certainty how long the SEC process will last or its ultimate outcome, including whether the Company will reach a settlement with the SEC and, if so, the amount of any related monetary fine and other possible remedies. In addition, the Company is unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of its financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC's investigation, even if ultimately resolved favorably for CSC, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows.

Out of Period Adjustments Financial Impact Summary

Cumulative Impact of Out of Period Adjustments

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments in fiscal 2014, 2013 and 2012 is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2012 Adjustments			Fiscal 2013 Adjustments			Fiscal 2014 Adjustments			Total Adjustments
Fiscal 2014	$	—		$	—		$	(2	)	$	(2	)
Fiscal 2013	—			6			4			10
Fiscal 2012	79			7			(6		)	80
Prior fiscal years (unaudited)	(79		)	(13		)	4			(88		)

See Note 19 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for fiscal 2014, 2013 and 2012.

Fiscal 2014 Adjustments Financial Impact Summary

During fiscal 2014, the Company identified and recorded net adjustments increasing income from continuing operations before taxes by $2 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes for fiscal 2014 is comprised of the following:


•	net adjustments decreasing fourth quarter pre-tax income by $1 million primarily resulting from the recognition of impairment charges on abandoned capitalized software costs;

•

net adjustments increasing third quarter pre-tax income by $5 million primarily resulting from the recognition of revenue on previously delivered software products and services and previously delivered outsourcing services, offset by charges to cost of services (COS) relating to previously delivered software productions and services and a margin correction on long-term contracts accounted for under the percentage-of-completion revenue method;

•

net adjustments decreasing second quarter pre-tax income by $11 million primarily resulting from the reversal of revenue due to deferral of revenue for undelivered elements on software contracts lacking vendor specific objective evidence and margin corrections on contracts under percentage of completion accounting, a charge to COS for reversal of previously deferred costs and a charge to selling, general and administrative (SG&A) expense reversing excess capitalization associated with internal systems development; and


•	net adjustments increasing first quarter pre-tax income by $9 million primarily resulting from the corrections of revenues and costs in its GBS segment, correction of payroll expenses within its GBS segment, corrections to record adjustments that were identified late in the close process but not included in the Company's consolidated fiscal 2013 financial statements.

Adjustments recorded during fiscal 2014 that should have been recorded in prior fiscal years decreased net income attributable to CSC common shareholders by $18 million. This decrease is attributable to the tax effect of the adjustments described above, a net $8 million of tax expense resulting from discrete tax items that should have been recorded in prior fiscal years and the effect of income from discontinued operations, net of tax of $2 million. The discrete tax expenses are primarily attributable to a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries and to the tax effect of the net pre-tax adjustments.

The following table summarizes the cumulative effect on net income attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2014 under the rollover method. The amounts noted below also include certain adjustments that only impacted quarters (unaudited) within fiscal 2014, but had no net impact on the full year fiscal 2014 results:



	Fiscal 2014
	Quarter Ended
(Amounts in millions)	June 28, 2013			September 27, 2013			December 27, 2013			March 28, 2014			Total
Other adjustments	$	(21	)	$	32		$	(12	)	$	(1	)	$	(2	)
Effect on income from continuing operations before taxes	(21		)	32			(12		)	(1		)	(2		)
Taxes on income	14			(4		)	—			—			10
Other income tax adjustments	2			9			5			(8		)	8
Effect on income from discontinued operations, net of taxes	—			—			(1		)	3			2
Effect on net income attributable to CSC common shareholders	$	(5	)	$	37		$	(8	)	$	(6	)	$	18

Out of period adjustments recorded in fiscal 2014 had the following impact on select line items of the Consolidated Statements of Operations for the twelve months ended March 28, 2014 under the rollover method:



	Twelve Months Ended March 28, 2014
(Amounts in millions, except per-share amounts)	As Reported		Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenues	$	12,998	$	21		$	13,019
Costs of services (excludes depreciation and amortization and restructuring costs)	9,567		23			9,590
Selling, general and administrative (excluding restructuring costs)	1,278		—			1,278
Depreciation and amortization	1,018		(2		)	1,016
Restructuring costs	76		2			78
Interest expense	147		—			147
Other expense, net	18		—			18
Income from continuing operations before taxes	910		(2		)	908
Taxes on income	289		(18		)	271
Income from continuing operations	621		16			637
Income from discontinued operations, net of taxes	69		2			71
Net income attributable to CSC common shareholders	674		18			692
EPS – Diluted
Continuing operations	$	4.01	$	0.11		$	4.12
Discontinued operations	0.46		0.01			0.47
Total	$	4.47	$	0.12		$	4.59

The out of period adjustments affecting income from continuing operations before taxes during the twelve months ended March 28, 2014 under the rollover method are related to the following consolidated balance sheet line items:


•	Accounts receivable ($1 million decrease);


•	Prepaid expenses and other current assets ($1 million increase);


•	Software ($2 million decrease);


•	Other assets ($1 million decrease);


•	Property and equipment ($1 million decrease);


•	Accrued payroll and related costs ($8 million decrease);


•	Accrued expenses and other current liabilities ($18 million decrease); and


•	Deferred revenue ($20 million increase).

The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2014 is immaterial to the consolidated results, financial position and cash flows for fiscal 2014 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014.

Fiscal 2013 Adjustments Financial Impact Summary

During fiscal 2013, the Company identified and recorded net adjustments decreasing income from continuing operations before taxes by $6 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes for fiscal 2013 is comprised of the following:


•	net adjustments decreasing fourth quarter pre-tax income by $9 million resulting primarily from the correction of inappropriately capitalized operating costs originating from the Company's GIS segment, a software revenue recognition correction originating from the Company's GBS segment and the correction of understated payroll and related expenses at Corporate;


•	net adjustments decreasing third quarter pre-tax income by $1 million primarily resulting from the correction of useful lives of property and equipment in service at a GIS contract that were inconsistent with established CSC accounting conventions;


•	net adjustments increasing second quarter pre-tax income by $5 million primarily resulting from the correction of accounting errors identified by the Company related to costs incurred under the NHS contract (see below for more discussion of out of period adjustments related to the Company's NHS contract); and

•

net adjustments decreasing first quarter pre-tax income by $1 million primarily resulting from the corrections of fiscal 2012 revenue recognized on a software contract in the Company's GBS segment, corrections of fiscal 2012 restructuring cost accruals originating primarily from the Company's GBS and GIS segments and corrections to record adjustments that were identified late in the close process but not included in the Company's consolidated fiscal 2012 financial statements

Adjustments recorded during fiscal 2013 that should have been recorded in prior fiscal years increased net income attributable to CSC common shareholders by $7 million. This increase is attributable to the tax effect of the adjustments described above and $5 million of tax benefit resulting from discrete tax items that should have been recorded in prior fiscal years. The discrete tax benefits are primarily attributable to the adjustment of the deferred tax liability related to intellectual property assets.

Further adjustments were identified and recorded in fiscal 2014 related to fiscal 2013 that increased the net error reported by $4 million.

NHS

As previously disclosed in fiscal 2012 and in the first quarter of fiscal 2013, the Company had identified certain additional items related to the investigation of the Company's use of the percentage-of-completion accounting method used on the NHS contract. During the second quarter of fiscal 2013, based on its analysis of these items, the Company recorded net credits of $9 million in pre-tax out of period adjustments impacting prior fiscal years. During the third quarter of fiscal 2013, the Company identified additional prior period errors. Such errors identified in the third quarter, which were self-correcting in the third quarter of fiscal 2012, have no impact on income from continuing operations before taxes for fiscal 2013. The accounting errors identified during fiscal 2013 are primarily related to either costs incurred under the contract or the estimation of contract revenues and costs at completion, which resulted in the overstatement of income from continuing operations before taxes. The Company has concluded that there is no cumulative impact of this overstatement as a result of the $1.5 billion specified contract charge recorded as of December 30, 2011 being overstated by the same amount.

The Company has concluded that the errors identified during fiscal 2013 do not appear to have any impact on amounts charged to the NHS. Based on information provided by independent counsel, the Company believes that a small portion of such adjustments should be characterized as intentional accounting irregularities. The impact on income (loss) from continuing operations before taxes of the out of period adjustments identified in fiscal 2013 related to the Company's NHS contract is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2013 Adjustments
Fiscal 2013	$	(9	)
Fiscal 2012	10
Fiscal 2011	(15		)
Fiscal 2010	18
Prior fiscal years (unaudited)	(4		)

The following table summarizes the cumulative effect on the fiscal 2013 net income attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2014 and 2013 under the rollover method. The amounts noted below also include certain adjustments that only impacted quarters (unaudited) within fiscal 2013, but had no net impact on the full year fiscal 2013 results:



	Fiscal 2013
	Quarter Ended
(Amounts in millions)	June 29, 2012			September 28, 2012			December 28, 2012			March 29, 2013			Total
NHS adjustments	$	—		$	(9	)	$	—		$	—		$	(9	)
Other adjustments	3			9			—			7			19
Effect on income from continuing operations before taxes	3			—			—			7			10
Taxes on income	(2		)	(2		)	(4		)	(7		)	(15		)
Other income tax adjustments	(2		)	—			(1		)	(12		)	(15		)
Effect on income from discontinued operations, net of taxes	—			—			(28		)	26			(2		)
Effect on net income attributable to CSC common shareholders	$	(1	)	$	(2	)	$	(33	)	$	14		$	(22	)

Out of period adjustments recorded during fiscal 2014 and 2013 had the following impact on select line items of the Consolidated Statements of Operations for the twelve months ended March 29, 2013 under the rollover method:



	Twelve Months Ended March 29, 2013
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenues	$	14,195		$	(2	)	$	14,193
Costs of services (excludes depreciation and amortization and restructuring costs)	11,100			(13		)	11,087
Selling, general and administrative (excludes restructuring costs)	1,176			—			1,176
Depreciation and amortization	1,070			(2		)	1,068
Restructuring costs	264			3			267
Interest expense	183			—			183
Other income, net	(25		)	—			(25		)
Income from continuing operations before taxes	449			10			459
Taxes on income	(49		)	30			(19		)
Income from continuing operations	498			(20		)	478
Income from discontinued operations, net of taxes	481			(2		)	479
Net income attributable to CSC common shareholders	961			(22		)	939
EPS – Diluted
Continuing operations	$	3.09		$	(0.13	)	$	2.96
Discontinued operations	3.09			(0.01		)	3.08
Total	$	6.18		$	(0.14	)	$	6.04

The out of period adjustments affecting loss from continuing operations before taxes during the twelve months ended March 29, 2013 under the rollover method are related to the following consolidated balance sheet line items:


•	Prepaid expenses and other current assets ($14 million increase);


•	Software ($1 million increase);


•	Outsourcing contract costs ($1 million decrease);


•	Other assets ($5 million decrease);


•	Property and equipment ($4 million decrease);


•	Accrued payroll and related costs ($9 million increase);


•	Accrued expenses and other current liabilities ($9 million increase); and


•	Deferred revenue ($3 million decrease).

The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2014 and 2013 is immaterial to the consolidated results, financial position and cash flows for fiscal 2013 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014 and 2013.

Fiscal 2012 Adjustments Financial Impact Summary

During fiscal 2012, the Company recorded various pre-tax adjustments that should have been recorded in prior fiscal years. The aggregate fiscal 2012 adjustments increased the loss from continuing operations before taxes by $79 million ($63 million net of tax) and were comprised of $13 million of charges relating to operations in the Nordic region, $23 million of charges relating to the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's GBS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s GIS and GBS segments, with $24 million and $39 million of adjustments within GIS and GBS, respectively. Further adjustments were identified and recorded in fiscal 2014 and 2013 related to fiscal 2012 that decreased the net error by $6 million and increased the net error by $7 million, respectively.

Nordic Region

The Company attributes the $13 million in pre-tax adjustments recorded in the Nordic region in fiscal 2012 to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than a $1 million operating lease adjustment noted in the first quarter of fiscal 2012 which was a refinement of an error previously corrected and reported in fiscal 2011.

Australia

As previously disclosed, in the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities were identified. As a result, certain personnel in Australia have been reprimanded, terminated and/or resigned. The Company attributes the $23 million of pre-tax adjustments recorded in fiscal 2012 to either intentional accounting irregularities (intentional irregularities) or other accounting errors (Other Errors). Other Errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation. The impact of the adjustments on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2008 & Prior (unaudited)			Fiscal 2009 (unaudited)			Fiscal 2010			Fiscal 2011			Total
Intentional irregularities	$	10		$	(7	)	$	(4	)	$	1		$	—
Other Errors	(7		)	(16		)	3			(3		)	(23		)
	$	3		$	(23	)	$	(1	)	$	(2	)	$	(23	)

NHS

As previously disclosed, in fiscal 2012, $25 million of out of period adjustments reducing income from continuing operations related to the Company's NHS contract were identified and recorded. During the course of the investigation in fiscal 2012 of the percentage-of-completion accounting method used on the Company's NHS contract, certain accounting errors were identified related to costs incurred under the contract, which resulted in errors in the recognition of income from continuing operations that would have reduced by approximately $24 million the $1.5 billion write-off recorded by the Company in the third quarter of fiscal 2012. Although the Company has concluded that these errors do not appear to have any impact on amounts charged to the NHS, the errors have impacted the operating income recognized on the NHS contract. The exclusion of certain costs incurred under the contract caused the estimated margin at completion, which determines the operating income that is booked when revenue milestones are achieved, to be overstated. Although the Company has concluded that there is no cumulative impact as a result of the $1.5 billion charge relating to the NHS contract recorded as of December 30, 2011, operating income from fiscal year 2007 through and including fiscal 2011 has been overstated by a total of approximately $24 million and, therefore, the charge taken by the Company as of December 30, 2011 was overstated by approximately the same amount.

Certain additional items had been identified related to the NHS contract that could have had an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior fiscal years. These additional items were subject to further investigation and therefore were not recorded in fiscal 2012. See discussion of fiscal 2013 adjustments above for further information regarding the impact of such items.

Certain CSC finance employees based in the U. K. were aware prior to fiscal 2012 of the aforementioned errors, but those employees failed to appropriately correct the errors. Therefore, the Company has classified these errors as intentional. Such categorization was provided to the Company through the independent investigation. As a result, certain personnel have been suspended.

The impact on income (loss) from continuing operations before taxes of the $25 million of out of period adjustments identified in fiscal 2012 related to the Company's NHS contract is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2012 Adjustments
Fiscal 2012	$	25
Fiscal 2011	(7		)
Fiscal 2010	(4		)
Prior fiscal years (unaudited)	(14		)

NPS

As previously reported, in fiscal 2012 the Company identified and recorded pre-tax adjustments reducing income from continuing operations before taxes by $16 million. Such adjustments were identified by the Company and were primarily related to the percentage-of-completion accounting adjustments.

Americas Outsourcing

As previously disclosed, in the course of the independent investigation of Americas Outsourcing accounting practices, accounting conventions used by Americas Outsourcing relating to intraperiod cost allocations were determined to be unintentional accounting errors. The errors did not have an impact on a fiscal year basis. The Company also determined that other operating units employed similar practices and made necessary corrections.

The following table summarizes the cumulative effect on the fiscal 2012 net loss attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2014, 2013, and 2012 under the rollover method. The amounts noted below also include certain adjustments that only impacted quarters (unaudited) within fiscal 2012, but had no net impact on the full year fiscal 2012 results:



	Fiscal 2012
	Quarter Ended
(Amounts in millions)	July 1, 2011			September 30, 2011			December 30, 2011			March 30, 2012			Total
Operating costs inappropriately capitalized	$	1		$	—		$	—		$	—		$	1
Misapplication of US GAAP	1			(1		)	2			(1		)	1
Miscellaneous errors	2			7			—			2			11
Total Nordic adjustments	4			6			2			1			13
Operating costs inappropriately capitalized	—			11			—			—			11
Misapplication of US GAAP	—			8			—			1			9
Miscellaneous errors	—			2			2			(2		)	2
Total Australia adjustments	—			21			2			(1		)	22
NHS adjustments	(2		)	(2		)	46			(7		)	35
NPS adjustments	3			1			(5		)	11			10
Other adjustments	2			(10		)	1			7			—
Effect on income (loss) from continuing operations before taxes	7			16			46			11			80
Taxes on income	(2		)	(4		)	(2		)	(4		)	(12		)
Other income tax adjustments	1			14			(9		)	(6		)	—
Effect on net income (loss) attributable to CSC common shareholders	$	6		$	26		$	35		$	1		$	68

Out of period adjustments recorded during fiscal 2014, 2013, and 2012 had the following impact on select line items of the Consolidated Statements of Operations for the twelve months ended March 30, 2012 under the rollover method:



	Twelve Months Ended March 30, 2012
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenues	$	14,476		$	50		$	14,526
Costs of services (excludes depreciation and amortization, specified contract charge, settlement charge and restructuring costs)	12,181			(28		)	12,153
Cost of services - specified contract charge (excludes amount charged to revenue of $204)	1,281			3			1,284
Selling, general and administrative	1,108			2			1,110
Depreciation and amortization	1,141			(1		)	1,140
Restructuring costs	140			(5		)	135
Interest expense	174			(3		)	171
Other expense, net	4			2			6
Loss from continuing operations before taxes	(4,487		)	80			(4,407		)
Taxes on income	(96		)	12			(84		)
Loss from continuing operations	(4,391		)	68			(4,323		)
Income from discontinued operations, net of taxes	166			—			166
Net loss attributable to CSC common shareholders	(4,242		)	68			(4,174		)
EPS – Diluted
Continuing operations	$	(28.44	)	$	0.44		$	(28.00	)
Discontinued operations	1.07			—			1.07
Total	$	(27.37	)	$	0.44		$	(26.93	)

The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2014, 2013, and 2012 is immaterial to the consolidated results, financial position and cash flows for fiscal 2012 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014, 2013, and 2012.