The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At June 30, 2023 and December 31, 2022, the amount recognized in other accounts receivables for the right to reclaim cash collateral was $46 million and $140 million, respectively. At June 30, 2023, there was no amount recognized in accounts payable for the obligation to return cash collateral. At December 31, 2022, the amount recognized in accounts payable for such obligation was $8 million. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At June 30, 2023, there was no cash collateral rehypothecated. At December 31, 2022, the amount rehypothecated was $8 million. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at June 30, 2023 and December 31, 2022, the total derivative asset and liability positions each would have been reduced by $267 million and $220 million, respectively.

On May 19, 2022, in connection with the disposition of 22.3 million shares of Kyndryl common stock, the company entered into a cash-settled swap that maintained IBM’s continued economic exposure in those shares. The notional value of the swap was $311 million. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement. The company settled the swap on November 2, 2022.

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2023 and December 31, 2022, the total notional amount of the company’s interest-rate swaps was $6.9 billion and $6.5 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2023 and December 31, 2022 was approximately 5.8 years and 6.0 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at June 30, 2023 and December 31, 2022.

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were no instruments outstanding at June 30, 2023 and December 31, 2022.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of $130 million and $139 million at June 30, 2023 and December 31, 2022, respectively, in AOCI. The company estimates that $17 million of the deferred net losses (before taxes) on derivatives in AOCI at June 30, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2023 and December 31, 2022, the carrying value of debt designated as hedging instruments was $15.7 billion and $13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At June 30, 2023 and December 31, 2022, the total notional amount of derivative instruments designated as net investment hedges was $4.9 billion and $4.7 billion, respectively. At June 30, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.2 years and 0.1 years, respectively.

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted

for as cash flow hedges. At June 30, 2023, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At June 30, 2023 and December 31, 2022, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.6 billion and $8.1 billion, respectively. At both June 30, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.6 years.

At June 30, 2023 and December 31, 2022, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of $63 million and $66 million, respectively, in AOCI. The company estimates that $3 million of deferred net losses (before taxes) on derivatives in AOCI at June 30, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At June 30, 2023, the maximum length of time remaining over which the company hedged its exposure is approximately eight years. At June 30, 2023 and December 31, 2022, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $3.9 billion and $3.1 billion, respectively.

At June 30, 2023 and December 31, 2022, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of $109 million and $101 million, respectively, in AOCI. The company estimates that $48 million of deferred net gains (before taxes) on derivatives in AOCI at June 30, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

The company uses its 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. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and 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 June 30, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $7.5 billion and $5.9 billion, respectively.

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At June 30, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion and $1.1 billion, respectively.


(Dollars in millions)	June 30, 2023		December 31, 2022
Short-term debt:
Carrying amount of the hedged item	$	(203)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(3)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,540)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	147	$	72

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment 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:


(Dollars in millions)	Total				Gains/(Losses) of Total Hedge Activity
For the three months ended June 30:	2023		2022		2023		2022
Cost of services	$	5,294	$	5,399	$	(3)	$	13
Cost of sales	$	1,587	$	1,750	$	2	$	23
Cost of financing	$	93	$	96	$	(3)	$	1
SG&A expense	$	4,900	$	4,855	$	43	$	(152)
Other (income) and expense	$	(261)	$	(81)	$	(141)	$	(439)
Interest expense	$	423	$	297	$	(18)	$	3


	Gain (Loss) Recognized in Consolidated Income Statement
(Dollars in millions)	Consolidated Income Statement Line Item	Recognized on Derivatives				Attributable to Risk Being Hedged (2)
For the three months ended June 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(30)	$	(17)	$	25	$	23
	Interest expense	(153)		(61)		130		81
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(196)		(313)		N/A		N/A
Equity contracts	SG&A expense	42		(166)		N/A		N/A
	Other (income) and expense	—		(88)		N/A		N/A
Total		$	(337)	$	(645)	$	155	$	104


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
	Recognized in OCI				Consolidated Income Statement Line Item	Reclassified from AOCI				Amounts Excluded from Effectiveness Testing (3)
(Dollars in millions)
For the three months ended June 30:	2023		2022			2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense	(4)		(3)		—		—
Foreign exchange contracts	178		200		Cost of services	(3)		13		—		—
					Cost of sales	2		23		—		—
					Cost of financing	(3)		(5)		—		—
					SG&A expense	1		14		—		—
					Other (income) and expense	55		(38)		—		—
					Interest expense	(18)		(19)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	136		1,379		Cost of financing	—		—		5		1
					Interest expense	—		—		27		5
Total	$	313	$	1,579		$	30	$	(16)	$	32	$	6

N/A - not applicable


(Dollars in millions)	Total				Gains/(Losses) of Total Hedge Activity
For the six months ended June 30:	2023		2022		2023		2022
Cost of services	$	10,604	$	10,747	$	(5)	$	28
Cost of sales	$	2,910	$	3,165	$	17	$	35
Cost of financing	$	203	$	194	$	(7)	$	(1)
SG&A expense	$	9,754	$	9,452	$	102	$	(223)
Other (income) and expense	$	(506)	$	166	$	1	$	(541)
Interest expense	$	790	$	607	$	(31)	$	(3)


	Gain (Loss) Recognized in Consolidated Income Statement
(Dollars in millions)	Consolidated Income Statement Line Item	Recognized on Derivatives				Attributable to Risk Being Hedged (2)
For the six months ended June 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(21)	$	(18)	$	13	$	26
	Interest expense	(96)		(65)		58		97
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(180)		(409)		N/A		N/A
Equity contracts	SG&A expense	91		(243)		N/A		N/A
	Other (income) and expense	—		(88)		N/A		N/A
Total		$	(206)	$	(821)	$	71	$	123


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
	Recognized in OCI				Consolidated Income Statement Line Item	Reclassified from AOCI				Amounts Excluded from Effectiveness Testing (3)
(Dollars in millions)
For six months ended June 30:	2023		2022			2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(2)	$	(2)	$	—	$	—
					Interest expense	(7)		(7)		—		—
Foreign exchange contracts	149		260		Cost of services	(5)		28		—		—
					Cost of sales	17		35		—		—
					Cost of financing	(8)		(10)		—		—
					SG&A expense	10		20		—		—
					Other (income) and expense	181		(45)		—		—
					Interest expense	(35)		(36)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	(88)		1,920		Cost of financing	—		—		11		2
					Interest expense	—		—		49		7
Total	$	61	$	2,180		$	152	$	(16)	$	60	$	9

For the three and six months ended June 30, 2023 and 2022, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.