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 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, as previously disclosed. The SEC's staff is of the view that losses associated with the NHS contract should have been recognized prior to fiscal 2012 and continues to disagree with the Company's historical accounting and disclosures with respect to the NHS contract. Discussions are still ongoing but 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 SEC enforcement action or settlement 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

The rollover impact on the pre-tax income (loss) from continuing operations of the recorded out of period adjustments in the first quarter of fiscal 2015, fiscal 2014 and fiscal 2013 is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2013 Adjustments			Fiscal 2014 Adjustments			First Six Months Fiscal 2015 Adjustments			Total Adjustments
Fiscal 2015	$	—		$	—		$	(12	)	$	(12	)
Fiscal 2014	—			(2		)	13			11
Fiscal 2013	6			4			(1		)	9
Prior fiscal years (unaudited)	(6		)	(2		)	—			(8		)

See Note 15 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarters ended October 3, 2014 and September 27, 2013, respectively.

Fiscal 2015 Adjustments

During the quarter and six months ended October 3, 2014, the Company identified and recorded net adjustments decreasing pre-tax income from continuing operations by $4 million and increasing pre-tax income from continuing operations $12 million, respectively, that should have been recorded in prior periods.

The $4 million decrease in pre-tax income from continuing operations recorded during the second quarter of fiscal 2015 was primarily attributable to adjustments increasing cost of services partially offset by adjustments increasing revenue that should have been recorded in the first quarter of fiscal 2015. Out of period adjustments identified during the second quarter of fiscal 2015 that should have been recorded in prior fiscal years were not material.

Adjustments recorded during the quarter ended October 3, 2014 increased net income attributable to CSC common shareholders by $2 million.

The $12 million increase in pre-tax income from continuing operations recorded during the first six months of fiscal 2015 primarily included lower fiscal 2014 variable compensation partially offset by certain adjustments related to cost of services that were identified late in the 2014 close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements.Adjustments recorded during the six months ended October 3, 2014, that should have been recorded in prior fiscal years, increased net income attributable to CSC common shareholders by $7 million.

The impact of out of period adjustments recorded during fiscal 2015 on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and six months ended October 3, 2014, using the rollover method, is shown below:



	Quarter Ended October 3, 2014
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,080		$	(5	)	$	3,075
Costs of services (excludes depreciation and amortization and restructuring costs)	2,207			(8		)	2,199
Selling, general and administrative	346			—			346
Depreciation and amortization	252			(1		)	251
Restructuring costs	(7		)	—			(7		)
Interest expense	36			—			36
Interest income	(5		)	—			(5		)
Other expense, net	6			—			6
Income from continuing operations before taxes	245			4			249
Taxes on income	68			4			72
Income from continuing operations	177			—			177
Loss from discontinued operations, net of taxes	(21		)	(2		)	(23		)
Net income attributable to CSC common stockholders	151			(2		)	149
EPS – Diluted
Continuing operations	$	1.18		$	—		$	1.18
Discontinued operations	(0.14		)	(0.01		)	(0.15		)
Total	$	1.04		$	(0.01	)	$	1.03



	Six Months Ended October 3, 2014
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	6,317		$	9		$	6,326
Costs of services (excludes depreciation and amortization and restructuring costs)	4,571			22			4,593
Selling, general and administrative	690			—			690
Depreciation and amortization	524			(1		)	523
Restructuring costs	3			—			3
Interest expense	75			—			75
Other expense, net	5			—			5
Income from continuing operations before taxes	459			(12		)	447
Taxes on income	123			(3		)	120
Income from continuing operations	336			(9		)	327
Loss from discontinued operations, net of taxes	(29		)	2			(27		)
Net income attributable to CSC common stockholders	297			(7		)	290
EPS – Diluted
Continuing operations	$	2.22		$	(0.06	)	$	2.16
Discontinued operations	(0.20		)	0.01			(0.19		)
Total	$	2.02		$	(0.05	)	$	1.97

For the six months ended October 3, 2014, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll over method is shown below:



(Amounts in million)	Increase/(Decrease)	October 3, 2014
Receivable, net of allowance for doubtful accounts	Increase	$	5
Property and Equipment	Decrease	1
Software, net of accumulated amortization	Decrease	1
Outsourcing contract costs, net of accumulated amortization	Increase	2
Other assets	Decrease	3
Accrued expenses and other current liabilities	Decrease	14
Deferred revenue and advance contract payments	Increase	4

The Company has determined that the impact of the consolidated out of period adjustments recorded in the six months ended October 3, 2014 is immaterial to the consolidated results, financial position and cash flows for the second quarter and first six months of fiscal 2015 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015.

Fiscal 2014 Adjustments

During the second quarter and through the first six months of fiscal 2014, the Company recorded net pre-tax adjustments decreasing income from continuing operations, before taxes by $11 million and $2 million, respectively, that should have been recorded in prior fiscal years. The $11 million of pre-tax out of period adjustments consists of a $9 million 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 $1 million charge to cost of sales for reversal of previously deferred costs and a $1 million charge to selling, general and administrative (SG&A) expense reversing excess capitalization associated with internal systems development. Adjustments, net of tax, during the second quarter and through the first six months of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $20 million and $22 million, respectively. The differences are attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the second quarter was negligible and for the first six months of fiscal 2014 was an $8 million increase in tax expense. The tax effect on the pre-tax adjustments for the first six months of fiscal 2014 resulted in an increase in tax expense despite the net reduction in income from continuing operations before taxes due to taxes on increases in income in taxable jurisdictions and absence of tax benefits on decreases in income in jurisdictions with net operating loss carry forwards. The out of period adjustments to tax expense for the second quarter and through the first six months of fiscal 2014 resulted in an increase to income tax expense of $9 million and $11 million, respectively. The out of period adjustments to tax expense consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries.

In addition, during the second quarter of fiscal 2014, the Company recorded $17 million of pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2014. The $17 million of pre-tax out of period adjustments consists of (1) a $13 million charge to cost of sales consisting of $6 million in adjustments to prepaid and accrued balances, a $4 million reversal of previously deferred costs and a $3 million reduction in work in process due to margin corrections on contracts under percentage-of-completion accounting; (2) a $3 million charge to SG&A expense primarily due to reversal of excess capitalization associated with internal systems development, partially offset by other adjustments; and (3) a $1 million charge to depreciation expense to correct the useful life for certain leasehold improvements. Adjustments, net of tax, during the second quarter of fiscal 2014 decreased income from continuing operations by $11 million that should have been recorded in the first quarter. The difference is attributable to the tax effect of the net pre-tax adjustments.

During periods subsequent to September 27, 2013, the Company recorded out of period adjustments with a net pre-tax impact to income from continuing operations of $3 million, primarily in the GIS segment, and $11 million, primarily in the GBS segment, that should have been recorded in the second quarter and first six months of fiscal 2014, respectively. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the second quarter and for the first six months of fiscal 2014 would have been higher by $3 million and $11 million, respectively.

The impact of out of period adjustments recorded during fiscal 2014, and the first six months of fiscal 2015, on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and first six months ended September 27, 2013, using the rollover method, is shown below:



	Quarter Ended September 27, 2013
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,187		$	11		$	3,198
Costs of services (excludes depreciation and amortization and restructuring costs)	2,317			(15		)	2,302
Selling, general and administrative	314			(4		)	310
Depreciation and amortization	248			(1		)	247
Restructuring costs	15			—			15
Interest expense	35			—			35
Interest income	(3		)	—			(3		)
Other (income) expense	22			—			22
Income from continuing operations before taxes	239			31			270
Taxes on income	77			(5		)	72
Income from continuing operations	162			36			198
Income from discontinued operations, net of taxes	80			2			82
Net income attributable to CSC common stockholders	232			38			270
EPS – Diluted
Continuing operations	$	1.01		$	0.24		$	1.25
Discontinued operations	0.53			0.01			0.54
Total	$	1.54		$	0.25		$	1.79



	Six Months Ended September 27, 2013
(Amounts in millions, except per-share amounts)	As Reported		Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	6,441	$	23		$	6,464
Costs of services (excludes depreciation and amortization and restructuring costs)	4,754		9			4,763
Selling, general and administrative	602		—			602
Depreciation and amortization	502		(1		)	501
Restructuring costs	22		2			24
Interest expense	74		—			74
Other (income) expense	21		—			21
Income from continuing operations before taxes	473		13			486
Taxes on income	150		(20		)	130
Income from continuing operations	323		33			356
Income from discontinued operations, net of taxes	96		3			99
Net income attributable to CSC common stockholders	406		36			442
EPS – Diluted
Continuing operations	$	2.05	$	0.22		$	2.27
Discontinued operations	0.63		0.02			0.65
Total	$	2.68	$	0.24		$	2.92

For the six months ended September 27, 2013, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll over method is shown below:



(Amounts in million)	Increase/(Decrease)	September 27, 2013
Receivable, net of allowance for doubtful accounts	Decrease	$	8
Prepaid expenses and other current assets	Increase	6
Property and Equipment	Decrease	1
Software, net of accumulated amortization	Decrease	1
Other assets	Increase	1
Accrued payroll and related costs	Decrease	5
Accrued expenses and other current liabilities	Decrease	13
Deferred revenue and advance contract payments	Increase	$	28

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