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 September 30, 2023 and December 31, 2022, the amount recognized in other accounts receivables for the right to reclaim cash collateral was $112 million and $140 million, respectively. At September 30, 2023 and December 31, 2022, the amount recognized in accounts payable for the obligation to return cash collateral was $3 million and $8 million respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At September 30, 2023 and December 31, 2022, the amount rehypothecated was $3 million and $8 million respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at

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 nine months ended September 30, 2022, an unrealized gain of $3 million and an unrealized loss of $85 million, respectively, 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 September 30, 2023 and December 31, 2022, the total notional amount of the company’s interest-rate swaps was $6.7 billion and $6.5 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2023 and December 31, 2022 was approximately 5.7 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 September 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 September 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 $126 million and $139 million at September 30, 2023 and December 31, 2022, respectively, in AOCI. The company estimates that $16 million of the deferred net losses (before taxes) on derivatives in AOCI at September 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 September 30, 2023 and December 31, 2022, the carrying value of debt designated as hedging instruments was $15.2 billion and $13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts (forward contracts) for this risk management purpose. At September 30, 2023 and December 31, 2022, the total notional amount of derivative instruments designated as net investment hedges was $5.3 billion and $4.7 billion, respectively. At September 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 September 30, 2023, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At September 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 $9.0 billion and $8.1 billion, respectively. At both September 30, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.6 years.

At September 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 $317 million and $66 million, respectively, in AOCI. The company estimates that $257 million of deferred net gains (before taxes) on derivatives in AOCI at September 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 may employ forward contracts or cross-currency swaps to convert the principal, or principal and interest payments of foreign currency denominated debt to debt denominated in the functional currency of the borrowing entity. These derivatives are accounted for as cash flow hedges. For forward contracts, the company excludes the initial forward points from the assessment of hedge effectiveness and recognizes it in other (income) and expense in the Consolidated Income Statement on a straight-line basis over the life of the hedging instrument. Changes in the fair value of the amounts excluded from the assessment of hedge effectiveness are recognized in OCI.

In August 2023, the company terminated all of its outstanding cross-currency swaps designated as cash flow hedges of the principal and interest associated with foreign currency denominated debt and executed forward contracts designated as cash flow hedges of the principal associated with foreign currency denominated debt. At September 30, 2023, the maximum length of time remaining over which the company hedged its exposure was approximately seven years. At September 30, 2023 and December 31, 2022, the total notional amount of derivative instruments designated as cash flow hedges of foreign-currency denominated debt was $5.2 billion and $3.1 billion, respectively.

At September 30, 2023, in connection with forward contracts, the company has recorded net gains (before taxes) of $40 million in AOCI. Approximately $72 million of losses (before taxes) related to the initial forward points excluded from the assessment of hedge effectiveness is expected to be amortized to other (income) and expenses within the next 12 months. There was no activity associated with forward contracts recorded in AOCI at December 31, 2022.

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 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 September 30, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $6.2 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 September 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)	September 30, 2023		December 31, 2022
Short-term debt:
Carrying amount of the hedged item	$	(2)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(2)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,376)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	312	$	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 September 30:	2023		2022		2023		2022
Cost of services	$	5,217	$	5,168	$	(2)	$	4
Cost of sales	$	1,419	$	1,389	$	(5)	$	35
Cost of financing	$	94	$	120	$	(3)	$	1
SG&A expense	$	4,458	$	4,391	$	(58)	$	(69)
Other (income) and expense	$	(215)	$	5,755	$	(316)	$	(189)
Interest expense	$	412	$	295	$	(15)	$	4


	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 September 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(33)	$	(64)	$	28	$	68
	Interest expense	(166)		(191)		139		203
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(141)		(186)		N/A		N/A
Equity contracts	SG&A expense	(54)		(76)		N/A		N/A
	Other (income) and expense	—		3		N/A		N/A
Total		$	(394)	$	(514)	$	167	$	271


	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 September 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					Cost of services	(2)		4		—		—
Amount included in the assessment of effectiveness	101		189		Cost of sales	(5)		35		—		—
Amount excluded from the assessment of effectiveness	29		—		Cost of financing	(2)		(6)		—		—
					SG&A expense	(4)		8		—		—
					Other (income) and expense	(164)		(6)		(11)		—
					Interest expense	(11)		(18)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	652		1,198		Cost of financing	—		—		5		5
					Interest expense	—		—		26		14
Total	$	782	$	1,387		$	(192)	$	12	$	21	$	19

(3)The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing for net investment hedges in net income each period. For cash flow hedges of foreign currency denominated debt, the amounts excluded from effectiveness testing are amortized to net income over the life of the hedging instrument.


(Dollars in millions)	Total				Gains/(Losses) of Total Hedge Activity
For the nine months ended September 30:	2023		2022		2023		2022
Cost of services	$	15,821	$	15,915	$	(6)	$	32
Cost of sales	$	4,329	$	4,555	$	12	$	71
Cost of financing	$	297	$	314	$	(10)	$	0
SG&A expense	$	14,212	$	13,843	$	44	$	(291)
Other (income) and expense	$	(721)	$	5,921	$	(315)	$	(730)
Interest expense	$	1,202	$	903	$	(46)	$	1


	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 nine months ended September 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(55)	$	(76)	$	42	$	89
	Interest expense	(261)		(261)		196		305
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(321)		(595)		N/A		N/A
Equity contracts	SG&A expense	37		(319)		N/A		N/A
	Other (income) and expense	—		(85)		N/A		N/A
Total		$	(600)	$	(1,336)	$	238	$	395


	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 nine months ended September 30:	2023		2022			2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(2)	$	(3)	$	—	$	—
					Interest expense	(11)		(10)		—		—
Foreign exchange contracts					Cost of services	(6)		32		—		—
Amount included in the assessment of effectiveness	250		449		Cost of sales	12		71		—		—
Amount excluded from the assessment of effectiveness	29		—		Cost of financing	(10)		(16)		—		—
					SG&A expense	7		28		—		—
					Other (income) and expense	16		(51)		(11)		—
					Interest expense	(46)		(54)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	564		3,118		Cost of financing	—		—		16		6
					Interest expense	—		—		75		22
Total	$	843	$	3,567		$	(40)	$	(4)	$	81	$	28