NOTE 14 – SEGMENT INFORMATION

In accordance with FASB ASC Topic 280, Segment Reporting, the Company disaggregates its operations into Mainframe Solutions, Enterprise Solutions and Services segments, which is utilized by the Chief Operating Decision Maker, who is the Company's Chief Executive Officer, for evaluating segment performance and allocating resources.

The Company’s Mainframe Solutions and Enterprise Solutions segments are comprised of its software business organized by the nature of the Company’s software offerings and the platforms on which the products operate. The Services segment is comprised of product implementation, consulting, customer education and customer training services, including those directly related to the Mainframe Solutions and Enterprise Solutions software that the Company sells to its customers.

The Company regularly enters into a single arrangement with a customer that includes mainframe solutions, enterprise solutions and services. The amount of contract revenue assigned to operating segments is generally based on the manner in which the proposal is made to the customer. The software product revenue assigned to the Mainframe Solutions and Enterprise Solutions segments is based on either (1) a list price allocation method (which allocates a discount in the total contract price to the individual products in proportion to the list price of the products); (2) allocations included within internal contract approval documents; or (3) the value for individual software products as stated in the customer contract. The price for the implementation, consulting, education and training services is separately stated in the contract and these amounts of contract revenue are assigned to the Services segment. The contract value assigned to each operating segment is then recognized in a manner consistent with the revenue recognition policies of the Company prior to the adoption of Topic 606. Accordingly, differences in segment revenue and consolidated revenue arise primarily from (a) term and perpetual software licenses that are recognized ratably under the Company’s segment policies and in its Condensed Consolidated Statement of Operations for periods prior to the adoption of Topic 606 that, after adoption of Topic 606, are recognized at a point-in-time; and (b) differences in the allocations of contract value among products and services in a contract arising from the use of a relative standalone selling price allocation method in the Company’s Condensed Consolidated Statement of Operations for periods after adoption of Topic 606 as compared to the aforementioned approach to assigning contract value to the Company’s segments.

Segment expenses include costs that are controllable by segment managers (i.e., direct costs) and, in the case of the Mainframe Solutions and Enterprise Solutions segments, an allocation of shared and indirect costs (i.e., allocated costs). Segment-specific direct costs include a portion of selling and marketing costs, licensing and maintenance costs, product development costs and general and administrative costs. Allocated segment costs primarily include indirect and non-segment-specific direct selling and marketing costs and general and administrative costs that are not directly attributable to a specific segment. The basis for allocating shared and indirect costs between the Mainframe Solutions and Enterprise Solutions segments is dependent on the nature of the cost being allocated and is generally either in proportion to segment revenues or in proportion to the related direct cost category. Expenses for the Services segment consist of cost of professional services and other direct costs included within selling and marketing and general and administrative expenses. There are no allocated or indirect costs for the Services segment.

Segment expenses do not include amortization of purchased software, amortization of other intangible assets, amortization of internally developed software products, share-based compensation expense, certain foreign exchange derivative hedging gains and losses, severance and facility actions approved by the Board, and other miscellaneous costs. A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed.

The Company’s summary of segment revenue and reconciliation to total consolidated revenue for the three months ended June 30, 2018 and 2017 was as follows:



	Three Months Ended June 30,
	2018			2017
	(in millions)
Revenue by segment:
Mainframe Solutions	$	553		$	536
Enterprise Solutions	425			414
Services	74			75
Total segment revenue	$	1,052		$	1,025
Impact of segment policies that differ from U.S. GAAP ⁽¹⁾	(114		)	—
Total consolidated revenue	$	938		$	1,025


(1)	The manner in which the Company measures and recognizes revenues for segment reporting was not revised upon adoption of Topic 606. For segment reporting purposes, the Company follows its previous Topic 605 policies, which recognizes software license revenue ratably, except for sales of perpetual licenses on a stand-alone basis, which are recognized at a point-in-time.

The Company’s summary of segment profit and reconciliation to income before income taxes for the three months ended June 30, 2018 and 2017 was as follows:



	Three Months Ended June 30,
	2018			2017
	(in millions)
Segment profit:
Mainframe Solutions	$	370		$	349
Enterprise Solutions	60			33
Services	—			1
Total segment profit	$	430		$	383
Impact of segment policies that differ from U.S. GAAP ⁽¹⁾	(117		)	—
Less unallocated amounts:
Purchased software amortization	55			58
Other intangibles amortization	10			10
Internally developed software products amortization	5			12
Share-based compensation expense	33			32
Other expenses, net ⁽²⁾	108			8
Interest expense, net	20			25
Income before income taxes	$	82		$	238


(1)	The manner in which the Company measures and recognizes revenues and expenses, including commissions, for segment reporting was not revised upon adoption of Topic 606. For segment reporting purposes, commissions are expensed in the period earned by the employee.

(2)

Other expenses, net for the three months ended June 30, 2018 consisted of costs associated with the Fiscal 2019 Plan of $114 million, certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs. Other expenses, net for the three months ended June 30, 2017 consisted of costs associated with certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.

Depreciation for the Mainframe Solutions and Enterprise Solutions segments for the three months ended June 30, 2018 was $9 million and $7 million, respectively. Depreciation for the Mainframe Solutions and Enterprise Solutions segments for the three months ended June 30, 2017 was $9 million and $7 million, respectively. There was no depreciation for the Services segment for the three months ended June 30, 2018 and 2017.