Investigations and Out of Period Adjustments

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

As previously disclosed, on January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation. That investigation covered a range of matters as previously disclosed by the Company, including certain of the Company’s prior disclosures and accounting determinations. On May 2, 2011, the Audit Committee of the Board of Directors of the Company (the Audit Committee) commenced an independent investigation. The Audit Committee retained independent counsel to represent the Company on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants and disclosure experts to assist with their work. 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.

As a result of findings by the Audit Committee’s independent investigation, the Company has previously acknowledged certain historic errors and irregularities relating to accounting entries arising from the Nordics region, Australia, and the Company’s contractual relationship with the NHS, self-reported these errors and irregularities to the SEC’s Division of Enforcement, and made adjustments to its financial statements that are related to prior periods as reported in its past filings. In addition, as previously disclosed, certain personnel in certain foreign operations were reprimanded, suspended, terminated and/or resigned and additional controls were implemented. Based on recommendations from the Audit Committee’s independent investigation, the Company also instituted comprehensive enhancements beginning in 2011 to its compliance, financial and disclosure controls, and to the function of internal audit. In doing so, the Company made significant changes to prevent the type of misconduct identified by the Audit Committee’s independent investigation from recurring. The Company previously took significant steps to enhance its compliance culture and to remediate any deficiencies through: (1) Company-wide communications concerning the Company’s key organizational values of ethics, compliance and integrity; (2) strengthening internal controls and processes to further ensure the accuracy and integrity of the Company’s financial reporting; (3) improving technical training for employees in finance and accounting roles; (4) a restructuring of the internal audit group and the outsourcing of many internal audit activities to Ernst & Young to enhance the quality and scalability of the Company’s overall internal audit function; (5) creating an independent investigations unit at the Company to investigate suspected violations of the law or the Company's Code of Conduct; (6) elevating the position of Chief Compliance and Ethics Officer to provide direct reporting to the Audit Committee; (7) creating a new position of Chief Accounting Officer responsible for developing accounting policies and reviewing complex technical accounting issues; and (8) revising policies and procedures concerning percentage-of-completion (POC) accounting to enhance the review and monitoring of long-term contracts, including those contracts similar to the contract with NHS.

The Company has been in continuing discussions with the SEC’s staff concerning a potential resolution of the SEC’s investigation. Many of those discussions have concerned the Company’s prior use in fiscal 2009-2012 of the terms of ongoing NHS contract negotiations in developing its assumptions and judgments with respect to the margin used in recognizing profit under the POC accounting method and in evaluating the recoverability of NHS contract assets as well as the Company’s prior disclosures concerning such matters.

As previously disclosed, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the antifraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second or third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter. The Board of Directors of the Company determined that the Company's previously issued consolidated financial statements for fiscal 2009-2012 (including the associated auditors' reports and the interim periods within those years) should no longer be relied upon.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.

As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government, but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation 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 nine months 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 Nine 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 January 2, 2015 and December 27, 2013, respectively.

Fiscal 2015 Adjustments

During the quarter and nine months ended January 2, 2015, the Company identified and recorded net adjustments increasing pre-tax income from continuing operations by $4 million and $12 million, respectively, that should have been recorded in prior periods.

The $4 million increase in pre-tax income from continuing operations recorded during the third quarter of fiscal 2015 was primarily attributable to adjustments decreasing cost of services and increasing revenue that should have been recorded primarily in the first half of fiscal 2015. Out of period adjustments identified during the second and third quarters of fiscal 2015 that should have been recorded in prior fiscal years were not material. The Company also recorded a net tax benefit of $6 million, primarily the impact of discrete tax adjustments, in the current quarter. Adjustments recorded during the quarter ended January 2, 2015 increased net income attributable to CSC common stockholders by $10 million.

The $12 million increase in pre-tax income from continuing operations recorded during the first nine 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 year-end close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements. The Company also recorded a net tax benefit of $5 million, primarily the impact of discrete tax adjustments partially offset by the tax effects of out period adjustments, in the nine months ended January 2, 2015. Adjustments recorded during the nine months ended January 2, 2015, that should have been recorded in prior fiscal years, increased net income attributable to CSC common stockholders by $15 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 nine months ended January 2, 2015, using the rollover method, is shown below:



	Quarter Ended January 2, 2015
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	2,947		$	(1	)	$	2,946
Costs of services (excludes depreciation and amortization and restructuring costs)	2,530			3			2,533
Selling, general and administrative	356			—			356
Depreciation and amortization	238			—			238
Restructuring costs	12			—			12
Interest expense	37			—			37
Interest income	(4		)	—			(4		)
Other expense, net	1			—			1
Income from continuing operations before taxes	(418		)	(4		)	(422		)
Taxes on income	(105		)	6			(99		)
Income (loss) from continuing operations	(313		)	(10		)	(323		)
Loss from discontinued operations, net of taxes	—			—			—
Net income (loss) attributable to CSC common stockholders	(314		)	(10		)	(324		)
EPS – Diluted
Continuing operations	$	(2.23	)	$	(0.07	)	$	(2.30	)
Discontinued operations	—			—			—
Total	$	(2.23	)	$	(0.07	)	$	(2.30	)



	Nine Months Ended January 2, 2015
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	9,264		$	9		$	9,273
Costs of services (excludes depreciation and amortization and restructuring costs)	7,101			22			7,123
Selling, general and administrative	1,046			—			1,046
Depreciation and amortization	762			(1		)	761
Restructuring costs	15			—			15
Interest expense	112			—			112
Other expense, net	6			—			6
Income (loss) from continuing operations before taxes	41			(12		)	29
Taxes on income	18			5			23
Income from continuing operations	23			(17		)	6
Loss from discontinued operations, net of taxes	(29		)	2			(27		)
Net income (loss) attributable to CSC common stockholders	(17		)	(15		)	(32		)
EPS – Diluted
Continuing operations	$	0.08		$	(0.12	)	$	(0.04	)
Discontinued operations	(0.20		)	0.01			(0.19		)
Total	$	(0.12	)	$	(0.11	)	$	(0.23	)

For the nine months ended January 2, 2015, 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	January 2, 2015
Receivable, net of allowance for doubtful accounts	Increase	$	5
Property and Equipment	Decrease	1
Software, net of accumulated amortization	Decrease	2
Outsourcing contract costs, net of accumulated amortization	Increase	2
Other assets	Decrease	3
Accrued expenses and other current liabilities	Decrease	15
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 nine months ended January 2, 2015 is immaterial to the consolidated results, financial position and cash flows for the third quarter and first nine months of fiscal 2015 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015.

Fiscal 2014 Adjustments

During the third quarter and through the first nine months of fiscal 2014, the Company recorded net pre-tax adjustments increasing income from continuing operations before taxes by $5 million and $3 million, respectively, that should have been recorded in prior fiscal years. The $5 million of pre-tax out of period adjustments consists of a $7 million increase to revenue (due to a $6 million adjustment to recognize revenue on previously delivered software products and services and a $1 million adjustment to recognize revenue on previously delivered outsourcing services), partially offset by a $2 million charge to cost of services (COS) (consisting of a $5 million increase to COS relating to previously delivered software products and services, offset by a $3 million decrease to COS as a result of a margin correction on long-term contracts accounted for under the POC method).

Adjustments, net of tax, during the third quarter of fiscal 2014 that should have been recorded in prior fiscal years increased income from continuing operations by $4 million. Adjustments, net of tax, during the first nine months of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $18 million. The difference between the pre-tax and after tax impact is 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 third quarter was a $1 million increase to tax expense and for the first nine months of fiscal 2014 was a $9 million increase in tax expense. The tax effect on the pre-tax adjustments for the first nine months of fiscal 2014 resulted in a disproportionate increase in tax expense 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 third quarter and first nine months of fiscal 2014 resulted in no change and an increase to income tax expense of $12 million, respectively. The out of period adjustments to tax expense for the nine months ended December 27, 2013, 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 recorded during the second quarter of fiscal 2014.

In addition, during the third quarter of fiscal 2014, the Company recorded $7 million of pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first six months of fiscal 2014. The $7 million of pre-tax out of period adjustments consists primarily of a reduction of $7 million to COS (attributable to a $5 million reduction to accrued expenses, a $3 million reduction of costs related to a reversal of previously recognized software products and services, a $4 million pension accrual expense reduction, all partially offset by a $3 million reduction of margin on long-term contracts accounted for under the POC method, and a $2 million adjustment to recognize costs on previously delivered software products and services). In addition to the reduction to COS, a net $1 million adjustment was recorded to increase revenue on previously delivered software products and services and a $1 million increase in selling, general and administrative (SG&A) expenses was recognized related to a write-off of prepaid facility charges. Adjustments, net of tax, during the third quarter of fiscal 2014 increased income from continuing operations by $9 million that should have been recorded in the first six months of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.

During the second quarter of fiscal 2014, the Company recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $11 million 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 POC accounting), a $1 million charge to cost of sales for reversal of previously deferred costs and a $1 million charge to SG&A expense reversing excess capitalization associated with internal systems development. Adjustments, net of tax, during the second quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $20 million. The difference between the pre-tax and after tax impact is 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 of fiscal 2014 was negligible. The out of period adjustments to tax expense for the second quarter of fiscal 2014 resulted in an increase to income tax expense of $9 million. 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 POC 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 of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.

During the first quarter of fiscal 2014, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $9 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes is comprised of the following:


•	net adjustments decreasing income from continuing operations before taxes by $13 million resulting primarily from revenues and costs in its GBS segment;


•	net adjustments increasing income from continuing operations before taxes by $8 million resulting from the correction of payroll expenses within its GBS segment; and


•	net adjustments increasing income from continuing operations before taxes by $14 million resulting primarily from adjustments identified by the Company late in the fiscal 2013 closing process.

Adjustments recorded during the first quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $2 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the adjustments described above, and $2 million of tax expense related to net adjustments that should have been recorded in prior periods.

During periods subsequent to December 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 NPS, subsequent to December 27, 2013 that should have been recorded in the first nine months of fiscal 2014. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the first nine months of fiscal 2014 would have been higher by $3 million.

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



	Quarter Ended December 27, 2013
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,228		$	(5	)	$	3,223
Costs of services (excludes depreciation and amortization and restructuring costs)	2,261			8			2,269
Selling, general and administrative	318			(1		)	317
Depreciation and amortization	251			—			251
Restructuring costs	11			—			11
Interest expense	38			—			38
Interest income	(4		)	—			(4		)
Other (income) expense	(5		)	—			(5		)
Income from continuing operations before taxes	358			(12		)	346
Taxes on income	77			(4		)	73
Income from continuing operations	281			(8		)	273
Income from discontinued operations, net of taxes	(5		)	(3		)	(8		)
Net income attributable to CSC common stockholders	271			(11		)	260
EPS – Diluted
Continuing operations	$	1.84		$	(0.05	)	$	1.79
Discontinued operations	(0.03		)	(0.02		)	(0.05		)
Total	$	1.81		$	(0.07	)	$	1.74



	Nine Months Ended December 27, 2013
(Amounts in millions, except per-share amounts)	As Reported		Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	9,669	$	17		$	9,686
Costs of services (excludes depreciation and amortization and restructuring costs)	7,015		16			7,031
Selling, general and administrative	920		—			920
Depreciation and amortization	753		(1		)	752
Restructuring costs	33		2			35
Interest expense	112		—			112
Other (income) expense	16		—			16
Income from continuing operations before taxes	831		—			831
Taxes on income	227		(24		)	203
Income from continuing operations	604		24			628
Income from discontinued operations, net of taxes	91		—			91
Net income attributable to CSC common stockholders	677		24			701
EPS – Diluted
Continuing operations	$	3.88	$	0.16		$	4.04
Discontinued operations	0.60		—			0.60
Total	$	4.48	$	0.16		$	4.64

For the nine months ended December 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	December 27, 2013
Receivable, net of allowance for doubtful accounts	Decrease	$	6
Prepaid expenses and other current assets	Increase	1
Property and Equipment	Decrease	1
Other assets	Increase	1
Accrued payroll and related costs	Decrease	9
Accrued expenses and other current liabilities	Decrease	18
Deferred revenue and advance contract payments	Increase	22

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