10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York	13-0871985
(State of incorporation)	(IRS employer identification number)

Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-499-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

The registrant had 908,793,777 shares of common stock outstanding at September 30, 2018.

Index

	Page
Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three and nine months ended September 30, 2018 and 2017	3
Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	4
Consolidated Statement of Financial Position at September 30, 2018 and December 31, 2017	5
Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 and 2017	7
Consolidated Statement of Changes in Equity for the nine months ended September 30, 2018 and 2017	8
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	57
Item 4. Controls and Procedures	93
Part II - Other Information:
Item 1. Legal Proceedings	93
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	93
Item 6. Exhibits	94

2

Part I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions except per share amounts)	2018			2017			2018			2017
Revenue:
Services	$	12,566		$	12,703		$	38,414		$	37,592
Sales	5,800			6,017			18,221			17,744
Financing	389			433			1,195			1,260
Total revenue	18,756			19,153			57,830			56,597
Cost:
Services	8,040			8,265		*	25,519			25,034		*
Sales	1,625			1,584		*	5,216			4,779		*
Financing	287			322			846			890
Total cost	9,953			10,172		*	31,582			30,703		*
Gross profit	8,803			8,981		*	26,249			25,894		*
Expense and other (income):
Selling, general and administrative	4,363			4,606		*	14,665			14,666		*
Research, development and engineering	1,252			1,291		*	4,021			4,212		*
Intellectual property and custom development income	(275		)	(308		)	(842		)	(1,118		)
Other (income) and expense	275			159		*	968			751		*
Interest expense	191			168			530			451
Total expense and other (income)	5,807			5,917		*	19,341			18,962		*
Income from continuing operations before income taxes	2,996			3,065			6,908			6,931
Provision for income taxes	304			339			138			120
Income from continuing operations	$	2,692		$	2,726		$	6,770		$	6,811
Income/(loss) from discontinued operations, net of tax	2			0			7			(3		)
Net income	$	2,694		$	2,726		$	6,777		$	6,807
Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	2.94		$	2.92		$	7.36		$	7.24
Discontinued operations	0.00			0.00			0.01			0.00
Total	$	2.94		$	2.92		$	7.37		$	7.24
Basic:
Continuing operations	$	2.95		$	2.93		$	7.39		$	7.28
Discontinued operations	0.00			0.00			0.01			0.00
Total	$	2.95		$	2.93		$	7.40		$	7.28
Weighted-average number of common shares outstanding: (millions)
Assuming dilution	915.2			933.2			920.0			940.2
Basic	911.2			929.4			915.6			935.6
Cash dividend per common share	$	1.57		$	1.50		$	4.64		$	4.40

* Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

3

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2018			2017			2018			2017
Net income	$	2,694		$	2,726		$	6,777		$	6,807
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments	(22		)	89			(535		)	213
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0			(1		)	(2		)	2
Reclassification of (gains)/losses to net income	—			0			—			1
Total net changes related to available-for-sale securities	0			(2		)	(2		)	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	(46		)	(70		)	(134		)	(198		)
Reclassification of (gains)/losses to net income	28			(73		)	408			(347		)
Total unrealized gains/(losses) on cash flow hedges	(18		)	(143		)	274			(545		)
Retirement-related benefit plans:
Prior service costs/(credits)	0			0			(1		)	0
Net (losses)/gains arising during the period	(1		)	1			83			106
Curtailments and settlements	2			2			7			3
Amortization of prior service (credits)/costs	(18		)	(22		)	(55		)	(66		)
Amortization of net (gains)/losses	737			733			2,231			2,156
Total retirement-related benefit plans	719			713			2,264			2,200
Other comprehensive income/(loss), before tax	678			658			2,001			1,869
Income tax (expense)/benefit related to items of other comprehensive income	(209		)	11			(807		)	7
Other comprehensive income/(loss), net of tax	470			669			1,194			1,877
Total comprehensive income/(loss)	$	3,164		$	3,394		$	7,970		$	8,684

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

4

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

ASSETS

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Assets:
Current assets:
Cash and cash equivalents	$	11,563	$	11,972
Restricted cash	168		262		*
Marketable securities	2,932		608
Notes and accounts receivable - trade (net of allowances of $310 in 2018 and $297 in 2017)	7,071		8,928
Short-term financing receivables (net of allowances of $273 in 2018 and $261 in 2017)	19,249		21,721
Other accounts receivable (net of allowances of $38 in 2018 and $36 in 2017)	767		981
Inventories, at lower of average cost or net realizable value:
Finished goods	448		333
Work in process and raw materials	1,445		1,250
Total inventories	1,893		1,583
Deferred costs	2,227		1,820		**
Prepaid expenses and other current assets	2,388		1,860		* **
Total current assets	48,257		49,735
Property, plant and equipment	32,484		32,331
Less: Accumulated depreciation	21,535		21,215
Property, plant and equipment — net	10,949		11,116
Long-term financing receivables (net of allowances of $52 in 2018 and $74 in 2017)	8,179		9,550
Prepaid pension assets	5,655		4,643
Deferred costs	2,581		2,136		**
Deferred taxes	4,436		4,862
Goodwill	36,526		36,788
Intangible assets — net	3,134		3,742
Investments and sundry assets	2,272		2,783		**
Total assets	$	121,990	$	125,356

*Recast to reflect adoption of the FASB guidance on restricted cash.

**Recast to conform to current period presentation.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

5

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY

			At September 30,			At December 31,
(Dollars in millions)			2018			2017
Liabilities:
Current liabilities:
Taxes			$	2,502		$	4,219
Short-term debt			10,932			6,987
Accounts payable			5,384			6,451
Compensation and benefits			3,601			3,644
Deferred income			10,704			11,552
Other accrued expenses and liabilities			3,700			4,510
Total current liabilities			36,822			37,363
Long-term debt			35,989			39,837
Retirement and nonpension postretirement benefit obligations			15,774			16,720
Deferred income			3,507			3,746
Other liabilities			9,979			9,965
Total liabilities			102,071			107,631
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital			54,987			54,566
Shares authorized: 4,687,500,000
Shares issued:		2018 - 2,232,637,802
		2017 - 2,229,428,813
Retained earnings			158,612			153,126
Treasury stock - at cost			(165,995		)	(163,507		)
Shares:	2018 - 1,323,844,025
	2017 - 1,307,249,588
Accumulated other comprehensive income/(loss)			(27,820		)	(26,592		)
Total IBM stockholders’ equity			19,784			17,594
Noncontrolling interests			134			131
Total equity			19,918			17,725
Total liabilities and equity			$	121,990		$	125,356

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

6

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
(Dollars in millions)	2018			2017
Cash flows from operating activities:
Net income	$	6,777		$	6,807
Adjustments to reconcile net income to cash provided by operating activities
Depreciation	2,337			2,231
Amortization of intangibles	1,031			1,161
Stock-based compensation	371			388
Net (gain)/loss on asset sales and other	(18		)	92
Changes in operating assets and liabilities, net of acquisitions/divestitures	631			312
Net cash provided by operating activities	11,128			10,991
Cash flows from investing activities:
Payments for property, plant and equipment	(2,613		)	(2,273		)
Proceeds from disposition of property, plant and equipment	192			337
Investment in software	(418		)	(411		)
Acquisition of businesses, net of cash acquired	(123		)	(442		)
Divestitures of businesses, net of cash transferred	—			35
Non-operating finance receivables — net	377			469
Purchases of marketable securities and other investments	(6,024		)	(3,764		)*
Proceeds from disposition of marketable securities and other investments	3,241			2,778
Net cash used in investing activities	(5,368		)	(3,271		)*
Cash flows from financing activities:
Proceeds from new debt	4,714			9,355
Payments to settle debt	(4,246		)	(6,252		)
Short-term borrowings/(repayments) less than 90 days — net	376			(794		)
Common stock repurchases	(2,393		)	(3,674		)
Common stock repurchases for tax withholdings	(148		)	(153		)
Financing — other	82			137
Cash dividends paid	(4,250		)	(4,119		)
Net cash used in financing activities	(5,864		)	(5,499		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(399		)	875
Net change in cash, cash equivalents and restricted cash	(503		)	3,096		*
Cash, cash equivalents and restricted cash at January 1	12,234			8,073		*
Cash, cash equivalents and restricted cash at September 30	$	11,731		$	11,168	*

* Recast to reflect adoption of the FASB guidance on restricted cash.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

7

INTERNATIONAL BUSINESS MACHINES CORPORATION
 AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

	Common
	Stock and								Accumulated
	Additional								Other			Total IBM			Non-
	Paid-in		Retained			Treasury			Comprehensive			Stockholders’			Controlling		Total
(Dollars in millions)	Capital		Earnings			Stock			Income/(Loss)			Equity			Interests		Equity
Equity - January 1, 2018	$	54,566	$	153,126		$	(163,507	)	$	(26,592	)	$	17,594		$	131	$	17,725
Cumulative effect of change in accounting principle:
Revenue			524									524					524
Stranded tax effects/other *			2,422						(2,422		)
Net income plus other comprehensive income/(loss):
Net income			6,777									6,777					6,777
Other comprehensive income/(loss)									1,194			1,194					1,194
Total comprehensive income/(loss)												$	7,970				$	7,970
Cash dividends paid — common stock ($4.64 per share)			(4,250		)							(4,250		)			(4,250		)
Common stock issued under employee plans (3,208,989 shares)	421											421					421
Purchases (978,004 shares) and sales (365,600 shares) of treasury stock under employee plans — net			13			(101		)				(89		)			(89		)
Other treasury shares purchased, not retired (15,982,033 shares)						(2,388		)				(2,388		)			(2,388		)
Changes in noncontrolling interests															3		3
Equity - September 30, 2018	$	54,987	$	158,612		$	(165,995	)	$	(27,820	)	$	19,784		$	134	$	19,918

* Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, “Accounting Changes”.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

8

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY — (CONTINUED)
(UNAUDITED)

	Common
	Stock and								Accumulated
	Additional								Other			Total IBM			Non-
	Paid-in		Retained			Treasury			Comprehensive			Stockholders’			Controlling			Total
(Dollars in millions)	Capital		Earnings			Stock			Income/(Loss)			Equity			Interests			Equity
Equity - January 1, 2017	$	53,935	$	152,759		$	(159,050	)	$	(29,398	)	$	18,246		$	146		$	18,392
Cumulative effect of change in accounting principle *			102									102						102
Net income plus other comprehensive income/(loss):
Net income			6,807									6,807						6,807
Other comprehensive income/(loss)									1,877			1,877						1,877
Total comprehensive income/(loss)												$	8,684					$	8,684
Cash dividends paid — common stock ($4.40 per share)			(4,119		)							(4,119		)				(4,119		)
Common stock issued under employee plans (3,372,586 shares)	460											460						460
Purchases (960,186 shares) and sales (363,335 shares) of treasury stock under employee plans — net			15			(106		)				(91		)				(91		)
Other treasury shares purchased, not retired (22,851,760 shares)						(3,655		)				(3,655		)				(3,655		)
Changes in noncontrolling interests															(16		)	(16		)
Equity - September 30, 2017	$	54,395	$	155,565		$	(162,812	)	$	(27,521	)	$	19,627		$	130		$	19,757

* Reflects the adoption of the FASB guidance on intra-entity transfers of assets.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

9

Notes to Consolidated Financial Statements:

1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue under the revenue standard effective January 1, 2018, see note 3, “Revenue Recognition”. Also, refer to the company’s 2017 Annual Report on pages 70 to 73, for a discussion of the company’s critical accounting estimates.

Noncontrolling interest amounts of $6.2 million and $4.4 million, net of tax, for the three months ended September 30, 2018 and 2017, respectively, and $17.9 million and $11.5 million, net of tax, for the nine months ended September 30, 2018 and 2017, respectively, are included as a reduction within other (income) and expense in the Consolidated Statement of Earnings.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2017 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

2. Accounting Changes:

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance on a customer’s accounting for implementation costs incurred in cloud-computing arrangements that are hosted by a vendor. Certain types of implementation costs should be capitalized and amortized over the term of the hosting arrangement. The guidance is effective January 1, 2020 and early adoption is permitted. The company will adopt the guidance on January 1, 2019 on a prospective basis, and does not expect the guidance to have a material impact on the consolidated financial results.

In August 2018, the FASB issued guidance which changes the disclosure requirements for fair value measurements and defined benefit plans. The guidance is effective for each of the topics on January 1, 2020 and January 1, 2021, respectively, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results.

In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established that is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.  The guidance is effective January 1, 2020 with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date.

The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will

10

Notes to Consolidated Financial Statements — (continued)

adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. The company expects to elect the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and nonlease components for all asset classes. The company will make a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. The other practical expedients available under the guidance are being evaluated.

A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company has made significant progress in these areas as well as in gathering the necessary data elements for the lease population. A system provider has been selected, with system configuration, testing and implementation underway. The company continues to evaluate the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. As a lessee, the company’s operating lease commitments were $6.6 billion at December 31, 2017.

From a lessor perspective, due to changes in lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount that would have been reclassified from lease receivables to loan receivables in 2017, under the application of this new guidance, would have been approximately $450 million. Additionally, the company does not expect the removal of third-party residual value guarantee insurance in the lease classification test to have a material impact on the Consolidated Statement of Earnings.

The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change.

Standards Implemented

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act (“U.S. tax reform”) from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established cease to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption on January 1, 2018, $2,420 million was reclassified from AOCI to retained earnings, primarily comprised of amounts relating to retirement-related benefit plans.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

In March 2017, the FASB issued guidance that impacts the presentation of net periodic pension and postretirement benefit costs (“net benefit cost”). Under the guidance, the service cost component of net benefit cost continues to be presented within cost, selling, general and administrative expense and research, development and engineering expense in the Consolidated Statement of Earnings, unless eligible for capitalization. The other components of net benefit cost are presented separately from service cost within other (income) and expense in the Consolidated Statement of Earnings. The guidance was effective January 1, 2018 with early adoption permitted. The company adopted the guidance as of the effective date. The guidance is primarily a change in financial statement presentation and did not have a material impact in the consolidated financial results. This presentation change was applied retrospectively upon adoption. For the three months ended September 30, 2017, $181 million, $42 million, and $51 million was recast from total cost, selling, general and administrative (SG&A) expense, and research, development, and engineering (RD&E) expense, respectively, into other (income) and expense.  For the nine months ended September 30, 2017, $529 million, $293 million, and $148 million was recast from total cost, SG&A expense, and RD&E expense, respectively, into other (income) and expense. Refer to note 9, “Retirement-Related Benefits,” for additional information.

11

Notes to Consolidated Financial Statements — (continued)

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance was effective January 1, 2018 and early adoption was not permitted except for limited provisions. The company adopted the guidance on the effective date. Certain equity investments are now measured at fair value with changes recognized in net income. The amendment also simplified the impairment test of equity investments that lack readily determinable fair value. The guidance did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance effective January 1, 2018 using the modified retrospective transition method. At adoption, $557 million was reclassified from notes and accounts receivable-trade and deferred income-current to prepaid expenses and other current assets to establish the opening balance for net contract assets. In-scope sales commission costs previously recorded in the Consolidated Statement of Earnings were capitalized in deferred costs in accordance with the transition guidance, in the amount of $737 million. Deferred income of $29 million was recorded for certain software licenses that will be recognized over time versus at a point in time under previous guidance. Additionally, net deferred taxes were reduced by $184 million in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $524 million. The guidance did not have a material impact in the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company expects revenue recognition for its broad portfolio of hardware, software, and services offerings to remain largely unchanged. Refer to note 3, “Revenue Recognition,” for additional information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In January 2017, the FASB issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance effective January 1, 2017, and it did not have a material impact in the consolidated financial results.

In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $102 million. In January 2017, the company had one transaction that generated a $582 million benefit to income tax expense, income from continuing operations and net income and a benefit to both basic and diluted earnings per share of $0.62 per share for the nine months ended September 30, 2017. No transactions impacted the consolidated financial results for the nine months ended September 30, 2018. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.

In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective and adopted by the company on January 1, 2017, and it did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share-based awards compared to grant date, however these impacts are not expected to be material. These impacts are recorded on a prospective basis. The company continues to estimate forfeitures in conjunction with measuring stock-based compensation cost. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. The FASB also issued guidance in May 2017 and June 2018, which relates to the accounting for modifications of share-based payment awards and accounting for share-based payments issued to non-employees, respectively. The company adopted the guidance for modifications in the second quarter of 2017, and guidance for non-employees’ payments in the second quarter of 2018. The guidance had no impact in the consolidated financial results.

12

Notes to Consolidated Financial Statements — (continued)

3. Revenue Recognition: Effective January 1, 2018, the company adopted the new accounting standard related to the recognition of revenue in contracts with customers under the modified retrospective transition method.  This method was applied to contracts that were not complete as of the date of initial application. The following is a summary of new and/or revised significant accounting policies, which relate primarily to revenue and cost recognition. Refer to note A, “Significant Accounting Policies,” in the company’s 2017 Annual Report for the policies in effect for revenue and cost prior to January 1, 2018 and for all other significant accounting policies. The impact related to adopting the new standard was not material. For further information regarding the adoption of the new standard, see note 2, “Accounting Changes”.

Revenue

The company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, the company estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. The company’s contracts may include terms that could cause variability in the transaction price, including, for example, rebates, volume discounts, service-level penalties, and performance bonuses or other forms of contingent revenue.

The company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The company may not be able to reliably estimate contingent revenue in certain long-term arrangements due to uncertainties that are not expected to be resolved for a long period of time or when the company’s experience with similar types of contracts is limited. The company’s arrangements infrequently include contingent revenue. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the company, taking into consideration the type of client, the type of transaction and the specific facts and circumstances of each arrangement. Changes in estimates of variable consideration are included in the disclosure on pages 20 and 21.

The company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days. Invoices are generally issued as control transfers and/or as services are rendered. Additionally, in determining the transaction price, the company adjusts the promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of payments agreed to by the parties to the contract provide the client or the company with a significant benefit of financing, in which case the contract contains a significant financing component. As a practical expedient, the company does not account for significant financing components if the period between when the company transfers the promised product or service to the client and when the client pays for that product or service will be one year or less. Most arrangements that contain a financing component are financed through the company’s Global Financing business and include explicit financing terms.

The company may include subcontractor services or third-party vendor equipment or software in certain integrated services arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is the principal for the transaction. To determine whether the company is an agent or principal, the company considers whether it obtains control of the products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most notably whether the company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.

The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has economic substance apart from the company and the reseller is considered the principal for the transaction with the end-user client.

The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.

In addition to the aforementioned general policies, the following are the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue.

13

Notes to Consolidated Financial Statements — (continued)

Arrangements with Multiple Performance Obligations

The company’s global capabilities as a cognitive solutions and cloud platform company include services, software, hardware and related financing. The company enters into revenue arrangements that may consist of any combination of these products and services based on the needs of its clients. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements may also include financing provided by the company. These arrangements consist of multiple products and services, whereby the hardware and software may be delivered in one period and the software support and hardware maintenance services are delivered over time. In another example, the company may assist the client in building and running an enterprise information technology (IT) environment utilizing a private cloud on a long-term basis and the client periodically purchases hardware and/or software products from the company to upgrade or expand the facility. The services delivered on the cloud are provided on a continuous basis across multiple reporting periods, and the hardware and software products are provided in each period the products are purchased.

The company continues to build new products and offerings and continuously reinvent its platforms and delivery methods, including through the use of cloud and as-a-Service models. These are not separate businesses; they are offerings across the segments that address market opportunities in analytics, data, cloud and security. Revenue from these offerings follows the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue, depending on the type of offering, which are comprised of services, hardware and/or software.

To the extent that a product or service in multiple performance obligation arrangements is subject to other specific accounting guidance, such as leasing guidance, that product or service is accounted for in accordance with such specific guidance. For all other products or services in these arrangements, the criteria below are considered to determine when the products or services are distinct and how to allocate the arrangement consideration to each distinct performance obligation. A performance obligation is a promise in a contract with a client to transfer products or services that are distinct. If the company enters into two or more contracts at or near the same time, the contracts may be combined and accounted for as one contract, in which case the company determines whether the products or services in the combined contract are distinct. A product or service that is promised to a client is distinct if both of the following criteria are met:

·The client can benefit from the product or service either on its own or together with other resources that are readily available to the client (that is, the product or service is capable of being distinct); and

·The company’s promise to transfer the product or service to the client is separately identifiable from other promises in the contract (that is, the product or service is distinct within the context of the contract).

If these criteria are not met, the company determines an appropriate measure of progress based on the nature of its overall promise for the single performance obligation. When products and services are distinct, the arrangement consideration is allocated to each performance obligation on a relative standalone selling price basis. The revenue policies in the Services, Hardware and/or Software sections below are then applied to each performance obligation, as applicable.

To the extent the company grants the customer the option to acquire additional products or services in one of these arrangements, the company accounts for the option as a distinct performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., a discount incremental to the range of discounts typically given for the product or service), in which case the client in effect pays in advance for the option to purchase future products or services. The company recognizes revenue when those future products or services are transferred or when the option expires.

Services

The company’s primary services offerings include infrastructure services, including outsourcing, and other managed services; application management services; global process services (GPS); maintenance and support; and consulting, including the design and development of complex IT systems to a client’s specifications (e.g., design and build). Many of these services can be delivered entirely or partially through cloud or as-a-Service delivery models. The company’s services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.

In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time. In design and build arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g., when the asset is built at the customer site) or because the company’s performance does not create an

14

Notes to Consolidated Financial Statements — (continued)

asset with an alternative use and the company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the benefits provided as the company performs the services.

In outsourcing, other managed services, application management, GPS and other cloud-based services arrangements, the company determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.

Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenue from as-a-Service type contracts, such as Infrastructure-as-a-Service, is recognized either on a straight-line basis or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether the contract has usage-based metrics). If the as-a-Service contract includes setup activities, those promises in the arrangement are evaluated to determine if they are distinct.

Revenue related to maintenance and support services and extended warranty is recognized on a straight-line basis over the period of performance because the company is standing ready to provide services.

In fixed-price design and build contracts, revenue is recognized based on progress towards completion of the performance obligation using a cost-to-cost measure of progress (i.e., percentage-of-completion (POC) method of accounting). Revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. Due to the nature of the work performed in these arrangements, the estimation of cost at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known by the company. Refer to page 21 for the amount of revenue recognized in the reporting period on a cumulative catch-up basis (i.e., from performance obligations satisfied, or partially satisfied, in previous periods).

The company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost measure of progress in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For other types of services contracts, any losses are recorded as incurred.

In some services contracts, the company bills the client prior to recognizing revenue from performing the services. In other services contracts, the company performs the services prior to billing the client. When the company performs services prior to billing the client in design and build contracts, the right to consideration is typically subject to milestone completion or client acceptance and the unbilled accounts receivable is classified as a contract asset. Refer to page 85 of the company’s 2017 Annual Report for the amount of deferred income and unbilled accounts receivable at December 31, 2017 and 2016.

Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions.

Hardware

The company’s hardware offerings include the sale or lease of system servers and storage solutions. These products can also be delivered through as-a-Service or cloud delivery models, such as Storage-as-a-Service. The company also offers installation services for its more complex hardware products. Hardware offerings are often sold with distinct maintenance services, described under the Services section above.

Revenue from hardware sales is recognized when control has transferred to the customer which typically occurs when the hardware has been shipped to the client, risk of loss has transferred to the client and the company has a present right to payment for the hardware. In limited circumstances when a hardware sale includes client acceptance provisions, revenue is recognized either when client acceptance has been obtained, client acceptance provisions have lapsed, or the company has

15

Notes to Consolidated Financial Statements — (continued)

objective evidence that the criteria specified in the client acceptance provisions have been satisfied. Revenue from hardware sales-type leases is recognized at the beginning of the lease term. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.

Revenue from as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. Installation services are accounted for as distinct performance obligations with revenue recognized as the services are performed. Any cost of standard warranties is accrued when the corresponding revenue is recognized. Shipping and handling activities that occur after the client has obtained control of a product are accounted for as an activity to fulfill the promise to transfer the product rather than as an additional promised service and, therefore, no revenue is deferred and recognized over the shipping period.

Software

The company’s software offerings include solutions software, which contains many of the company’s strategic areas including analytics, data and security; transaction processing software, which primarily runs mission-critical systems for clients; integration software, which helps clients to create, connect and optimize their applications data and infrastructure; and, operating systems software, which provides operating systems for IBM Z and Power Systems hardware. Many of these offerings can be delivered entirely or partially through as-a-Service or cloud delivery models, while others are delivered as on-premise software licenses.

Revenue from perpetual (one-time charge) license software is recognized at a point in time at the inception of the arrangement when control transfers to the client, if the software license is distinct from the post-contract support offered by the company. In limited circumstances, when the software requires continuous updates to provide the intended functionality, the software license and post-contract support are not distinct and revenue for the single performance obligation is recognized over time as the post-contract support is provided. This is only applicable to certain security software perpetual licenses offered by the company. Prior to the adoption of the new revenue standard, the company recognized revenue for these software licenses at a point in time at the inception of the arrangement. This change did not have a material impact on the company’s financial statements.

Revenue from post-contract support is recognized over the contract term on a straight-line basis because the company is providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term.

Revenue from software hosting or Software-as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. In software hosting arrangements, the rights provided to the client (e.g., ownership of a license, contract termination provisions and the feasibility of the client to operate the software) are considered in determining whether the arrangement includes a license. In arrangements that include a software license, the associated revenue is recognized in accordance with the software license recognition policy above rather than over time as a service.

Revenue from term license software is recognized at a point in time for the committed term of the contract (which is typically one month due to client termination rights). However, if the amount of consideration to be paid in exchange for the license depends on client usage, revenue is recognized when the usage occurs.

Financing

Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.

Standalone Selling Price

The company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which the company would sell a promised product or service separately to a client. In most cases, the company is able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances to similar clients. The company typically establishes a standalone selling price range for its products and services which are reassessed on a periodic basis or when facts and circumstances change.

In certain instances, the company may not be able to establish a standalone selling price range based on observable prices and the company estimates the standalone selling price. The company estimates SSP by considering multiple factors

16

Notes to Consolidated Financial Statements — (continued)

including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. Additionally, in certain circumstances, the company may estimate SSP for a product or service by applying the residual approach. This approach has been most commonly used when certain perpetual software licenses are only sold bundled with one year of post-contract support and a price has not been established for the software. Estimating SSP is a formal process that includes review and approval by the company’s management.

Services Costs

Recurring operating costs for services contracts are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the cost-to-cost measure of progress are deferred and recognized based on the labor costs incurred to date (i.e., the measure of progress), as a percentage of the total estimated labor costs to fulfill the contract as control transfers over time for these performance obligations. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts and other cloud-based services contracts (i.e., setup costs) are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs consist of transition and setup costs related to the installation of systems and processes and other deferred fulfillment costs, including, prepaid assets used in services contracts (i.e., prepaid software or prepaid maintenance), and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to the client of the services to which the asset relates. Additionally, fixed assets associated with these contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the carrying amount of the asset to the remaining amount of consideration the company expects to receive for the services to which the asset relates, less the costs that relate directly to providing those services that have not yet been recognized. If the carrying amount is deemed not recoverable, an impairment loss is recognized.

In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services.

Software Costs

Certain eligible, non-recurring costs incurred in the initial phases of Software-as-a-Service contracts are deferred and amortized over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the policy described for Services Costs. Recurring operating costs in these contracts are recognized as incurred.

Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis over the expected customer relationship period if the company expects to recover those costs. The company previously expensed these costs as incurred. The expected customer relationship is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years. Expected renewal periods are only included in the expected customer relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The company has determined that certain commissions programs meet the requirements to be capitalized. Some commission programs are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized. Additionally, as a practical expedient, the company expenses costs to obtain a contract as incurred if the amortization period would have been a year or less. These costs are included in selling, general and administrative expenses.

Product Warranties

The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for standard warranty terms are recognized when revenue is recorded for the related product. The company estimates its warranty costs standard to the product based on historical warranty claim experience and

17

Notes to Consolidated Financial Statements — (continued)

estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period because the company is providing a service of standing ready to provide services over such term.

Contract Assets and Notes and Accounts Receivable—Trade

The company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the company’s contract assets represent unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized, revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract liabilities) at the contract level. At January 1, 2018 and September 30, 2018 contract assets of $557 million and $510 million, respectively, are included in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. At December 31, 2017, these assets were classified as notes and accounts receivable-trade in the Consolidated Statement of Financial Position.

An allowance for contract assets, if needed, and uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.

18

Notes to Consolidated Financial Statements — (continued)

Disaggregation of Revenue

The following tables provide details of revenue by major products/service offerings and by geography.

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the three months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	2,910	$	—	$	—	$	—	$	—	$	—	$	2,910
Transaction Processing Software	1,238		—		—		—		—		—		1,238
Consulting	—		1,900		—		—		—		—		1,900
Global Process Services	—		314		—		—		—		—		314
Application Management	—		1,915		—		—		—		—		1,915
Infrastructure Services	—		—		5,595		—		—		—		5,595
Technical Support Services	—		—		1,707		—		—		—		1,707
Integration Software	—		—		990		—		—		—		990
Systems Hardware	—		—		—		1,339		—		—		1,339
Operating Systems Software	—		—		—		397		—		—		397
Global Financing*	—		—		—		—		388		—		388
Other Revenue	—		—		—		—		—		62		62
Total	$	4,148	$	4,130	$	8,292	$	1,736	$	388	$	62	$	18,756

* Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the three months	Total
ended September 30, 2018:	Revenue
Americas	$	8,853
Europe/Middle East/Africa	5,827
Asia Pacific	4,076
Total	$	18,756

19

Notes to Consolidated Financial Statements — (continued)

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the nine months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	9,080	$	—	$	—	$	—	$	—	$	—	$	9,080
Transaction Processing Software	3,946		—		—		—		—		—		3,946
Consulting	—		5,698		—		—		—		—		5,698
Global Process Services	—		934		—		—		—		—		934
Application Management	—		5,863		—		—		—		—		5,863
Infrastructure Services	—		—		17,188		—		—		—		17,188
Technical Support Services	—		—		5,239		—		—		—		5,239
Integration Software	—		—		3,106		—		—		—		3,106
Systems Hardware	—		—		—		4,187		—		—		4,187
Operating Systems Software	—		—		—		1,225		—		—		1,225
Global Financing*	—		—		—		—		1,188		—		1,188
Other Revenue	—		—		—		—		—		176		176
Total	$	13,027	$	12,495	$	25,533	$	5,412	$	1,188	$	176	$	57,830

*Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the nine months	Total
ended September 30, 2018:	Revenue
Americas	$	26,772
Europe/Middle East/Africa	18,410
Asia Pacific	12,648
Total	$	57,830

Remaining Performance Obligations

The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

At September 30, 2018, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $119 billion. Given the profile of contract terms, approximately 60 percent of this amount is expected to be recognized as revenue over the next two years, approximately 35 percent between three and five years and the balance (mostly Infrastructure Services) thereafter.

20

Notes to Consolidated Financial Statements — (continued)

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three and nine months ending September 30, 2018, revenue was reduced by $25 million and $50 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on percentage-of-completion based contracts. Refer to pages 14 and 15 for additional information on percentage-of-completion contracts and estimates of costs to complete.

Reconciliation of Contract Balances

The following table provides information about notes and accounts receivables-trade, contract assets and deferred income balances:

	At September 30,		At January 1,
(Dollars in millions)	2018		2018 (as adjusted)
Notes and accounts receivable-trade (net of allowances of $310 and $297 at September 30, 2018 and January 1, 2018, respectively)	$	7,071	$	8,295
Contract assets (1)	510		557
Deferred income (current)	10,704		11,493
Deferred income (noncurrent)	3,507		3,758

(1) Included within prepaid expenses and other current assets in the Consolidated Statement of Financial Position.

The amount of revenue recognized during the three months ended September 30, 2018 that was included within the deferred income balance at July 1, 2018 was $3.8 billion and primarily relates to services and software.

The amount of revenue recognized during the nine months ended September 30, 2018 that was included within the deferred income balance at January 1, 2018 was $8.0 billion and primarily relates to services and software.

Deferred Costs

	At September 30,
(Dollars in millions)	2018
Capitalized costs to obtain a contract	$	681
Deferred costs to fulfill a contract:
Deferred setup costs	2,123
Other deferred fulfillment costs	2,003
Total deferred costs (1)	$	4,808

(1) Of the total, $2,227 million is current and $2,581 million is noncurrent. Prior to January 1, 2018, the current and noncurrent balance of deferred costs were included within prepaid expenses and other current assets and investments and sundry assets, respectively.

On January 1, 2018, in accordance with the transition guidance, $737 million of in-scope sales commissions that were previously recorded in the Consolidated Statement of Earnings were capitalized as costs to obtain a contract.

The amount of total deferred costs amortized during the quarter ended September 30, 2018 was $929 million. There were no material impairment losses incurred during the period. Refer to page 17 for additional information on deferred costs to fulfill a contract and capitalized costs of obtaining a contract.

Transition Disclosures

In accordance with the modified retrospective method transition requirements, the company will present the financial statement line items impacted and adjusted to compare to presentation under the prior GAAP for each of the interim and annual periods during the first year of adoption of the new revenue standard. The following tables summarize the impacts as of and for the three and nine months ended September 30, 2018. The impacts to adjust to prior GAAP are primarily the result of the transition adjustments recorded at adoption. Current period impacts were not material. Refer to note 2, “Accounting Changes,” for additional information on the transition adjustments.

21

Notes to Consolidated Financial Statements — (continued)

Consolidated Statement of Earnings Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the three months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	18,756	$	4		$	18,760
Cost	9,953		—			9,953
Gross profit	8,803		4			8,807
Selling, general and administrative expense	4,363		(28		)	4,335
Income from continuing operations before income taxes	2,996		33			3,029
Provision for/(benefit from) income taxes	304		8			313
Net income	$	2,694	$	24		$	2,718
Earnings/(loss) per share of common stock:
Assuming dilution	$	2.94	$	0.03		$	2.97
Basic	$	2.95	$	0.03		$	2.98

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	57,830	$	(10	)	$	57,821
Cost	31,582		0			31,582
Gross profit	26,249		(10		)	26,239
Selling, general and administrative expense	14,665		(32		)	14,633
Income from continuing operations before income taxes	6,908		23			6,930
Provision for/(benefit from) income taxes	138		5			143
Net income	$	6,777	$	17		$	6,794
Earnings/(loss) per share of common stock:
Assuming dilution	$	7.36	$	0.02		$	7.38
Basic	$	7.39	$	0.02		$	7.41

Consolidated Statement of Financial Position Impacts

	As reported under			Adjustments to			Adjusted
(Dollars in millions)	new revenue			convert to			amounts under
At September 30, 2018:	standard			prior GAAP			prior GAAP
Assets:
Notes and accounts receivable - trade (net of allowances)	$	7,071		$	574		$	7,645
Deferred costs (current)	2,227			(280		)	1,947
Prepaid expenses and other current assets	2,388			(510		)	1,878
Deferred taxes	4,436			179			4,615
Deferred costs (noncurrent)	2,581			(402		)	2,179
Investments and sundry assets	2,272			—			2,272
Total assets	$	121,990		$	(439	)	$	121,551
Liabilities:
Taxes	$	2,502		$	—		$	2,502
Deferred income (current)	10,704			51			10,754
Deferred income (noncurrent)	3,507			(5		)	3,502
Total liabilities	$	102,071		$	46		$	102,117
Equity:
Retained earnings	$	158,612		$	(507	)	$	158,106
AOCI	(27,820		)	22			(27,798		)
Total stockholders’ equity	19,918			(484		)	19,434
Total liabilities and stockholders’ equity	$	121,990		$	(439	)	$	121,551

22

Notes to Consolidated Financial Statements — (continued)

Consolidated Statement of Cash Flows Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Cash flows from operating activities:
Net income	$	6,777	$	17		$	6,794
Adjustments to reconcile net income to cash provided by operating activities:
Changes in operating assets and liabilities, net of acquisitions/divestitures	631		(17		)	614
Net cash provided by operating activities	$	11,128	$	—		$	11,128

4. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

·Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

·Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·Level 3—Unobservable inputs for the asset or liability.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

·Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

·Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

23

Notes to Consolidated Financial Statements — (continued)

Certain non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. There were no material impairments of non-financial assets for the nine months ended September 30, 2018 and 2017, respectively.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Effective January 1, 2018, the company adopted the new FASB guidance on recognition, measurement, presentation and disclosure of financial instruments using the cumulative catch-up transition method. Under the new standard, the company measures equity investments at fair value with changes recognized in net income. Based on the method of adoption, prior year information has not been updated to conform with the new guidance. Refer to note 2, “Accounting Changes,” for further information.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.

(Dollars in millions)
At September 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,238	$	—	$	8,238	(6)
Money market funds	26		—		—		26
Total	$	26	$	8,238	$	—	$	8,263
Equity investments (2)	11		—		—		11
Debt securities - current (3)	—		2,932		—		2,932		(6)
Derivative assets (4)	9		685		—		694		(7)
Total assets	$	46	$	11,854	$	—	$	11,900
Liabilities:
Derivative liabilities (5)	$	2	$	413	$	—	$	415	(7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3)Included within marketable securities in the Consolidated Statement of Financial Position.

(4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at September 30, 2018 were $312 million and $382 million, respectively.

(5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at September 30, 2018 were $122 million and $292 million, respectively.

(6)Available-for-sale debt securities with carrying values that approximate fair value.

(7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $285 million.

24

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
At December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,066	$	—	$	8,066
Commercial paper	—		96		—		96
Money market funds	26		—		—		26
Canadian government securities	—		398		—		398
Total	$	26	$	8,560	$	—	$	8,586	(6)
Equity investments (2)	4		—		—		4
Debt securities - current (3)	—		608		—		608		(6)
Debt securities - noncurrent (2)	4		7		—		11
Derivative assets (4)	—		942		—		942		(7)
Total assets	$	33	$	10,117	$	—	$	10,151
Liabilities:
Derivative liabilities (5)	$	—	$	415	$	—	$	415	(7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3)U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.

(4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2017 were $185 million and $757 million, respectively.

(5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2017 were $377 million and $38 million, respectively.

(6)Available-for-sale securities with carrying values that approximate fair value.

(7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $255 million.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2018 and December 31, 2017, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $35,989 million and $39,837 million, and the estimated fair value was $37,636 million and $42,264 million at September 30, 2018 and December 31, 2017, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

25

Notes to Consolidated Financial Statements — (continued)

Available-for-sale Securities

Gross realized gains/losses from the sale of available-for-sale securities during the three and nine month periods ended September 30, 2018 and 2017 were immaterial. After-tax net unrealized holding gains/losses on available-for-sale securities that have been included in other comprehensive income/loss for the three and nine month periods ended September 30, 2018 and 2017 were immaterial.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at September 30, 2018.

Derivative Financial Instruments

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.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2018 and December 31, 2017 was $120 million and $126 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions at September 30, 2018 and December 31, 2017 was $694 million and $942 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $285 million and $255 million at September 30, 2018 and December 31, 2017, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2018 and December 31, 2017, this exposure was reduced by $11 million and $114 million of cash collateral, respectively. There were no non-cash collateral balances in U.S. Treasury securities at September 30, 2018 and December 31, 2017. At September 30, 2018 and December 31, 2017, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $398 million and $572 million, respectively. At September 30, 2018 and December 31, 2017, the net position related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $130 million and $160 million, respectively.

In the Consolidated Statement of Financial Position, 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. No amount was recognized in other receivables at September 30, 2018 or December 31, 2017 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $11 million and $114 million at September 30, 2018 and December 31, 2017, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Statement of Financial Position. No amount was rehypothecated at September 30, 2018 and December 31, 2017.

26

Notes to Consolidated Financial Statements — (continued)

The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

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, 2018 and December 31, 2017, the total notional amount of the company’s interest rate swaps was $9.9 billion and $9.1 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was approximately 4.3 years and 4.8 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, 2018 and December 31, 2017.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

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. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments designated as net investment hedges was $6.4 billion and $7.0 billion, respectively. At September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of these instruments was approximately 0.2 years at both periods.

Anticipated Royalties and Cost Transactions

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At September 30, 2018 and December 31, 2017, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $9.2 billion and $7.8 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was 0.7 years at both periods.

27

Notes to Consolidated Financial Statements — (continued)

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $202 million and net gains of $27 million (before taxes), respectively, in AOCI. The company estimates that $199 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately ten years. At September 30, 2018 and December 31, 2017, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $6.5 billion at both periods.

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gains of $141 million and net gains of $42 million (before taxes), respectively, in AOCI. The company estimates that $202 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

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 Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $7.6 billion and $11.5 billion, respectively.

Equity Risk Management

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 selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. 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 Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion at both periods.

Other Risks

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported

28

Notes to Consolidated Financial Statements — (continued)

in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2018 and December 31, 2017, the company did not have any derivative instruments relating to this program outstanding.

The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity at September 30, 2018 and December 31, 2017, as well as for the three and nine months ended September 30, 2018 and 2017, respectively.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	9/30/2018		12/31/2017		Classification	9/30/2018		12/31/2017
Designated as hedging instruments:
Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2	Other accrued expenses and liabilities	$	11	$	—
	Investments and sundry assets	237		459		Other liabilities	145		34
Foreign exchange contracts	Prepaid expenses and other current assets	281		111		Other accrued  expenses and liabilities	52		318
	Investments and sundry assets	145		298		Other liabilities	147		3
	Fair value of derivative assets	$	664	$	870	Fair value of derivative liabilities	$	356	$	355
Not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	18	$	61	Other accrued expenses and liabilities	$	53	$	57
Equity contracts	Prepaid expenses and other current assets	12		12		Other accrued expenses and liabilities	6		3
	Fair value of derivative assets	$	30	$	72	Fair value of derivative liabilities	$	59	$	60
Total derivatives		$	694	$	942		$	415	$	415
Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	—	$	—
Long-term debt		N/A		N/A			6,294		6,471
		N/A		N/A			$	6,294	$	6,471
Total		$	694	$	942		$	6,709	$	6,886

N/A - not applicable

(1) Debt designated as hedging instruments are reported at carrying value.

At September 30, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:

(Dollars in millions)

Line Item in the	Carrying Amount of the			Cumulative Amount of Fair Value Hedging Adjustment
Consolidated Statement of Financial Position	Hedged Item			Included in the Carrying
in which the Hedged Item is Included	Assets/(Liabilities)			Amount of Assets/(Liabilities)
Short-term debt	$	(1,539	)	$	10
Long-term debt	$	(8,567	)	$	(208	)(1)

(1) Includes ($178) million of hedging adjustments on discontinued hedging relationships.

29

Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

The total amounts of income and expense line items presented in the Consolidated Statement of Earnings 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)									Other
For the three months	Cost of		Cost of		Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales		Financing		Expense		Expense			Expense
Total	$	8,040	$	1,625	$	287	$	4,363	$	275		$	191
Gains/(losses) of total hedge activity	1		8		15		47		(63		)	(21		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives						Being Hedged(2)
For the three months ended September 30:	Earnings Line Item	2018			2017			2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(27	)	$	(3	)	$	33	$	20
	Interest expense	(26		)	(3		)	33		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(55		)	(35		)	N/A		N/A
Equity contracts	SG&A expense	40			31			N/A		N/A
Total		$	(69	)	$	(10	)	$	66	$	41

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(46	)	$	(70	)	Interest expense	$	(36	)	$	(7	)	$	—	$	—
							Other (income) and expense	(8		)	64			—		(1		)
							Cost of sales	8			1			—		—
							Cost of services	1			20			—		—
							SG&A expense	7			(6		)	—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			8		0
contracts	86			(507		)	Interest expense	—			—			9		8
Total	$	40		$	(577	)		$	(28	)	$	73		$	18	$	7

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity.

(1)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)Instruments in net investment hedges include derivative and non-derivative instruments.

30

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)										Other
For the nine months	Cost of		Cost of			Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales			Financing		Expense		Expense			Expense
Total	$	25,519	$	5,216		$	846	$	14,665	$	968		$	530
Gains/(losses) of total hedge activity	29		(15		)	56		24		(449		)	(53		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the nine months ended September 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(138	)	$	37	$	170	$	22
	Interest expense	(128		)	34		157		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(148		)	74		N/A		N/A
Equity contracts	SG&A expense	38			88		N/A		N/A
Total		$	(377	)	$	233	$	327	$	42

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the nine months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(134	)	$	(198	)	Interest expense	$	(108	)	$	(21	)	$	—	$	—
							Other (income) and expense	(301		)	275			—		2
							Cost of sales	(15		)	23			—		—
							Cost of services	29			47			—		—
							SG&A expense	(14		)	23			—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			24		0
contracts	509			(1,513		)	Interest expense	—			—			25		34
Total	$	375		$	(1,712	)		$	(408	)	$	347		$	49	$	37

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity.

(1)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)Instruments in net investment hedges include derivative and non-derivative instruments.

For the three and nine months ending September 30, 2018 and 2017, 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.

31

Notes to Consolidated Financial Statements — (continued)

5. Financing Receivables: Financing receivables primarily consist of investment in sales-type and direct financing leases, commercial financing receivables and client loan and installment payment receivables (loans). Investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans) are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loans and installment payment financing contracts are priced independently at competitive market rates.

A summary of the components of the company’s financing receivables is presented as follows:

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At September 30, 2018:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	6,566		$	9,397		$	12,259		$	28,222
Unearned income	(502		)	(30		)	(576		)	(1,108		)
Recorded Investment	$	6,064		$	9,367		$	11,683		$	27,114
Allowance for credit losses	(103		)	(12		)	(210		)	(325		)
Unguaranteed residual value	549			—			—			549
Guaranteed residual value	90			—			—			90
Total financing receivables, net	$	6,599		$	9,355		$	11,473		$	27,427
Current portion	$	2,764		$	9,355		$	7,130		$	19,249
Noncurrent portion	$	3,836		$	—		$	4,343		$	8,179

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At December 31, 2017:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	7,128		$	11,649		$	13,311		$	32,087
Unearned income	(535		)	(32		)	(644		)	(1,210		)
Recorded Investment	$	6,593		$	11,617		$	12,667		$	30,877
Allowance for credit losses	(103		)	(21		)	(211		)	(336		)
Unguaranteed residual value	630			—			—			630
Guaranteed residual value	100			—			—			100
Total financing receivables, net	$	7,220		$	11,596		$	12,456		$	31,272
Current portion	$	2,900		$	11,596		$	7,226		$	21,721
Noncurrent portion	$	4,320		$	—		$	5,230		$	9,550

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $754 million and $773 million at September 30, 2018 and December 31, 2017, respectively.

The company did not have any financing receivables held for sale as of September 30, 2018 and December 31, 2017.

32

Notes to Consolidated Financial Statements — (continued)

Financing Receivables by Portfolio Segment

The following tables present the recorded investment by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2018 and December 31, 2017. Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

(Dollars in millions)
At September 30, 2018:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,526		$	1,377		$	1,161		$	6,064
Loan receivables	6,118			3,313			2,252			11,683
Ending balance	$	9,644		$	4,690		$	3,413		$	17,747
Recorded investment collectively evaluated for impairment	$	9,484		$	4,634		$	3,338		$	17,456
Recorded investment individually evaluated for impairment	$	161		$	56		$	75		$	291
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	108			52			51			211
Total	$	172		$	61		$	82		$	314
Write-offs	$	(5	)	$	(1	)	$	(3	)	$	(9	)
Recoveries	0			0			2			2
Provision	10			10			2			21
Other*	(9		)	(2		)	(4		)	(15		)
Ending balance at September 30, 2018	$	167		$	68		$	78		$	313
Lease receivables	$	61		$	12		$	29		$	103
Loan receivables	$	106		$	55		$	48		$	210
Related allowance, collectively evaluated for impairment	$	42		$	15		$	5		$	62
Related allowance, individually evaluated for impairment	$	125		$	52		$	73		$	250

* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were $6 million and $3 million, respectively, for the nine months ended September 30, 2018. Provisions for credit losses recorded for lease receivables and loan receivables were $4 million and $17 million, respectively, for the nine months ended September 30, 2018.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $143 million, $56 million and $76 million, respectively, for the three months ended September 30, 2018 and $156 million, $31 million and $101 million, respectively, for the three months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended September 30, 2018 and 2017.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $136 million, $56 million and $79 million, respectively, for the nine months ended September 30, 2018 and $165 million, $27 million and $131 million, respectively, for the nine months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the nine months ended September 30, 2018 and 2017.

33

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
At December 31, 2017:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,911		$	1,349		$	1,333		$	6,593
Loan receivables	6,715			3,597			2,354			12,667
Ending balance	$	10,626		$	4,946		$	3,687		$	19,259
Recorded investment collectively evaluated for impairment	$	10,497		$	4,889		$	3,604		$	18,990
Recorded investment individually evaluated for impairment	$	129		$	57		$	83		$	269
Allowance for credit losses
Beginning balance at January 1, 2017
Lease receivables	$	54		$	4		$	76		$	133
Loan receivables	169			18			89			276
Total	$	223		$	22		$	165		$	410
Write-offs	$	(51	)	$	(1	)	$	(85	)	$	(137	)
Recoveries	1			1			0			2
Provision	(8		)	29			(4		)	16
Other*	7			11			6			24
Ending balance at December 31, 2017	$	172		$	61		$	82		$	314
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	$	108		$	52		$	51		$	211
Related allowance, collectively evaluated for impairment	$	43		$	15		$	6		$	64
Related allowance, individually evaluated for impairment	$	128		$	46		$	76		$	250

* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were $55 million and $82 million, respectively, for the year ended December 31, 2017.  Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $7 million, respectively, for the year ended December 31, 2017.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following table summarizes information about the recorded investment in lease and loan financing receivables, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.

34

Notes to Consolidated Financial Statements — (continued)

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At September 30, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,526	$	268	$	213	$	27	$	59
EMEA	1,377		26		10		2		17
Asia Pacific	1,161		36		8		2		29
Total lease receivables	$	6,064	$	330	$	230	$	31	$	105
Americas	$	6,118	$	382	$	276	$	27	$	128
EMEA	3,313		62		23		4		77
Asia Pacific	2,252		78		31		8		49
Total loan receivables	$	11,683	$	523	$	330	$	39	$	254
Total	$	17,747	$	853	$	561	$	70	$	359

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $291 million is individually evaluated for impairment with a related allowance of $250 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2017:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)(3)
Americas	$	3,911	$	239	$	197	$	29	$	44
EMEA	1,349		32		5		3		27
Asia Pacific	1,333		57		23		3		36
Total lease receivables	$	6,593	$	328	$	225	$	36	$	107
Americas	$	6,715	$	345	$	254	$	38	$	96
EMEA	3,597		90		17		0		74
Asia Pacific	2,354		63		12		3		54
Total loan receivables	$	12,667	$	498	$	283	$	41	$	224
Total	$	19,259	$	825	$	507	$	77	$	331

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3) Recast to conform to current period presentation, which includes billed impaired amounts.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

The following tables present the recorded investment net of allowance for credit losses for each class of receivables, by credit quality indicator, at September 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

35

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)	Lease Receivables						Loan Receivables
At September 30, 2018:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	385	$	54	$	87	$	668	$	128	$	169
A1 – A3	741		167		434		1,285		400		845
Baa1 – Baa3	796		416		278		1,381		994		541
Ba1 – Ba2	754		432		184		1,308		1,032		358
Ba3 – B1	459		185		88		797		443		172
B2 – B3	298		100		52		517		239		102
Caa – D	32		10		8		55		23		16
Total	$	3,465	$	1,365	$	1,132	$	6,012	$	3,258	$	2,203

(Dollars in millions)	Lease Receivables						Loan Receivables
At December 31, 2017:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	422	$	49	$	68	$	724	$	129	$	120
A1 – A3	855		190		544		1,469		502		961
Baa1 – Baa3	980		371		337		1,683		982		596
Ba1 – Ba2	730		448		184		1,253		1,186		325
Ba3 – B1	443		192		89		760		508		157
B2 – B3	367		77		64		630		204		113
Caa – D	51		13		18		88		34		31
Total	$	3,847	$	1,340	$	1,302	$	6,607	$	3,545	$	2,303

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2018 or for the year ended December 31, 2017.

6. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2018			2017			2018			2017
Cost	$	19		$	22		$	60		$	68
Selling, general and administrative	95			88			264			277
Research, development and engineering	15			13			47			43
Pre-tax stock-based compensation cost	$	129		$	123		$	371		$	388
Income tax benefits	(29		)	(41		)	(88		)	(128		)
Total net stock-based compensation cost	$	100		$	82		$	283		$	260

Pre-tax stock-based compensation cost for the three months ended September 30, 2018 increased by $6 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($8 million) partially offset by decreases in restricted stock units ($1 million), and the conversion of stock-based awards previously issued by acquired entities ($1 million).

Pre-tax stock-based compensation cost for the nine months ended September 30, 2018 decreased $17 million compared to the corresponding period in the prior year. This was due to decreases related to restricted stock units ($13 million), and the conversion of stock-based awards previously issued by acquired entities ($4 million).

As of September 30, 2018, the total unrecognized compensation cost of $805 million related to non-vested awards was expected to be recognized over a weighted-average period of approximately 2.5 years.

There was no significant capitalized stock-based compensation cost at September 30, 2018 and 2017.

36

Notes to Consolidated Financial Statements — (continued)

7. Segments: The tables below reflect the continuing operations results of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on operating pre-tax income from continuing operations. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance.

SEGMENT INFORMATION

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the three months ended September 30, 2018:
External revenue	$	4,148		$	4,130		$	8,292		$	1,736		$	388		$	18,694
Internal revenue	639			77			240			181			338			1,476
Total revenue	$	4,787		$	4,207		$	8,533		$	1,917		$	726		$	20,170
Pre-tax income from continuing operations	$	1,629		$	579		$	1,075		$	209		$	308		$	3,801
Revenue year-to-year change	(4.8		)%	0.5		%	(1.0		)%	(1.6		)%	4.0		%	(1.5		)%
Pre-tax income year-to-year change	(0.9		)%	30.9		%	(8.6		)%	(37.9		)%	26.9		%	(1.1		)%
Pre-tax income margin	34.0		%	13.8		%	12.6		%	10.9		%	42.5		%	18.8		%
For the three months ended September 30, 2017:
External revenue	$	4,400		$	4,093		$	8,457		$	1,721		$	427		$	19,098
Internal revenue	629			92			164			227			272			1,384
Total revenue	$	5,030		$	4,185		$	8,621		$	1,948		$	698		$	20,482
Pre-tax income from continuing operations *	$	1,643		$	442		$	1,177		$	337		$	243		$	3,843
Pre-tax income margin *	32.7		%	10.6		%	13.7		%	17.3		%	34.8		%	18.8		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Reconciliations to IBM as Reported:

(Dollars in millions)
For the three months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	20,170		$	20,482
Eliminations of internal transactions	(1,476		)	(1,384		)
Other revenue	62			56
Total consolidated revenue	$	18,756		$	19,153
Pre-tax income from continuing operations:
Total reportable segments	$	3,801		$	3,843	*
Amortization of acquired intangible assets	(207		)	(238		)
Acquisition-related (charges)/income	(2		)	0
Non-operating retirement-related (costs)/income	(389		)	(273		)*
Eliminations of internal transactions	(116		)	(126		)
Unallocated corporate amounts	(91		)	(141		)
Total pre-tax income from continuing operations	$	2,996		$	3,065

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

37

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the nine months ended September 30, 2018:
External revenue	$	13,027		$	12,495		$	25,533		$	5,412		$	1,188		$	57,655
Internal revenue	2,122			249			550			576			1,240			4,738
Total revenue	$	15,149		$	12,744		$	26,083		$	5,989		$	2,428		$	62,392
Pre-tax income from continuing operations	$	4,718		$	1,109		$	2,395		$	352		$	1,042		$	9,616
Revenue year-to-year change	0.8		%	2.2		%	2.0		%	10.2		%	11.8		%	2.8		%
Pre-tax income year-to-year change	4.3		%	7.1		%	(15.8		)%	58.8		%	24.8		%	1.7		%
Pre-tax income margin	31.1		%	8.7		%	9.2		%	5.9		%	42.9		%	15.4		%
For the nine months ended September 30, 2017:
External revenue	$	13,021		$	12,196		$	25,079		$	4,863		$	1,246		$	56,405
Internal revenue	2,001			271			497			571			925			4,265
Total revenue	$	15,022		$	12,467		$	25,576		$	5,434		$	2,171		$	60,670
Pre-tax income from continuing operations *	$	4,522		$	1,035		$	2,845		$	222		$	835		$	9,459
Pre-tax income/(loss) margin *	30.1		%	8.3		%	11.1		%	4.1		%	38.5		%	15.6		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Reconciliations to IBM as Reported:

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	62,392		$	60,670
Eliminations of internal transactions	(4,738		)	(4,265		)
Other revenue	176			192
Total consolidated revenue	$	57,830		$	56,597
Pre-tax income from continuing operations:
Total reportable segments	$	9,616		$	9,459	*
Amortization of acquired intangible assets	(613		)	(731		)
Acquisition-related (charges)/income	(3		)	(19		)
Non-operating retirement-related (costs)/income	(1,185		)	(969		)*
Eliminations of internal transactions	(625		)	(515		)
Unallocated corporate amounts	(283		)	(294		)
Total pre-tax income from continuing operations	$	6,908		$	6,931

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

38

Notes to Consolidated Financial Statements — (continued)

8. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(22	)	$	(22	)	$	(44	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(46	)	$	11		$	(35	)
Reclassification of (gains)/losses to:
Cost of sales	(8		)	3			(6		)
Cost of services	(1		)	0			(1		)
SG&A expense	(7		)	2			(5		)
Other (income) and expense	8			(2		)	6
Interest expense	36			(9		)	27
Total unrealized gains/(losses) on cash flow hedges	$	(18	)	$	4		$	(14	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	(1		)	1			(1		)
Curtailments and settlements	2			0			1
Amortization of prior service (credits)/costs	(18		)	5			(13		)
Amortization of net (gains)/losses	737			(196		)	540
Total retirement-related benefit plans	$	719		$	(191	)	$	527
Other comprehensive income/(loss)	$	678		$	(209	)	$	470

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

39

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	89		$	195		$	284
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1	)	$	1		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(70	)	$	20		$	(50	)
Reclassification of (gains)/losses to:
Cost of sales	(1		)	1			(1		)
Cost of services	(20		)	8			(12		)
SG&A expense	6			(1		)	4
Other (income) and expense	(64		)	25			(39		)
Interest expense	7			(3		)	4
Total unrealized gains/(losses) on cash flow hedges	$	(143	)	$	49		$	(94	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	1			0			1
Curtailments and settlements	2			(1		)	1
Amortization of prior service (credits)/costs	(22		)	7			(15		)
Amortization of net (gains)/losses	733			(242		)	491
Total retirement-related benefit plans	$	713		$	(235	)	$	479
Other comprehensive income/(loss)	$	658		$	11		$	669

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

40

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(535	)	$	(128	)	$	(663	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(1	)
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(134	)	$	39		$	(95	)
Reclassification of (gains)/losses to:
Cost of sales	15			(4		)	11
Cost of services	(29		)	7			(22		)
SG&A expense	14			(4		)	10
Other (income) and expense	301			(76		)	225
Interest expense	108			(27		)	81
Total unrealized gains/(losses) on cash flow hedges	$	274		$	(63	)	$	210
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	(1	)	$	0		$	(1	)
Net (losses)/gains arising during the period	83			(22		)	60
Curtailments and settlements	7			(2		)	5
Amortization of prior service (credits)/costs	(55		)	15			(40		)
Amortization of net (gains)/losses	2,231			(607		)	1,624
Total retirement-related benefit plans	$	2,264		$	(616	)	$	1,648
Other comprehensive income/(loss)	$	2,001		$	(807	)	$	1,194

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

41

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	213		$	581		$	794
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	2		$	0		$	1
Reclassification of (gains)/losses to other (income) and expense		1			0			0
Total net changes related to available-for-sale securities	$	2		$	0		$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(198	)	$	53		$	(146	)
Reclassification of (gains)/losses to:
Cost of sales	(23		)	6			(17		)
Cost of services	(47		)	18			(29		)
SG&A expense	(23		)	6			(17		)
Other (income) and expense	(275		)	106			(169		)
Interest expense	21			(8		)	13
Total unrealized gains/(losses) on cash flow hedges	$	(545	)	$	180		$	(365	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	106			(36		)	70
Curtailments and settlements	3			(1		)	2
Amortization of prior service (credits)/costs	(66		)	23			(43		)
Amortization of net (gains)/losses	2,156			(739		)	1,417
Total retirement-related benefit plans	$	2,200		$	(754	)	$	1,446
Other comprehensive income/(loss)	$	1,869		$	7		$	1,877

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

42

Notes to Consolidated Financial Statements — (continued)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2018	$	35		$	(2,834	)	$	(23,796	)	$	3		$	(26,592	)
Cumulative effect of a change in accounting principle **	5			46			(2,471		)	(2)			(2,422		)
Other comprehensive income before reclassifications	(95		)	(663		)	65			(1		)	(695		)
Amount reclassified from accumulated other comprehensive income	305			—			1,584			—			1,889
Total change for the period	$	210		$	(663	)	$	1,648		$	(1	)	$	1,194
September 30, 2018	$	250		$	(3,451	)	$	(24,618	)	$	0		$	(27,820	)

*Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

**Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, “Accounting Changes”.

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2017	$	319		$	(3,603	)	$	(26,116	)	$	2	$	(29,398	)
Other comprehensive income before reclassifications	(146		)	794			72			1		721
Amount reclassified from accumulated other comprehensive income	(219		)	—			1,374			0		1,155
Total change for the period	$	(365	)	$	794		$	1,446		$	2	$	1,877
September 30, 2017	$	(46	)	$	(2,809	)	$	(24,670	)	$	4	$	(27,521	)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

9. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the pre-tax cost for all retirement-related plans.

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	705	$	592	19.0	%
Nonpension postretirement plans — cost	49		61		(19.5	)
Total	$	754	$	653	15.5	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	2,152	$	1,915	12.3	%
Nonpension postretirement plans — cost	149		182		(18.3	)
Total	$	2,300	$	2,097	9.7	%

43

Notes to Consolidated Financial Statements — (continued)

The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	104		$	106
Interest cost (1)	430			478			204			215
Expected return on plan assets (1)	(675		)	(753		)	(330		)	(340		)
Amortization of prior service costs/(credits) (1)	4			4			(20		)	(25		)
Recognized actuarial losses (1)	381			334			346			387
Curtailments and settlements (1)	—			—			2			2
Multi-employer plans	—			—			9			11
Other costs (1)	—			—			5			(85		)
Total net periodic pension (income)/cost of defined benefit plans	$	140		$	63		$	318		$	271
Cost of defined contribution plans	152			156			95			102
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	292		$	219		$	413		$	373

(1)These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	309		$	308
Interest cost (1)	1,289			1,435			630			622
Expected return on plan assets (1)	(2,026		)	(2,260		)	(1,017		)	(985		)
Amortization of prior service costs/(credits) (1)	12			12			(62		)	(73		)
Recognized actuarial losses (1)	1,144			1,003			1,057			1,120
Curtailments and settlements (1)	—			—			7			3
Multi-employer plans	—			—			29			30
Other costs (1)	—			—			16			(76		)
Total net periodic pension (income)/cost of defined benefit plans	$	419		$	190		$	969		$	950
Cost of defined contribution plans	457			475			306			301
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	876		$	665		$	1,276		$	1,250

(1)These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

On October 12, 2012, the High Court in London issued a ruling against IBM United Kingdom Limited and IBM United Kingdom Holdings Limited, both wholly-owned subsidiaries of the company, in litigation involving one of IBM UK’s defined benefit plans. The company recorded a pre-tax charge in SG&A expense of $162 million in the fourth quarter of 2012. The final Court of Appeal ruling was received in August 2017, and as a result the company adjusted its obligation under the plan and recorded a gain of $91 million in SG&A expense in the Consolidated Statement of Earnings for the three and nine months ended September 30, 2017. This gain is reflected in “Non-US Plans - Other costs” in the tables above.

In 2018, the company expects to contribute approximately $400 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in the UK, Japan and Spain. This amount generally represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first nine months of 2018 were $275 million, of which $117 million was in cash and $157 million in U.S. Treasury securities. Total contributions to the non-U.S. plans in the first nine months of 2017 were $301 million, of which $124 million was in cash and $176 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

44

Notes to Consolidated Financial Statements — (continued)

The following table provides the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	3		$	4		$	1		$	1
Interest cost (1)	33			38			11			14
Expected return on plan assets (1)	—			—			(1		)	(2		)
Amortization of prior service costs/(credits) (1)	(2		)	(2		)	0			0
Recognized actuarial losses (1)	2			5			1			2
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	37		$	45		$	12		$	16

(1)These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	10		$	11		$	4		$	4
Interest cost (1)	99			115			34			43
Expected return on plan assets (1)	—			—			(4		)	(6		)
Amortization of prior service costs/(credits) (1)	(6		)	(6		)	0			0
Recognized actuarial losses (1)	7			15			4			5
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	111		$	135		$	38		$	47

(1)These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

The company contributed $275 million in U.S. Treasury securities to the U.S. nonpension postretirement benefit plan during the nine months ended September 30, 2018, and $259 million in U.S. Treasury securities during the nine months ended September 30, 2017. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

10. Acquisitions: During the nine months ended September 30, 2018, the company completed two acquisitions at an aggregate cost of $49 million.

The Cognitive Solutions segment completed the acquisition of one privately held business: in the second quarter, Armanta, Inc. (Armanta). The Global Business Services segment completed the acquisition of one privately held business: in the second quarter, Oniqua Holdings Pty Ltd. (Oniqua).

Each acquisition is expected to enhance the company’s portfolio of product and services capabilities. Armanta is a provider of aggregation and analytics software to financial institutions, enabling data aggregation across multiple systems in near real-time speed, enhancing decision-making and improving regulatory compliance. Oniqua is a global innovator in maintenance-repair-operate inventory optimization solutions and services for asset-intensive industries. All of these acquisitions were for 100 percent of the acquired businesses.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The acquisitions did not have a material impact in the Consolidated Financial Statements.

45

Notes to Consolidated Financial Statements — (continued)

11. Intangible Assets Including Goodwill:  The following table details the company’s intangible asset balances by major asset class.

	At September 30, 2018
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,572	$	(784	)	$	788
Client relationships	2,273		(1,247		)	1,026
Completed technology	2,509		(1,560		)	949
Patents/trademarks	661		(324		)	337
Other*	56		(21		)	34
Total	$	7,071	$	(3,937	)	$	3,134

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

	At December 31, 2017
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,600	$	(790	)	$	810
Client relationships	2,358		(1,080		)	1,278
Completed technology	2,586		(1,376		)	1,210
Patents/trademarks	668		(256		)	413
Other*	47		(16		)	31
Total	$	7,260	$	(3,518	)	$	3,742

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased $608 million during the first nine months of 2018, primarily due to intangible asset amortization, partially offset by additions resulting from capitalized software. The aggregate intangible amortization expense was $348 million and $1,031 million for the third quarter and first nine months of 2018, respectively, versus $383 million and $1,161 million for the third quarter and first nine months of 2017, respectively. In addition, in the first nine months of 2018, the company retired $612 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at September 30, 2018:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2018 (for Q4)	$	140	$	198	$	338
2019	393		676		1,070
2020	203		564		768
2021	51		451		502
2022	—		382		382

46

Notes to Consolidated Financial Statements — (continued)

The change in the goodwill balances by reportable segment, for the nine months ended September 30, 2018 and for the year ended December 31, 2017 are as follows:

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/18		Additions		Adjustments			Divestitures			Adjustments*			9/30/18
Cognitive Solutions	$	19,665	$	10	$	0		$	(1	)	$	(148	)	$	19,526
Global Business Services	4,813		24		(4		)	—			(51		)	4,782
Technology Services & Cloud Platforms	10,447		—		0			—			(86		)	10,361
Systems	1,862		—		—			—			(6		)	1,857
Total	$	36,788	$	34	$	(4	)	$	(1	)	$	(291	)	$	36,526

* Primarily driven by foreign currency translation.

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/17		Additions		Adjustments			Divestitures			Adjustments*		12/31/17
Cognitive Solutions	$	19,484	$	3	$	(38	)	$	(20	)	$	235	$	19,665
Global Business Services	4,607		—		2			—			204		4,813
Technology Services & Cloud Platforms	10,258		13		(2		)	—			179		10,447
Systems	1,850		—		0			—			13		1,862
Total	$	36,199	$	16	$	(38	)	$	(20	)	$	631	$	36,788

* Primarily driven by foreign currency translation.

There were no goodwill impairment losses recorded during the first nine months of 2018 or the full year of 2017 and the company has no accumulated impairment losses.

Purchase price adjustments recorded in the first nine months of 2018 and full year 2017 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded during the first nine months of 2018 were not material. Net purchase price adjustments of $38 million were recorded during 2017, with the primary drivers being deferred tax assets, other taxes payable and other current liabilities associated with the Truven Health Analytics, Inc. and The Weather Company acquisitions.

12. Borrowings:

Short-Term Debt

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Commercial paper	$	3,986	$	1,496
Short-term loans	173		276
Long-term debt — current maturities	6,773		5,214
Total	$	10,932	$	6,987

The weighted-average interest rate for commercial paper at September 30, 2018 and December 31, 2017 was 2.2 percent and 1.5 percent, respectively. The weighted-average interest rate for short-term loans was 8.3 percent and 8.8 percent at September 30, 2018 and December 31, 2017, respectively.

47

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Pre-Swap Borrowing

		Balance		Balance
(Dollars in millions)	Maturities	9/30/2018		12/31/2017
U.S. dollar debt (weighted-average interest rate at September 30, 2018):*
7.6%	2018	$	1,634	$	4,640
2.9%	2019	5,474		5,540
2.2%	2020	3,347		3,416
2.5%	2021	5,001		4,129
2.4%	2022	3,533		3,481
3.3%	2023	2,395		1,547
3.6%	2024	2,013		2,000
7.0%	2025	600		600
3.5%	2026	1,350		1,350
4.7%	2027	969		969
6.5%	2028	313		313
3.7%	2030	32		—
5.9%	2032	600		600
8.0%	2038	83		83
5.6%	2039	745		745
4.0%	2042	1,107		1,107
7.0%	2045	27		27
4.7%	2046	650		650
7.1%	2096	316		316
		$	30,192	$	31,515
Other currencies (average interest rate at September 30, 2018, in parentheses):*
Euros (1.5%)	2019–2029	$	10,162	$	10,502
Pound sterling (2.7%)	2020–2022	1,369		1,420
Japanese yen (0.3%)	2022–2026	1,281		1,291
Other (6.6%)	2019–2022	446		717
		$	43,450	$	45,445
Less: net unamortized discount		808		826
Less: net unamortized debt issuance costs		79		93
Add: fair value adjustment**		198		526
		$	42,762	$	45,052
Less: current maturities		6,773		5,214
Total		$	35,989	$	39,837

*Includes notes, debentures, bank loans, secured borrowings and capital lease obligations.

**The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

During the third quarter of 2017, IBM Credit LLC, a wholly owned subsidiary of the company, filed a shelf registration statement with the Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. In 2017, IBM Credit LLC issued fixed- and floating-rate debt securities in the aggregate amount of $3.0 billion with maturity dates ranging from 2019 to 2022. During the first quarter of 2018, IBM Credit LLC issued fixed- and floating-rate debt securities in the aggregate amount of $2.0 billion with maturity dates ranging from 2021 to 2023. This debt is included in the long-term debt table above.

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and

48

Notes to Consolidated Financial Statements — (continued)

sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, 2018, are as follows:

(Dollars in millions)	Total
2018 (for Q4)	$	1,724
2019	7,034
2020	6,286
2021	6,139
2022	4,320
2023 and beyond	17,946
Total	$	43,450

Interest on Debt

(Dollars in millions)
For the nine months ended September 30:	2018		2017
Cost of financing	$	568	$	496
Interest expense	530		451
Interest capitalized	3		(1		)
Total interest paid and accrued	$	1,101	$	947

Lines of Credit

On July 19, 2018, the company amended its existing $10.25 billion Five-Year Credit Agreement. In addition, the company and IBM Credit LLC entered into a new $2.5 billion, 364-Day Credit Agreement, to replace the maturing $2.5 billion, 364-Day agreement, and also amended the existing $2.5 billion Three-Year Credit Agreement. The amended Five-Year and Three-Year credit agreements included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity dates. The new maturity dates for the Five-Year and Three-Year Credit Agreements are July 20, 2023 and July 20, 2021, respectively. Each of the facility sizes remained unchanged.

As of September 30, 2018, there were no borrowings by the company, or its subsidiaries, under these credit facilities.

13. Contingencies: As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any

49

Notes to Consolidated Financial Statements — (continued)

changes to such liabilities for the quarter ended September 30, 2018 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons.

Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

The following is a summary of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the dismissal of all but one of SCO’s remaining claims, which was remanded to the Federal Court in Utah.

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court. On August 7, 2017, the Indiana Superior Court awarded the State $128 million, which it then offset against IBM’s previously affirmed award of $50 million, resulting in a $78 million award to the State, plus interest. On September 28, 2018, the Indiana Court of Appeals affirmed the Superior Court’s $78 million award to the State, but reversed the Superior Court by awarding IBM prejudgment interest on

50

Notes to Consolidated Financial Statements — (continued)

its previously affirmed $50 million award. Both parties have appealed to the Indiana Supreme Court and the matter remains pending.

On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance benefits programs. The matter is pending in a Pennsylvania court.

On October 29, 2013, Bridgestone Americas, Inc. (Bridgestone) sued IBM regarding a 2009 contract for the implementation of an SAP-based, enterprise-wide order management system. IBM counterclaimed against Bridgestone and its parent, Bridgestone Corp.  IBM and Bridgestone have resolved the case and all claims have been dismissed.

Following the 2017 final judgment of the Appeal Court in London holding that IBM UK acted lawfully in 2010 in closing its UK defined benefit plans to future accruals for most participants and in implementing a new retirement policy, the Employment Tribunal in Southampton UK is expected to address approximately 290 individual actions alleging constructive dismissal and age discrimination brought against IBM UK in 2010 by employees who left the company at that time. The individual actions were previously stayed.

In May 2015, a putative class action was commenced in the United States District Court for the Southern District of New York related to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business, alleging violations of the Employee Retirement Income Security Act (“ERISA”). Management’s Retirement Plans Committee and three current or former IBM executives are named as defendants. On September 29, 2017, the Court granted the defendants’ motion to dismiss the first amended complaint. Plaintiffs appealed to the Second Circuit Court of Appeals and the matter remains pending.

In August 2015, IBM learned that the SEC was conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company cooperated with the SEC in this matter. In May 2018, the SEC informed IBM that based on the information to date, it closed its investigation into this matter without pursuing any enforcement action against the company.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $900 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

14. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $8,537 million and $8,111 million at September 30, 2018 and December 31, 2017, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $3,798 million and $3,569 million at September 30, 2018 and December 31, 2017, respectively.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other

51

Notes to Consolidated Financial Statements — (continued)

party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $15 million and $19 million at September 30, 2018 and December 31, 2017, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty are

presented in the following tables.

Standard Warranty Liability

(Dollars in millions)	2018			2017
Balance at January 1	$	152		$	156
Current period accruals	84			107
Accrual adjustments to reflect actual experience	(31		)	(3		)
Charges incurred	(93		)	(126		)
Balance at September 30	$	112		$	134

Extended Warranty Liability

(Dollars in millions)	2018			2017
Aggregate deferred revenue at January 1	$	566		$	531
Revenue deferred for new extended warranty contracts	138			175
Amortization of deferred revenue	(178		)	(198		)
Other*	(12		)	24
Aggregate deferred revenue at September 30	$	514		$	533
Current portion	$	242		$	258
Noncurrent portion	$	273		$	275

* Other primarily consists of foreign currency translation adjustments.

15. Taxes: For the three months ended September 30, 2018, the company reported a provision for income taxes of $304 million and an effective tax rate of 10.2 percent, compared to a provision of $339 million and an effective tax rate of 11.0 percent for the three months ended September 30, 2017. For the nine-month period ended September 30, 2018, the company reported a provision for income taxes of $138 million and an effective tax rate of 2.0 percent. The year-to-date effective rate was primarily driven by the resolution in the first quarter of certain tax matters related to the ongoing U.S. federal audit of the company’s 2013-2014 tax returns, the completion of the U.S. federal audit of amended tax returns filed for prior years and a benefit attributable to a tax incentive claim approved by the Internal Revenue Service (IRS) in the third quarter. For the nine months ended September 30, 2017, the company reported a provision for income taxes of $120 million, and its effective tax rate was 1.7 percent, primarily as a result of discrete tax benefits.

The company’s U.S. income tax returns for 2013 and 2014 continue to be examined by the IRS with specific focus on certain cross-border transactions in 2013. Although the IRS could propose additional adjustments, the company believes it is adequately reserved on these issues. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2013. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

52

Notes to Consolidated Financial Statements — (continued)

In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016.  The company anticipates that this audit will be completed in 2020.

The amount of unrecognized tax benefits at December 31, 2017 decreased $892 million in the first nine months of 2018 to $6,139 million. The decrease was primarily driven by the resolution of certain tax matters in the first quarter related to the U.S. audits. The liability at September 30, 2018 of $6,139 million can be reduced by $599 million of offsetting tax benefits associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments and state income taxes. The net amount of $5,540 million, if recognized, would favorably affect the company’s effective tax rate.

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of September 30, 2018, the company has recorded $636 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. The company believes it will prevail on these matters.

U.S. Tax Reform

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform resulted in the company recording a provisional tax expense charge of $5,475 million in the fourth-quarter and year-ended December 31, 2017. This charge was the result of the one-time U.S. transition tax and any foreign tax costs on undistributed foreign earnings, as well as the remeasurement of deferred tax balances to the new U.S. federal tax rate.

All components of the provisional charge of $5,475 million were based on the company’s estimates as of December 31, 2017. Specifically, the transition tax, any foreign tax costs, as well as the remeasurement of deferred tax balances are provisional and were calculated based on existing tax law and the best information available as of the date of estimate. The effect of U.S. tax reform changes on deferred tax assets and liabilities was a benefit of $270 million and was included in the one-time charge. An additional provisional charge of $107 million was recorded in the first quarter as a result of IRS guidance issued in January 2018 and a benefit of $14 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment, conclusion of the effects of the “Global Intangible Low-Taxed Income” (“GILTI”) provisions, further refinement of the company’s calculations, additional guidance that may be issued by the U.S. government, among other items. The company is still evaluating the Act’s GILTI provisions and has not yet elected an accounting policy. The company has not completed its assessment and the tax charge remains provisional as of September 30, 2018.

The charge will be finalized in the fourth quarter of 2018 which is within the 12-month time limit provided by the SEC.

53

Notes to Consolidated Financial Statements — (continued)

16. Earnings Per Share of Common Stock: The following tables provide the computation of basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2018 and 2017.

	For the Three Months Ended
	September 30, 2018		September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	911,152,848		929,437,441
Add – Incremental shares under stock-based compensation plans	2,566,139		2,236,234
Add – Incremental shares associated with contingently issuable shares	1,493,644		1,553,754
Number of shares on which diluted earnings per share is calculated	915,212,631		933,227,429
Income from continuing operations (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax (millions)	2		0
Net income on which basic earnings per share is calculated (millions)	$	2,694	$	2,726
Income from continuing operations (millions)	$	2,692	$	2,726
Net income applicable to contingently issuable shares (millions)	—		0
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	2		0
Net income on which diluted earnings per share is calculated (millions)	$	2,694	$	2,726
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	2.94	$	2.92
Discontinued operations	0.00		0.00
Total	$	2.94	$	2.92
Basic
Continuing operations	$	2.95	$	2.93
Discontinued operations	0.00		0.00
Total	$	2.95	$	2.93

Stock options to purchase 388,335 shares and 399,844 shares were outstanding as of September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

54

Notes to Consolidated Financial Statements — (continued)

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	915,632,501			935,600,777
Add – Incremental shares under stock compensation plans	3,000,429			3,213,758
Add – Incremental shares associated with contingently issuable shares	1,373,960			1,394,930
Number of shares on which diluted earnings per share is calculated	920,006,890			940,209,466
Income from continuing operations (millions)	$	6,770		$	6,811
Income/(loss) from discontinued operations, net of tax (millions)	7			(3		)
Net income on which basic earnings per share is calculated (millions)	$	6,777		$	6,807
Income from continuing operations (millions)	$	6,770		$	6,811
Net income applicable to contingently issuable shares (millions)	(1		)	(2		)
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	6,769		$	6,809
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	7			(3		)
Net income on which diluted earnings per share is calculated (millions)	$	6,776		$	6,806
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	7.36		$	7.24
Discontinued operations	0.01			0.00
Total	$	7.37		$	7.24
Basic
Continuing operations	$	7.39		$	7.28
Discontinued operations	0.01			0.00
Total	$	7.40		$	7.28

Stock options to purchase 264,628 shares and 146,795 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective periods was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

55

Notes to Consolidated Financial Statements — (continued)

17. Subsequent Events: On October 30, 2018, the company announced that the Board of Directors approved a quarterly dividend of $1.57 per common share. The dividend is payable December 10, 2018 to shareholders of record on November 9, 2018.

On October 30, 2018, the company announced that the Board of Directors authorized $4.0 billion in additional funds for use in the company’s stock repurchase program.

On October 28, 2018, the company announced its intent to acquire all of the outstanding shares of Red Hat, Inc. (Red Hat). The combination of Red Hat’s vast portfolio of open-source technologies, innovative cloud development platform and developer community combined with IBM’s innovative hybrid cloud technology, industry expertise and commitment to data, trust and security will bring clients the hybrid, multi-cloud capabilities they are demanding. Under the terms of the definitive agreement, Red Hat shareholders will receive $190 per share in cash. The transaction values Red Hat at approximately $34 billion. The transaction is subject to customary closing conditions, including regulatory clearance and approval by the Red Hat shareholders.

In connection with the proposed transaction, IBM has entered into a commitment letter pursuant to which certain banks have committed to provide a 364-day bridge loan credit facility in an amount of $20 billion in support of the transaction. At signing, the company has ample cash, credit and bridge lines to secure the transaction financing. The company intends to close the transaction through a combination of cash and debt. IBM will continue with a disciplined financial policy and is committed to continued dividend growth and maintaining strong investment grade credit ratings. As a result of the proposed transaction, the company expects the major rating agencies to downgrade IBM and IBM Credit LLC long-term debt securities by one rating. Standard and Poor’s has lowered IBM and IBM Credit’s long-term debt rating one notch to A from A+, with no change to the short-term debt rating of A-1. The other major rating agencies are reviewing the companies’ ratings. In addition, the company intends to suspend its share repurchase program in 2020 and 2021.

56

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

Snapshot

Financial Results Summary — Three Months Ended September 30:

							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the three months ended September 30:	2018			2017			Change
Revenue	$	18,756		$	19,153		(2.1	)%*
Gross profit margin	46.9		%	46.9		%**	0.0	pts.
Total expense and other (income)	$	5,807		$	5,917	**	(1.9	)%
Total expense and other (income)-to-revenue ratio	31.0		%	30.9		%**	0.1	pts.
Income from continuing operations before income taxes	$	2,996		$	3,065		(2.2	)%
Provision for income taxes from continuing operations	$	304		$	339		(10.1	)%
Income from continuing operations	$	2,692		$	2,726		(1.3	)%
Income from continuing operations margin	14.4		%	14.2		%	0.1	pts.
Income/(loss) from discontinued operations, net of tax	$	2		$	0		nm
Net income	$	2,694		$	2,726		(1.2	)%
Earnings per share from continuing operations - assuming dilution	$	2.94		$	2.92		0.7	%
Consolidated earnings per share - assuming dilution	$	2.94		$	2.92		0.7	%
Weighted-average shares outstanding - assuming dilution	915.2			933.2			(1.9	)%

*(0.4) percent adjusted for currency.

**Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

nm - not meaningful

Organization of Information:

Effective January 1, 2018, the company adopted the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs (“net benefit cost”). The guidance is primarily a change in financial statement presentation, but it did impact the consolidated and reportable segment gross profit margins and expense and other income. As a result, the company aligned its presentation of operating (non-GAAP) earnings to conform to the FASB presentation of these costs in the Consolidated Statement of Earnings. The periods presented in this Form 10-Q are reported on a comparable basis. The company filed a Form 8-K on March 29, 2018 to recast its historical consolidated and segment information to reflect the change.

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When the company refers to growth rates at constant currency or adjusts such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” on pages 87 and 88 for additional information.

57

Management Discussion — (continued)

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, the company separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization expense resulting from basis differences on equity method investments, retirement-related costs, discontinued operations and related tax impacts. Operating (non-GAAP) earnings also exclude any one-time impacts associated with the enactment of the U.S. Tax Cuts and Jobs Act due to its unique non-recurring nature. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses and tax charges related to acquisition integration. These charges are excluded as they may be inconsistent in amount and timing from period to period and are dependent on the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management Discussion, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. For retirement-related costs, the company characterizes certain items as operating and others as non-operating. The company includes defined benefit plan and nonpension postretirement benefit plan service cost, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includes defined benefit plan and nonpension postretirement benefit plan amortization of prior service cost, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside of the operational performance of the business.

Overall, the company believes that providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The company’s reportable segment financial results reflect operating earnings from continuing operations, consistent with the company’s management and measurement system.

The following table provides the company’s (non-GAAP) operating earnings for the third quarter of 2018 and 2017.

						Yr. to Yr.
(Dollars in millions except per share amounts)						Percent
For the three months ended September 30:	2018		2017			Change
Net income as reported	$	2,694	$	2,726		(1.2	)%
Income/(loss) from discontinued operations, net of tax	2		0			nm
Income from continuing operations	$	2,692	$	2,726		(1.3	)%
Non-operating adjustments (net of tax):
Acquisition-related charges	153		159			(3.7	)
Non-operating retirement-related costs/(income)	289		160		**	80.6
Operating (non-GAAP) earnings*	$	3,134	$	3,045	**	2.9	%
Diluted operating (non-GAAP) earnings per share	$	3.42	$	3.26	**	4.9	%

*Refer to page 91 for a more detailed reconciliation of net income to operating earnings.

**Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

Financial Performance Summary — Three Months Ended September 30:

In the third quarter of 2018, the company reported $18.8 billion in revenue, $2.7 billion in income from continuing operations and operating (non-GAAP) earnings of $3.1 billion, resulting in diluted earnings per share from continuing operations of $2.94 as reported and $3.42 on an operating (non-GAAP) basis. The consolidated gross margin of 46.9 percent and operating (non-GAAP) gross margin of 47.4 percent were each flat compared to the prior year, representing the company’s strongest year-to-year gross margin performance in three years. The company generated $4.2 billion in cash from operations and $2.2 billion in free cash flow in the third quarter of 2018, and delivered shareholder returns of $2.1 billion through gross common stock repurchases and dividends. These results reflect the company’s ability to deliver differentiated value through innovative technologies with the skills and expertise to implement these technologies.

58

Management Discussion — (continued)

Total consolidated revenue decreased 2.1 percent as reported but was flat adjusted for currency in the third quarter, with continued growth in offerings in hybrid cloud, security, digital, analytics and AI.

From a segment perspective, Cognitive Solutions revenue decreased 5.7 percent as reported and 5 percent adjusted for currency, compared to third quarter 2017 with declines in both Solutions Software and Transaction Processing Software. However, within Solutions Software, there was growth in security, key areas of analytics and industry verticals such as Watson Health. Global Business Services (GBS) revenue increased 0.9 percent as reported and 3 percent year to year adjusted for currency, building on the progress from the first half. Consulting increased 5.4 percent as reported and 7 percent adjusted for currency, led by offerings in Digital Strategy and iX. Application Management revenue decreased 3.1 percent as reported and 1 percent adjusted for currency. Technology Services & Cloud Platforms (TS&CP) decreased 1.9 percent as reported and was flat adjusted for currency. While Infrastructure Services decreased 1.2 percent and Integration Software was flat year to year as reported, both grew 1 percent adjusted for currency in the third quarter with growth in hybrid cloud implementations. Technical Support Services declined year to year as reported and adjusted for currency. Systems revenue increased 0.9 percent and 2 percent adjusted for currency compared to the third quarter 2017 with continued growth in IBM Z and Power Systems and a decline in Storage as reported and adjusted for currency.

Strategic imperatives revenue over the last 12 months was $39.5 billion, an increase of 13 percent as reported and 11 percent adjusted for currency. In the third quarter, cloud revenue of $4.6 billion increased 11 percent (13 percent adjusted for currency) driven by as-a-Service revenue which grew 21 percent as reported and 24 percent adjusted for currency. The annual exit run rate for as-a-Service revenue increased to $11.4 billion in the third quarter of 2018 compared to $9.4 billion in the third quarter of 2017. Security grew 33 percent as reported (34 percent adjusted for currency). Analytics revenue of $5.0 billion increased 1 percent as reported and 2 percent adjusted for currency. Mobile revenue increased 4 percent as reported and 5 percent adjusted for currency.

From a geographic perspective, in the third quarter, Americas revenue was down 0.9 percent year to year as reported, but grew 1 percent adjusted for currency. The U.S. grew 0.2 percent compared to the prior year, Canada grew 0.7 percent (5 percent adjusted for currency) and Latin America declined 8.6 percent, but grew 3 percent adjusted for currency. Europe/Middle East/Africa (EMEA) revenue decreased 3.0 percent as reported and 2 percent adjusted for currency. There was solid growth in the UK and Spain as reported and adjusted for currency, offset by declines in Germany and France as reported and adjusted for currency. Asia Pacific decreased 3.3 percent as reported and 1 percent adjusted for currency, with Japan flat year to year as reported and adjusted for currency.

The consolidated gross margin of 46.9 percent and the operating (non-GAAP) gross margin of 47.4 percent were each flat compared to the third quarter 2017, with an improvement in the year-to-year trajectory. This performance also represents sequential improvement from the second quarter and included margin improvement in GBS and TS&CP, partially offset by an impact from mix.

Total expense and other (income) decreased 1.9 percent in the third quarter of 2018. The year-to-year decrease was due to the effects of currency (2 points) and lower spending (1 point) as the company continues to realize acquisition synergies and drive operational efficiencies by using automation, leveraging agile processes and implementing new ways of working. This benefit was partially offset by a lower level of intellectual property (IP) income (1 point) compared to the prior year. Total operating (non-GAAP) expense and other (income) decreased 3.9 percent year to year, driven primarily by the same factors.

Pre-tax income from continuing operations of $3.0 billion decreased 2.2 percent and the pre-tax margin was 16.0 percent, flat year to year. The continuing operations effective tax rate was 10.2 percent compared to 11.0 percent in the third quarter of 2017. Income from continuing operations of $2.7 billion decreased 1.3 percent and the net income margin was 14.4 percent, an increase from 14.2 percent in the third quarter of 2017. Net income of $2.7 billion decreased 1.2 percent year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $3.6 billion increased 0.5 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.5 points to 19.2 percent. Operating (non-GAAP) income from continuing operations of $3.1 billion increased 2.9 percent with an operating (non-GAAP) income margin from continuing operations of 16.7 percent, an increase of 0.8 points year to year. The operating (non-GAAP) effective tax rate from continuing operations in the third quarter of 2018 was 12.8 percent, a decline of 2.0 points.

Diluted earnings per share from continuing operations of $2.94 increased 0.7 percent and operating (non-GAAP) diluted earnings per share of $3.42 increased 4.9 percent versus the third quarter of 2017. In the third quarter of 2018, the company

59

Management Discussion — (continued)

repurchased 4.3 million shares of its common stock at a cost of $0.6 billion and had $1.4 billion remaining in the current share repurchase authorization at September 30, 2018.

The company generated $4.2 billion in cash flow provided by operating activities, an increase of $0.7 billion compared to the third quarter of 2017, driven primarily by an increase in cash provided by financing receivables ($0.8 billion). Net cash used in investing activities of $3.0 billion in the third quarter of 2018 was $1.1 billion higher than the prior year, primarily driven by an increase from net purchases of marketable securities and other investments ($1.5 billion). Net cash used in financing activities of $0.4 billion decreased $2.3 billion compared to the third quarter of 2017, driven primarily by a decrease in net cash used for debt transactions ($2.0 billion) and a decrease in cash used for gross common share repurchases ($0.3 billion).

The company continues to expect GAAP earnings per share from continuing operations of at least $11.60 and operating (non-GAAP) earnings of at least $13.80 per diluted share for 2018. The company continues to expect free cash flow to be approximately $12 billion in 2018. Free cash flow realization is expected to be in excess of 100 percent of GAAP net income. Refer to page 89 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. Refer to the Looking Forward section on pages 86 and 87 for additional information on the company’s expectations.

Financial Results Summary - Nine Months Ended September 30:

							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the nine months ended September 30:	2018			2017			Change
Revenue	$	57,830		$	56,597		2.2	%*
Gross profit margin	45.4		%	45.8		%**	(0.4	) pts.
Total expense and other (income)	$	19,341		$	18,962	**	2.0	%
Total expense and other (income)-to-revenue ratio	33.4		%	33.5		%**	(0.1	) pts.
Income from continuing operations, before income taxes	$	6,908		$	6,931		(0.3	)%
Provision for income taxes from continuing operations	$	138		$	120		14.9	%
Income from continuing operations	$	6,770		$	6,811		(0.6	)%
Income from continuing operations margin	11.7		%	12.0		%	(0.3	) pts.
Income/(loss) from discontinued operations, net of tax	$	7		$	(3	)	nm
Net income	$	6,777		$	6,807		(0.5	)%
Earnings per share from continuing operations - assuming dilution	$	7.36		$	7.24		1.7	%
Consolidated earnings per share - assuming dilution	$	7.37		$	7.24		1.8	%
Weighted-average shares outstanding - assuming dilution	920.0			940.2			(2.1	)%

	At 9/30/18		At 12/31/17
Assets	$	121,990	$	125,356	(2.7	)%
Liabilities	$	102,071	$	107,631	(5.2	)%
Equity	$	19,918	$	17,725	12.4	%

*0.4 percent adjusted for currency.

**Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

60

Management Discussion — (continued)

The following table provides the company’s (non-GAAP) operating earnings for the first nine months of 2018 and 2017.

						Yr. to Yr.
(Dollars in millions except per share amounts)						Percent
For the nine months ended September 30:	2018		2017			Change
Net income as reported	$	6,777	$	6,807		(0.5	)%
Income/(loss) from discontinued operations, net of tax	7		(3		)	nm
Income from continuing operations	$	6,770	$	6,811		(0.6	)%
Non-operating adjustments (net of tax):
Acquisition-related charges	478		537			(11.1	)
Non-operating retirement-related costs/(income)	900		681		**	32.2
U.S. tax reform one-time charge	93		—			nm
Operating (non-GAAP) earnings*	$	8,241	$	8,030	**	2.6	%
Diluted operating (non-GAAP) earnings per share	$	8.96	$	8.54	**	4.9	%

*Refer to page 92 for a more detailed reconciliation of net income to operating earnings.

**Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

Financial Performance Summary — Nine Months Ended September 30:

In the first nine months of 2018, the company reported $57.8 billion in revenue, and delivered $6.8 billion in income from continuing operations, resulting in diluted earnings per share from continuing operations of $7.36 as reported and $8.96 on an operating (non-GAAP) basis. The company generated $11.1 billion in cash from operations and $5.4 billion in free cash flow in the first nine months of 2018 and delivered shareholder returns of $6.6 billion through gross common stock repurchases and dividends.

Total consolidated revenue increased 2.2 percent year to year as reported and 0.4 percent adjusted for currency in the first nine months of 2018. The company continued to have solid revenue growth in its strategic imperatives, led by cloud and security.

From a segment perspective, Cognitive Solutions revenue was flat as reported but decreased 1 percent adjusted for currency with Solutions Software growing 0.7 percent as reported (decreased 1 percent adjusted for currency) and Transaction Processing Software decreasing 1.5 percent as reported (3 percent adjusted for currency). GBS revenue increased 2.4 percent as reported, but was flat year to year adjusted for currency. Consulting increased 5.6 percent as reported (4 percent adjusted for currency) and Application Management increased 0.1 percent as reported (declined 2 percent adjusted for currency). TS&CP revenue increased 1.8 percent as reported and was flat adjusted for currency with growth in Infrastructure Services and Integration Software offset by a decline in Technical Support Services, as reported and adjusted for currency. Systems revenue increased 11.3 percent as reported and 10 percent adjusted for currency, driven by strong growth in IBM Z and growth in Power Systems.

In the first nine months of 2018, the company’s strategic imperatives revenue increased 12 percent year to year as reported and 10 percent adjusted for currency. Total cloud revenue in the first nine months of 2018 of $13.5 billion increased 17 percent year to year as reported and 15 percent adjusted for currency, with as-a-Service revenue up 24 percent (22 percent adjusted for currency). Analytics revenue of $15.3 billion increased 5 percent as reported and 4 percent adjusted for currency. Mobile revenue increased 9 percent year to year (7 percent adjusted for currency) and Security revenue increased 57 percent as reported (56 percent adjusted for currency).

From a geographic perspective, Americas revenue declined 0.3 percent year to year as reported and was flat adjusted for currency with a modest decline in the U.S. There was growth in Canada as reported and adjusted for currency, while Latin America declined as reported but grew year to year adjusted for currency. EMEA increased 6.9 percent as reported and 1 percent adjusted for currency with growth as reported and adjusted for currency in Germany, France, the UK and Spain. Asia Pacific increased 1.0 percent as reported and was flat adjusted for currency, with Japan up 2.1 percent as reported and flat adjusted for currency. China was flat as reported (declined 2 percent adjusted for currency) and India declined as reported and adjusted for currency.

61

Management Discussion — (continued)

The consolidated gross margin of 45.4 percent decreased 0.4 points year to year. The operating (non-GAAP) gross margin of 45.9 percent decreased 0.5 points versus the prior year. While the GBS margin has improved on a year-to-year basis, the overall margin decline is primarily driven by continued investment in cloud and portfolio mix.

Total expense and other (income) increased $0.4 billion or 2.0 percent in the first nine months of 2018 compared to the prior year. The year-to-year increase included a higher level of workforce rebalancing charges (2 points), an impact from currency (2 points) and a lower level of IP income (1 points), partially offset by lower spending (3 points) driven by operating efficiencies, including acquisition synergies. Total operating (non-GAAP) expense and other (income) increased 1.3 percent year to year, driven primarily by the same factors.

Pre-tax income from continuing operations of $6.9 billion decreased 0.3 percent and the pre-tax margin was 11.9 percent, a decrease of 0.3 points versus the first nine months of 2017. The continuing operations effective tax rate for the first nine months of 2018 was 2.0 percent compared to 1.7 percent in the prior year. The tax rate in the first nine months of 2018 was primarily driven by the first-quarter resolution of certain U.S. tax audit matters and a net discrete tax benefit in the third quarter. The prior year tax rate was primarily driven by discrete tax items in the first half of the year. Income from continuing operations of $6.8 billion decreased 0.6 percent and the net income margin was 11.7 percent, a decrease of 0.3 points compared to the first nine months of 2017. Income from discontinued operations, net of tax, was $7 million in the first nine months of 2018 versus a loss of $3 million in the prior-year period. Net income of $6.8 billion decreased 0.5 percent year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $8.7 billion increased 0.7 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 0.2 points to 15.1 percent. Operating (non-GAAP) income from continuing operations of $8.2 billion increased 2.6 percent and the operating (non-GAAP) income margin from continuing operations of 14.2 percent increased 0.1 points. The operating (non-GAAP) effective tax rate from continuing operations in the first nine months of 2018 was 5.4 percent versus 7.2 percent in the first nine months of 2017.

Diluted earnings per share from continuing operations of $7.36 increased 1.7 percent and operating (non-GAAP) diluted earnings per share of $8.96 increased 4.9 percent versus the prior year. In the first nine months of 2018, the company repurchased 16.0 million shares of its common stock and had $1.4 billion remaining in the current share repurchase authorization at September 30, 2018.

At September 30, 2018, the balance sheet remained strong and the company continues to have the financial flexibility to support the business for the long term. Cash, restricted cash and marketable securities at quarter end were $14.7 billion, an increase of $1.8 billion from December 31, 2017. Key drivers in the balance sheet and total cash flows were:

Total assets decreased $3.4 billion ($0.9 billion adjusted for currency) from December 31, 2017 driven by:

·Decreases in total receivables ($6.1 billion), and net intangible assets ($0.6 billion); partially offset by

·Increases in cash, restricted cash and marketable securities ($1.8 billion), and retirement plan assets ($1.0 billion).

Total liabilities decreased $5.6 billion ($3.5 billion adjusted for currency) from December 31, 2017 driven by:

·Decreases in taxes payable ($1.7 billion), accounts payable ($1.1 billion), deferred income ($1.1 billion), retirement-related liabilities ($0.9 billion) and other accrued expenses and liabilities ($0.8 billion).

Total equity of $19.9 billion increased $2.2 billion from December 31, 2017 as a result of:

·Increases from net income ($6.8 billion), retirement-related benefit plans ($1.6 billion) and adoption of the new revenue standard ($0.5 billion); partially offset by

·Decreases from dividends ($4.2 billion) and share repurchases ($2.4 billion).

The company generated $11.1 billion in cash flows provided by operating activities, an increase of $0.1 billion compared to the first nine months of 2017, driven primarily by an increase in cash provided by financing receivables ($0.4 billion); partially offset by an increase in cash income tax payments ($0.3 billion). Net cash used in investing activities of $5.4 billion was $2.1 billion higher than the prior year, primarily driven by an increase in net purchases of marketable securities and other investments ($1.8 billion) and an increase in net capital investments ($0.5 billion); partially offset by a decrease in cash used

62

Management Discussion — (continued)

related to acquisitions ($0.3 billion). Net cash used in financing activities of $5.9 billion increased $0.4 billion compared to the first nine months of 2017, driven by a decrease in net cash sourced from debt transactions ($1.5 billion); partially offset by a decrease in cash used for gross common share repurchases ($1.3 billion).

Third Quarter and First Nine Months in Review

Results of Continuing Operations

Segment Details

The following is an analysis of the third quarter and first nine months of 2018 versus the third quarter and first nine months of 2017 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

									Yr. to Yr.
									Percent
							Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For
For the three months ended September 30:	2018			2017			Change		Currency
Revenue:
Cognitive Solutions	$	4,148		$	4,400		(5.7	)%	(4.6	)%
Gross margin	76.0		%	78.7		%*	(2.7	)pts.
Global Business Services	4,130			4,093			0.9	%	2.5	%
Gross margin	29.8		%	27.1		%*	2.7	pts.
Technology Services & Cloud Platforms	8,292			8,457			(1.9	)%	0.2	%
Gross margin	42.1		%	40.9		%*	1.2	pts.
Systems	1,736			1,721			0.9	%	1.8	%
Gross margin	52.7		%	53.6		%*	(1.0	)pts.
Global Financing	388			427			(9.0	)%	(7.1	)%
Gross margin	26.3		%	25.2		%	1.0	pts.
Other	62			56			11.0	%	13.5	%
Gross margin	(143.1		)%	(148.3		)%*	5.2	pts.
Total consolidated revenue	$	18,756		$	19,153		(2.1	)%	(0.4	)%
Total consolidated gross profit	$	8,803		$	8,981	*	(2.0	)%
Total consolidated gross margin	46.9		%	46.9		%*	0.0	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	96			114			(15.8	)%
Retirement-related costs/(income)	—			—		*	—
Operating (non-GAAP) gross profit	$	8,899		$	9,095	*	(2.2	)%
Operating (non-GAAP) gross margin	47.4		%	47.5		%*	0.0	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

63

Management Discussion — (continued)

									Yr. to Yr.
									Percent
							Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For
For the nine months ended September 30:	2018			2017			Change		Currency
Revenue:
Cognitive Solutions	$	13,027		$	13,021		0.0	%	(1.4	)%
Gross margin	76.7		%	78.3		%*	(1.7	)pts.
Global Business Services	12,495			12,196			2.4	%	0.5	%
Gross margin	26.3		%	25.1		%*	1.3	pts.
Technology Services & Cloud Platforms	25,533			25,079			1.8	%	(0.1	)%
Gross margin	39.9		%	40.1		%*	(0.2	)pts.
Systems	5,412			4,863			11.3	%	9.9	%
Gross margin	49.3		%	51.5		%*	(2.2	)pts.
Global Financing	1,188			1,246			(4.7	)%	(5.8	)%
Gross margin	29.1		%	29.2		%	(0.1	)pts.
Other	176			192			(8.2	)%	(9.9	)%
Gross margin	(132.5		)%	(148.2		)%*	15.7	pts.
Total consolidated revenue	$	57,830		$	56,597		2.2	%	0.4	%
Total consolidated gross profit	$	26,249		$	25,894	*	1.4	%
Total consolidated gross margin	45.4		%	45.8		%*	(0.4	)pts.
Non-operating adjustments:
Amortization of acquired intangible assets	283			349			(19.1	)%
Retirement-related costs/(income)	—			—		*	—
Operating (non-GAAP) gross profit	$	26,531		$	26,243	*	1.1	%
Operating (non-GAAP) gross margin	45.9		%	46.4		%*	(0.5	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Cognitive Solutions

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017		Change		Currency
Cognitive Solutions external revenue:	$	4,148	$	4,400	(5.7	)%	(4.6	)%
Solutions Software	$	2,910	$	3,029	(4.0	)%	(2.9	)%
Transaction Processing Software	1,238		1,371		(9.7	)	(8.3	)

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017		Change		Currency
Cognitive Solutions external revenue:	$	13,027	$	13,021	0.0	%	(1.4	)%
Solutions Software	$	9,080	$	9,015	0.7	%	(0.6	)%
Transaction Processing Software	3,946		4,006		(1.5	)	(3.2	)

Cognitive Solutions revenue of $4,148 million decreased 5.7 percent as reported and 5 percent adjusted for currency in the third quarter of 2018 compared to the prior year, with declines in Solutions Software and Transaction Processing Software. For the first nine months of the year, Cognitive Solutions revenue of $13,027 million was flat as reported, but declined 1 percent adjusted for currency, with growth in Solutions Software as reported, but declined adjusted for currency. Transaction Processing Software revenue declined both as reported and adjusted for currency.

In the third quarter, Solutions Software revenue of $2,910 million decreased 4.0 percent as reported and 3 percent adjusted for currency. There was good performance in the quarter in strategic verticals such as health, domain-specific capabilities including security solutions and key strategic areas of analytics, and in the emerging technologies of AI and blockchain. The performance in these key areas was more than offset by transition in other areas, including collaboration,

64

Management Discussion — (continued)

commerce and talent, as the company continues to respond to secular shifts in the market by modernizing offerings, infusing AI and enhancing the digital experience. Transaction Processing Software revenue of $1,238 million decreased 9.7 percent as reported and 8 percent adjusted for currency. The year-to-year performance was impacted by strong results in third quarter 2017. This software runs mission-critical workloads, leveraging IBM hardware platforms, and performance is often tied to client buying cycles. Across the platforms, declines in Storage and IBM Z middleware software were partially offset by growth in Power Systems middleware.

Cognitive Solutions third-quarter strategic imperatives revenue of $2.8 billion declined 5 percent as reported and 4 percent adjusted for currency. Within Cognitive Solutions, strategic imperatives performance essentially reflects the performance in Solutions Software. Cloud revenue of $0.6 billion decreased 3 percent as reported and 2 percent adjusted for currency, with an as-a-Service exit run rate of $2.0 billion. For the first nine months of the year, Cognitive Solutions strategic imperatives revenue of $8.6 billion grew 1 percent as reported, but decreased 1 percent adjusted for currency. Cloud revenue of $1.9 billion grew 1 percent as reported and was flat adjusted for currency.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2018			2017*			Change
Cognitive Solutions:
External gross profit	$	3,151		$	3,463		(9.0	)%
External gross profit margin	76.0		%	78.7		%	(2.7	)pts.
Pre-tax income	$	1,629		$	1,643		(0.9	)%
Pre-tax margin	34.0		%	32.7		%	1.3	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2018			2017*			Change
Cognitive Solutions:
External gross profit	$	9,988		$	10,202		(2.1	)%
External gross profit margin	76.7		%	78.3		%	(1.7	)pts.
Pre-tax income	$	4,718		$	4,522		4.3	%
Pre-tax margin	31.1		%	30.1		%	1.0	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Cognitive Solutions gross profit margin decreased 2.7 points to 76.0 percent in the third quarter of 2018. For the first nine months of 2018, gross profit margin decreased 1.7 points to 76.7 percent. The gross profit margin decline in both periods was driven by continued investment in strategic areas, a mix to services and a higher level of royalty cost associated with IP licensing agreements compared to the prior-year periods.

In the third quarter, pre-tax income of $1,629 million decreased 0.9 percent compared to the prior year with a pre-tax margin improvement of 1.3 points to 34.0 percent. For the first nine months of the year, pre-tax income of $4,718 million increased 4.3 percent compared to the prior year with a pre-tax margin improvement of 1.0 points to 31.1 percent. Pre-tax margins improved, driven by operational efficiencies, including acquisition synergies, even as the company continues to invest at high levels in key strategic areas, including AI, security and blockchain.

65

Management Discussion — (continued)

Global Business Services

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017		Change		Currency
Global Business Services external revenue:	$	4,130	$	4,093	0.9	%	2.5	%
Consulting	$	1,900	$	1,803	5.4	%	6.8	%
Global Process Services	314		314		0.1		2.0
Application Management	1,915		1,976		(3.1	)	(1.3	)

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017		Change		Currency
Global Business Services external revenue:	$	12,495	$	12,196	2.4	%	0.5	%
Consulting	$	5,698	$	5,394	5.6	%	3.6	%
Global Process Services	934		948		(1.4	)	(2.4	)
Application Management	5,863		5,855		0.1		(2.0	)

Global Business Services revenue of $4,130 million increased 0.9 percent as reported and 3 percent adjusted for currency in the third quarter of 2018 compared to the prior year. The company has realigned its practice model around key growth platforms including digital transformation, cloud applications and cognitive processes. For the first nine months of the year, Global Business Services revenue of $12,495 million increased 2.4 percent as reported and was flat adjusted for currency.

In the third quarter, Consulting revenue of $1,900 million increased 5.4 percent as reported and 7 percent adjusted for currency, led by growth in offerings within Digital Strategy, iX and Cognitive Process Transformation.  Clients are leveraging IBM’s leading-edge technology portfolio and industry expertise to enable their digital transformation. Global Process Services (GPS) revenue of $314 million was flat as reported and increased 2 percent adjusted for currency. Application Management revenue of $1,915 million decreased 3.1 percent as reported and 1 percent adjusted for currency with decline in traditional enterprise application managed services partially offset by growth in strategic offerings, such as Cloud Migration Factory.

Third-quarter 2018 GBS strategic imperatives revenue of $2.7 billion grew 8 percent as reported and 9 percent adjusted for currency. Cloud revenue of $1.2 billion grew 16 percent as reported and 18 percent adjusted for currency, with an as-a-Service exit run rate of $1.9 billion. For the first nine months of the year, GBS strategic imperatives revenue of $7.9 billion grew 9 percent as reported and 7 percent adjusted for currency year to year. Cloud revenue of $3.3 billion grew 15 percent as reported and 13 percent adjusted for currency.

66

Management Discussion — (continued)

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2018			2017*			Change
Global Business Services:
External gross profit	$	1,231		$	1,108		11.1	%
External gross profit margin	29.8		%	27.1		%	2.7	pts.
Pre-tax income	$	579		$	442		30.9	%
Pre-tax margin	13.8		%	10.6		%	3.2	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2018			2017*			Change
Global Business Services:
External gross profit	$	3,292		$	3,056		7.7	%
External gross profit margin	26.3		%	25.1		%	1.3	pts.
Pre-tax income	$	1,109		$	1,035		7.1	%
Pre-tax margin	8.7		%	8.3		%	0.4	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

GBS third-quarter gross profit margin increased 2.7 points to 29.8 percent. The company has continued to shift toward higher value offerings such as Digital and Cognitive to capture price for value, at the same time realigning resources to key skill areas, driving increased utilization and productivity. Pre-tax income of $579 million increased 30.9 percent year to year and pre-tax margin increased 3.2 points to 13.8 percent. For the first nine months of the year, pre-tax income of $1,109 million increased 7.1 percent and pre-tax margin improved 0.4 points to 8.7 percent. Pre-tax margin for the first nine months of 2018 included an impact of 0.8 points due to a higher level of charges related to workforce rebalancing in the first-quarter 2018, which is contributing to productivity around labor models and structure.

Technology Services & Cloud Platforms

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017		Change		Currency
Technology Services & Cloud Platforms external revenue:	$	8,292	$	8,457	(1.9	)%	0.2	%
Infrastructure Services	$	5,595	$	5,665	(1.2	)%	1.0	%
Technical Support Services	1,707		1,801		(5.2	)	(2.7	)
Integration Software	990		990		0.0		1.4

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017		Change		Currency
Technology Services & Cloud Platforms external revenue:	$	25,533	$	25,079	1.8	%	(0.1	)%
Infrastructure Services	$	17,188	$	16,695	3.0	%	0.9	%
Technical Support Services	5,239		5,357		(2.2	)	(3.5	)
Integration Software	3,106		3,027		2.6		0.9

In the third-quarter 2018, TS&CP revenue of $8,292 million decreased 1.9 percent as reported, but grew for the second consecutive quarter adjusted for currency, driven by growth at constant currency in Infrastructure Services and Integration Software, offset by declines in Technical Support Services. Clients are shifting mission-critical business processes and

67

Management Discussion — (continued)

applications to the cloud and IBM’s differentiated value proposition helps clients optimize across hybrid cloud environments. For the first nine months of the year, TS&CP revenue of $25,533 million increased 1.8 percent as reported and was flat adjusted for currency.

Infrastructure Services revenue of $5,595 million decreased 1.2 percent as reported, but increased 1 percent adjusted for currency in the third quarter of 2018 compared to the prior-year period. Performance was driven by growth in hybrid cloud implementations and the company continues to deliver new, open and interoperable approaches to the cloud.

Technical Support Services (TSS) third-quarter revenue of $1,707 million decreased 5.2 percent as reported and 3 percent adjusted for currency. TSS revenue continues to be impacted by the dynamics of the IBM Z product cycle as clients move from maintenance to warranty for the first year, partially offset by continued growth in core multi-vendor support services.

In the third-quarter 2018, Integration Software revenue of $990 million was flat as reported and grew 1 percent adjusted for currency driven by offerings that assist clients with the modernization, automation and integration of their applications within a hybrid cloud environment, including strong adoption of IBM Cloud Private.

TS&CP third-quarter 2018 strategic imperatives revenue of $2.9 billion grew 14 percent year to year as reported and 16 percent adjusted for currency. Cloud revenue of $2.1 billion grew 19 percent as reported and 22 percent adjusted for currency, with an as-a-Service exit run rate of $7.5 billion. For the first nine months of the year, TS&CP strategic imperatives revenue of $9.0 billion grew 21 percent as reported and 19 percent adjusted for currency. Cloud revenue of $6.4 billion grew 25 percent as reported and 23 percent adjusted for currency.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2018			2017*			Change
Technology Services & Cloud Platforms:
External Technology Services gross profit	$	2,696		$	2,657		1.5	%
External Technology Services gross profit margin	36.9		%	35.6		%	1.3	pts.
External Integration Software gross profit	$	797		$	805		(1.0	)%
External Integration Software gross profit margin	80.6		%	81.3		%	(0.8	)pts.
External total gross profit	$	3,493		$	3,462		0.9	%
External total gross profit margin	42.1		%	40.9		%	1.2	pts.
Pre-tax income	$	1,075		$	1,177		(8.6	)%
Pre-tax margin	12.6		%	13.7		%	(1.1	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2018			2017*			Change
Technology Services & Cloud Platforms:
External Technology Services gross profit	$	7,674		$	7,600		1.0	%
External Technology Services gross profit margin	34.2		%	34.5		%	(0.2	)pts.
External Integration Software gross profit	$	2,511		$	2,450		2.5	%
External Integration Software gross profit margin	80.9		%	80.9		%	(0.1	) pts.
External total gross profit	$	10,185		$	10,050		1.3	%
External total gross profit margin	39.9		%	40.1		%	(0.2	)pts.
Pre-tax income	$	2,395		$	2,845		(15.8	)%
Pre-tax margin	9.2		%	11.1		%	(1.9	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Technology Services & Cloud Platforms gross profit margin increased 1.2 points year to year to 42.1 percent in the third quarter. The company continues to make the investments required to capitalize on the shift to cloud by expanding capacity and data center footprints around the world, driving productivity and workforce optimization efficiencies, and investing in hybrid cloud innovation. Pre-tax income of $1,075 million decreased 8.6 percent in the third quarter. Pre-tax margin declined 1.1 points year to year to 12.6 percent. For the first nine months of 2018, pre-tax income of $2,395 million decreased 15.8

68

Management Discussion — (continued)

percent and pre-tax margin decreased 1.9 points to 9.2 percent. The pre-tax margin in the first nine months of 2018 compared to the prior year included an impact of 0.9 points from a higher level of workforce rebalancing charges in the first quarter of 2018.

Services Backlog and Signings

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
	At September 30,		At September 30,		Percent		Adjusted For
(Dollars in billions)	2018		2017		Change		Currency
Total backlog	$	112.8	$	119.3	(5.4	)%	(2.9	)%

The estimated total services backlog at September 30, 2018 was $113 billion, a decrease of 5.4 percent as reported (3 percent adjusted for currency). Global Technology Services (GTS) backlog and GBS backlog declined year to year as reported and adjusted for currency.

Total services backlog includes Infrastructure Services, Consulting, Global Process Services, Application Management and Technical Support Services. Total backlog is intended to be a statement of overall work under contract which is either non-cancellable, or which historically has very low likelihood of termination, given the criticality of certain services to the company’s clients. Total backlog does not include as-a-Service arrangements that allow for termination under contractual commitment terms. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.

Services signings are management’s initial estimate of the value of a client’s commitment under a services contract. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Signings include Infrastructure Services, Consulting, Global Process Services and Application Management contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Technical Support Services (TSS) are generally not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar to outsourcing contracts are included in signings.

Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017		Change		Currency
Total signings	$	8,029	$	10,385	(22.7	)%	(20.9	)%

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017		Change		Currency
Total signings	$	28,865	$	29,178	(1.1	)%	(2.6	)%

69

Management Discussion — (continued)

Systems

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017		Change		Currency
Systems external revenue:	$	1,736	$	1,721	0.9	%	1.8	%
Systems Hardware	$	1,339	$	1,301	3.0	%	3.7	%
IBM Z					5.2		5.8
Power Systems					15.9		16.7
Storage Systems					(6.4	)	(5.6	)
Operating Systems Software	397		420		(5.6	)	(4.3	)

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017		Change		Currency
Systems external revenue:	$	5,412	$	4,863	11.3	%	9.9	%
Systems Hardware	$	4,187	$	3,629	15.4	%	14.1	%
IBM Z					53.5		52.0
Power Systems					8.9		7.7
Storage Systems					(4.2	)	(5.5	)
Operating Systems Software	1,225		1,234		(0.7	)	(2.3	)

Systems revenue of $1,736 million increased 0.9 percent as reported (2 percent adjusted for currency) in the third quarter of 2018 compared to the prior year. Systems Hardware revenue of $1,339 million grew 3.0 percent as reported (4 percent adjusted for currency) driven by continued adoption of z14 and double-digit growth in Power Systems, offset by a decline in Storage Systems, as reported and adjusted for currency. Operating Systems Software revenue of $397 million decreased 5.6 percent as reported and 4 percent adjusted for currency compared to the prior year. For the first nine months of 2018, Systems revenue of $5,412 million increased 11.3 percent as reported (10 percent adjusted for currency) with strong growth in Systems Hardware, driven by z14 which continues to track ahead of prior cycles and Power Systems, partially offset by declines in Storage Systems and Operating Systems Software.

Within Systems Hardware, third quarter IBM Z revenue grew 5.2 percent as reported (6 percent adjusted for currency), driven by new workload MIPS. The z14 adoption remained broad based, across many countries and industries, and revenue increased year to year despite the strong growth in the prior year. The pervasive encryption capabilities of the z14 continues to be a key differentiator, as new clients were again added to the platform during the third quarter.

Power Systems revenue grew 15.9 percent as reported (17 percent adjusted for currency), driven by strong growth in Linux and good performance across the new POWER9-based architecture. New POWER9 processors for mid-range and high-end systems were launched in the third quarter which are designed for handling advanced analytics, cloud environments and data intensive workloads in AI, HANA and UNIX markets. During the third quarter, the company continued to deliver the most powerful commercially available supercomputers built with POWER9 technology to U.S. Department of Energy labs.

Storage Systems third-quarter revenue declined 6.4 percent as reported (6 percent adjusted for currency), driven by declines in mid-range and high-end, partially offset by strong growth in All Flash Arrays. Storage is an increasingly competitive environment requiring continual investment in innovation. The company has released new functionality to protect critical client data from cyberattacks, and the new FlashSystem with next generation NVMe technology was announced in the quarter.

Third-quarter Systems strategic imperatives revenue of $0.9 billion grew 5 percent year to year both as reported and adjusted for currency. Cloud revenue of $0.6 billion declined 9 percent as reported (8 percent adjusted for currency). For the first nine months of the year, Systems strategic imperatives revenue of $2.9 billion increased 29 percent as reported (28 percent adjusted for currency), primarily due to the strong acceptance of the z14. Cloud revenue of $1.9 billion increased 12 percent as reported and 10 percent adjusted for currency.

70

Management Discussion — (continued)

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2018			2017*			Change
Systems:
External Systems Hardware gross profit	$	577		$	557		3.5	%
External Systems Hardware gross profit margin	43.1		%	42.8		%	0.2	pts.
External Operating Systems Software gross profit	$	337		$	366		(7.8	)%
External Operating Systems Software gross profit margin	85.0		%	87.0		%	(2.1	)pts.
External total gross profit	$	914		$	923		(1.0	)%
External total gross profit margin	52.7		%	53.6		%	(1.0	)pts.
Pre-tax income	$	209		$	337		(37.9	)%
Pre-tax margin	10.9		%	17.3		%	(6.4	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2018			2017*			Change
Systems:
External Systems Hardware gross profit	$	1,642		$	1,431		14.8	%
External Systems Hardware gross profit margin	39.2		%	39.4		%	(0.2	)pts.
External Operating Systems Software gross profit	$	1,027		$	1,074		(4.3	)%
External Operating Systems Software gross profit margin	83.9		%	87.0		%	(3.1	)pts.
External total gross profit	$	2,670		$	2,505		6.6	%
External total gross profit margin	49.3		%	51.5		%	(2.2	)pts.
Pre-tax income/(loss)	$	352		$	222		58.8	%
Pre-tax margin	5.9		%	4.1		%	1.8	pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Systems gross profit margin decreased 1.0 points to 52.7 percent in the third quarter of 2018 compared to the prior year. The overall decrease year to year was driven primarily by margin declines in Operating Systems Software. Systems Hardware margins were flat year to year, with growth in IBM Z offset by declines in Power Systems and Storage Systems. For the first nine months of the year, Systems gross profit margin decreased 2.2 points to 49.3 percent compared to the prior year, driven primarily by margin declines in Operating Systems Software. Systems Hardware gross profit margins were flat year to year, with margin declines in IBM Z, Power Systems and Storage Systems offset by a benefit from mix to IBM Z.

In the third quarter of 2018, pre-tax income of $209 million declined 37.9 percent and pre-tax margin decreased 6.4 points year to year to 10.9 percent, driven primarily by a lower level of IP income and continuing investment to drive innovation across the portfolio. For the first nine months of the year, pre-tax income of $352 million increased $131 million and pre-tax margin increased 1.8 points year to year to 5.9 percent, primarily due to the IBM Z product cycle, partially offset by the first-quarter actions taken to improve the systems cost structure over the longer term.

Global Financing

Global Financing is a reportable segment that is measured as a stand-alone entity. Global Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating strong returns on equity. Global Financing also optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment include equipment returned at the end of a lease, surplus internal equipment and used equipment purchased externally. Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Global Financing has insight into product plans and cycles for the IBM products under lease. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

71

Management Discussion — (continued)

Results of Operations

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Dollars in millions)	2018		2017			2018		2017
External revenue	$	388	$	427		$	1,188	$	1,246
Internal revenue	338		272			1,240		925
Total revenue	$	726	$	698		$	2,428	$	2,171
Pre-tax income	$	308	$	243	*	$	1,042	$	835	*

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

In the third quarter of 2018, Global Financing total revenue of $726 million increased 4.0 percent compared to the prior year. External revenue decreased 9.0 percent as reported (7 percent adjusted for currency), due to a decrease in used equipment sales (down 41.5 percent to $82 million), partially offset by an increase in financing (up 7.0 percent to $306 million). Internal revenue increased 24.5 percent, driven by an increase in used equipment sales (up 23.9 percent to $228 million), and an increase in financing (up 25.7 percent to $110 million).

The increase in total revenue of $257 million in the first nine months of 2018 compared to the same period in 2017 was due to an increase in internal revenue of 34.1 percent, driven by an increase in used equipment sales (up 40.0 percent to $926 million) and an increase in financing (up 19.2 percent to $314 million). External revenue decreased 4.7 percent (6 percent adjusted for currency), driven by a decline in used equipment sales (down 27.2 percent to $269 million), partially offset by an increase in financing (up 4.8 percent to $918 million).

The year-to-year increases in internal financing revenue in the three and nine months ended September 30, 2018 were due to higher asset yields and higher average asset balances. The increases in external financing revenue in the third quarter and first nine months of 2018, compared to the same periods in 2017, respectively, were due to higher average asset balances, partially offset by lower asset yields.

Total sales of used equipment represented 42.7 percent and 49.2 percent of Global Financing’s revenue in the third quarter and first nine months of 2018, respectively, compared to 46.5 percent and 47.5 percent in the third quarter and first nine months of 2017, respectively. The decrease in the third quarter was due to a lower volume of external used equipment sales, partially offset by increases in internal transactions. The increase in the first nine months of 2018 compared to the prior year was due to higher volumes for internal used equipment sales. The gross profit margin on used sales was 50.9 percent and 33.2 percent in the third quarter of 2018 and 2017, respectively, and 56.6 percent and 45.4 percent in the first nine months of 2018 and 2017, respectively. The increase in the gross profit margin was driven by a shift towards higher margin internal equipment sales.

Global Financing pre-tax income increased 26.9 percent to $308 million in the third quarter of 2018, compared to the same period in 2017, due to higher gross profit of $58 million and a decrease in expense of $7 million. Pre-tax income increased 24.8 percent to $1,042 million in the first nine months of 2018, compared to the same period in 2017, due to higher gross profit of $212 million, partially offset by an increase in expense of $5 million.

Global Financing return on equity was 27.5 percent and 30.5 percent for the three and nine months ended September 30, 2018, respectively, compared to 23.8 percent and 24.5 percent for the three and nine months ended September 30, 2017, respectively. The increase in return on equity in the third quarter and first nine months of 2018, compared to the same periods of 2017, was due to the increase in net income. Refer to page 90 for the details of the after-tax income and return on equity calculation.

Total unguaranteed residual value of leases, including operating leases, was $663 million as of September 30, 2018. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. Third-party residual value guarantees increase the minimum lease payments as provided for by accounting standards that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease. The aggregate asset values associated with the guarantees of sales-type leases were $57 million and $79 million for the financing transactions originated during the quarters ended September 30, 2018 and 2017, respectively, and $212 million and $186 million for the nine months ended September 30, 2018 and 2017, respectively.

72

Management Discussion — (continued)

Geographic Revenue

In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis.

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2018		2017*		Change		Currency
Total Revenue	$	18,756	$	19,153	(2.1	)%	(0.4	)%
Americas	$	8,853	$	8,929	(0.9	)%	1.0	%
Europe/Middle East/Africa (EMEA)	5,827		6,010		(3.0	)	(1.8	)
Asia Pacific	4,076		4,215		(3.3	)	(1.2	)

* Recast to conform to current period presentation.

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2018		2017*		Change		Currency
Total Revenue	$	57,830	$	56,597	2.2	%	0.4	%
Americas	$	26,772	$	26,851	(0.3	)%	0.4	%
Europe/Middle East/Africa (EMEA)	18,410		17,224		6.9		1.1
Asia Pacific	12,648		12,522		1.0		(0.3	)

* Recast to conform to current period presentation.

In the third quarter, total revenue of $18,756 million decreased 2.1 percent as reported and was flat adjusted for currency compared to the prior year. Americas revenue of $8,853 million decreased 0.9 percent as reported, but grew 1 percent adjusted for currency. EMEA revenue of $5,827 million decreased 3.0 percent as reported and 2 percent adjusted for currency. Asia Pacific revenue of $4,076 million decreased 3.3 percent as reported and 1 percent adjusted for currency.

Within Americas, U.S. revenue increased 0.2 percent compared to the prior year. Canada increased 0.7 percent as reported and 5 percent adjusted for currency. Latin America decreased 8.6 percent as reported, but grew 3 percent adjusted for currency. Within Latin America, Brazil decreased 14.5 percent as reported, but was flat adjusted for currency.

In EMEA, Germany declined 6.6 percent as reported and 6 percent adjusted for currency. France decreased 5.3 percent as reported and 4 percent adjusted for currency. Italy decreased 1.4 percent as reported and was flat adjusted for currency. The UK increased 5.9 percent as reported and 7 percent adjusted for currency and Spain increased 5.3 percent as reported and 6 percent adjusted for currency. The Middle East and Africa region decreased 11.0 percent as reported and 10 percent adjusted for currency.

Within Asia Pacific, Japan was flat as reported and adjusted for currency compared to the prior year. Australia was flat as reported, but grew 8 percent adjusted for currency. India decreased 21.4 percent (14 percent adjusted for currency) and China decreased 4.2 percent (3 percent adjusted for currency).

Total revenue of $57,830 million increased 2.2 percent as reported and was flat adjusted for currency in the first nine months of 2018 compared to the prior year. Americas revenue of $26,772 million was flat as reported and adjusted for currency. EMEA revenue of $18,410 million increased 6.9 percent as reported and 1 percent adjusted for currency. Asia Pacific revenue of $12,648 million increased 1.0 percent as reported and was flat on an adjusted for currency basis.

Within Americas, U.S. revenue decreased 0.6 percent compared to the first nine months of the prior year. Canada increased 3.7 percent as reported and 2 percent adjusted for currency. Latin America decreased 2.4 percent as reported, but grew 4 percent adjusted for currency. Within Latin America, Brazil decreased 4.4 percent as reported, but increased 4 percent adjusted for currency.

73

Management Discussion — (continued)

Within EMEA, the UK increased 9.0 percent as reported and 3 percent adjusted for currency and Germany increased 8.1 percent as reported and 1 percent adjusted for currency. France increased 11.4 percent as reported and 4 percent adjusted for currency. Spain increased 16.6 percent as reported and 9 percent adjusted for currency. Italy increased 6.2 percent as reported, but declined 1 percent adjusted for currency. The Middle East and Africa region increased 2.1 percent as reported and 2 percent adjusted for currency.

Within Asia Pacific, Japan increased 2.1 percent as reported and was flat adjusted for currency. Australia increased 3.3 percent as reported and 5 percent adjusted for currency. India decreased 10.0 percent as reported and 7 percent adjusted for currency, while China was flat as reported, but declined 2 percent adjusted for currency.

Expense

Total Expense and Other (Income)

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended September 30:	2018			2017			Change
Total consolidated expense and other (income)	$	5,807		$	5,917	*	(1.9	)%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(112	)	$	(125	)	(10.5	)%
Acquisition-related charges	(2		)	0			nm
Non-operating retirement-related (costs)/income	(389		)	(273		)*	42.5
Operating (non-GAAP) expense and other (income)	$	5,304		$	5,519	*	(3.9	)%
Total consolidated expense-to-revenue ratio	31.0		%	30.9		%*	0.1	pts.
Operating (non-GAAP) expense-to-revenue ratio	28.3		%	28.8		%*	(0.5	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

							Yr. to Yr.
(Dollars in millions)							Percent
For the nine months ended September 30:	2018			2017			Change
Total consolidated expense and other (income)	$	19,341		$	18,962	*	2.0	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(331	)	$	(382	)	(13.3	)%
Acquisition-related charges	(3		)	(19		)	(86.1	)
Non-operating retirement-related (costs)/income	(1,185		)	(969		)*	22.3
Operating (non-GAAP) expense and other (income)	$	17,822		$	17,593	*	1.3	%
Total consolidated expense-to-revenue ratio	33.4		%	33.5		%*	(0.1	)pts.
Operating (non-GAAP) expense-to-revenue ratio	30.8		%	31.1		%*	(0.3	)pts.

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.

74

Management Discussion — (continued)

Selling, General and Administrative Expense

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended September 30:	2018			2017			Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,805		$	4,032	*	(5.6	)%
Advertising and promotional expense	323			337			(4.3	)
Workforce rebalancing charges	26			17			51.7
Amortization of acquired intangible assets	110			125			(11.5	)
Stock-based compensation	95			88			8.3
Bad debt expense	4			7			(50.1	)
Total consolidated selling, general and administrative expense	$	4,363		$	4,606	*	(5.3	)%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(110	)	$	(125	)	(11.5	)%
Acquisition-related charges	(2		)	0			nm
Non-operating retirement-related (costs)/income	—			—		*	—
Operating (non-GAAP) selling, general and administrative expense	$	4,251		$	4,482	*	(5.1	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm — not meaningful

							Yr. to Yr.
(Dollars in millions)							Percent
For the nine months ended September 30:	2018			2017			Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	12,295		$	12,690	*	(3.1	)%
Advertising and promotional expense	1,131			1,090			3.8
Workforce rebalancing charges	590			188			213.9
Amortization of acquired intangible assets	329			382			(13.7	)
Stock-based compensation	264			277			(4.8	)
Bad debt expense	56			40			41.1
Total consolidated selling, general and administrative expense	$	14,665		$	14,666	*	0.0	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(329	)	$	(382	)	(13.7	)%
Acquisition-related charges	(3		)	(12		)	(77.7	)
Non-operating retirement-related (costs)/income	—			—		*	—
Operating (non-GAAP) selling, general and administrative expense	$	14,333		$	14,273	*	0.4	%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Total selling, general and administrative (SG&A) expense decreased 5.3 percent in the third quarter of 2018 driven primarily by the following factors:

·Lower spending (4 points) reflecting acquisition synergies and operational efficiencies; and

·The effects of currency (2 points).

Operating (non-GAAP) expense decreased 5.1 percent year to year driven primarily by the same factors.

SG&A expense was flat year to year in the first nine months of 2018 versus the first nine months of 2017 driven primarily by the following factors:

·Higher current year workforce rebalancing charges (2 points); and

·The effects of currency (1 point); partially offset by

·Lower spending (4 points).

Operating (non-GAAP) expense was flat year to year driven primarily by the same factors.

75

Management Discussion — (continued)

Bad debt expense increased $16 million year to year in the first nine months of 2018. The receivables provision coverage was 1.9 percent at September 30, 2018, an increase of 30 basis points compared to December 31, 2017 and flat compared to September 30, 2017.

Research, Development and Engineering

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended September 30:	2018		2017			Change
Total consolidated research, development and engineering expense	$	1,252	$	1,291	*	(3.1	)%
Non-operating adjustment:
Non-operating retirement-related (costs)/income	$	—	$	—	*	—
Operating (non-GAAP) research, development and engineering expense	$	1,252	$	1,291	*	(3.1	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

						Yr. to Yr.
(Dollars in millions)						Percent
For the nine months ended September 30:	2018		2017			Change
Total consolidated research, development and engineering expense	$	4,021	$	4,212	*	(4.5	)%
Non-operating adjustment:
Non-operating retirement-related (costs)/income	$	—	$	—	*	—
Operating (non-GAAP) research, development and engineering expense	$	4,021	$	4,212	*	(4.5	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Research, development and engineering (RD&E) expense was 6.7 percent and 7.0 percent of revenue in the third quarter and first nine months of 2018, respectively, compared to 6.7 percent and 7.4 percent in the prior-year periods, respectively. The company continues to invest in research and development as it builds new markets and maintains its leadership in enterprise IT.

RD&E expense in the third quarter of 2018 decreased 3.1 percent year to year primarily driven by:

·Lower spending (2 points); and

·The effects of currency (1 point).

RD&E expense in the first nine months of 2018 decreased 4.5 percent year to year primarily driven by:

·Lower spending (6 points); partially offset by

·The effects of currency (1 point).

76

Management Discussion — (continued)

Intellectual Property and Custom Development Income

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2018		2017		Change
Intellectual Property and Custom Development Income:
Licensing of intellectual property including royalty-based fees	$	200	$	236	(15.2	)%
Custom development income	66		62		7.5
Sales/other transfers of intellectual property	8		10		(13.9	)
Total	$	275	$	308	(10.6	)%

					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2018		2017		Change
Intellectual Property and Custom Development Income:
Licensing of intellectual property including royalty-based fees	$	630	$	921	(31.6	)%
Custom development income	200		186		7.3
Sales/other transfers of intellectual property	12		11		18.4
Total	$	842	$	1,118	(24.7	)%

Licensing of intellectual property including royalty-based fees decreased 15.2 percent and 31.6 percent year to year in the third quarter and first nine months of 2018, respectively. The company entered into new partnership agreements in the first nine months of 2018, which included three transactions with period income greater than $100 million. There were two transactions greater than $100 million in the first nine months of 2017. The company licenses IP to partners who allocate their skills to extend the value of assets that are high value, but may be in mature markets. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

Other (Income) and Expense

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended September 30:	2018			2017			Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(76	)	$	37		nm
(Gains)/losses on derivative instruments	63			(29		)	nm
Interest income	(70		)	(38		)	81.7	%
Net (gains)/losses from securities and investment assets	(8		)	(6		)	48.4
Retirement-related costs/(income)	389			273		*	42.5
Other	(23		)	(79		)	(70.8	)
Total consolidated other (income) and expense	$	275		$	159	*	73.5	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1	)	$	—		nm
Acquisition-related charges	—			—			—
Non-operating retirement-related (costs)/income	(389		)	(273		)*	42.5
Operating (non-GAAP) other (income) and expense	$	(115	)	$	(114	)	0.5	%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

77

Management Discussion — (continued)

							Yr. to Yr.
(Dollars in millions)							Percent
For the nine months ended September 30:	2018			2017			Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(349	)	$	374		nm
(Gains)/losses on derivative instruments	449			(351		)	nm
Interest income	(187		)	(102		)	82.6	%
Net (gains)/losses from securities and investment assets	(89		)	(16		)	472.8
Retirement-related costs/(income)	1,185			969		*	22.3
Other	(42		)	(123		)	(66.3	)
Total consolidated other (income) and expense	$	968		$	751	*	28.8	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1	)	$	—		nm
Acquisition-related charges	—			(7		)	(100.0	)%
Non-operating retirement-related (costs)/income	(1,185		)	(969		)*	22.3
Operating (non-GAAP) other (income) and expense	$	(219	)	$	(225	)	(2.8	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

Total consolidated other (income) and expense was expense of $275 million in the third quarter of 2018, an increase of 73.5 percent compared to the third quarter of 2017. The increase was primarily driven by:

·Higher non-operating retirement-related costs ($116 million) with drivers described in the Retirement-Related Plans cost section; and

·Lower gains on real estate transactions (reflected in Other in the table above) ($56 million); partially offset by

·Higher interest income ($31 million); and

·Higher net exchange gains ($21 million).

Operating (non-GAAP) other (income) and expense was income of $115 million in the third quarter of 2018 and was flat year to year driven by the same factors as above, excluding the higher non-operating retirement-related costs.

Total consolidated other (income) and expense was expense of $968 million in the first nine months of 2018, an increase of 28.8 percent year to year. The increase was primarily driven by:

·Higher non-operating retirement-related costs ($216 million);

·Higher net exchange losses ($77 million); and

·Lower gains on real estate transactions (reflected in Other in the table above) ($52 million); partially offset by

·Higher interest income ($85 million); and

·Increased gains from securities and investment assets ($74 million).

Operating (non-GAAP) other (income) and expense was income of $219 million in the first nine months of 2018, a decrease of 2.8 percent year to year. The year-to-year change was driven primarily by the same factors as above, excluding the higher non-operating retirement-related costs.

78

Management Discussion — (continued)

Interest Expense

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2018		2017		Change
Interest expense	$	191	$	168	13.8	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2018		2017		Change
Interest expense	$	530	$	451	17.5	%

Interest expense increased $23 million and $79 million year to year in the third quarter and first nine months of 2018, respectively. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings if the related external borrowings are to support the Global Financing external business. Overall interest expense (excluding capitalized interest) for the third quarter and first nine months of 2018 was $384 million and $1,098 million, respectively, an increase of $49 million and $151 million versus the comparable prior year periods, primarily driven by a higher average debt balance and higher average interest rates.

Retirement-Related Plans

The following table provides the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended September 30:	2018			2017			Change
Retirement-related plans — cost:
Service cost	$	109		$	111		(1.6	)%
Multi-employer plans	9			11		*	(22.2	)
Cost of defined contribution plans	247			258			(4.2	)
Total operating costs/(income)	$	365		$	380	*	(4.0	)%
Interest cost	$	677		$	746		(9.3	)%
Expected return on plan assets	(1,007		)	(1,096		)	(8.1	)
Recognized actuarial losses	731			728			0.3
Amortization of prior service costs/(credits)	(18		)	(22		)*	(18.6	)
Curtailments/settlements	2			2			(16.7	)
Other costs	5			(85		)	nm
Total non-operating costs/(income)	$	389		$	273	*	42.5	%
Total retirement-related plans — cost	$	754		$	653		15.5	%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

79

Management Discussion — (continued)

							Yr. to Yr.
(Dollars in millions)							Percent
For the nine months ended September 30:	2018			2017			Change
Retirement-related plans — cost:
Service cost	$	323		$	323		0.1	%
Multi-employer plans	29			30		*	(3.6	)
Cost of defined contribution plans	763			776			(1.6	)
Total operating costs/(income)	$	1,115		$	1,128	*	(1.2	)%
Interest cost	$	2,053		$	2,215		(7.3	)%
Expected return on plan assets	(3,047		)	(3,250		)	(6.2	)
Recognized actuarial losses	2,212			2,143			3.2
Amortization of prior service costs/(credits)	(55		)	(66		)*	(15.9	)
Curtailments/settlements	7			3			110.7
Other costs	16			(76		)	nm
Total non-operating costs/(income)	$	1,185		$	969	*	22.3	%
Total retirement-related plans — cost	$	2,300		$	2,097		9.7	%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

nm - not meaningful

In the third quarter of 2018, total pre-tax retirement-related plan cost increased by $101 million compared to the third quarter of 2017, primarily driven by lower expected return on plan assets ($89 million) and an increase in other costs ($90 million) driven by a pension obligation adjustment recorded in the prior year related to the UK pension litigation; partially offset by lower interest costs ($69 million). Total cost for the first nine months of 2018 increased by $203 million versus the first nine months of 2017, primarily driven by lower expected return on plan assets ($203 million), an increase in recognized actuarial losses ($70 million) and an increase in other costs ($92 million) driven by the prior year pension obligation adjustment; partially offset by lower interest costs ($162 million).

As discussed in the “Operating (non-GAAP) Earnings” section on page 58, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the third quarter of 2018 were $365 million, a decrease of $15 million compared to the third quarter of 2017 and non-operating costs were $389 million increasing $116 million year to year. For the first nine months of 2018, operating retirement-related costs were $1,115 million, a decrease of $13 million compared to the prior year and non-operating costs were $1,185 million increasing $216 million in the first nine months of 2018 compared to the prior year driven primarily by the same factors as above.

Taxes

The continuing operations effective tax rate for the third quarter of 2018 was 10.2 percent, a decrease of 0.9 points compared to the third quarter of 2017. The continuing operations effective tax rate for the first nine months of 2018 was 2.0 percent, an increase of 0.3 points compared to the first nine months of 2017. The operating (non-GAAP) tax rate for the third quarter was 12.8 percent, a decrease of 2.0 points compared to the third quarter of 2017. The operating (non-GAAP) tax rate for the first nine months of 2018 was 5.4 percent, a decrease of 1.8 points compared to the first nine months of 2017.

The decrease in the continuing operations effective tax rate in the third quarter of 2018 was primarily driven by a net discrete tax benefit primarily attributable to a tax incentive claim approved by the IRS in the quarter (4.8 points) and a more favorable mix of geographic income year to year (1.7 points).  These benefits were partially offset by a decrease in foreign tax credits (4.6 points) as well as the net impact of audit activity in the third quarter (1.0 points). The decrease in the operating (non-GAAP) tax rate for the third quarter of 2018 was driven by the same factors.

The change in the continuing operations effective tax rate for the first nine months of 2018 compared to 2017 was primarily driven by the year to year impacts above, as well as a discrete tax benefit in the first quarter of 2018 from the resolution of certain U.S. federal audit activity. These benefits were partially offset by the first-half 2018 net provisional charge related to U.S. tax reform and prior year tax benefits related to the intercompany transfer of IP and foreign audit activity.

80

Management Discussion — (continued)

The change in the operating (non-GAAP) tax rate was primarily driven by the same factors, except for the impact of the provisional net tax charge in the first nine months of 2018 related to U.S. tax reform.

Earnings Per Share

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

						Yr. to Yr.
						Percent
For the three months ended September 30:	2018		2017			Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	2.94	$	2.92		0.7	%
Basic	$	2.95	$	2.93		0.7	%
Diluted operating (non-GAAP)	$	3.42	$	3.26	*	4.9	%
Weighted-average shares outstanding: (in millions)
Assuming dilution	915.2		933.2			(1.9	)%
Basic	911.2		929.4			(2.0	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

						Yr. to Yr.
						Percent
For the nine months ended September 30:	2018		2017			Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	7.36	$	7.24		1.7	%
Basic	$	7.39	$	7.28		1.5	%
Diluted operating (non-GAAP)	$	8.96	$	8.54	*	4.9	%
Weighted-average shares outstanding: (in millions)
Assuming dilution	920.0		940.2			(2.1	)%
Basic	915.6		935.6			(2.1	)%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Actual shares outstanding at September 30, 2018 were 908.8 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of 2018 were 18.0 million and 20.2 million shares lower than the same periods of 2017. The decreases were primarily the result of the common stock repurchase program.

Financial Position

Dynamics

At September 30, 2018, the balance sheet remained strong and the company continues to have the financial flexibility to support the business for the long term. Cash, restricted cash and marketable securities at quarter end were $14,662 million. The company continues to manage the investment portfolio to meet its capital preservation and liquidity objectives. Total debt of $46,921 million increased $97 million from December 31, 2017, driven by new debt issuances of $2,756 million and an increase in commercial paper of $2,490 million; partially offset by debt maturities of $4,243 million. Within total debt, $30,367 million, or approximately 65 percent, is in support of the Global Financing business. In the first nine months of 2018, the company generated $11,128 million in cash from operations, compared to $10,991 million in the first nine months of 2017. The company has consistently generated strong cash flows from operations and continues to have access to additional sources of liquidity through the capital markets and its credit facilities.

The assets and debt associated with the Global Financing business are a significant part of the company’s financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing.

81

Management Discussion — (continued)

Global Financing Financial Position Key Metrics:

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Cash and cash equivalents	$	1,969	$	2,696
Net investment in sales-type and direct financing leases (1)	6,626		7,253
Equipment under operating leases — external clients (2)	495		477
Client loans	11,473		12,450
Total client financing assets	18,595		20,180
Commercial financing receivables	9,355		11,590
Intercompany financing receivables (3) (4)	4,843		5,056
Total assets	$	38,058	$	41,096
Debt	$	30,367	$	31,434
Total equity	$	3,374	$	3,484

(1) Includes deferred initial direct costs which are eliminated in IBM’s consolidated results.

(2) Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions

which is eliminated in IBM’s consolidated results.

(3) Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on pages 5 and 6.

(4) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.

At September 30, 2018, substantially all client and commercial financing assets were IT related assets, and approximately 55 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers. This investment grade percentage is based on the credit ratings of the companies in the portfolio.

The company has a long-standing practice of taking mitigating actions, in certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, non-recourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Adjusting for the mitigation actions, the investment grade content would increase by 15 points to 69 percent, an increase of 2 points year to year.

IBM Working Capital

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Current assets	$	48,257	$	49,735
Current liabilities	36,822		37,363
Working capital	$	11,435	$	12,373
Current ratio	1.31:1		1.33:1

Working capital decreased $937 million from the year-end 2017 position. The key changes are described below:

Current assets decreased $1,478 million ($188 million adjusted for currency) due to:

·A decrease in receivables of $4,543 million ($3,894 million adjusted for currency) primarily driven by seasonal declines in financing receivables of $2,472 million and trade receivables of $1,857 million; partially offset by

·An increase of $1,820 million ($2,274 million adjusted for currency) in cash, restricted cash and marketable securities; and

·An increase of $528 million ($611 million adjusted for currency) in prepaid expenses and other current assets primarily due to the reclassification of certain trade receivables upon adoption of the new revenue standard.

Current liabilities decreased $541 million (increased $499 million adjusted for currency) as a result of:

·A decrease in taxes payable of $1,717 million ($1,627 million adjusted for currency) principally driven by the resolution in the first-quarter of certain matters related to the U.S. tax audit of the company’s 2013-2014 tax returns; and

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Management Discussion — (continued)

·A decrease in accounts payable of $1,067 million ($958 million adjusted for currency) reflecting declines from typically higher year-end balances; and

·A decrease in deferred income of $849 million ($562 million adjusted for currency) driven by amortization; and

·A decrease in other accrued expenses and liabilities of $810 million ($422 million adjusted for currency) driven by declines in derivative liabilities; partially offset by

·An increase in short-term debt of $3,945 million ($4,019 million adjusted for currency) primarily as a result of reclassifications of $5,264 million from long-term debt to reflect upcoming maturities and an increase in commercial paper of $2,490 million partially offset by maturities of $3,808 million.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses (included in Total IBM)

(Dollars in millions)
January 1, 2018		Additions *		Write-offs **			Other ***			September 30, 2018
$	668	$	56	$	(24	)	$	(27	)	$	673

*Additions for Allowance for Credit Losses are charged to expense.

**Refer to note A, “Significant Accounting Policies,” in the company’s 2017 Annual Report on pages 92 and 93 for additional information regarding Allowance for Credit Loss write-offs.

***Primarily represents translation adjustments.

The total IBM receivables provision coverage was 1.9 percent at September 30, 2018, an increase of 30 basis points compared to December 31, 2017. The increase was primarily driven by the overall decline in gross receivables.

Global Financing Receivables and Allowances

The following table presents external Global Financing receivables excluding residual values, the allowance for credit losses and immaterial miscellaneous receivables.

	At September 30,			At December 31,
(Dollars in millions)	2018			2017
Recorded investment (1)	$	27,141		$	30,892
Specific allowance for credit losses	252			258
Unallocated allowance for credit losses	73			78
Total allowance for credit losses	325			336
Net financing receivables	$	26,816		$	30,556
Allowance for credit losses coverage	1.2		%	1.1		%

(1) Includes deferred initial direct costs which are eliminated in IBM’s consolidated results.

The percentage of Global Financing receivables reserved increased from 1.1 percent at December 31, 2017, to 1.2 percent at September 30, 2018. The increase was primarily driven by the overall decline in gross receivables. Specific reserves decreased 2 percent from $258 million at December 31, 2017, to $252 million at September 30, 2018. Unallocated reserves decreased 6 percent from $78 million at December 31, 2017, to $73 million at September 30, 2018.

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Management Discussion — (continued)

Roll Forward of Global Financing Receivables Allowance for Credit Losses

(Dollars in millions)
January 1, 2018		Additions *		Write-offs **			Other ***			September 30, 2018
$	336	$	18	$	(15	)	$	(14	)	$	325

*Additions for Allowance for Credit Losses are charged to expense.

**Refer to note A, “Significant Accounting Policies,” in the company’s 2017 Annual Report on pages 92 and 93 for additional information regarding allowance for credit loss write-offs.

***Primarily represents translation adjustments.

Global Financing’s bad debt expense was a release of $6 million for the three months ended September 30, 2018, compared to a $1 million release for the same period in 2017 due to lower unallocated allowance requirements.

Global Financing’s bad debt expense was $18 million for the nine months ended September 30, 2018 compared to $14 million in the prior year, due to higher specific allowance requirements in 2018.

Noncurrent Assets and Liabilities

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Noncurrent assets	$	73,733	$	75,621
Long-term debt	$	35,989	$	39,837
Noncurrent liabilities (excluding debt)	$	29,261	$	30,432

The decrease in noncurrent assets of $1,888 million ($748 million adjusted for currency) was driven by:

·A decrease of $1,372 million in long-term financing receivables ($1,209 million adjusted for currency) reflecting seasonal reductions from higher year-end balances; and

·A decrease in net intangible assets and goodwill of $870 million ($579 million adjusted for currency) resulting from amortization and currency impacts; partially offset by

·An increase in retirement plan assets of $1,012 million ($1,111 million adjusted for currency) driven by the expected returns on plan assets, partially offset by interest costs.

Long-term debt decreased $3,848 million ($3,641 million adjusted for currency) primarily driven by:

·Reclassifications to short-term debt of $5,264 million to reflect upcoming maturities; partially offset by

·Issuances of $2,563 million.

Noncurrent liabilities (excluding debt) decreased $1,171 million ($337 million adjusted for currency) primarily driven by:

·A decrease in retirement and nonpension postretirement liabilities of $946 million driven by a currency impact of $405 million.

Debt

The company’s funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed.

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Management Discussion — (continued)

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Total company debt	$	46,921	$	46,824
Total Global Financing segment debt	$	30,367	$	31,434
Debt to support external clients	26,494		27,556
Debt to support internal clients	3,873		3,878
Non-Global Financing debt	$	16,554	$	15,390

Total debt of $46,921 million increased $97 million from December 31, 2017, driven by new debt issuances of $2,756 million and an increase in commercial paper of $2,490 million; partially offset by debt maturities of $4,243 million.

Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Technology Services & Cloud Platforms, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their attributes, these Technology Services & Cloud Platforms assets are leveraged with the balance of the Global Financing asset base. IBM Credit LLC began issuing public debt in September 2017.

Non-Global Financing debt of $16,554 million was up $1,164 million from December 31, 2017 and up $319 million from September 30, 2017.

Global Financing debt-to-equity ratio

At September 30,		At December 31,
2018		2017
9.0	x	9.0	x

The debt used to fund Global Financing assets is composed of intercompany loans and external debt. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are based on arm’s-length pricing.

Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. As previously stated, the company measures Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s external client and internal business is included in the “Global Financing Results of Operations” on page 72 and in note 7, “Segments,” on pages 37 and 38. In the company’s Consolidated Statement of Earnings, the external debt-related interest expense supporting Global Financing’s internal financing to the company is reclassified from cost of financing to interest expense.

Equity

Total equity increased by $2,194 million from December 31, 2017 primarily due to increases from net income ($6,777 million), an increase in retirement-related amounts ($1,648 million) and transition adjustments related to the adoption of the new revenue standard ($524 million); partially offset by decreases from dividends ($4,250 million) and an increase in treasury stock ($2,489 million) primarily due to share repurchases.

Cash Flow

The company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the following table. These amounts include the cash flows associated with the Global Financing business.

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Management Discussion — (continued)

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Net cash provided by/(used in) continuing operations:
Operating activities	$	11,128		$	10,991
Investing activities	(5,368		)	(3,271		)*
Financing activities	(5,864		)	(5,499		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(399		)	875
Net change in cash, cash equivalents and restricted cash	$	(503	)	$	3,096	*

* Recast to reflect adoption of the FASB guidance on restricted cash.

Net cash provided by operating activities increased $137 million as compared to the first nine months of 2017 driven by the following key factors:

·An increase in cash provided by financing receivables of $406 million; partially offset by

·An increase in cash income tax payments of $266 million.

Net cash used in investing activities increased $2,097 million driven by:

·An increase from net purchases of marketable securities and other investments of $1,797 million; and

·An increase in cash used for net capital expenditures of $492 million; partially offset by

·A decrease in net cash used related to acquisitions of $319 million.

Net cash used in financing activities increased $365 million driven by the following factors:

·A decrease in net cash sourced from debt transactions of $1,465 million primarily driven by a lower level of issuances and maturities in the current year; partially offset by

·A decrease in cash used for gross common share repurchases of $1,281 million.

Looking Forward

The company’s strategies, investments and actions are all made with an objective of optimizing long-term performance. A long-term perspective ensures that the company is well-positioned to take advantage of the major shifts in technology, business and the global economy.

As part of its strategic model, the company expects to continue to allocate capital efficiently and effectively to investments, and to return value to shareholders through a combination of dividends and share repurchases. Over the long term, in consideration of the opportunities it will continue to develop, the company continues to expect to have the ability to generate low single-digit revenue growth, and with a higher-value business mix, mid single-digit profit growth, high single-digit operating (non-GAAP) earnings per share growth, with free cash flow realization of GAAP net income over 90 percent.

Over the last several years, the company has been making investments and shifting resources, embedding AI and cloud into its offerings while building new solutions and modernizing its existing platforms. These investments not only drive current performance, but will extend the company’s innovation leadership into the future. The company’s key differentiators are built around three pillars - innovative technology, industry expertise and trust and security, uniquely delivered through an integrated model.

The company’s performance in the third quarter and first nine months of 2018 reflects the investments that have been made and actions taken to reposition the business, further align the company’s skills base to opportunity and drive operating efficiencies. The company has been rebuilding its innovation pipeline in order to address the areas enterprise clients value in an IT industry that has been rapidly reordering; technologies such as AI, blockchain and cybersecurity; delivered in hybrid cloud environments. In the first nine months of 2018, the company delivered revenue growth, as reported and adjusted for currency, an improving gross margin trajectory which was flat in the third quarter compared to the prior year (GAAP and

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Management Discussion — (continued)

operating (non-GAAP)) and returned significant value to shareholders. This is consistent with the long-term model and reinforces the company’s position as high-value.

At mid-October spot rates, the company expects a 0 to 1 point currency benefit to full-year 2018 revenue growth, including a 2 point currency headwind in the fourth quarter and continues to expect full-year revenue growth.   The company expects average seasonality (of the last three to five years) for revenue performance from the third to fourth quarter.  With enterprise productivity, the company expects both GAAP and operating (non-GAAP) pre-tax margin expansion in the fourth quarter.

Overall, the company continues to expect GAAP earnings per share from continuing operations for 2018 to be at least $11.60; excluding acquisition-related charges of $0.78 per share, non-operating retirement-related items of $1.32 per share and U.S. tax reform related one-time charges of $0.10 per share, operating (non-GAAP) earnings per share is expected to be at least $13.80. GAAP earnings per share from continuing operations expectations do not include any estimate for final impacts that will be recorded in the fourth-quarter 2018 from U.S. tax reform enactment.

The company continues to expect free cash flow to be approximately $12 billion in 2018. Free cash flow expectations for the year include a year-to-year headwind from strong receivables performance in 2017, a year-to-year headwind from cash tax payments, which was fully realized by the end of the second quarter, and a full year expected increase in capital expenditures.  Free cash flow realization, which is defined as free cash flow to income from continuing operations (GAAP), is expected to be over 100% for the year, driven by sales cycle working capital, pension and capital expenditures (net of depreciation and amortization), mitigated by income taxes.

For 2018, the company expects the GAAP tax rate to be approximately 2 points lower than the operating (non-GAAP) tax rate expectation. The company expects its operating (non-GAAP) tax rate for 2018 to be 16 percent, plus or minus 2 points (excluding discrete items). The tax rates reflect U.S. tax reform, which includes a lower U.S. corporate tax rate, offset by the broader tax base and reduced foreign tax credit utilization. The rate will change year to year based on discrete tax events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and local taxes and the effects of various global income tax strategies. The GAAP tax rate could be affected by changes to the net provisional charge recorded by the company for U.S. tax reform enactment, as the charge is finalized in the fourth quarter. Including these items, the company expects a lower GAAP tax rate and a higher operating (non-GAAP) tax rate on a year-to-year basis.

The company expects 2018 pre-tax retirement-related plan cost to be approximately $3.1 billion, an increase of approximately $200 million compared to 2017. This estimate reflects current pension plan assumptions at December 31, 2017. Consistent with the new FASB guidance for the presentation of net periodic pension and postretirement benefit costs, within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.5 billion, approximately flat versus 2017. Non-operating retirement-related plan cost is expected to be approximately $1.6 billion, an increase of approximately $200 million compared to 2017, driven by lower income from expected return on assets and a year-to-year impact due to the pension obligation adjustment resulting from the successful resolution of the UK pension litigation matter in 2017. Contributions for all retirement-related plans are expected to be approximately $2.3 billion in 2018, a decrease of approximately $100 million compared to 2017.

Beginning in 2019, the company projects that within the IBM U.S. Qualified Personal Pension Plan, substantially all the plan participants will be considered inactive, which, as required by U.S. GAAP, will result in a change in the amortization period of unrecognized actuarial losses, from the average remaining service period to the average remaining life expectancy of plan participants. These periods are approximately 8 years and 18 years, respectively. As a result of this change, the company expects a reduction to 2019 amortization expense in the range of $800 million to $1.0 billion. Actuarial loss amortization is reported within non-operating pension costs. There will be no impact to operating (non-GAAP) retirement-related costs. There will be no impact to the funded status, retiree benefit payments or funding requirements of the U.S. Qualified Personal Pension Plan, however there will be an impact to free cash flow realization in 2019. The company is not able to provide expectations on the overall expected 2019 pre-tax retirement-related plan cost, as certain assumptions, such as discount rates, could have a material impact on the cost and are not available until December 31, 2018.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD) affect the company’s financial results and financial position. At September 30, 2018, currency changes resulted in assets and liabilities denominated in local currencies

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Management Discussion — (continued)

being translated into fewer dollars than at year-end 2017. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.

During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, the company may use some of the advantage from a weakening U.S. dollar to improve its position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to its customers. Competition will frequently take the same action. Consequently, the company believes that some of the currency-based changes in cost impact the prices charged to clients. The company also maintains currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on the company’s financial results.

The company translates revenue, cost and expense in its non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that the company utilizes to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Currency movements impacted the company’s year-to-year revenue and earnings per share growth in the first nine months of 2018. Based on the currency rate movements in the first nine months of 2018, total revenue increased 2.2 percent as reported and 0.4 percent at constant currency versus the first nine months of 2017. On an income from continuing operations before income tax basis, these translation impacts offset by the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase of approximately $200 million in the first nine months of 2018 on an as-reported basis and an increase of approximately $225 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in a decrease of approximately $10 million in the first nine months of 2017 on an as-reported basis and a decrease of approximately $20 million on an operating (non-GAAP) basis. The company views these amounts as a theoretical maximum impact to its as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but the company believes it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.

For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars.

In recent months there have been reported economic events impacting the Argentinean economy, such as significant depreciation of the Argentine peso, increases in interest rates and the Argentine government requesting financial assistance from the International Monetary Fund. The three-year cumulative inflation rates, using a combination of monthly indices, exceeded the 100% threshold for hyperinflation. As a result, effective July 1, 2018, the company changed the functional currency from local currency to U.S. dollar functional for Argentina with no material impact. The ongoing impact from the change is not expected to be material given the size of the company’s operations in the country (less than 1 percent of total 2017 revenue).

Liquidity and Capital Resources

In the company’s 2017 Annual Report, on pages 67 to 70, there is a discussion of the company’s liquidity including two tables that present five years of data. The table presented on page 67 includes net cash from operating activities, cash and marketable securities and the size of the company’s global credit facilities for each of the past five years. For the nine months ended, or as of, as applicable, September 30, 2018, those amounts are $11.1 billion of net cash from operating activities, $14.7 billion of cash, restricted cash and marketable securities and $15.3 billion in global credit facilities, respectively.

The major rating agencies’ ratings on the company’s debt securities at September 30, 2018 appear in the following table. The ratings remain unchanged from December 31, 2017. The company does not have “ratings trigger” provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. The company’s contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the company’s credit rating were to fall below investment grade. At September 30, 2018, the fair value of those instruments that were in a liability position was $415 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the company’s outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.

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Management Discussion — (continued)

	STANDARD	MOODY’S
	AND	INVESTORS	FITCH
IBM and IBM Credit LLC ratings:	POOR’S	SERVICE	RATINGS
Senior long-term debt	A+	A1	A+
Commercial paper	A-1	Prime-1	F1

The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlights causes and events underlying sources and uses of cash in that format on page 86. For the purpose of running its business, the company manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan share repurchase levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Global Financing receivables. Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. As previously noted, the company views Global Financing receivables as a profit-generating investment which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result the company does not estimate a GAAP Net Cash from Operations expectation metric.

The following is management’s view of cash flows for the first nine months of 2018 and 2017 prepared in a manner consistent with the description above.

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Net cash from operating activities per GAAP	$	11,128		$	10,991
Less: change in Global Financing receivables	2,874			2,468
Net cash from operating activities, excluding Global Financing receivables	$	8,254		$	8,523
Capital expenditures, net	(2,839		)	(2,347		)
Free cash flow (FCF)	$	5,415		$	6,176
Acquisitions	(123		)	(442		)
Divestitures	—			35
Share repurchase	(2,393		)	(3,674		)
Common stock repurchases for tax withholdings	(148		)	(153		)
Dividends	(4,250		)	(4,119		)
Non-Global Financing debt	1,607			1,896
Other (includes Global Financing net receivables and Global Financing debt)	1,712			3,276		*
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	1,820		$	2,995	*

* Recast to reflect adoption of the FASB guidance on restricted cash.

In the first nine months of 2018, the company generated free cash flow of $5.4 billion, a decrease of $0.8 billion versus the prior year driven by higher capital expenditures and higher cash taxes. Net capital expenditures of $2.8 billion increased $0.5 billion year to year reflecting increased investments to build out global cloud datacenters. In the first nine months of 2018, the company continued to focus its cash utilization on returning value to shareholders including $4.2 billion in dividends and $2.4 billion in gross common stock repurchases (16.0 million shares).

Events that could temporarily change the historical cash flow dynamics discussed previously and in the company’s 2017 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 13, “Contingencies,” in this Form 10-Q. With respect to pension

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Management Discussion — (continued)

funding, the company expects to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $400 million in 2018. Contributions related to all retirement-related plans are expected to be approximately $2.3 billion in 2018. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.

In 2018, the company is not legally required to make any contributions to the U.S. defined benefit plans.

The company’s U.S. cash flows continue to be sufficient to fund its current domestic operations and obligations, including investing and financing activities such as dividends and debt service. The company’s U.S. operations generate substantial cash flows, and, in those circumstances where the company has additional cash requirements in the U.S., the company has several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates, utilizing its committed global credit facility, repatriating certain foreign earnings and utilizing intercompany loans with certain foreign subsidiaries.

Global Financing Return on Equity Calculation

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2018			2017 ***			2018			2017 ***
Numerator
Global Financing after-tax income*	$	235		$	194		$	791		$	620
Annualized after-tax income (a)	$	940		$	774		$	1,055		$	827
Denominator
Average Global Financing equity (b)**	$	3,414		$	3,254		$	3,457		$	3,371
Global Financing return on equity (a)/(b)	27.5		%	23.8		%	30.5		%	24.5		%

*Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis.

**Average of the ending equity for Global Financing for the last 2 quarters and 3 quarters, for the three months ended September 30, and for the nine months ended September 30, respectively.

***Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

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Management Discussion — (continued)

GAAP Reconciliation

The tables below provide a reconciliation of the company’s income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section on page 58 for the company’s rationale for presenting operating earnings information.

(Dollars in millions except per share amounts)				Acquisition-Related			Retirement-Related			Operating
For the three months ended September 30, 2018:	GAAP			Adjustments			Adjustments			(non-GAAP)
Gross profit	$	8,803		$	96		$	—		$	8,899
Gross profit margin	46.9		%	0.5		pts.	—		pts.	47.4		%
S,G&A	$	4,363		$	(112	)	$	—		$	4,251
R,D&E	1,252			—			—			1,252
Other (income) and expense	275			(1		)	(389		)	(115		)
Total expense and other (income)	5,807			(113		)	(389		)	5,304
Pre-tax income from continuing operations	2,996			209			389			3,594
Pre-tax margin from continuing operations	16.0		%	1.1		pts.	2.1		pts.	19.2		%
Provision for income taxes*	$	304		$	56		$	100		$	460
Effective tax rate	10.2		%	1.0		pts.	1.7		pts.	12.8		%
Income from continuing operations	$	2,692		$	153		$	289		$	3,134
Income margin from continuing operations	14.4		%	0.8		pts.	1.5		pts.	16.7		%
Diluted earnings per share from continuing operations	$	2.94		$	0.17		$	0.31		$	3.42

*The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

(Dollars in millions except per share amounts)				Acquisition-Related			Retirement-Related			Operating
For the three months ended September 30, 2017:	GAAP**			Adjustments			Adjustments**			(non-GAAP)**
Gross profit	$	8,981		$	114		$	—		$	9,095
Gross profit margin	46.9		%	0.6		pts.	—		pts.	47.5		%
S,G&A	$	4,606		$	(125	)	$	—		$	4,482
R,D&E	1,291			—			—			1,291
Other (income) and expense	159			—			(273		)	(114		)
Total expense and other (income)	5,917			(125		)	(273		)	5,519
Pre-tax income from continuing operations	3,065			238			273			3,576
Pre-tax margin from continuing operations	16.0		%	1.2		pts.	1.4		pts.	18.7		%
Provision for income taxes*	$	339		$	79		$	113		$	531
Effective tax rate	11.0		%	1.5		pts.	2.3		pts.	14.8		%
Income from continuing operations	$	2,726		$	159		$	160		$	3,045
Income margin from continuing operations	14.2		%	0.8		pts.	0.8		pts.	15.9		%
Diluted earnings per share from continuing operations	$	2.92		$	0.17		$	0.17		$	3.26

*The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

**Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

91

Management Discussion — (continued)

				Acquisition-			Retirement-			Tax Reform
(Dollars in millions except per share amounts)				Related			Related			One-Time			Operating
For the nine months ended September 30, 2018:	GAAP			Adjustments			Adjustments			Impact**			(non-GAAP)
Gross profit	$	26,249		$	283		$	—		$	—		$	26,531
Gross profit margin	45.4		%	0.5		pts.	—		pts.	—		pts.	45.9		%
S,G&A	$	14,665		$	(332	)	$	—		$	—		$	14,333
R,D&E	4,021			—			—			—			4,021
Other (income) and expense	968			(1		)	(1,185		)	—			(219		)
Total expense and other (income)	19,341			(333		)	(1,185		)	—			17,822
Pre-tax income from continuing operations	6,908			616			1,185			—			8,709
Pre-tax margin from continuing operations	11.9		%	1.1		pts.	2.0		pts.	—		pts.	15.1		%
Provision for income taxes*	$	138		$	138		$	285		$	(93	)	$	468
Effective tax rate	2.0		%	1.4		pts.	3.0		pts.	(1.1		)pts.	5.4		%
Income from continuing operations	$	6,770		$	478		$	900		$	93		$	8,241
Income margin from continuing operations	11.7		%	0.8		pts.	1.6		pts.	0.2		pts.	14.2		%
Diluted earnings per share from continuing operations	$	7.36		$	0.52		$	0.98		$	0.10		$	8.96

*The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

**Operating (non-GAAP) earnings excludes a net charge associated with the enactment of U.S. tax reform due to its unique non-recurring nature.

(Dollars in millions except per share amounts)				Acquisition-Related			Retirement-Related			Operating
For the nine months ended September 30, 2017:	GAAP**			Adjustments			Adjustments**			(non-GAAP)**
Gross profit	$	25,894		$	349		$	—		$	26,243
Gross profit margin	45.8		%	0.6		pts.	—		pts.	46.4		%
S,G&A	$	14,666		$	(393	)	$	—		$	14,273
R,D&E	4,212			—			—			4,212
Other (income) and expense	751			(7		)	(969		)	(225		)
Total expense and other (income)	18,962			(401		)	(969		)	17,593
Pre-tax income from continuing operations	6,931			750			969			8,650
Pre-tax margin from continuing operations	12.2		%	1.3		pts.	1.7		pts.	15.3		%
Provision for income taxes*	$	120		$	212		$	288		$	621
Effective tax rate	1.7		%	2.3		pts.	3.1		pts.	7.2		%
Income from continuing operations	$	6,811		$	537		$	681		$	8,030
Income margin from continuing operations	12.0		%	0.9		pts.	1.2		pts.	14.2		%
Diluted earnings per share from continuing operations	$	7.24		$	0.57		$	0.73		$	8.54

*The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

**Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

92

Management Discussion — (continued)

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; impacts of damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.

Item 4. Controls and Procedures

The company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

Part II — Other Information

Item 1.  Legal Proceedings

Refer to note 13, “Contingencies,” on pages 49 to 51 of this Form 10-Q.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

The following table provides information relating to the company’s repurchase of common stock for the third quarter of 2018.

				Total Number	Approximate
				of Shares	Dollar Value
				Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*
July 1, 2018 - July 31, 2018	1,423,448	$	144.87	1,423,448	$	1,818,897,344
August 1, 2018 - August 31, 2018	1,584,553	$	145.52	1,584,553	$	1,588,310,584
September 1, 2018 - September 30, 2018	1,280,326	$	148.56	1,280,326	$	1,398,102,805
Total	4,288,327	$	146.21	4,288,327

* On October 31, 2017, the Board of Directors authorized $3.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

93

Item 6. Exhibits

Exhibit Number
10.1	Forms of equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit awards as well as the Terms and Conditions of LTPP Equity Awards, effective October 1, 2018, in connection with the foregoing award agreements.
10.2	Form of Noncompetition Agreement.
11	Statement re: computation of per share earnings.
	The statement re: computation of per share earnings is note 16, “Earnings Per Share of Common Stock,” in this Form 10-Q.
12	Statement re: computation of ratios.
31.1	Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

94

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		International Business Machines Corporation
		(Registrant)
Date:	October 30, 2018
		By:	/s/ Robert F. Del Bene
			Robert F. Del Bene
			Vice President and Controller

95

EX-10.1

Exhibit 10.1

	International Business Machines Corporation (“IBM”)
	Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	[Stock Options, Restricted Stock, Restricted Stock Units, Cash-Settled Restricted Stock Units, SARs]
Purpose	The purpose of this Award is to retain selected employees and executives. You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective October 1, 2018” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant: [Month Date, Year] [Exercise Price: $XX] Number of [Options/Units/Shares/SARs] Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document.
	Options/Units/Shares/SARs	Date
	[number of shares]	[month date year]
	[number of shares]	[month date year]
	[             “             ]	[             “             ]
	Options expire, subject to the Terms and Conditions document, on: [month date year]
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances. It is strongly recommended that you print the Terms and Conditions document for later reference.

1

Cancellation and Rescission	You understand that IBM may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award if you render services for a competitor prior to, or during the Rescission Period. You understand that the Rescission Period that has been established is 12 months. Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM’s long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary. The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments. The Plan is discretionary in nature. This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future. Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions. This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it. This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time two business days prior to the first vesting date in the “Vesting” section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to jurisdiction, governing law, expenses, taxes and administration section of the Terms and Conditions document (unless you are, and have been for at least 30 days immediately preceding the termination of your employment with IBM, a resident of or an employee in the Commonwealth of Massachusetts at the time of the termination of your employment with IBM, in which case the jurisdiction, governing law, expenses, taxes and administration terms of your previous awards shall apply).

2

International Business Machines Corporation (“IBM”)

Equity Award Agreement

Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	Performance Share Units (PSUs)
Purpose	The purpose of this Award is to retain selected executives.  You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective October 1, 2018” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant		# PSUs Awarded					Performance Period						Date of Payout
	[month day year]		[amount]					[dates]						[date]
	[month day year]		[amount]					[dates]						[date]
	[          “             ]		[     “     ]					[   “   ]						[  “   ]
Vesting	You can earn the PSUs awarded above based on IBM’s performance in achieving cumulative business targets of operating earnings per share and free cash flow, weighted 70/30 respectively, over the 3-year Performance Period applicable to the award. Performance against each of the targets will be subject to separate payout calculations according to the following table (which will be applied separately for each award of PSUs listed above):
	% of Target	<70		%	70	%	80		%	90	%	100	%		110	%	>120	%
	% of PSUs earned	0		%	25	%	50		%	75	%	100	%		125	%	150	%
	[IF APPLICABLE: For Performance Periods commencing on or after January 1, 2018,] [A]fter the percentage of PSUs earned is determined, such percentage is further subject to a Relative Return on Invested Capital (ROIC) modifier over the three-year Performance Period that could result in (1) the percentage of PSUs earned being reduced up to 20 points if the performance falls below the S&P 500 Index median; or (2) the percentage of PSUs earned being increased up to 20 points when IBM exceeds the median performance of both the S&P 500 Index and the S&P Information Technology Index. The relative ROIC modifier has no effect on the percentage of PSUs earned when IBM’s ROIC performance falls between the S&P 500 Index and the S&P Information Technology Index median. The final number of PSUs earned under this Award is generally determined after the ROIC modifier is applied. In the event the final percentage of PSUs earned is 0% based on IBM’s performance in achieving cumulative business targets of operating earnings per share and free cash flow, the relative ROIC modifier would not apply.
Payout of Awards	Following the Date of Payout, the Company shall either (a) deliver to you a number of shares of Capital Stock equal to the number of your earned PSUs, or (b) make a cash payment to you equal to the Fair Market Value on the Date of Payout of the number of your earned PSUs at the end of the Performance Period, in either case, net of any applicable tax withholding, and the respective PSUs shall thereafter be canceled. All payouts under this Award are subject to the provisions of the Plan, this Agreement and the Terms and Conditions document, including those relating to the cancellation and rescission of awards.

Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document   http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances. It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award if you render services for a competitor prior to, or during the Rescission Period.  You understand that the Rescission Period that has been established is 12 months.  Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM’s  long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary.  The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments.  The Plan is discretionary in nature.  This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future.  Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions.  This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it.  This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time two business days prior to the end of the Performance Period in the “Grant” section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on  IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to (A) jurisdiction, governing law, expenses, taxes and administration section of the Terms and Conditions document (unless you are, and have been for at least 30 days immediately preceding the termination of your employment with IBM, a resident of or an employee in the Commonwealth of Massachusetts at the time of the termination of your employment with IBM, in which case the jurisdiction, governing law, expenses, taxes and administration terms of your previous awards shall apply) and (B) any cancellation, rescission or recovery required by applicable laws, rules, regulations or standards, including without limitation any requirements or standards of the U.S. Securities and Exchange Commission or the New York Stock Exchange.

	International Business Machines Corporation (“IBM”)
	Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	Retention Restricted Stock Units  (RRSUs)
Purpose	The purpose of this Award is to retain selected executives.  You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country [Global ID]	Sample United States (USA)  [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective October 1, 2018” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award.   This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant:  [Month Date, Year] Number of Units Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document.
		Units	Date
		[amount]	[month date, year]
		[amount]	[month date, year]
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award if you render services for a competitor prior to, or during the Rescission Period.  You understand that the Rescission Period that has been established is three years.  Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM’s long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.

1

Extraordinary Compensation

Your participation in the Plan is voluntary.  The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments.  The Plan is discretionary in nature.  This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future.  Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions.  This Equity Award Agreement is not part of your employment agreement, if any.

Accept Your Award

This Award is considered valid when you accept it.  This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time two business days prior to the first vesting date in the “Vesting” section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to  jurisdiction, governing law, expenses, taxes and administration section of the Terms and Conditions document (unless you are, and have been for at least 30 days immediately preceding, a resident of or an employee in Massachusetts at the time of the termination of your employment with IBM, in which case the jurisdiction, governing law, expenses, taxes and administration terms of your previous awards shall apply).

2

IBM

TERMS AND CONDITIONS OF YOUR EQUITY

AWARD:

EFFECTIVE OCTOBER 1, 2018

Terms and Conditions of Your Equity Award

Table of Contents

Introduction	3
How to Use This Document	3
Definition of Terms	4
Provisions that apply to all Award types and all countries	6
Provisions that apply to all Award types but not all countries	8
Provisions that apply to specific Award types for all countries	9
a. Restricted Stock Units (“RSUs”) including Cash-Settled RSUs and Retention RSUs (“RRSUs”)	9
i. All RSUs	9
ii. RSUs Other Than Cash-Settled RSUs and Cash-Settled RRSUs	11
iii. Cash-Settled RSUs including Cash-Settled RRSUs	11
b. Restricted Stock	11
c. Stock Options (“Options”) and Stock Appreciation Rights (“SARs”)	13
i. All Option and SAR Awards	13
ii. All SAR Awards	14
d. Performance Share Units (“PSUs”)	15
Provisions that apply to specific countries	16
a. Denmark	16
b. Israel	16
c. United States	16

Executive Awards: October 1, 2018

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Terms and Conditions of Your Equity Award

Introduction

This document provides you with the terms and conditions of your Award that are in addition to the terms and conditions contained in your Equity Award Agreement for your specific Award. Also, your Award is subject to the terms and conditions in the governing plan document; the applicable document is indicated in your Equity Award Agreement and can be found at http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml.

As an Award recipient, you can see a personalized summary of all your outstanding equity grants in the “Personal statement” section of the IBM executive compensation web site (http://w3.ibm.com/hr/exec/comp). This site also contains other information about long-term incentive awards, including copies of the prospectus (the governing plan document).  If you have additional questions and you are based in the U.S., you can call the IBM Benefits Center at 866-937-0720, weekdays from 8:00 a.m. to 8:00 p.m. Eastern time (TTY available at 800-426-6537). Outside of the U.S. dial your country’s toll-free AT&T Direct® access number, and then enter 866-937-0720. In the U.S., call 800-331-1140 to obtain AT&T Direct access numbers. Access numbers are also available online at www.att.com/traveler or from your local operator.

How to Use This Document

Terms and conditions that apply to all awards in all countries can be found on page 6. Review these in addition to any award- or country-specific terms and conditions that may be listed. Once you have reviewed these general terms, check in your Equity Award Agreement for any award-specific and/or country-specific terms that apply to your Award.

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Terms and Conditions of Your Equity Award:

Definition of Terms

The following are defined terms from the Long-Term Performance Plan, your Equity Award Agreement, or this Terms and Conditions document. These are provided for your information. In addition to this document, see the Plan prospectus and your Equity Award Agreement for more details.

“Awards” — The grant of any form of stock option, stock appreciation right, stock or cash award, whether granted singly, in combination or in tandem, to a Participant pursuant to such terms, conditions, performance requirements, limitations and restrictions as the Committee may establish in order to fulfill the objectives of the Plan.

“Board” — The Board of Directors of International Business Machines Corporation (“IBM”).

“Capital Stock” — Authorized and issued or unissued Capital Stock of IBM, at such par value as may be established from time to time.

“Committee” — The committee designated by the Board to administer the Plan.

“Company” — IBM and its affiliates and subsidiaries including subsidiaries of subsidiaries and partnerships and other business ventures in which IBM has an equity interest.

“Engage in or Associate with” includes, without limitation, engagement or association as a sole proprietor, owner, employer, director, partner, principal, joint venture, associate, employee, member, consultant, or contractor.  This also includes engagement or association as a shareholder or investor during the course of your employment with the Company, and includes beneficial ownership of five percent (5%) or more of any class of outstanding stock of a competitor of the Company following the termination of your employment with the Company.

“Equity Award Agreement” — The document provided to the Participant which provides the grant details.

“Fair Market Value” — The average of the high and low prices of Capital Stock on the New York Stock Exchange for the date in question, provided that, if no sales of Capital Stock were made on said exchange on that date, the average of the high and low prices of Capital Stock as reported for the most recent preceding day on which sales of Capital Stock were made on said exchange.

“Participant” — An individual to whom an Award has been made under the Plan. Awards may be made to any employee of, or any other individual providing services to, the Company. However, incentive stock options may be granted only to individuals who are

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employed by IBM or by a subsidiary corporation (within the meaning of section 424(f) of the Code) of IBM, including a subsidiary that becomes such after the adoption of the Plan.

“Plan” — Any IBM Long-Term Performance Plan.

“Termination of Employment” — For the purposes of determining when you cease to be an employee for the cancellation of any Award, a Participant will be deemed to be terminated if the Participant is no longer employed by IBM or a subsidiary corporation that employed the Participant when the Award was granted unless approved by a method designated by those administering the Plan.

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Terms and Conditions of Your Equity Award:

Provisions that apply to all Award types and all countries

The following terms apply to all countries and for all Award types (Restricted Stock Units, Cash-Settled Restricted Stock Units, Restricted Stock, Stock Options, Stock Appreciation Rights and Performance Share Units).

Cancellation and Rescission

All determinations regarding enforcement, waiver or modification of the cancellation and rescission and other provisions of the Plan and your Equity Award Agreement (including the provisions relating to termination of employment, death and disability) shall be made in IBM’s sole discretion. Determinations made under your Equity Award Agreement and the Plan need not be uniform and may be made selectively among individuals, whether or not such individuals are similarly situated.

You agree that the cancellation and rescission provisions of the Plan and your Equity Award Agreement are reasonable and agree not to challenge the reasonableness of such provisions, even where forfeiture of your Award is the penalty for violation.  Engaging in Detrimental Activity as defined in the Plan may result in cancellation or rescission of your Award.  Detrimental Activity includes your acceptance of an offer to Engage in or Associate with any business which is or becomes competitive with the Company.

Jurisdiction, Governing Law, Expenses, Taxes and Administration

Your Equity Award Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of law rules. You agree that any action or proceeding with respect to your Equity Award Agreement shall be brought exclusively in the state and federal courts sitting in New York County or, Westchester County, New York.  You agree to the personal jurisdiction thereof, and irrevocably waive any objection to the venue of such action, including any objection that the action has been brought in an inconvenient forum.

If any court of competent jurisdiction finds any provision of your Equity Award Agreement, or portion thereof, to be unenforceable, that provision shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of your Equity Award Agreement shall continue in full force and effect.

If you or the Company brings an action to enforce your Equity Award Agreement and the Company prevails, you will pay all costs and expenses incurred by the Company in connection with that action and in connection with collection, including reasonable attorneys’ fees.

If the Company, in its sole discretion, determines that it has incurred or will incur any obligation to withhold taxes as a result of your Award, without limiting the Company’s rights under Section 9 of the Plan, the Company may withhold the number of shares

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that it determines is required to satisfy such liability and/or the Company may withhold amounts from other compensation to the extent required to satisfy such liability under federal, state, provincial, local, foreign or other tax laws. To the extent that such amounts are not withheld, the Company may require you to pay to the Company any amount demanded by the Company for the purpose of satisfying such liability.

If the Company changes the vendor engaged to administer the Plan, you consent to moving all of the shares you have received under the Plan that is in an account with such vendor (including unvested and previously vested shares), to the new vendor that the Company engages to administer the Plan. Such consent will remain in effect unless and until revoked in writing by you.

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Terms and Conditions of Your Equity Award:

Provisions that apply to all Award types but not all countries

The following provision applies to all Award types (Restricted Stock Units, Cash-Settled Restricted Stock Units, Restricted Stock, Stock Options, Stock Appreciation Rights and Performance Share Units) granted to all individuals in all countries except those with a home country of Latin America, specifically: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

Non-Solicitation

In consideration of your Award, you agree that during your employment with the Company and for two years following the termination of your employment for any reason, you will not directly or indirectly hire, solicit or make an offer to any employee of the Company to be employed or perform services outside of the Company. Also, you agree that during your employment with the Company and for one year following the termination of your employment for any reason, you will not directly or indirectly, solicit, for competitive business purposes, any customer of the Company with which you were involved as part of your job responsibilities during the last year of your employment with the Company. By accepting your Award, you acknowledge that the Company would suffer irreparable harm if you fail to comply with the foregoing, and that the Company would be entitled to any appropriate relief, including money damages, equitable relief and attorneys’ fees.

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Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

a. Restricted Stock Units (“RSUs”) including Cash-Settled RSUs and Retention RSUs (“RRSUs”)

All references in this document to RSUs include RRSUs, unless explicitly stated otherwise

i. All RSUs

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan) prior to the Vesting Date(s) set in your Equity Award Agreement, all then unvested RSUs, including RRSUs, under your Award shall be canceled.

However, your unvested and/or outstanding RSUs, but not RRSUs, will continue to vest upon the termination of employment if all of the following criteria are met:

·   You are on the performance team, or any successor team thereto, at the time of termination of employment;

·   You have completed at least one year of active service since the award date of grant;

·   You have reached age 55 with 15 years of service at the time of termination of employment (age 60 with 15 years of service for the Chairman and CEO); and

·   Appropriate senior management, the Committee or the Board, as appropriate, do not exercise their discretion to cancel or otherwise limit the vesting of the RSUs.

For purposes of the Plan the performance team refers to the team of IBM’s senior leaders who run IBM Business Units or geographies, including the chairman and CEO.

Death or Disability

Upon your death all RSUs covered by this Agreement shall vest immediately and your Vesting Date shall be your date of death. If you are disabled as described in Section 12 of the Plan, your RSUs shall continue to vest according to the terms of your Award.

Leave of Absence

In the event of a management approved leave of absence, any unvested RSUs shall continue to vest as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement. If you return to active

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status, your unvested RSUs will continue to vest in accordance with the terms in this document and your Equity Award Agreement.

Dividend Equivalents

IBM shall not pay dividend equivalents on cash-settled or stock-settled unvested RSU awards.

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Terms and Conditions of Your Equity Award:
Provisions that apply to specific Award types for all countries

ii. RSUs Other Than Cash-Settled RSUs and Cash-Settled RRSUs

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the section “Termination of Employment including Death, Disability and Leave of Absence” above, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, IBM shall make a payment to Participant in shares of Capital Stock equal to the number of vested RSUs, subject to any applicable tax withholding requirements as described in Section 9 of the Plan, and the respective RSUs shall thereupon be canceled. RSUs are not shares of Capital Stock and do not convey any stockholder rights.

iii. Cash-Settled RSUs including Cash-Settled RRSUs

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the section entitled “Termination of Employment including Death, Disability and Leave of Absence” above, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, the Company shall make a payment to Participant in cash equal to the Fair Market Value of the vested RSUs, subject to any applicable tax withholding requirements as described in Section 9 of the Plan, and the respective RSUs shall thereupon be canceled. Fair Market Value will be calculated in your home country currency at the exchange rate on the applicable Vesting Date using a commercially reasonable measure of exchange rate. RSUs are not shares of Capital Stock and do not convey any stockholder rights.

b. Restricted Stock

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the paragraph entitled “Termination of Employment including Death, Disability or Leave of Absence” below, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, the shares of Restricted Stock awarded under your Equity Award Agreement will be deliverable to you, subject to any applicable tax withholding requirements as described in Section 9 of the Plan.

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Terms and Conditions of Your Equity Award:
Provisions that apply to specific Award types for all countries

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan) prior to the Vesting Date(s) in your Equity Award Agreement, all then unvested shares of Restricted Stock under your Award shall be canceled (unless your Equity Award Agreement provides otherwise).

Death or Disability

Upon your death all unvested shares of Restricted Stock covered by your Equity Award Agreement shall vest immediately and your Vesting Date shall be your date of death. If you are disabled as described in Section 12 of the Plan, your unvested shares of Restricted Stock shall continue to vest according to the terms of your Equity Award Agreement.

Leave of Absence

In the event of a management approved leave of absence, any unvested shares of Restricted Stock shall continue to vest as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement. If you return to active status, your unvested shares of Restricted Stock will continue to vest in accordance with the terms in this document and your Equity Award Agreement.

Dividends and Other Rights

During the period that the Restricted Stock is held by IBM hereunder, such stock will remain on the books of IBM in your name, may be voted by you, and any applicable dividends shall be paid to you. Shares issued in stock splits or similar events which relate to Restricted Stock then held by IBM in your name shall be issued in your name but shall be held by IBM under the terms hereof.

Transferability

Shares of Restricted Stock awarded under your Equity Award Agreement cannot be sold, assigned, transferred, pledged or otherwise encumbered prior to the vesting of your Award as set forth in your Equity Award Agreement and any such sale, assignment, transfer, pledge or encumbrance, or any attempt thereof, shall be void.

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Terms and Conditions of Your Equity Award:
Provisions that apply to specific Award types for all countries

c. Stock Options (“Options”) and Stock Appreciation Rights (“SARs”)

i. All Option and SAR Awards

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan):

·   Any Options or SARs that are not exercisable as of the date your employment terminates shall be canceled immediately (unless your Equity Award Agreement provides otherwise), and

·   Any Options or SARs that are exercisable as of the date your employment terminates (other than for cause) will remain exercisable for 90 days (not three months) after the date of termination, after which any unexercised Options or SARs are canceled; provided, however, if you are a banded executive when your employment with the Company terminates (other than for cause) after you have attained age 55 and completed at least 15 years of service with the Company at the time of termination, any Options or SARs that are exercisable as of the date your employment terminates shall remain exercisable for the full term as in your Equity Award Agreement (unless your Equity Award Agreement provides otherwise).

Death or Disability

In the event of your death, all Options or SARs shall become fully exercisable and remain exercisable for their full term.

In the event you are disabled (as described in Section 12 of the Plan), any unvested Options or SARs shall continue to vest and be exercisable.

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Terms and Conditions of Your Equity Award:
Provisions that apply to specific Award types for all countries

Leave of Absence

In the event of a management approved leave of absence, any unvested Options or SARs shall continue to vest and be exercisable as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement. If you return to active status, your Options or SARs will continue to vest and be exercisable in accordance with their terms. If you do not return to active status,

·   Your unvested Options or SARs will be canceled immediately; and

·   Your vested Options or SARs will be canceled on the later of the 91st day following your last day of active employment or the date of the termination of your leave of absence; provided, however, if you are a banded executive when your employment terminates (other than for cause) after you have attained age 55 and completed at least 15 years of service with the Company at the time of termination, any Options or SARs that are exercisable as of the date your employment terminates shall remain exercisable for the full term as in your Equity Award Agreement.

Termination of Employment for Cause

If your employment terminates for cause, all exercisable and not exercisable Options or SARs are canceled immediately.

ii. All SAR Awards

Settlement of Award

Upon exercise, the Company shall deliver an aggregate amount, in cash, equal to the excess of the Fair Market Value of a share of Capital Stock on the date of exercise over the Exercise Price set forth in your Equity Award Agreement multiplied by the number of SARs exercised, subject to any applicable tax withholding requirements as described in Section 9 of the Plan. The value of the Award will be calculated in your home country currency at the exchange rate on the date the Award becomes fully vested using a commercially reasonable measure of exchange rate.

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Terms and Conditions of Your Equity Award:
Provisions that apply to specific Award types for all countries

d. Performance Share Units (“PSUs”)

Termination of Employment, including Death and Disability, and Leave of Absence

Termination of Employment and Leave of Absence

If you cease to be an active, full-time employee for any reason (other than on account of death or are disabled as described in Section 12 of the Plan) before the Date of Payout (in the case of a recipient in the United States, at year end of the applicable PSU Performance Period), all PSUs are canceled immediately provided, however, if you are a banded executive when you cease to be an active, full-time employee (other than for cause) after you have attained age 55, completed at least 15 years of service with the Company at such time, and completed at least one year of active service during the PSU Performance Period (as set forth in your Equity Award Agreement), the PSUs granted hereunder shall be paid out on the Date of Payout (as set forth in your Equity Award Agreement) based on IBM performance over the entire applicable Performance Period(s), in an amount that will be prorated for the number of months completed as an active executive during the PSU Performance Period, adjusted for the performance score.

However, your unvested PSUs will continue to vest upon termination of employment or the time you cease to be an active, full-time employee if all of the following criteria are met:

·You are on the performance team, or any successor team thereto, at the time of termination of employment or the time you cease to be an active, full-time employee;

·You have completed at least one year of active service during the PSU Performance Period (as set forth in your Equity Award Agreement);

·You have reached age 55 with 15 years of service at the time of termination of employment or the time you cease to be an active, full-time employee (age 60 with 15 years of service for the Chairman and CEO);

·The Committee has certified that all performance conditions have been met; and

·Appropriate senior management, the Committee or the Board, as appropriate, do not exercise their discretion to cancel or otherwise limit the payout.

Death or Disability

Prior to the Date of Payout, (i) in the event of your death or (ii) if you are disabled (as described in Section 12 of the Plan), all PSUs shall continue to vest according to the terms of your Equity Award Agreement and the PSUs will be paid out at the end of the Performance Period based on IBM performance over the entire applicable Performance Period(s).

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Terms and Conditions of Your Equity Award:

Provisions that apply to specific countries

a. Denmark

i. All Awards

Non-Solicitation

The following part of the above non-solicitation provision does not apply to those individuals with the home country of Denmark: “In consideration of your Award, you agree that during your employment with the Company and for two years following the termination of your employment for any reason, you will not directly or indirectly hire, solicit or make an offer to any employee of the Company to be employed or perform services outside of the Company.”

b. Israel

i. All Awards

Data Privacy

In addition to the data privacy provisions in your Equity Award Agreement, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary (including transferring such data out of the country of origin both in and out of the EEA), and with any vendor engaged by IBM to administer this Award.

c. United States

i. All Awards

Nothing in the Plan prospectus, your Equity Award Agreement or this Document affects your rights, immunities, or obligations under any federal, state, or local law, including under the Defend Trade Secrets Act of 2016, as described in Company policies, or prohibits you from reporting possible violations of law or regulation to a government agency, as protected by law.

If you are, and have been for at least 30 days immediately preceding, a resident of, or an employee in Massachusetts at the time of the termination of your employment with IBM, cancellation and rescission provisions of the Plan will not apply if you engage in competitive activities after your employment relationship has ended with IBM. For the avoidance of doubt, cancellation and rescission provisions of the Plan will apply if you engage in (1) any Detrimental Activity prior to your employment relationship ending with IBM or (2) any Detrimental Activity described in Section 13(a) of the Plan other than engaging in competitive activities after your employment relationship has ended with IBM.

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EX-10.2

Exhibit 10.2

NONCOMPETITION AGREEMENT

In recognition of your critical role as a senior executive with International Business Machines Corporation (“IBM”) and in recognition of your access to IBM Confidential Information and/or IBM customer goodwill by virtue of your position, and/or your membership on the Acceleration Team, and/or your appointment as an IBM Fellow, and/or as mutually agreed upon consideration for your promotion or hiring as a senior executive, including your eligibility for awards to be granted to you under an IBM Long-Term Performance Plan (which constitutes independent consideration for Paragraph 1(e) herein), and/or for other good and valuable consideration, you (“Employee” or “you”) agree to the terms and conditions herein of this Noncompetition Agreement (the “Agreement”).  Capitalized terms not otherwise defined shall have the meaning ascribed to them in Paragraph 2.

1.Covenants.

You acknowledge and agree that:

a)the compensation that you will receive in connection with this Agreement, including any equity awards, cash and other compensation, your position as a senior executive, and/or your appointment to or continued membership on the Acceleration Team or any successor team or group (“AT”), if applicable, and/or your appointment as an IBM Fellow, if applicable, is consideration for your work at IBM, your agreement to the terms and conditions of this Agreement, and your compliance with the post-employment restrictive covenants included in this Agreement.

b)(i) the business in which IBM and its affiliates (collectively, the “Company”) are engaged is intensely competitive and your employment by IBM and/or your membership on the AT, if applicable, and/or your role as an IBM Fellow, if applicable, requires that you have access to, and knowledge of, IBM Confidential Information, including IBM Confidential Information that pertains not only to your business or unit, but also to the Company’s global operations; (ii) you are given access to, and develop relationships with, customers of the Company at the time and expense of the Company; and (iii) by your training, experience and expertise, your services to the Company are, and will continue to be, extraordinary, special and unique.

c)(i) the disclosure of IBM Confidential Information would place the Company at a serious competitive disadvantage and would do serious damage, financial and otherwise, to the business of the Company; and (ii) you will keep in strict confidence, and will not, directly or indirectly, at any time during or after your employment with IBM, disclose, furnish, disseminate, make available or use, except in the course of performing your duties of employment with IBM, any IBM Confidential Information or any other trade secrets or confidential business and technical information of the Company’s customers or vendors, without limitation as to when or how you may have acquired such information.

d)IBM Confidential Information, whether reduced to writing, maintained on any form of electronic media, or maintained in your mind or memory and whether compiled by the Company and/or you, is owned by the Company, and (i) IBM Confidential Information includes, but is not limited to, information that derives independent economic value from not being generally known to or readily ascertainable through proper means by others who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain the secrecy of such information; (ii) IBM Confidential Information includes, but is not limited to, information that constitutes a trade secret of the Company; and (iii) the retention and/or use of such IBM Confidential Information by you during or after your employment with IBM (except in the course of performing your duties and obligations to the Company) shall constitute a misappropriation of the Company’s trade secrets.

e)during your employment with IBM and for twelve (12) months following the termination of your employment either by you or by IBM: (i) you will not directly or indirectly, within the Restricted Area, Engage in or Associate with (a) any Business Enterprise or (b) any competitor of the Company, if performing the duties and responsibilities of such engagement or association could result in you (1) intentionally or unintentionally using, disclosing, or relying upon IBM Confidential Information to which you had access by virtue of your job duties or other responsibilities with IBM or (2) exploiting customer goodwill cultivated in the course of your employment with IBM; however, in the event that your employment with IBM is terminated by IBM as a direct result of a resource action or similar restructuring action and not for Cause, the post-employment restriction in this clause will not apply; and (ii) you will not directly or indirectly solicit, for competitive business purposes, any actual or prospective

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customer of the Company with which you were directly or indirectly involved as part of your job responsibilities during the last twelve (12) months of your employment with IBM.

f)during your employment with IBM and for two (2) years following the termination of your employment either by you or by IBM for any reason, you will not directly or indirectly, within the Restricted Area, hire, solicit or make an offer to, or attempt to or participate or assist in any effort to hire, solicit, or make an offer to, any Employee of the Company to be employed or to perform services outside of the Company.

2.Definitions.

The following terms have the meanings provided below.

a)“Business Enterprise” means any entity that engages in, or owns or controls an interest in any entity that engages in, competition with any business unit or division of the Company in which you worked at any time during the three (3) year period prior to the termination of your employment.

b)“Cause” means, as reasonably determined by IBM, the occurrence of any of the following: (i) embezzlement, misappropriation of corporate funds or other material acts of dishonesty; (ii) commission or conviction of any felony or of any misdemeanor involving moral turpitude, or entry of a plea of guilty or nolo contendere to any felony or misdemeanor (other than a minor traffic violation or other minor infraction); (iii) engagement in any activity that you know or should know could harm the business or reputation of the Company; (iv) failure to adhere to the Company’s corporate codes, policies or procedures; (v) a breach of any covenant in any employment agreement or any intellectual property agreement, or a breach of any other provision of your employment agreement, in either case if the breach is not cured to the Company’s satisfaction within a reasonable period after you are provided with notice of the breach (no notice and cure period is required if the breach cannot be cured), provided, however, that the mere failure to achieve performance objectives shall not constitute Cause; (vi) failure by you to perform your duties or follow management direction, which failure is not cured to the Company’s satisfaction within a reasonable period of time after a written demand for substantial performance is delivered to you (no notice or cure period is required if the failure to perform cannot be cured); (vii) violation of any statutory, contractual or common law duty or obligation to the Company, including, without limitation, the duty of loyalty; (viii) rendering of services for

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any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company; or (ix) acceptance of an offer to Engage in or Associate with any business which is or becomes competitive with the Company.

c)“Employee of the Company” means any employee of the Company who worked within the Restricted Area at any time in the twelve (12) month period immediately preceding any actual or attempted hiring, solicitation or making of an offer.

d)“Engage in or Associate with” includes, without limitation, engagement or association as a sole proprietor, owner, employer, director, partner, principal, joint venturer, associate, employee, member, consultant, or contractor.  The phrase also includes engagement or association as a shareholder or investor during the course of your employment with IBM, and includes beneficial ownership of five percent (5%) or more of any class of outstanding stock of a Business Enterprise or competitor of the Company following the termination of your employment with IBM.

e)“IBM Confidential Information” is any information of a confidential or secret nature that is disclosed to you, or created or learned by you that relates to the business of the Company, including trade secrets.  Examples of IBM Confidential Information include, but are not limited to:  the Company’s formulae, patterns, compilations, programs, devices, methods, techniques, software, tools, systems, and processes, the Company’s selling, manufacturing, and servicing methods and business techniques, implementation strategies, and information about any of the foregoing, the Company’s training, service, and business manuals, promotional materials, training courses, and other training and instructional materials, vendor and product information, customer and prospective customer lists, other customer and prospective customer information, client data, global strategic plans, marketing plans, information about the Company’s management techniques and management strategies, information regarding long-term business opportunities, information regarding the development status of specific Company products, assessments of the global competitive landscape of the industries in which the Company competes, plans for acquisition or disposition of products or companies or business

4

units, expansion plans, financial status and plans, compensation information, and personnel information.

f)“Restricted Area” means any geographic area in the world in which you worked or for which you had job responsibilities, including supervisory responsibilities, during the last twelve (12) months of your employment with IBM.  You acknowledge that IBM is a global company and that the responsibilities of certain IBM employees, including, without limitation, AT members, are global in scope.

3.Acknowledgements.

You acknowledge that a mere agreement not to disclose, use, or rely on IBM Confidential Information after your employment by IBM ends would be inadequate, standing alone, to protect IBM’s legitimate business interests.  You acknowledge that disclosure of, use of, or reliance on IBM Confidential Information, whether or not intentional, is often difficult or impossible for the Company to detect until it is too late to obtain any effective remedy.  You acknowledge that the Company will suffer irreparable harm if you fail to comply with Paragraph 1 or otherwise improperly disclose, use, or rely on IBM Confidential Information.  You acknowledge that the restrictions set forth in Paragraph 1 are reasonable as to geography, scope and duration.  You acknowledge that you have the right to consult with counsel prior to signing this Agreement.

4.Injunctive Relief.

You agree that the Company would suffer irreparable harm if you were to breach, or threaten to breach, any provision of this Agreement and that the Company would by reason of such breach, or threatened breach, be entitled to injunctive relief in a court of appropriate jurisdiction, without the need to post any bond, and you further consent and stipulate to the entry of such injunctive relief in such a court prohibiting you from breaching, or further breaching, this Agreement.  This Paragraph shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief.

5.Severability.

In the event that any one or more of the provisions of this Agreement shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall

5

not in any way be affected or impaired thereby.  Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law.  Furthermore, a determination in any jurisdiction that this Agreement, in whole or in part, is invalid or unenforceable shall not in any way affect or impair the validity or enforceability of this Agreement in any other jurisdiction.

6.Headings.

The headings in this Agreement are inserted for convenience and reference only and shall in no way affect, define, limit, or describe the scope, intent or construction of any provision hereof.

7.Waiver.

The failure of IBM to enforce any terms, provisions or covenants of this Agreement shall not be construed as a waiver of the same or of the right of IBM to enforce the same.  Waiver by IBM of any breach or default by you (or by any other employee or former employee of IBM) of any term or provision of this Agreement (or any similar agreement between IBM and you or any other employee or former employee of IBM) shall not operate as a waiver of any other breach or default.

8.Successors and Assigns.

This Agreement shall inure to the benefit of and be binding upon IBM, any successor organization which shall succeed to IBM by acquisition, merger, consolidation or operation of law, or by acquisition of assets of IBM and any assigns.  You may not assign your obligations under this Agreement.

9.Disclosure of Existence of Covenants.

You agree that while employed by IBM and for two (2) years thereafter, you will communicate the contents of this Agreement to any person, firm, association, partnership, corporation or other entity which you intend to be employed by, associated with or represent, prior to or at the time of accepting such employment, association or representation.

6

10.Notice to IBM of Prospective Position.

You agree that if, at any time during your employment or within twelve (12) months following the termination of your employment with IBM, you are offered and intend to accept a position with any person, firm, association, partnership, corporation or other entity other than the Company, you will provide the Senior Vice President of Human Resources for IBM Corporation with two (2) week written notice prior to accepting any such position.  This two (2) week written notice is separate from any other notice obligations you may have under agreements with IBM.  If for any reason you cannot, despite using your best efforts, provide the two (2) week written notice prior to accepting any such position, you agree that you will provide two (2) week written notice prior to commencing that new position.  You acknowledge and agree that a two (2) week written notice period is appropriate and necessary to permit IBM to determine whether, in its view, your proposed new position could lead to a violation of this Agreement, and you agree that you will provide IBM with such information as IBM may request to allow IBM to complete its assessment (except that you need not provide any information that would constitute confidential or trade secret information of any entity other than the Company).  During the notice period required by this Paragraph, IBM may choose, in its sole discretion, to limit your duties in your position with IBM and to restrict your access to IBM’s premises, systems, products, information, and employees.  IBM is committed to protect its trade secrets and other confidential and proprietary information, and will take all necessary and appropriate steps to do so.  Upon giving notice, you agree to cooperate with IBM in good faith to ensure that its trade secrets and other confidential and proprietary information are not disclosed, either intentionally or inadvertently.

11.No Oral Modification.

This Agreement may not be changed orally, but may be changed only in a writing signed by the Employee and a duly authorized representative of IBM.

12.Entire Agreement.

Although this Agreement sets forth the entire understanding between the Employee and IBM concerning the restrictive covenants herein, this Agreement does not impair, diminish, restrict or waive any other restrictive covenant, nondisclosure obligation or confidentiality obligation of the Employee to the Company under any other agreement, policy,

7

plan or program of the Company.  Nothing herein affects your rights, immunities, or obligations under any federal, state or local law, including under the Defend Trade Secrets Act of 2016, as described in the Company’s Business Conduct Guidelines, or prohibits you from reporting possible violations of law or regulation to a government agency, as protected by law.  The Employee and IBM represent that, in executing this Agreement, the Employee and IBM have not relied upon any representations or statements made, other than those set forth herein, with regard to the subject matter, basis or effect of this Agreement.

13.Governing Law and Choice of Forum.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of law rules.  The parties agree that any action or proceeding with respect to this Agreement shall be brought exclusively in the state and federal courts sitting in New York County or Westchester County, New York.  The parties agree to the personal jurisdiction thereof, and irrevocably waive any objection to the venue of such action, including any objection that the action has been brought in an inconvenient forum.  Notwithstanding anything in this paragraph, (a) if you are, and have been for at least thirty (30)  days immediately preceding, a resident of or an employee in Massachusetts at the time of the termination of your employment with IBM, the law of Massachusetts shall apply to this Agreement, and (b) if you reside in Massachusetts, and have resided for at least thirty (30) days immediately preceding at the time of the termination of your employment with IBM, any action or proceeding with respect to this Agreement may be brought in the county where you reside.

[INSERT EMPLOYEE NAME HERE]			INTERNATIONAL BUSINESS MACHINES CORPORATION
By:			By:
	(Employee Signature)			Diane J. Gherson
				Senior Vice President, Human Resources
Employee Serial No.		Date

8

EX-12

EXHIBIT 12

COMPUTATION OF RATIO OF INCOME FROM

CONTINUING OPERATIONS TO FIXED CHARGES

FOR NINE MONTHS ENDED SEPTEMBER 30,

(UNAUDITED)

(Dollars in millions)	2018		2017
Income from continuing operations before income taxes (1)	$	6,915	$	6,936
Add: fixed charges, excluding capitalized interest	1,501		1,301
Income as adjusted before income taxes	$	8,416	$	8,236
Fixed charges:
Interest expense	$	1,098	$	947
Capitalized interest	3		(1		)
Portion of rental expense representative of interest	404		354
Total fixed charges	$	1,504	$	1,300
Ratio of income from continuing operations to fixed charges	5.59		6.34

(1)Income from continuing operations before income taxes excludes (a) amortization of capitalized interest, and (b) the company’s share in the income and losses of less-than-fifty percent-owned affiliates.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Virginia M. Rometty, certify that:

1.I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2018

/s/ Virginia M. Rometty

Virginia M. Rometty

Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, James J. Kavanaugh, certify that:

1.I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2018

/s/ James J. Kavanaugh

James J. Kavanaugh

Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Virginia M. Rometty, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Virginia M. Rometty

Virginia M. Rometty

Chairman, President and Chief Executive Officer

October 30, 2018

A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James  J. Kavanaugh, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James J. Kavanaugh

James J. Kavanaugh

Senior Vice President and Chief Financial Officer

October 30, 2018

A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2018 shares
Document and Entity Information
Entity Registrant Name	INTERNATIONAL BUSINESS MACHINES CORP
Entity Central Index Key	0000051143
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding	908,793,777
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Trading Symbol	IBM

XML

CONSOLIDATED STATEMENT OF EARNINGS - USD ($) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017		Sep. 30, 2018	Sep. 30, 2017
Revenue	$ 18,756	$ 19,153		$ 57,830	$ 56,597
Cost	9,953	10,172	[1]	31,582	30,703	[1]
Gross profit	8,803	8,981	[1]	26,249	25,894	[1]
Expense and other (income):
Selling, general and administrative	4,363	4,606	[1]	14,665	14,666	[1]
Research, development and engineering	1,252	1,291	[1]	4,021	4,212	[1]
Intellectual property and custom development income	(275)	(308)		(842)	(1,118)
Other (income) and expense	275	159	[1]	968	751	[1]
Interest expense	191	168		530	451
Total expense and other (income)	5,807	5,917	[1]	19,341	18,962	[1]
Income from continuing operations before income taxes	2,996	3,065		6,908	6,931
Provision for income taxes	304	339		138	120
Income from continuing operations	2,692	2,726		6,770	6,811
Income/(loss) from discontinued operations, net of tax	2	0		7	(3)
Net income	$ 2,694	$ 2,726		$ 6,777	$ 6,807
Assuming dilution:
Continuing operations (in dollars per share)	$ 2.94	$ 2.92		$ 7.36	$ 7.24
Discontinued operations (in dollars per share)	0.00	0.00		0.01	0.00
Total (in dollars per share)	2.94	2.92		7.37	7.24
Basic:
Continuing operations (in dollars per share)	2.95	2.93		7.39	7.28
Discontinued operations (in dollars per share)	0.00	0.00		0.01	0.00
Total (in dollars per share)	$ 2.95	$ 2.93		$ 7.40	$ 7.28
Weighted-average number of common shares outstanding:
Assuming dilution (in shares)	915,212,631	933,227,429		920,006,890	940,209,466
Basic (in shares)	911,152,848	929,437,441		915,632,501	935,600,777
Cash dividend per common share	$ 1.57	$ 1.50		$ 4.64	$ 4.40
Services
Revenue	$ 12,566	$ 12,703		$ 38,414	$ 37,592
Cost	8,040	8,265	[1]	25,519	25,034	[1]
Sales
Revenue	5,800	6,017		18,221	17,744
Cost	1,625	1,584	[1]	5,216	4,779	[1]
Financing
Revenue	389	433		1,195	1,260
Cost	$ 287	$ 322		$ 846	$ 890

[1] Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

XML

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income	$ 2,694	$ 2,726	$ 6,777	$ 6,807
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments	(22)	89	(535)	213
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0	(1)	(2)	2
Reclassification of (gains)/losses to net income		0		1
Total net changes related to available-for-sale securities	0	(2)	(2)	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	(46)	(70)	(134)	(198)
Reclassification of (gains)/losses to net income	28	(73)	408	(347)
Total unrealized gains/(losses) on cash flow hedges	(18)	(143)	274	(545)
Retirement-related benefit plans:
Prior service costs/(credits)	0	0	(1)	0
Net (losses)/gains arising during the period	(1)	1	83	106
Curtailments and settlements	2	2	7	3
Amortization of prior service (credits)/costs	(18)	(22)	(55)	(66)
Amortization of net (gains)/losses	737	733	2,231	2,156
Total retirement-related benefit plans	719	713	2,264	2,200
Other comprehensive income/(loss), before tax	678	658	2,001	1,869
Income tax (expense)/benefit related to items of other comprehensive income	(209)	11	(807)	7
Other comprehensive income/(loss), net of tax	470	669	1,194	1,877
Total comprehensive income/(loss)	$ 3,164	$ 3,394	$ 7,970	$ 8,684

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 11,563	$ 11,972
Restricted cash	168	262	[1]
Marketable securities	2,932	608
Notes and accounts receivable - trade (net of allowances of $310 in 2018 and $297 in 2017)	7,071	8,928
Short-term financing receivables (net of allowances of $273 in 2018 and $261 in 2017)	19,249	21,721
Other accounts receivable (net of allowances of $38 in 2018 and $36 in 2017)	767	981
Inventories, at lower of average cost or net realizable value:
Finished goods	448	333
Work in process and raw materials	1,445	1,250
Total inventories	1,893	1,583
Deferred costs	2,227	1,820	[2]
Prepaid expenses and other current assets	2,388	1,860	[1],[2]
Total current assets	48,257	49,735
Property, plant and equipment	32,484	32,331
Less: Accumulated depreciation	21,535	21,215
Property, plant and equipment - net	10,949	11,116
Long-term financing receivables (net of allowances of $52 in 2018 and $74 in 2017)	8,179	9,550
Prepaid pension assets	5,655	4,643
Deferred costs	2,581	2,136	[2]
Deferred taxes	4,436	4,862
Goodwill	36,526	36,788
Intangible assets - net	3,134	3,742
Investments and sundry assets	2,272	2,783	[2]
Total assets	121,990	125,356
Current liabilities:
Taxes	2,502	4,219
Short-term debt	10,932	6,987
Accounts payable	5,384	6,451
Compensation and benefits	3,601	3,644
Deferred income	10,704	11,552
Other accrued expenses and liabilities	3,700	4,510
Total current liabilities	36,822	37,363
Long-term debt	35,989	39,837
Retirement and nonpension postretirement benefit obligations	15,774	16,720
Deferred income	3,507	3,746
Other liabilities	9,979	9,965
Total liabilities	102,071	107,631
IBM stockholders' equity:
Common stock, par value $.20 per share, and additional paid-in capital; Shares authorized: 4,687,500,000; Shares issued: 2018 - 2,232,637,802; 2017 - 2,229,428,813	54,987	54,566
Retained earnings	158,612	153,126
Treasury stock, at cost; Shares: 2018 - 1,323,844,025; 2017 - 1,307,249,588	(165,995)	(163,507)
Accumulated other comprehensive income/(loss)	(27,820)	(26,592)
Total IBM stockholders' equity	19,784	17,594
Noncontrolling interests	134	131
Total equity	19,918	17,725
Total liabilities and equity	$ 121,990	$ 125,356

[1] Recast to reflect adoption of the FASB guidance on restricted cash.

[2] Recast to conform to current period presentation.

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Parenthetical) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Notes and accounts receivable - trade, allowances	$ 310	$ 297
Short-term financing receivables, allowances	273	261
Other accounts receivable, allowances	38	36
Long-term financing receivables, allowances	$ 52	$ 74
Common stock, par value (in dollars per share)	$ 0.20	$ 0.20
Common stock, Shares authorized (in shares)	4,687,500,000	4,687,500,000
Common stock, Shares issued (in shares)	2,232,637,802	2,229,428,813
Treasury stock, Shares (in shares)	1,323,844,025	1,307,249,588

XML

CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net income	$ 6,777	$ 6,807
Adjustments to reconcile net income to cash provided by operating activities
Depreciation	2,337	2,231
Amortization of intangibles	1,031	1,161
Stock-based compensation	371	388
Net (gain)/loss on asset sales and other	(18)	92
Changes in operating assets and liabilities, net of acquisitions/divestitures	631	312
Net cash provided by operating activities	11,128	10,991
Cash flows from investing activities:
Payments for property, plant and equipment	(2,613)	(2,273)
Proceeds from disposition of property, plant and equipment	192	337
Investment in software	(418)	(411)
Acquisition of businesses, net of cash acquired	(123)	(442)
Divestitures of businesses, net of cash transferred		35
Non-operating finance receivables - net	377	469
Purchases of marketable securities and other investments	(6,024)	(3,764)	[1]
Proceeds from disposition of marketable securities and other investments	3,241	2,778
Net cash used in investing activities	(5,368)	(3,271)	[1]
Cash flows from financing activities:
Proceeds from new debt	4,714	9,355
Payments to settle debt	(4,246)	(6,252)
Short-term borrowings/(repayments) less than 90 days - net	376	(794)
Common stock repurchases	(2,393)	(3,674)
Common stock repurchases for tax withholdings	(148)	(153)
Financing - other	82	137
Cash dividends paid	(4,250)	(4,119)
Net cash used in financing activities	(5,864)	(5,499)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(399)	875
Net change in cash, cash equivalents and restricted cash	(503)	3,096	[1]
Cash, cash equivalents and restricted cash at beginning of period	12,234	8,073	[1]
Cash, cash equivalents and restricted cash at end of period	$ 11,731	$ 11,168	[1]

[1] Recast to reflect adoption of the FASB guidance on restricted cash.

XML

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - USD ($) $ in Millions		Total IBM Stockholders' Equity	Common Stock and Additional Paid-in Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income/(Loss)	Non-Controlling Interests	Total
Balance at the Beginning of the Period at Dec. 31, 2016		$ 18,246	$ 53,935	$ 152,759	$ (159,050)	$ (29,398)	$ 146	$ 18,392
Equity
Cumulative effect of change in accounting principle | Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory	[1]	102		102				102
Net income plus other comprehensive income/(loss)
Net income		6,807		6,807				6,807
Other comprehensive income/(loss)		1,877				1,877		1,877
Total comprehensive income/(loss)		8,684						8,684
Cash dividends paid - common stock		(4,119)		(4,119)				(4,119)
Common stock issued under employee plans (Shares - 3,208,989 and 3,372,586 for 2018 and 2017, respectively)		460	460					460
Purchases (Shares - 978,004 and 960,186) and sales (Shares - 365,600 and 363,335) of treasury stock under employee plans - net, for 2018 and 2017, respectively		(91)		15	(106)			(91)
Other treasury shares purchased, not retired (Shares - 15,982,033 and 22,851,760 for 2018 and 2017, respectively)		(3,655)			(3,655)			(3,655)
Changes in noncontrolling interests							(16)	(16)
Balance at the End of the Period at Sep. 30, 2017		19,627	54,395	155,565	(162,812)	(27,521)	130	19,757
Balance at the Beginning of the Period at Dec. 31, 2017		17,594	54,566	153,126	(163,507)	(26,592)	131	17,725
Equity
Cumulative effect of change in accounting principle | Accounting Standards Update 2014-09, Revenue from Contracts with Customers		524		524				524
Cumulative effect of change in accounting principle | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)	[2]			2,422		(2,422)
Net income plus other comprehensive income/(loss)
Net income		6,777		6,777				6,777
Other comprehensive income/(loss)		1,194				1,194		1,194
Total comprehensive income/(loss)		7,970						7,970
Cash dividends paid - common stock		(4,250)		(4,250)				(4,250)
Common stock issued under employee plans (Shares - 3,208,989 and 3,372,586 for 2018 and 2017, respectively)		421	421					421
Purchases (Shares - 978,004 and 960,186) and sales (Shares - 365,600 and 363,335) of treasury stock under employee plans - net, for 2018 and 2017, respectively		(89)		13	(101)			(89)
Other treasury shares purchased, not retired (Shares - 15,982,033 and 22,851,760 for 2018 and 2017, respectively)		(2,388)			(2,388)			(2,388)
Changes in noncontrolling interests							3	3
Balance at the End of the Period at Sep. 30, 2018		$ 19,784	$ 54,987	$ 158,612	$ (165,995)	$ (27,820)	$ 134	$ 19,918

[1] Reflects the adoption of the FASB guidance on intra-entity transfers of assets.

[2] Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, "Accounting Changes".

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Parenthetical) - $ / shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Cash dividend per common share	$ 4.64	$ 4.40
Common stock issued under employee plans (in shares)	3,208,989	3,372,586
Purchases of treasury stock under employee plans (in shares)	978,004	960,186
Sales of treasury stock under employee plans (in shares)	365,600	363,335
Other treasury shares purchased, not retired (in shares)	15,982,033	22,851,760

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Basis of Presentation

9 Months Ended

Sep. 30, 2018

Basis of Presentation

Basis of Presentation

1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue under the revenue standard effective January 1, 2018, see note 3, “Revenue Recognition”. Also, refer to the company’s 2017 Annual Report on pages 70 to 73, for a discussion of the company’s critical accounting estimates.

Noncontrolling interest amounts of $6.2 million and $4.4 million, net of tax, for the three months ended September 30, 2018 and 2017, respectively, and $17.9 million and $11.5 million, net of tax, for the nine months ended September 30, 2018 and 2017, respectively, are included as a reduction within other (income) and expense in the Consolidated Statement of Earnings.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2017 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

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Accounting Changes

9 Months Ended

Sep. 30, 2018

Accounting Changes

Accounting Changes

2. Accounting Changes:

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance on a customer’s accounting for implementation costs incurred in cloud-computing arrangements that are hosted by a vendor. Certain types of implementation costs should be capitalized and amortized over the term of the hosting arrangement. The guidance is effective January 1, 2020 and early adoption is permitted. The company will adopt the guidance on January 1, 2019 on a prospective basis, and does not expect the guidance to have a material impact on the consolidated financial results.

In August 2018, the FASB issued guidance which changes the disclosure requirements for fair value measurements and defined benefit plans. The guidance is effective for each of the topics on January 1, 2020 and January 1, 2021, respectively, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results.

In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established that is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.  The guidance is effective January 1, 2020 with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date.

The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. The company expects to elect the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and nonlease components for all asset classes. The company will make a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. The other practical expedients available under the guidance are being evaluated.

A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company has made significant progress in these areas as well as in gathering the necessary data elements for the lease population. A system provider has been selected, with system configuration, testing and implementation underway. The company continues to evaluate the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. As a lessee, the company’s operating lease commitments were $6.6 billion at December 31, 2017.

From a lessor perspective, due to changes in lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount that would have been reclassified from lease receivables to loan receivables in 2017, under the application of this new guidance, would have been approximately $450 million. Additionally, the company does not expect the removal of third-party residual value guarantee insurance in the lease classification test to have a material impact on the Consolidated Statement of Earnings.

The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change.

Standards Implemented

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act (“U.S. tax reform”) from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established cease to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption on January 1, 2018, $2,420 million was reclassified from AOCI to retained earnings, primarily comprised of amounts relating to retirement-related benefit plans.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

In March 2017, the FASB issued guidance that impacts the presentation of net periodic pension and postretirement benefit costs (“net benefit cost”). Under the guidance, the service cost component of net benefit cost continues to be presented within cost, selling, general and administrative expense and research, development and engineering expense in the Consolidated Statement of Earnings, unless eligible for capitalization. The other components of net benefit cost are presented separately from service cost within other (income) and expense in the Consolidated Statement of Earnings. The guidance was effective January 1, 2018 with early adoption permitted. The company adopted the guidance as of the effective date. The guidance is primarily a change in financial statement presentation and did not have a material impact in the consolidated financial results. This presentation change was applied retrospectively upon adoption. For the three months ended September 30, 2017, $181 million, $42 million, and $51 million was recast from total cost, selling, general and administrative (SG&A) expense, and research, development, and engineering (RD&E) expense, respectively, into other (income) and expense.  For the nine months ended September 30, 2017, $529 million, $293 million, and $148 million was recast from total cost, SG&A expense, and RD&E expense, respectively, into other (income) and expense. Refer to note 9, “Retirement-Related Benefits,” for additional information.

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance was effective January 1, 2018 and early adoption was not permitted except for limited provisions. The company adopted the guidance on the effective date. Certain equity investments are now measured at fair value with changes recognized in net income. The amendment also simplified the impairment test of equity investments that lack readily determinable fair value. The guidance did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance effective January 1, 2018 using the modified retrospective transition method. At adoption, $557 million was reclassified from notes and accounts receivable-trade and deferred income-current to prepaid expenses and other current assets to establish the opening balance for net contract assets. In-scope sales commission costs previously recorded in the Consolidated Statement of Earnings were capitalized in deferred costs in accordance with the transition guidance, in the amount of $737 million. Deferred income of $29 million was recorded for certain software licenses that will be recognized over time versus at a point in time under previous guidance. Additionally, net deferred taxes were reduced by $184 million in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $524 million. The guidance did not have a material impact in the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company expects revenue recognition for its broad portfolio of hardware, software, and services offerings to remain largely unchanged. Refer to note 3, “Revenue Recognition,” for additional information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In January 2017, the FASB issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance effective January 1, 2017, and it did not have a material impact in the consolidated financial results.

In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $102 million. In January 2017, the company had one transaction that generated a $582 million benefit to income tax expense, income from continuing operations and net income and a benefit to both basic and diluted earnings per share of $0.62 per share for the nine months ended September 30, 2017. No transactions impacted the consolidated financial results for the nine months ended September 30, 2018. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.

In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective and adopted by the company on January 1, 2017, and it did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share-based awards compared to grant date, however these impacts are not expected to be material. These impacts are recorded on a prospective basis. The company continues to estimate forfeitures in conjunction with measuring stock-based compensation cost. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. The FASB also issued guidance in May 2017 and June 2018, which relates to the accounting for modifications of share-based payment awards and accounting for share-based payments issued to non-employees, respectively. The company adopted the guidance for modifications in the second quarter of 2017, and guidance for non-employees’ payments in the second quarter of 2018. The guidance had no impact in the consolidated financial results.

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Revenue Recognition

9 Months Ended

Sep. 30, 2018

Revenue Recognition

Revenue Recognition

3. Revenue Recognition: Effective January 1, 2018, the company adopted the new accounting standard related to the recognition of revenue in contracts with customers under the modified retrospective transition method.  This method was applied to contracts that were not complete as of the date of initial application. The following is a summary of new and/or revised significant accounting policies, which relate primarily to revenue and cost recognition. Refer to note A, “Significant Accounting Policies,” in the company’s 2017 Annual Report for the policies in effect for revenue and cost prior to January 1, 2018 and for all other significant accounting policies. The impact related to adopting the new standard was not material. For further information regarding the adoption of the new standard, see note 2, “Accounting Changes”.

Revenue

The company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, the company estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. The company’s contracts may include terms that could cause variability in the transaction price, including, for example, rebates, volume discounts, service-level penalties, and performance bonuses or other forms of contingent revenue.

The company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The company may not be able to reliably estimate contingent revenue in certain long-term arrangements due to uncertainties that are not expected to be resolved for a long period of time or when the company’s experience with similar types of contracts is limited. The company’s arrangements infrequently include contingent revenue. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the company, taking into consideration the type of client, the type of transaction and the specific facts and circumstances of each arrangement. Changes in estimates of variable consideration are included in the disclosure on pages 20 and 21.

The company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days. Invoices are generally issued as control transfers and/or as services are rendered. Additionally, in determining the transaction price, the company adjusts the promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of payments agreed to by the parties to the contract provide the client or the company with a significant benefit of financing, in which case the contract contains a significant financing component. As a practical expedient, the company does not account for significant financing components if the period between when the company transfers the promised product or service to the client and when the client pays for that product or service will be one year or less. Most arrangements that contain a financing component are financed through the company’s Global Financing business and include explicit financing terms.

The company may include subcontractor services or third-party vendor equipment or software in certain integrated services arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is the principal for the transaction. To determine whether the company is an agent or principal, the company considers whether it obtains control of the products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most notably whether the company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.

The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has economic substance apart from the company and the reseller is considered the principal for the transaction with the end-user client.

The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.

In addition to the aforementioned general policies, the following are the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue.

Arrangements with Multiple Performance Obligations

The company’s global capabilities as a cognitive solutions and cloud platform company include services, software, hardware and related financing. The company enters into revenue arrangements that may consist of any combination of these products and services based on the needs of its clients. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements may also include financing provided by the company. These arrangements consist of multiple products and services, whereby the hardware and software may be delivered in one period and the software support and hardware maintenance services are delivered over time. In another example, the company may assist the client in building and running an enterprise information technology (IT) environment utilizing a private cloud on a long-term basis and the client periodically purchases hardware and/or software products from the company to upgrade or expand the facility. The services delivered on the cloud are provided on a continuous basis across multiple reporting periods, and the hardware and software products are provided in each period the products are purchased.

The company continues to build new products and offerings and continuously reinvent its platforms and delivery methods, including through the use of cloud and as-a-Service models. These are not separate businesses; they are offerings across the segments that address market opportunities in analytics, data, cloud and security. Revenue from these offerings follows the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue, depending on the type of offering, which are comprised of services, hardware and/or software.

To the extent that a product or service in multiple performance obligation arrangements is subject to other specific accounting guidance, such as leasing guidance, that product or service is accounted for in accordance with such specific guidance. For all other products or services in these arrangements, the criteria below are considered to determine when the products or services are distinct and how to allocate the arrangement consideration to each distinct performance obligation. A performance obligation is a promise in a contract with a client to transfer products or services that are distinct. If the company enters into two or more contracts at or near the same time, the contracts may be combined and accounted for as one contract, in which case the company determines whether the products or services in the combined contract are distinct. A product or service that is promised to a client is distinct if both of the following criteria are met:

· The client can benefit from the product or service either on its own or together with other resources that are readily available to the client (that is, the product or service is capable of being distinct); and

· The company’s promise to transfer the product or service to the client is separately identifiable from other promises in the contract (that is, the product or service is distinct within the context of the contract).

If these criteria are not met, the company determines an appropriate measure of progress based on the nature of its overall promise for the single performance obligation. When products and services are distinct, the arrangement consideration is allocated to each performance obligation on a relative standalone selling price basis. The revenue policies in the Services, Hardware and/or Software sections below are then applied to each performance obligation, as applicable.

To the extent the company grants the customer the option to acquire additional products or services in one of these arrangements, the company accounts for the option as a distinct performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., a discount incremental to the range of discounts typically given for the product or service), in which case the client in effect pays in advance for the option to purchase future products or services. The company recognizes revenue when those future products or services are transferred or when the option expires.

Services

The company’s primary services offerings include infrastructure services, including outsourcing, and other managed services; application management services; global process services (GPS); maintenance and support; and consulting, including the design and development of complex IT systems to a client’s specifications (e.g., design and build). Many of these services can be delivered entirely or partially through cloud or as-a-Service delivery models. The company’s services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.

In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time. In design and build arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g., when the asset is built at the customer site) or because the company’s performance does not create an asset with an alternative use and the company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the benefits provided as the company performs the services.

In outsourcing, other managed services, application management, GPS and other cloud-based services arrangements, the company determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.

Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenue from as-a-Service type contracts, such as Infrastructure-as-a-Service, is recognized either on a straight-line basis or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether the contract has usage-based metrics). If the as-a-Service contract includes setup activities, those promises in the arrangement are evaluated to determine if they are distinct.

Revenue related to maintenance and support services and extended warranty is recognized on a straight-line basis over the period of performance because the company is standing ready to provide services.

In fixed-price design and build contracts, revenue is recognized based on progress towards completion of the performance obligation using a cost-to-cost measure of progress (i.e., percentage-of-completion (POC) method of accounting). Revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. Due to the nature of the work performed in these arrangements, the estimation of cost at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known by the company. Refer to page 21 for the amount of revenue recognized in the reporting period on a cumulative catch-up basis (i.e., from performance obligations satisfied, or partially satisfied, in previous periods).

The company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost measure of progress in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For other types of services contracts, any losses are recorded as incurred.

In some services contracts, the company bills the client prior to recognizing revenue from performing the services. In other services contracts, the company performs the services prior to billing the client. When the company performs services prior to billing the client in design and build contracts, the right to consideration is typically subject to milestone completion or client acceptance and the unbilled accounts receivable is classified as a contract asset. Refer to page 85 of the company’s 2017 Annual Report for the amount of deferred income and unbilled accounts receivable at December 31, 2017 and 2016.

Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions.

Hardware

The company’s hardware offerings include the sale or lease of system servers and storage solutions. These products can also be delivered through as-a-Service or cloud delivery models, such as Storage-as-a-Service. The company also offers installation services for its more complex hardware products. Hardware offerings are often sold with distinct maintenance services, described under the Services section above.

Revenue from hardware sales is recognized when control has transferred to the customer which typically occurs when the hardware has been shipped to the client, risk of loss has transferred to the client and the company has a present right to payment for the hardware. In limited circumstances when a hardware sale includes client acceptance provisions, revenue is recognized either when client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. Revenue from hardware sales-type leases is recognized at the beginning of the lease term. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.

Revenue from as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. Installation services are accounted for as distinct performance obligations with revenue recognized as the services are performed. Any cost of standard warranties is accrued when the corresponding revenue is recognized. Shipping and handling activities that occur after the client has obtained control of a product are accounted for as an activity to fulfill the promise to transfer the product rather than as an additional promised service and, therefore, no revenue is deferred and recognized over the shipping period.

Software

The company’s software offerings include solutions software, which contains many of the company’s strategic areas including analytics, data and security; transaction processing software, which primarily runs mission-critical systems for clients; integration software, which helps clients to create, connect and optimize their applications data and infrastructure; and, operating systems software, which provides operating systems for IBM Z and Power Systems hardware. Many of these offerings can be delivered entirely or partially through as-a-Service or cloud delivery models, while others are delivered as on-premise software licenses.

Revenue from perpetual (one-time charge) license software is recognized at a point in time at the inception of the arrangement when control transfers to the client, if the software license is distinct from the post-contract support offered by the company. In limited circumstances, when the software requires continuous updates to provide the intended functionality, the software license and post-contract support are not distinct and revenue for the single performance obligation is recognized over time as the post-contract support is provided. This is only applicable to certain security software perpetual licenses offered by the company. Prior to the adoption of the new revenue standard, the company recognized revenue for these software licenses at a point in time at the inception of the arrangement. This change did not have a material impact on the company’s financial statements.

Revenue from post-contract support is recognized over the contract term on a straight-line basis because the company is providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term.

Revenue from software hosting or Software-as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. In software hosting arrangements, the rights provided to the client (e.g., ownership of a license, contract termination provisions and the feasibility of the client to operate the software) are considered in determining whether the arrangement includes a license. In arrangements that include a software license, the associated revenue is recognized in accordance with the software license recognition policy above rather than over time as a service.

Revenue from term license software is recognized at a point in time for the committed term of the contract (which is typically one month due to client termination rights). However, if the amount of consideration to be paid in exchange for the license depends on client usage, revenue is recognized when the usage occurs.

Financing

Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.

Standalone Selling Price

The company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which the company would sell a promised product or service separately to a client. In most cases, the company is able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances to similar clients. The company typically establishes a standalone selling price range for its products and services which are reassessed on a periodic basis or when facts and circumstances change.

In certain instances, the company may not be able to establish a standalone selling price range based on observable prices and the company estimates the standalone selling price. The company estimates SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. Additionally, in certain circumstances, the company may estimate SSP for a product or service by applying the residual approach. This approach has been most commonly used when certain perpetual software licenses are only sold bundled with one year of post-contract support and a price has not been established for the software. Estimating SSP is a formal process that includes review and approval by the company’s management.

Services Costs

Recurring operating costs for services contracts are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the cost-to-cost measure of progress are deferred and recognized based on the labor costs incurred to date (i.e., the measure of progress), as a percentage of the total estimated labor costs to fulfill the contract as control transfers over time for these performance obligations. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts and other cloud-based services contracts (i.e., setup costs) are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs consist of transition and setup costs related to the installation of systems and processes and other deferred fulfillment costs, including, prepaid assets used in services contracts (i.e., prepaid software or prepaid maintenance), and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to the client of the services to which the asset relates. Additionally, fixed assets associated with these contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the carrying amount of the asset to the remaining amount of consideration the company expects to receive for the services to which the asset relates, less the costs that relate directly to providing those services that have not yet been recognized. If the carrying amount is deemed not recoverable, an impairment loss is recognized.

In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services.

Software Costs

Certain eligible, non-recurring costs incurred in the initial phases of Software-as-a-Service contracts are deferred and amortized over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the policy described for Services Costs. Recurring operating costs in these contracts are recognized as incurred.

Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis over the expected customer relationship period if the company expects to recover those costs. The company previously expensed these costs as incurred. The expected customer relationship is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years. Expected renewal periods are only included in the expected customer relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The company has determined that certain commissions programs meet the requirements to be capitalized. Some commission programs are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized. Additionally, as a practical expedient, the company expenses costs to obtain a contract as incurred if the amortization period would have been a year or less. These costs are included in selling, general and administrative expenses.

Product Warranties

The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for standard warranty terms are recognized when revenue is recorded for the related product. The company estimates its warranty costs standard to the product based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period because the company is providing a service of standing ready to provide services over such term.

Contract Assets and Notes and Accounts Receivable—Trade

The company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the company’s contract assets represent unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized, revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract liabilities) at the contract level. At January 1, 2018 and September 30, 2018 contract assets of $557 million and $510 million, respectively, are included in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. At December 31, 2017, these assets were classified as notes and accounts receivable-trade in the Consolidated Statement of Financial Position.

An allowance for contract assets, if needed, and uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.

Disaggregation of Revenue

The following tables provide details of revenue by major products/service offerings and by geography.

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the three months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	2,910	$	—	$	—	$	—	$	—	$	—	$	2,910
Transaction Processing Software	1,238		—		—		—		—		—		1,238
Consulting	—		1,900		—		—		—		—		1,900
Global Process Services	—		314		—		—		—		—		314
Application Management	—		1,915		—		—		—		—		1,915
Infrastructure Services	—		—		5,595		—		—		—		5,595
Technical Support Services	—		—		1,707		—		—		—		1,707
Integration Software	—		—		990		—		—		—		990
Systems Hardware	—		—		—		1,339		—		—		1,339
Operating Systems Software	—		—		—		397		—		—		397
Global Financing*	—		—		—		—		388		—		388
Other Revenue	—		—		—		—		—		62		62
Total	$	4,148	$	4,130	$	8,292	$	1,736	$	388	$	62	$	18,756

* Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the three months	Total
ended September 30, 2018:	Revenue
Americas	$	8,853
Europe/Middle East/Africa	5,827
Asia Pacific	4,076
Total	$	18,756

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the nine months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	9,080	$	—	$	—	$	—	$	—	$	—	$	9,080
Transaction Processing Software	3,946		—		—		—		—		—		3,946
Consulting	—		5,698		—		—		—		—		5,698
Global Process Services	—		934		—		—		—		—		934
Application Management	—		5,863		—		—		—		—		5,863
Infrastructure Services	—		—		17,188		—		—		—		17,188
Technical Support Services	—		—		5,239		—		—		—		5,239
Integration Software	—		—		3,106		—		—		—		3,106
Systems Hardware	—		—		—		4,187		—		—		4,187
Operating Systems Software	—		—		—		1,225		—		—		1,225
Global Financing*	—		—		—		—		1,188		—		1,188
Other Revenue	—		—		—		—		—		176		176
Total	$	13,027	$	12,495	$	25,533	$	5,412	$	1,188	$	176	$	57,830

*Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the nine months	Total
ended September 30, 2018:	Revenue
Americas	$	26,772
Europe/Middle East/Africa	18,410
Asia Pacific	12,648
Total	$	57,830

Remaining Performance Obligations

The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

At September 30, 2018, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $119 billion. Given the profile of contract terms, approximately 60 percent of this amount is expected to be recognized as revenue over the next two years, approximately 35 percent between three and five years and the balance (mostly Infrastructure Services) thereafter.

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three and nine months ending September 30, 2018, revenue was reduced by $25 million and $50 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on percentage-of-completion based contracts. Refer to pages 14 and 15 for additional information on percentage-of-completion contracts and estimates of costs to complete.

Reconciliation of Contract Balances

The following table provides information about notes and accounts receivables-trade, contract assets and deferred income balances:

	At September 30,		At January 1,
(Dollars in millions)	2018		2018 (as adjusted)
Notes and accounts receivable-trade (net of allowances of $310 and $297 at September 30, 2018 and January 1, 2018, respectively)	$	7,071	$	8,295
Contract assets (1)	510		557
Deferred income (current)	10,704		11,493
Deferred income (noncurrent)	3,507		3,758

(1) Included within prepaid expenses and other current assets in the Consolidated Statement of Financial Position.

The amount of revenue recognized during the three months ended September 30, 2018 that was included within the deferred income balance at July 1, 2018 was $3.8 billion and primarily relates to services and software.

The amount of revenue recognized during the nine months ended September 30, 2018 that was included within the deferred income balance at January 1, 2018 was $8.0 billion and primarily relates to services and software.

Deferred Costs

	At September 30,
(Dollars in millions)	2018
Capitalized costs to obtain a contract	$	681
Deferred costs to fulfill a contract:
Deferred setup costs	2,123
Other deferred fulfillment costs	2,003
Total deferred costs (1)	$	4,808

(1) Of the total, $2,227 million is current and $2,581 million is noncurrent. Prior to January 1, 2018, the current and noncurrent balance of deferred costs were included within prepaid expenses and other current assets and investments and sundry assets, respectively.

On January 1, 2018, in accordance with the transition guidance, $737 million of in-scope sales commissions that were previously recorded in the Consolidated Statement of Earnings were capitalized as costs to obtain a contract.

The amount of total deferred costs amortized during the quarter ended September 30, 2018 was $929 million. There were no material impairment losses incurred during the period. Refer to page 17 for additional information on deferred costs to fulfill a contract and capitalized costs of obtaining a contract.

Transition Disclosures

In accordance with the modified retrospective method transition requirements, the company will present the financial statement line items impacted and adjusted to compare to presentation under the prior GAAP for each of the interim and annual periods during the first year of adoption of the new revenue standard. The following tables summarize the impacts as of and for the three and nine months ended September 30, 2018. The impacts to adjust to prior GAAP are primarily the result of the transition adjustments recorded at adoption. Current period impacts were not material. Refer to note 2, “Accounting Changes,” for additional information on the transition adjustments.

Consolidated Statement of Earnings Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the three months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	18,756	$	4		$	18,760
Cost	9,953		—			9,953
Gross profit	8,803		4			8,807
Selling, general and administrative expense	4,363		(28		)	4,335
Income from continuing operations before income taxes	2,996		33			3,029
Provision for/(benefit from) income taxes	304		8			313
Net income	$	2,694	$	24		$	2,718
Earnings/(loss) per share of common stock:
Assuming dilution	$	2.94	$	0.03		$	2.97
Basic	$	2.95	$	0.03		$	2.98

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	57,830	$	(10	)	$	57,821
Cost	31,582		0			31,582
Gross profit	26,249		(10		)	26,239
Selling, general and administrative expense	14,665		(32		)	14,633
Income from continuing operations before income taxes	6,908		23			6,930
Provision for/(benefit from) income taxes	138		5			143
Net income	$	6,777	$	17		$	6,794
Earnings/(loss) per share of common stock:
Assuming dilution	$	7.36	$	0.02		$	7.38
Basic	$	7.39	$	0.02		$	7.41

Consolidated Statement of Financial Position Impacts

	As reported under			Adjustments to			Adjusted
(Dollars in millions)	new revenue			convert to			amounts under
At September 30, 2018:	standard			prior GAAP			prior GAAP
Assets:
Notes and accounts receivable - trade (net of allowances)	$	7,071		$	574		$	7,645
Deferred costs (current)	2,227			(280		)	1,947
Prepaid expenses and other current assets	2,388			(510		)	1,878
Deferred taxes	4,436			179			4,615
Deferred costs (noncurrent)	2,581			(402		)	2,179
Investments and sundry assets	2,272			—			2,272
Total assets	$	121,990		$	(439	)	$	121,551
Liabilities:
Taxes	$	2,502		$	—		$	2,502
Deferred income (current)	10,704			51			10,754
Deferred income (noncurrent)	3,507			(5		)	3,502
Total liabilities	$	102,071		$	46		$	102,117
Equity:
Retained earnings	$	158,612		$	(507	)	$	158,106
AOCI	(27,820		)	22			(27,798		)
Total stockholders’ equity	19,918			(484		)	19,434
Total liabilities and stockholders’ equity	$	121,990		$	(439	)	$	121,551

Consolidated Statement of Cash Flows Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Cash flows from operating activities:
Net income	$	6,777	$	17		$	6,794
Adjustments to reconcile net income to cash provided by operating activities:
Changes in operating assets and liabilities, net of acquisitions/divestitures	631		(17		)	614
Net cash provided by operating activities	$	11,128	$	—		$	11,128

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Financial Instruments

9 Months Ended

Sep. 30, 2018

Financial Instruments

Financial Instruments

4. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

· Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

· Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

· Level 3—Unobservable inputs for the asset or liability.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

· Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

· Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Certain non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. There were no material impairments of non-financial assets for the nine months ended September 30, 2018 and 2017, respectively.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Effective January 1, 2018, the company adopted the new FASB guidance on recognition, measurement, presentation and disclosure of financial instruments using the cumulative catch-up transition method. Under the new standard, the company measures equity investments at fair value with changes recognized in net income. Based on the method of adoption, prior year information has not been updated to conform with the new guidance. Refer to note 2, “Accounting Changes,” for further information.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.

(Dollars in millions)
At September 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,238	$	—	$	8,238	(6)
Money market funds	26		—		—		26
Total	$	26	$	8,238	$	—	$	8,263
Equity investments (2)	11		—		—		11
Debt securities - current (3)	—		2,932		—		2,932		(6)
Derivative assets (4)	9		685		—		694		(7)
Total assets	$	46	$	11,854	$	—	$	11,900
Liabilities:
Derivative liabilities (5)	$	2	$	413	$	—	$	415	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3) Included within marketable securities in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investmentsand sundry assets in the Consolidated Statement of Financial Position at September 30, 2018 were $312 million and $382 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at September 30, 2018 were $122 million and $292million, respectively.

(6) Available-for-sale debt securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the ConsolidatedStatement of Financial Position, the total derivative asset and liability positions each would have been reduced by $285 million.

(Dollars in millions)
At December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,066	$	—	$	8,066
Commercial paper	—		96		—		96
Money market funds	26		—		—		26
Canadian government securities	—		398		—		398
Total	$	26	$	8,560	$	—	$	8,586	(6)
Equity investments (2)	4		—		—		4
Debt securities - current (3)	—		608		—		608		(6)
Debt securities - noncurrent (2)	4		7		—		11
Derivative assets (4)	—		942		—		942		(7)
Total assets	$	33	$	10,117	$	—	$	10,151
Liabilities:
Derivative liabilities (5)	$	—	$	415	$	—	$	415	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3) U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investmentsand sundry assets in the Consolidated Statement of Financial Position at December 31, 2017 were $185 million and$757 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and otherliabilities in the Consolidated Statement of Financial Position at December 31, 2017 were $377 million and $38million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the ConsolidatedStatement of Financial Position, the total derivative asset and liability positions each would have been reduced by $255 million.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2018 and December 31, 2017, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $35,989 million and $39,837 million, and the estimated fair value was $37,636 million and $42,264 million at September 30, 2018 and December 31, 2017, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Available-for-sale Securities

Gross realized gains/losses from the sale of available-for-sale securities during the three and nine month periods ended September 30, 2018 and 2017 were immaterial. After-tax net unrealized holding gains/losses on available-for-sale securities that have been included in other comprehensive income/loss for the three and nine month periods ended September 30, 2018 and 2017 were immaterial.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at September 30, 2018.

Derivative Financial Instruments

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.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2018 and December 31, 2017 was $120 million and $126 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions at September 30, 2018 and December 31, 2017 was $694 million and $942 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $285 million and $255 million at September 30, 2018 and December 31, 2017, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2018 and December 31, 2017, this exposure was reduced by $11 million and $114 million of cash collateral, respectively. There were no non-cash collateral balances in U.S. Treasury securities at September 30, 2018 and December 31, 2017. At September 30, 2018 and December 31, 2017, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $398 million and $572 million, respectively. At September 30, 2018 and December 31, 2017, the net position related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $130 million and $160 million, respectively.

In the Consolidated Statement of Financial Position, 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. No amount was recognized in other receivables at September 30, 2018 or December 31, 2017 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $11 million and $114 million at September 30, 2018 and December 31, 2017, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Statement of Financial Position. No amount was rehypothecated at September 30, 2018 and December 31, 2017.

The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

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, 2018 and December 31, 2017, the total notional amount of the company’s interest rate swaps was $9.9 billion and $9.1 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was approximately 4.3 years and 4.8 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, 2018 and December 31, 2017.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

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. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments designated as net investment hedges was $6.4 billion and $7.0 billion, respectively. At September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of these instruments was approximately 0.2 years at both periods.

Anticipated Royalties and Cost Transactions

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At September 30, 2018 and December 31, 2017, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $9.2 billion and $7.8 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was 0.7 years at both periods.

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $202 million and net gains of $27 million (before taxes), respectively, in AOCI. The company estimates that $199 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately ten years. At September 30, 2018 and December 31, 2017, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $6.5 billion at both periods.

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gains of $141 million and net gains of $42 million (before taxes), respectively, in AOCI. The company estimates that $202 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

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 Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $7.6 billion and $11.5 billion, respectively.

Equity Risk Management

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 selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. 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 Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion at both periods.

Other Risks

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2018 and December 31, 2017, the company did not have any derivative instruments relating to this program outstanding.

The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity at September 30, 2018 and December 31, 2017, as well as for the three and nine months ended September 30, 2018 and 2017, respectively.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	9/30/2018		12/31/2017		Classification	9/30/2018		12/31/2017
Designated as hedging instruments:
Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2	Other accrued expenses and liabilities	$	11	$	—
	Investments and sundry assets	237		459		Other liabilities	145		34
Foreign exchange contracts	Prepaid expenses and other current assets	281		111		Other accrued  expenses and liabilities	52		318
	Investments and sundry assets	145		298		Other liabilities	147		3
	Fair value of derivative assets	$	664	$	870	Fair value of derivative liabilities	$	356	$	355
Not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	18	$	61	Other accrued expenses and liabilities	$	53	$	57
Equity contracts	Prepaid expenses and other current assets	12		12		Other accrued expenses and liabilities	6		3
	Fair value of derivative assets	$	30	$	72	Fair value of derivative liabilities	$	59	$	60
Total derivatives		$	694	$	942		$	415	$	415
Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	—	$	—
Long-term debt		N/A		N/A			6,294		6,471
		N/A		N/A			$	6,294	$	6,471
Total		$	694	$	942		$	6,709	$	6,886

N/A - not applicable

(1) Debt designated as hedging instruments are reported at carrying value.

At September 30, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:

(Dollars in millions)

Line Item in the	Carrying Amount of the			Cumulative Amount of Fair Value Hedging Adjustment
Consolidated Statement of Financial Position	Hedged Item			Included in the Carrying
in which the Hedged Item is Included	Assets/(Liabilities)			Amount of Assets/(Liabilities)
Short-term debt	$	(1,539	)	$	10
Long-term debt	$	(8,567	)	$	(208	)(1)

(1) Includes ($178) million of hedging adjustments on discontinued hedging relationships.

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

The total amounts of income and expense line items presented in the Consolidated Statement of Earnings 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)									Other
For the three months	Cost of		Cost of		Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales		Financing		Expense		Expense			Expense
Total	$	8,040	$	1,625	$	287	$	4,363	$	275		$	191
Gains/(losses) of total hedge activity	1		8		15		47		(63		)	(21		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives						Being Hedged(2)
For the three months ended September 30:	Earnings Line Item	2018			2017			2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(27	)	$	(3	)	$	33	$	20
	Interest expense	(26		)	(3		)	33		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(55		)	(35		)	N/A		N/A
Equity contracts	SG&A expense	40			31			N/A		N/A
Total		$	(69	)	$	(10	)	$	66	$	41

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(46	)	$	(70	)	Interest expense	$	(36	)	$	(7	)	$	—	$	—
							Other (income) and expense	(8		)	64			—		(1		)
							Cost of sales	8			1			—		—
							Cost of services	1			20			—		—
							SG&A expense	7			(6		)	—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			8		0
contracts	86			(507		)	Interest expense	—			—			9		8
Total	$	40		$	(577	)		$	(28	)	$	73		$	18	$	7

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity.

(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4) Instruments in net investment hedges include derivative and non-derivative instruments.

(Dollars in millions)										Other
For the nine months	Cost of		Cost of			Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales			Financing		Expense		Expense			Expense
Total	$	25,519	$	5,216		$	846	$	14,665	$	968		$	530
Gains/(losses) of total hedge activity	29		(15		)	56		24		(449		)	(53		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the nine months ended September 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(138	)	$	37	$	170	$	22
	Interest expense	(128		)	34		157		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(148		)	74		N/A		N/A
Equity contracts	SG&A expense	38			88		N/A		N/A
Total		$	(377	)	$	233	$	327	$	42

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the nine months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(134	)	$	(198	)	Interest expense	$	(108	)	$	(21	)	$	—	$	—
							Other (income) and expense	(301		)	275			—		2
							Cost of sales	(15		)	23			—		—
							Cost of services	29			47			—		—
							SG&A expense	(14		)	23			—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			24		0
contracts	509			(1,513		)	Interest expense	—			—			25		34
Total	$	375		$	(1,712	)		$	(408	)	$	347		$	49	$	37

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity.

(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4) Instruments in net investment hedges include derivative and non-derivative instruments.

For the three and nine months ending September 30, 2018 and 2017, 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.

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Financing Receivables

9 Months Ended

Sep. 30, 2018

Financing Receivables

Financing Receivables

5. Financing Receivables: Financing receivables primarily consist of investment in sales-type and direct financing leases, commercial financing receivables and client loan and installment payment receivables (loans). Investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans) are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loans and installment payment financing contracts are priced independently at competitive market rates.

A summary of the components of the company’s financing receivables is presented as follows:

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At September 30, 2018:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	6,566		$	9,397		$	12,259		$	28,222
Unearned income	(502		)	(30		)	(576		)	(1,108		)
Recorded Investment	$	6,064		$	9,367		$	11,683		$	27,114
Allowance for credit losses	(103		)	(12		)	(210		)	(325		)
Unguaranteed residual value	549			—			—			549
Guaranteed residual value	90			—			—			90
Total financing receivables, net	$	6,599		$	9,355		$	11,473		$	27,427
Current portion	$	2,764		$	9,355		$	7,130		$	19,249
Noncurrent portion	$	3,836		$	—		$	4,343		$	8,179

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At December 31, 2017:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	7,128		$	11,649		$	13,311		$	32,087
Unearned income	(535		)	(32		)	(644		)	(1,210		)
Recorded Investment	$	6,593		$	11,617		$	12,667		$	30,877
Allowance for credit losses	(103		)	(21		)	(211		)	(336		)
Unguaranteed residual value	630			—			—			630
Guaranteed residual value	100			—			—			100
Total financing receivables, net	$	7,220		$	11,596		$	12,456		$	31,272
Current portion	$	2,900		$	11,596		$	7,226		$	21,721
Noncurrent portion	$	4,320		$	—		$	5,230		$	9,550

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $754 million and $773 million at September 30, 2018 and December 31, 2017, respectively.

The company did not have any financing receivables held for sale as of September 30, 2018 and December 31, 2017.

Financing Receivables by Portfolio Segment

The following tables present the recorded investment by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2018 and December 31, 2017. Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

(Dollars in millions)
At September 30, 2018:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,526		$	1,377		$	1,161		$	6,064
Loan receivables	6,118			3,313			2,252			11,683
Ending balance	$	9,644		$	4,690		$	3,413		$	17,747
Recorded investment collectively evaluated for impairment	$	9,484		$	4,634		$	3,338		$	17,456
Recorded investment individually evaluated for impairment	$	161		$	56		$	75		$	291
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	108			52			51			211
Total	$	172		$	61		$	82		$	314
Write-offs	$	(5	)	$	(1	)	$	(3	)	$	(9	)
Recoveries	0			0			2			2
Provision	10			10			2			21
Other*	(9		)	(2		)	(4		)	(15		)
Ending balance at September 30, 2018	$	167		$	68		$	78		$	313
Lease receivables	$	61		$	12		$	29		$	103
Loan receivables	$	106		$	55		$	48		$	210
Related allowance, collectively evaluated for impairment	$	42		$	15		$	5		$	62
Related allowance, individually evaluated for impairment	$	125		$	52		$	73		$	250

* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were $6 million and $3 million, respectively, for the nine months ended September 30, 2018. Provisions for credit losses recorded for lease receivables and loan receivables were $4 million and $17 million, respectively, for the nine months ended September 30, 2018.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $143 million, $56 million and $76 million, respectively, for the three months ended September 30, 2018 and $156 million, $31 million and $101 million, respectively, for the three months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended September 30, 2018 and 2017.

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $136 million, $56 million and $79 million, respectively, for the nine months ended September 30, 2018 and $165 million, $27 million and $131 million, respectively, for the nine months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the nine months ended September 30, 2018 and 2017.

(Dollars in millions)
At December 31, 2017:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,911		$	1,349		$	1,333		$	6,593
Loan receivables	6,715			3,597			2,354			12,667
Ending balance	$	10,626		$	4,946		$	3,687		$	19,259
Recorded investment collectively evaluated for impairment	$	10,497		$	4,889		$	3,604		$	18,990
Recorded investment individually evaluated for impairment	$	129		$	57		$	83		$	269
Allowance for credit losses
Beginning balance at January 1, 2017
Lease receivables	$	54		$	4		$	76		$	133
Loan receivables	169			18			89			276
Total	$	223		$	22		$	165		$	410
Write-offs	$	(51	)	$	(1	)	$	(85	)	$	(137	)
Recoveries	1			1			0			2
Provision	(8		)	29			(4		)	16
Other*	7			11			6			24
Ending balance at December 31, 2017	$	172		$	61		$	82		$	314
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	$	108		$	52		$	51		$	211
Related allowance, collectively evaluated for impairment	$	43		$	15		$	6		$	64
Related allowance, individually evaluated for impairment	$	128		$	46		$	76		$	250

* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were $55 million and $82 million, respectively, for the year ended December 31, 2017.  Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $7 million, respectively, for the year ended December 31, 2017.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following table summarizes information about the recorded investment in lease and loan financing receivables, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At September 30, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,526	$	268	$	213	$	27	$	59
EMEA	1,377		26		10		2		17
Asia Pacific	1,161		36		8		2		29
Total lease receivables	$	6,064	$	330	$	230	$	31	$	105
Americas	$	6,118	$	382	$	276	$	27	$	128
EMEA	3,313		62		23		4		77
Asia Pacific	2,252		78		31		8		49
Total loan receivables	$	11,683	$	523	$	330	$	39	$	254
Total	$	17,747	$	853	$	561	$	70	$	359

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $291 million is individually evaluated for impairment with a related allowance of $250 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2017:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)(3)
Americas	$	3,911	$	239	$	197	$	29	$	44
EMEA	1,349		32		5		3		27
Asia Pacific	1,333		57		23		3		36
Total lease receivables	$	6,593	$	328	$	225	$	36	$	107
Americas	$	6,715	$	345	$	254	$	38	$	96
EMEA	3,597		90		17		0		74
Asia Pacific	2,354		63		12		3		54
Total loan receivables	$	12,667	$	498	$	283	$	41	$	224
Total	$	19,259	$	825	$	507	$	77	$	331

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3) Recast to conform to current period presentation, which includes billed impaired amounts.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

The following tables present the recorded investment net of allowance for credit losses for each class of receivables, by credit quality indicator, at September 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

(Dollars in millions)	Lease Receivables						Loan Receivables
At September 30, 2018:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	385	$	54	$	87	$	668	$	128	$	169
A1 – A3	741		167		434		1,285		400		845
Baa1 – Baa3	796		416		278		1,381		994		541
Ba1 – Ba2	754		432		184		1,308		1,032		358
Ba3 – B1	459		185		88		797		443		172
B2 – B3	298		100		52		517		239		102
Caa – D	32		10		8		55		23		16
Total	$	3,465	$	1,365	$	1,132	$	6,012	$	3,258	$	2,203

(Dollars in millions)	Lease Receivables						Loan Receivables
At December 31, 2017:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	422	$	49	$	68	$	724	$	129	$	120
A1 – A3	855		190		544		1,469		502		961
Baa1 – Baa3	980		371		337		1,683		982		596
Ba1 – Ba2	730		448		184		1,253		1,186		325
Ba3 – B1	443		192		89		760		508		157
B2 – B3	367		77		64		630		204		113
Caa – D	51		13		18		88		34		31
Total	$	3,847	$	1,340	$	1,302	$	6,607	$	3,545	$	2,303

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2018 or for the year ended December 31, 2017.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2018

Stock-Based Compensation

Stock-Based Compensation

6. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2018			2017			2018			2017
Cost	$	19		$	22		$	60		$	68
Selling, general and administrative	95			88			264			277
Research, development and engineering	15			13			47			43
Pre-tax stock-based compensation cost	$	129		$	123		$	371		$	388
Income tax benefits	(29		)	(41		)	(88		)	(128		)
Total net stock-based compensation cost	$	100		$	82		$	283		$	260

Pre-tax stock-based compensation cost for the three months ended September 30, 2018 increased by $6 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($8 million) partially offset by decreases in restricted stock units ($1 million), and the conversion of stock-based awards previously issued by acquired entities ($1 million).

Pre-tax stock-based compensation cost for the nine months ended September 30, 2018 decreased $17 million compared to the corresponding period in the prior year. This was due to decreases related to restricted stock units ($13 million), and the conversion of stock-based awards previously issued by acquired entities ($4 million).

As of September 30, 2018, the total unrecognized compensation cost of $805 million related to non-vested awards was expected to be recognized over a weighted-average period of approximately 2.5 years.

There was no significant capitalized stock-based compensation cost at September 30, 2018 and 2017.

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Segments

9 Months Ended

Sep. 30, 2018

Segments

Segments

7. Segments: The tables below reflect the continuing operations results of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on operating pre-tax income from continuing operations. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance.

SEGMENT INFORMATION

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the three months ended September 30, 2018:
External revenue	$	4,148		$	4,130		$	8,292		$	1,736		$	388		$	18,694
Internal revenue	639			77			240			181			338			1,476
Total revenue	$	4,787		$	4,207		$	8,533		$	1,917		$	726		$	20,170
Pre-tax income from continuing operations	$	1,629		$	579		$	1,075		$	209		$	308		$	3,801
Revenue year-to-year change	(4.8		)%	0.5		%	(1.0		)%	(1.6		)%	4.0		%	(1.5		)%
Pre-tax income year-to-year change	(0.9		)%	30.9		%	(8.6		)%	(37.9		)%	26.9		%	(1.1		)%
Pre-tax income margin	34.0		%	13.8		%	12.6		%	10.9		%	42.5		%	18.8		%
For the three months ended September 30, 2017:
External revenue	$	4,400		$	4,093		$	8,457		$	1,721		$	427		$	19,098
Internal revenue	629			92			164			227			272			1,384
Total revenue	$	5,030		$	4,185		$	8,621		$	1,948		$	698		$	20,482
Pre-tax income from continuing operations *	$	1,643		$	442		$	1,177		$	337		$	243		$	3,843
Pre-tax income margin *	32.7		%	10.6		%	13.7		%	17.3		%	34.8		%	18.8		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Reconciliations to IBM as Reported:

(Dollars in millions)
For the three months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	20,170		$	20,482
Eliminations of internal transactions	(1,476		)	(1,384		)
Other revenue	62			56
Total consolidated revenue	$	18,756		$	19,153
Pre-tax income from continuing operations:
Total reportable segments	$	3,801		$	3,843	*
Amortization of acquired intangible assets	(207		)	(238		)
Acquisition-related (charges)/income	(2		)	0
Non-operating retirement-related (costs)/income	(389		)	(273		)*
Eliminations of internal transactions	(116		)	(126		)
Unallocated corporate amounts	(91		)	(141		)
Total pre-tax income from continuing operations	$	2,996		$	3,065

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

SEGMENT INFORMATION

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the nine months ended September 30, 2018:
External revenue	$	13,027		$	12,495		$	25,533		$	5,412		$	1,188		$	57,655
Internal revenue	2,122			249			550			576			1,240			4,738
Total revenue	$	15,149		$	12,744		$	26,083		$	5,989		$	2,428		$	62,392
Pre-tax income from continuing operations	$	4,718		$	1,109		$	2,395		$	352		$	1,042		$	9,616
Revenue year-to-year change	0.8		%	2.2		%	2.0		%	10.2		%	11.8		%	2.8		%
Pre-tax income year-to-year change	4.3		%	7.1		%	(15.8		)%	58.8		%	24.8		%	1.7		%
Pre-tax income margin	31.1		%	8.7		%	9.2		%	5.9		%	42.9		%	15.4		%
For the nine months ended September 30, 2017:
External revenue	$	13,021		$	12,196		$	25,079		$	4,863		$	1,246		$	56,405
Internal revenue	2,001			271			497			571			925			4,265
Total revenue	$	15,022		$	12,467		$	25,576		$	5,434		$	2,171		$	60,670
Pre-tax income from continuing operations *	$	4,522		$	1,035		$	2,845		$	222		$	835		$	9,459
Pre-tax income/(loss) margin *	30.1		%	8.3		%	11.1		%	4.1		%	38.5		%	15.6		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Reconciliations to IBM as Reported:

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	62,392		$	60,670
Eliminations of internal transactions	(4,738		)	(4,265		)
Other revenue	176			192
Total consolidated revenue	$	57,830		$	56,597
Pre-tax income from continuing operations:
Total reportable segments	$	9,616		$	9,459	*
Amortization of acquired intangible assets	(613		)	(731		)
Acquisition-related (charges)/income	(3		)	(19		)
Non-operating retirement-related (costs)/income	(1,185		)	(969		)*
Eliminations of internal transactions	(625		)	(515		)
Unallocated corporate amounts	(283		)	(294		)
Total pre-tax income from continuing operations	$	6,908		$	6,931

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

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Equity Activity

9 Months Ended

Sep. 30, 2018

Equity Activity

Equity Activity

8. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(22	)	$	(22	)	$	(44	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(46	)	$	11		$	(35	)
Reclassification of (gains)/losses to:
Cost of sales	(8		)	3			(6		)
Cost of services	(1		)	0			(1		)
SG&A expense	(7		)	2			(5		)
Other (income) and expense	8			(2		)	6
Interest expense	36			(9		)	27
Total unrealized gains/(losses) on cash flow hedges	$	(18	)	$	4		$	(14	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	(1		)	1			(1		)
Curtailments and settlements	2			0			1
Amortization of prior service (credits)/costs	(18		)	5			(13		)
Amortization of net (gains)/losses	737			(196		)	540
Total retirement-related benefit plans	$	719		$	(191	)	$	527
Other comprehensive income/(loss)	$	678		$	(209	)	$	470

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	89		$	195		$	284
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1	)	$	1		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(70	)	$	20		$	(50	)
Reclassification of (gains)/losses to:
Cost of sales	(1		)	1			(1		)
Cost of services	(20		)	8			(12		)
SG&A expense	6			(1		)	4
Other (income) and expense	(64		)	25			(39		)
Interest expense	7			(3		)	4
Total unrealized gains/(losses) on cash flow hedges	$	(143	)	$	49		$	(94	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	1			0			1
Curtailments and settlements	2			(1		)	1
Amortization of prior service (credits)/costs	(22		)	7			(15		)
Amortization of net (gains)/losses	733			(242		)	491
Total retirement-related benefit plans	$	713		$	(235	)	$	479
Other comprehensive income/(loss)	$	658		$	11		$	669

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(535	)	$	(128	)	$	(663	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(1	)
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(134	)	$	39		$	(95	)
Reclassification of (gains)/losses to:
Cost of sales	15			(4		)	11
Cost of services	(29		)	7			(22		)
SG&A expense	14			(4		)	10
Other (income) and expense	301			(76		)	225
Interest expense	108			(27		)	81
Total unrealized gains/(losses) on cash flow hedges	$	274		$	(63	)	$	210
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	(1	)	$	0		$	(1	)
Net (losses)/gains arising during the period	83			(22		)	60
Curtailments and settlements	7			(2		)	5
Amortization of prior service (credits)/costs	(55		)	15			(40		)
Amortization of net (gains)/losses	2,231			(607		)	1,624
Total retirement-related benefit plans	$	2,264		$	(616	)	$	1,648
Other comprehensive income/(loss)	$	2,001		$	(807	)	$	1,194

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	213		$	581		$	794
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	2		$	0		$	1
Reclassification of (gains)/losses to other (income) and expense		1			0			0
Total net changes related to available-for-sale securities	$	2		$	0		$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(198	)	$	53		$	(146	)
Reclassification of (gains)/losses to:
Cost of sales	(23		)	6			(17		)
Cost of services	(47		)	18			(29		)
SG&A expense	(23		)	6			(17		)
Other (income) and expense	(275		)	106			(169		)
Interest expense	21			(8		)	13
Total unrealized gains/(losses) on cash flow hedges	$	(545	)	$	180		$	(365	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	106			(36		)	70
Curtailments and settlements	3			(1		)	2
Amortization of prior service (credits)/costs	(66		)	23			(43		)
Amortization of net (gains)/losses	2,156			(739		)	1,417
Total retirement-related benefit plans	$	2,200		$	(754	)	$	1,446
Other comprehensive income/(loss)	$	1,869		$	7		$	1,877

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2018	$	35		$	(2,834	)	$	(23,796	)	$	3		$	(26,592	)
Cumulative effect of a change in accounting principle **	5			46			(2,471		)	(2)			(2,422		)
Other comprehensive income before reclassifications	(95		)	(663		)	65			(1		)	(695		)
Amount reclassified from accumulated other comprehensive income	305			—			1,584			—			1,889
Total change for the period	$	210		$	(663	)	$	1,648		$	(1	)	$	1,194
September 30, 2018	$	250		$	(3,451	)	$	(24,618	)	$	0		$	(27,820	)

*    Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

**  Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, “Accounting Changes”.

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2017	$	319		$	(3,603	)	$	(26,116	)	$	2	$	(29,398	)
Other comprehensive income before reclassifications	(146		)	794			72			1		721
Amount reclassified from accumulated other comprehensive income	(219		)	—			1,374			0		1,155
Total change for the period	$	(365	)	$	794		$	1,446		$	2	$	1,877
September 30, 2017	$	(46	)	$	(2,809	)	$	(24,670	)	$	4	$	(27,521	)

*  Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Retirement-Related Benefits

9 Months Ended

Sep. 30, 2018

Retirement-Related Benefits

Retirement-Related Benefits

9. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the pre-tax cost for all retirement-related plans.

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	705	$	592	19.0	%
Nonpension postretirement plans — cost	49		61		(19.5	)
Total	$	754	$	653	15.5	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	2,152	$	1,915	12.3	%
Nonpension postretirement plans — cost	149		182		(18.3	)
Total	$	2,300	$	2,097	9.7	%

The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	104		$	106
Interest cost (1)	430			478			204			215
Expected return on plan assets (1)	(675		)	(753		)	(330		)	(340		)
Amortization of prior service costs/(credits) (1)	4			4			(20		)	(25		)
Recognized actuarial losses (1)	381			334			346			387
Curtailments and settlements (1)	—			—			2			2
Multi-employer plans	—			—			9			11
Other costs (1)	—			—			5			(85		)
Total net periodic pension (income)/cost of defined benefit plans	$	140		$	63		$	318		$	271
Cost of defined contribution plans	152			156			95			102
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	292		$	219		$	413		$	373

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	309		$	308
Interest cost (1)	1,289			1,435			630			622
Expected return on plan assets (1)	(2,026		)	(2,260		)	(1,017		)	(985		)
Amortization of prior service costs/(credits) (1)	12			12			(62		)	(73		)
Recognized actuarial losses (1)	1,144			1,003			1,057			1,120
Curtailments and settlements (1)	—			—			7			3
Multi-employer plans	—			—			29			30
Other costs (1)	—			—			16			(76		)
Total net periodic pension (income)/cost of defined benefit plans	$	419		$	190		$	969		$	950
Cost of defined contribution plans	457			475			306			301
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	876		$	665		$	1,276		$	1,250

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

On October 12, 2012, the High Court in London issued a ruling against IBM United Kingdom Limited and IBM United Kingdom Holdings Limited, both wholly-owned subsidiaries of the company, in litigation involving one of IBM UK’s defined benefit plans. The company recorded a pre-tax charge in SG&A expense of $162 million in the fourth quarter of 2012. The final Court of Appeal ruling was received in August 2017, and as a result the company adjusted its obligation under the plan and recorded a gain of $91 million in SG&A expense in the Consolidated Statement of Earnings for the three and nine months ended September 30, 2017. This gain is reflected in “Non-US Plans - Other costs” in the tables above.

In 2018, the company expects to contribute approximately $400 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in the UK, Japan and Spain. This amount generally represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first nine months of 2018 were $275 million, of which $117 million was in cash and $157 million in U.S. Treasury securities. Total contributions to the non-U.S. plans in the first nine months of 2017 were $301 million, of which $124 million was in cash and $176 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

The following table provides the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	3		$	4		$	1		$	1
Interest cost (1)	33			38			11			14
Expected return on plan assets (1)	—			—			(1		)	(2		)
Amortization of prior service costs/(credits) (1)	(2		)	(2		)	0			0
Recognized actuarial losses (1)	2			5			1			2
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	37		$	45		$	12		$	16

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	10		$	11		$	4		$	4
Interest cost (1)	99			115			34			43
Expected return on plan assets (1)	—			—			(4		)	(6		)
Amortization of prior service costs/(credits) (1)	(6		)	(6		)	0			0
Recognized actuarial losses (1)	7			15			4			5
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	111		$	135		$	38		$	47

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

The company contributed $275 million in U.S. Treasury securities to the U.S. nonpension postretirement benefit plan during the nine months ended September 30, 2018, and $259 million in U.S. Treasury securities during the nine months ended September 30, 2017. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

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Acquisitions

9 Months Ended

Sep. 30, 2018

Acquisitions

Acquisitions

10. Acquisitions: During the nine months ended September 30, 2018, the company completed two acquisitions at an aggregate cost of $49 million.

The Cognitive Solutions segment completed the acquisition of one privately held business: in the second quarter, Armanta, Inc. (Armanta). The Global Business Services segment completed the acquisition of one privately held business: in the second quarter, Oniqua Holdings Pty Ltd. (Oniqua).

Each acquisition is expected to enhance the company’s portfolio of product and services capabilities. Armanta is a provider of aggregation and analytics software to financial institutions, enabling data aggregation across multiple systems in near real-time speed, enhancing decision-making and improving regulatory compliance. Oniqua is a global innovator in maintenance-repair-operate inventory optimization solutions and services for asset-intensive industries. All of these acquisitions were for 100 percent of the acquired businesses.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The acquisitions did not have a material impact in the Consolidated Financial Statements.

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Intangible Assets Including Goodwill

9 Months Ended

Sep. 30, 2018

Intangible Assets Including Goodwill

Intangible Assets Including Goodwill

11. Intangible Assets Including Goodwill:  The following table details the company’s intangible asset balances by major asset class.

	At September 30, 2018
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,572	$	(784	)	$	788
Client relationships	2,273		(1,247		)	1,026
Completed technology	2,509		(1,560		)	949
Patents/trademarks	661		(324		)	337
Other*	56		(21		)	34
Total	$	7,071	$	(3,937	)	$	3,134

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

	At December 31, 2017
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,600	$	(790	)	$	810
Client relationships	2,358		(1,080		)	1,278
Completed technology	2,586		(1,376		)	1,210
Patents/trademarks	668		(256		)	413
Other*	47		(16		)	31
Total	$	7,260	$	(3,518	)	$	3,742

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased $608 million during the first nine months of 2018, primarily due to intangible asset amortization, partially offset by additions resulting from capitalized software. The aggregate intangible amortization expense was $348 million and $1,031 million for the third quarter and first nine months of 2018, respectively, versus $383 million and $1,161 million for the third quarter and first nine months of 2017, respectively. In addition, in the first nine months of 2018, the company retired $612 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at September 30, 2018:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2018 (for Q4)	$	140	$	198	$	338
2019	393		676		1,070
2020	203		564		768
2021	51		451		502
2022	—		382		382

The change in the goodwill balances by reportable segment, for the nine months ended September 30, 2018 and for the year ended December 31, 2017 are as follows:

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/18		Additions		Adjustments			Divestitures			Adjustments*			9/30/18
Cognitive Solutions	$	19,665	$	10	$	0		$	(1	)	$	(148	)	$	19,526
Global Business Services	4,813		24		(4		)	—			(51		)	4,782
Technology Services & Cloud Platforms	10,447		—		0			—			(86		)	10,361
Systems	1,862		—		—			—			(6		)	1,857
Total	$	36,788	$	34	$	(4	)	$	(1	)	$	(291	)	$	36,526

* Primarily driven by foreign currency translation.

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/17		Additions		Adjustments			Divestitures			Adjustments*		12/31/17
Cognitive Solutions	$	19,484	$	3	$	(38	)	$	(20	)	$	235	$	19,665
Global Business Services	4,607		—		2			—			204		4,813
Technology Services & Cloud Platforms	10,258		13		(2		)	—			179		10,447
Systems	1,850		—		0			—			13		1,862
Total	$	36,199	$	16	$	(38	)	$	(20	)	$	631	$	36,788

* Primarily driven by foreign currency translation.

There were no goodwill impairment losses recorded during the first nine months of 2018 or the full year of 2017 and the company has no accumulated impairment losses.

Purchase price adjustments recorded in the first nine months of 2018 and full year 2017 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded during the first nine months of 2018 were not material. Net purchase price adjustments of $38 million were recorded during 2017, with the primary drivers being deferred tax assets, other taxes payable and other current liabilities associated with the Truven Health Analytics, Inc. and The Weather Company acquisitions.

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Borrowings

9 Months Ended

Sep. 30, 2018

Borrowings

Borrowings

12. Borrowings:

Short-Term Debt

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Commercial paper	$	3,986	$	1,496
Short-term loans	173		276
Long-term debt — current maturities	6,773		5,214
Total	$	10,932	$	6,987

The weighted-average interest rate for commercial paper at September 30, 2018 and December 31, 2017 was 2.2 percent and 1.5 percent, respectively. The weighted-average interest rate for short-term loans was 8.3 percent and 8.8 percent at September 30, 2018 and December 31, 2017, respectively.

Long-Term Debt

Pre-Swap Borrowing

		Balance		Balance
(Dollars in millions)	Maturities	9/30/2018		12/31/2017
U.S. dollar debt (weighted-average interest rate at September 30, 2018):*
7.6%	2018	$	1,634	$	4,640
2.9%	2019	5,474		5,540
2.2%	2020	3,347		3,416
2.5%	2021	5,001		4,129
2.4%	2022	3,533		3,481
3.3%	2023	2,395		1,547
3.6%	2024	2,013		2,000
7.0%	2025	600		600
3.5%	2026	1,350		1,350
4.7%	2027	969		969
6.5%	2028	313		313
3.7%	2030	32		—
5.9%	2032	600		600
8.0%	2038	83		83
5.6%	2039	745		745
4.0%	2042	1,107		1,107
7.0%	2045	27		27
4.7%	2046	650		650
7.1%	2096	316		316
		$	30,192	$	31,515
Other currencies (average interest rate at September 30, 2018, in parentheses):*
Euros (1.5%)	2019–2029	$	10,162	$	10,502
Pound sterling (2.7%)	2020–2022	1,369		1,420
Japanese yen (0.3%)	2022–2026	1,281		1,291
Other (6.6%)	2019–2022	446		717
		$	43,450	$	45,445
Less: net unamortized discount		808		826
Less: net unamortized debt issuance costs		79		93
Add: fair value adjustment**		198		526
		$	42,762	$	45,052
Less: current maturities		6,773		5,214
Total		$	35,989	$	39,837

*Includes notes, debentures, bank loans, secured borrowings and capital lease obligations.

**   The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

During the third quarter of 2017, IBM Credit LLC, a wholly owned subsidiary of the company, filed a shelf registration statement with the Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. In 2017, IBM Credit LLC issued fixed- and floating-rate debt securities in the aggregate amount of $3.0 billion with maturity dates ranging from 2019 to 2022. During the first quarter of 2018, IBM Credit LLC issued fixed- and floating-rate debt securities in the aggregate amount of $2.0 billion with maturity dates ranging from 2021 to 2023. This debt is included in the long-term debt table above.

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, 2018, are as follows:

(Dollars in millions)	Total
2018 (for Q4)	$	1,724
2019	7,034
2020	6,286
2021	6,139
2022	4,320
2023 and beyond	17,946
Total	$	43,450

Interest on Debt

(Dollars in millions)
For the nine months ended September 30:	2018		2017
Cost of financing	$	568	$	496
Interest expense	530		451
Interest capitalized	3		(1		)
Total interest paid and accrued	$	1,101	$	947

Lines of Credit

On July 19, 2018, the company amended its existing $10.25 billion Five-Year Credit Agreement. In addition, the company and IBM Credit LLC entered into a new $2.5 billion, 364-Day Credit Agreement, to replace the maturing $2.5 billion, 364-Day agreement, and also amended the existing $2.5 billion Three-Year Credit Agreement. The amended Five-Year and Three-Year credit agreements included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity dates. The new maturity dates for the Five-Year and Three-Year Credit Agreements are July 20, 2023 and July 20, 2021, respectively. Each of the facility sizes remained unchanged.

As of September 30, 2018, there were no borrowings by the company, or its subsidiaries, under these credit facilities.

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Contingencies

9 Months Ended

Sep. 30, 2018

Contingencies

Contingencies

13. Contingencies: As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended September 30, 2018 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons.

Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

The following is a summary of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the dismissal of all but one of SCO’s remaining claims, which was remanded to the Federal Court in Utah.

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court. On August 7, 2017, the Indiana Superior Court awarded the State $128 million, which it then offset against IBM’s previously affirmed award of $50 million, resulting in a $78 million award to the State, plus interest. On September 28, 2018, the Indiana Court of Appeals affirmed the Superior Court’s $78 million award to the State, but reversed the Superior Court by awarding IBM prejudgment interest on its previously affirmed $50 million award. Both parties have appealed to the Indiana Supreme Court and the matter remains pending.

On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance benefits programs. The matter is pending in a Pennsylvania court.

On October 29, 2013, Bridgestone Americas, Inc. (Bridgestone) sued IBM regarding a 2009 contract for the implementation of an SAP-based, enterprise-wide order management system. IBM counterclaimed against Bridgestone and its parent, Bridgestone Corp.  IBM and Bridgestone have resolved the case and all claims have been dismissed.

Following the 2017 final judgment of the Appeal Court in London holding that IBM UK acted lawfully in 2010 in closing its UK defined benefit plans to future accruals for most participants and in implementing a new retirement policy, the Employment Tribunal in Southampton UK is expected to address approximately 290 individual actions alleging constructive dismissal and age discrimination brought against IBM UK in 2010 by employees who left the company at that time. The individual actions were previously stayed.

In May 2015, a putative class action was commenced in the United States District Court for the Southern District of New York related to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business, alleging violations of the Employee Retirement Income Security Act (“ERISA”). Management’s Retirement Plans Committee and three current or former IBM executives are named as defendants. On September 29, 2017, the Court granted the defendants’ motion to dismiss the first amended complaint. Plaintiffs appealed to the Second Circuit Court of Appeals and the matter remains pending.

In August 2015, IBM learned that the SEC was conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company cooperated with the SEC in this matter. In May 2018, the SEC informed IBM that based on the information to date, it closed its investigation into this matter without pursuing any enforcement action against the company.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $900 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

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Commitments

9 Months Ended

Sep. 30, 2018

Commitments

Commitments

14. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $8,537 million and $8,111 million at September 30, 2018 and December 31, 2017, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $3,798 million and $3,569 million at September 30, 2018 and December 31, 2017, respectively.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $15 million and $19 million at September 30, 2018 and December 31, 2017, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty are presented in the following tables.

Standard Warranty Liability

(Dollars in millions)	2018			2017
Balance at January 1	$	152		$	156
Current period accruals	84			107
Accrual adjustments to reflect actual experience	(31		)	(3		)
Charges incurred	(93		)	(126		)
Balance at September 30	$	112		$	134

Extended Warranty Liability

(Dollars in millions)	2018			2017
Aggregate deferred revenue at January 1	$	566		$	531
Revenue deferred for new extended warranty contracts	138			175
Amortization of deferred revenue	(178		)	(198		)
Other*	(12		)	24
Aggregate deferred revenue at September 30	$	514		$	533
Current portion	$	242		$	258
Noncurrent portion	$	273		$	275

* Other primarily consists of foreign currency translation adjustments.

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Taxes

9 Months Ended

Sep. 30, 2018

Taxes

Taxes

15.  Taxes: For the three months ended September 30, 2018, the company reported a provision for income taxes of $304 million and an effective tax rate of 10.2 percent, compared to a provision of $339 million and an effective tax rate of 11.0 percent for the three months ended September 30, 2017. For the nine-month period ended September 30, 2018, the company reported a provision for income taxes of $138 million and an effective tax rate of 2.0 percent. The year-to-date effective rate was primarily driven by the resolution in the first quarter of certain tax matters related to the ongoing U.S. federal audit of the company’s 2013-2014 tax returns, the completion of the U.S. federal audit of amended tax returns filed for prior years and a benefit attributable to a tax incentive claim approved by the Internal Revenue Service (IRS) in the third quarter. For the nine months ended September 30, 2017, the company reported a provision for income taxes of $120 million, and its effective tax rate was 1.7 percent, primarily as a result of discrete tax benefits.

The company’s U.S. income tax returns for 2013 and 2014 continue to be examined by the IRS with specific focus on certain cross-border transactions in 2013. Although the IRS could propose additional adjustments, the company believes it is adequately reserved on these issues. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2013. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016.  The company anticipates that this audit will be completed in 2020.

The amount of unrecognized tax benefits at December 31, 2017 decreased $892 million in the first nine months of 2018 to $6,139 million. The decrease was primarily driven by the resolution of certain tax matters in the first quarter related to the U.S. audits. The liability at September 30, 2018 of $6,139 million can be reduced by $599 million of offsetting tax benefits associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments and state income taxes. The net amount of $5,540 million, if recognized, would favorably affect the company’s effective tax rate.

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of September 30, 2018, the company has recorded $636 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. The company believes it will prevail on these matters.

U.S. Tax Reform

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform resulted in the company recording a provisional tax expense charge of $5,475 million in the fourth-quarter and year-ended December 31, 2017. This charge was the result of the one-time U.S. transition tax and any foreign tax costs on undistributed foreign earnings, as well as the remeasurement of deferred tax balances to the new U.S. federal tax rate.

All components of the provisional charge of $5,475 million were based on the company’s estimates as of December 31, 2017. Specifically, the transition tax, any foreign tax costs, as well as the remeasurement of deferred tax balances are provisional and were calculated based on existing tax law and the best information available as of the date of estimate. The effect of U.S. tax reform changes on deferred tax assets and liabilities was a benefit of $270 million and was included in the one-time charge. An additional provisional charge of $107 million was recorded in the first quarter as a result of IRS guidance issued in January 2018 and a benefit of $14 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment, conclusion of the effects of the “Global Intangible Low-Taxed Income” (“GILTI”) provisions, further refinement of the company’s calculations, additional guidance that may be issued by the U.S. government, among other items. The company is still evaluating the Act’s GILTI provisions and has not yet elected an accounting policy. The company has not completed its assessment and the tax charge remains provisional as of September 30, 2018.

The charge will be finalized in the fourth quarter of 2018 which is within the 12-month time limit provided by the SEC.

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Earnings Per Share of Common Stock

9 Months Ended

Sep. 30, 2018

Earnings Per Share of Common Stock

Earnings Per Share of Common Stock

16. Earnings Per Share of Common Stock: The following tables provide the computation of basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2018 and 2017.

	For the Three Months Ended
	September 30, 2018		September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	911,152,848		929,437,441
Add – Incremental shares under stock-based compensation plans	2,566,139		2,236,234
Add – Incremental shares associated with contingently issuable shares	1,493,644		1,553,754
Number of shares on which diluted earnings per share is calculated	915,212,631		933,227,429
Income from continuing operations (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax (millions)	2		0
Net income on which basic earnings per share is calculated (millions)	$	2,694	$	2,726
Income from continuing operations (millions)	$	2,692	$	2,726
Net income applicable to contingently issuable shares (millions)	—		0
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	2		0
Net income on which diluted earnings per share is calculated (millions)	$	2,694	$	2,726
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	2.94	$	2.92
Discontinued operations	0.00		0.00
Total	$	2.94	$	2.92
Basic
Continuing operations	$	2.95	$	2.93
Discontinued operations	0.00		0.00
Total	$	2.95	$	2.93

Stock options to purchase 388,335 shares and 399,844 shares were outstanding as of September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	915,632,501			935,600,777
Add – Incremental shares under stock compensation plans	3,000,429			3,213,758
Add – Incremental shares associated with contingently issuable shares	1,373,960			1,394,930
Number of shares on which diluted earnings per share is calculated	920,006,890			940,209,466
Income from continuing operations (millions)	$	6,770		$	6,811
Income/(loss) from discontinued operations, net of tax (millions)	7			(3		)
Net income on which basic earnings per share is calculated (millions)	$	6,777		$	6,807
Income from continuing operations (millions)	$	6,770		$	6,811
Net income applicable to contingently issuable shares (millions)	(1		)	(2		)
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	6,769		$	6,809
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	7			(3		)
Net income on which diluted earnings per share is calculated (millions)	$	6,776		$	6,806
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	7.36		$	7.24
Discontinued operations	0.01			0.00
Total	$	7.37		$	7.24
Basic
Continuing operations	$	7.39		$	7.28
Discontinued operations	0.01			0.00
Total	$	7.40		$	7.28

Stock options to purchase 264,628 shares and 146,795 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective periods was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

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Subsequent Events

9 Months Ended

Sep. 30, 2018

Subsequent Events

Subsequent Events

17. Subsequent Events: On October 30, 2018, the company announced that the Board of Directors approved a quarterly dividend of $1.57 per common share. The dividend is payable December 10, 2018 to shareholders of record on November 9, 2018.

      On October 30, 2018, the company announced that the Board of Directors authorized $4.0 billion in additional funds for use in the company’s stock repurchase program. 

      On October 28, 2018, the company announced its intent to acquire all of the outstanding shares of Red Hat, Inc. (Red Hat).  The combination of Red Hat’s vast portfolio of open-source technologies, innovative cloud development platform and developer community combined with IBM’s innovative hybrid cloud technology, industry expertise and commitment to data, trust and security will bring clients the hybrid, multi-cloud capabilities they are demanding.  Under the terms of the definitive agreement, Red Hat shareholders will receive $190 per share in cash.  The transaction values Red Hat at approximately $34 billion. The transaction is subject to customary closing conditions, including regulatory clearance and approval by the Red Hat shareholders.

      In connection with the proposed transaction, IBM has entered into a commitment letter pursuant to which certain banks have committed to provide a 364-day bridge loan credit facility in an amount of $20 billion in support of the transaction. At signing, the company has ample cash, credit and bridge lines to secure the transaction financing. The company intends to close the transaction through a combination of cash and debt. IBM will continue with a disciplined financial policy and is committed to continued dividend growth and maintaining strong investment grade credit ratings. As a result of the proposed transaction, the company expects the major rating agencies to downgrade IBM and IBM Credit LLC long-term debt securities by one rating. Standard and Poor’s has lowered IBM and IBM Credit’s long-term debt rating one notch to A from A+, with no change to the short-term debt rating of A-1. The other major rating agencies are reviewing the companies’ ratings. In addition, the company intends to suspend its share repurchase program in 2020 and 2021.

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Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue under the revenue standard effective January 1, 2018, see note 3, “Revenue Recognition”. Also, refer to the company’s 2017 Annual Report on pages 70 to 73, for a discussion of the company’s critical accounting estimates.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2017 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

Accounting Changes

New Standards to be Implemented

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance on a customer’s accounting for implementation costs incurred in cloud-computing arrangements that are hosted by a vendor. Certain types of implementation costs should be capitalized and amortized over the term of the hosting arrangement. The guidance is effective January 1, 2020 and early adoption is permitted. The company will adopt the guidance on January 1, 2019 on a prospective basis, and does not expect the guidance to have a material impact on the consolidated financial results.

In August 2018, the FASB issued guidance which changes the disclosure requirements for fair value measurements and defined benefit plans. The guidance is effective for each of the topics on January 1, 2020 and January 1, 2021, respectively, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results.

In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established that is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.  The guidance is effective January 1, 2020 with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date.

The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. The company expects to elect the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and nonlease components for all asset classes. The company will make a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. The other practical expedients available under the guidance are being evaluated.

A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company has made significant progress in these areas as well as in gathering the necessary data elements for the lease population. A system provider has been selected, with system configuration, testing and implementation underway. The company continues to evaluate the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. As a lessee, the company’s operating lease commitments were $6.6 billion at December 31, 2017.

From a lessor perspective, due to changes in lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount that would have been reclassified from lease receivables to loan receivables in 2017, under the application of this new guidance, would have been approximately $450 million. Additionally, the company does not expect the removal of third-party residual value guarantee insurance in the lease classification test to have a material impact on the Consolidated Statement of Earnings.

The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change.

Standards Implemented

In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act (“U.S. tax reform”) from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established cease to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption on January 1, 2018, $2,420 million was reclassified from AOCI to retained earnings, primarily comprised of amounts relating to retirement-related benefit plans.

In August 2017, the FASB issued guidance to simplify the application of hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.

In March 2017, the FASB issued guidance that impacts the presentation of net periodic pension and postretirement benefit costs (“net benefit cost”). Under the guidance, the service cost component of net benefit cost continues to be presented within cost, selling, general and administrative expense and research, development and engineering expense in the Consolidated Statement of Earnings, unless eligible for capitalization. The other components of net benefit cost are presented separately from service cost within other (income) and expense in the Consolidated Statement of Earnings. The guidance was effective January 1, 2018 with early adoption permitted. The company adopted the guidance as of the effective date. The guidance is primarily a change in financial statement presentation and did not have a material impact in the consolidated financial results. This presentation change was applied retrospectively upon adoption. For the three months ended September 30, 2017, $181 million, $42 million, and $51 million was recast from total cost, selling, general and administrative (SG&A) expense, and research, development, and engineering (RD&E) expense, respectively, into other (income) and expense.  For the nine months ended September 30, 2017, $529 million, $293 million, and $148 million was recast from total cost, SG&A expense, and RD&E expense, respectively, into other (income) and expense. Refer to note 9, “Retirement-Related Benefits,” for additional information.

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance was effective January 1, 2018 and early adoption was not permitted except for limited provisions. The company adopted the guidance on the effective date. Certain equity investments are now measured at fair value with changes recognized in net income. The amendment also simplified the impairment test of equity investments that lack readily determinable fair value. The guidance did not have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The company adopted the guidance effective January 1, 2018 using the modified retrospective transition method. At adoption, $557 million was reclassified from notes and accounts receivable-trade and deferred income-current to prepaid expenses and other current assets to establish the opening balance for net contract assets. In-scope sales commission costs previously recorded in the Consolidated Statement of Earnings were capitalized in deferred costs in accordance with the transition guidance, in the amount of $737 million. Deferred income of $29 million was recorded for certain software licenses that will be recognized over time versus at a point in time under previous guidance. Additionally, net deferred taxes were reduced by $184 million in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $524 million. The guidance did not have a material impact in the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company expects revenue recognition for its broad portfolio of hardware, software, and services offerings to remain largely unchanged. Refer to note 3, “Revenue Recognition,” for additional information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In January 2017, the FASB issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance effective January 1, 2017, and it did not have a material impact in the consolidated financial results.

In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance was effective January 1, 2018 and early adoption was permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net increase to retained earnings of $102 million. In January 2017, the company had one transaction that generated a $582 million benefit to income tax expense, income from continuing operations and net income and a benefit to both basic and diluted earnings per share of $0.62 per share for the nine months ended September 30, 2017. No transactions impacted the consolidated financial results for the nine months ended September 30, 2018. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.

In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective and adopted by the company on January 1, 2017, and it did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share-based awards compared to grant date, however these impacts are not expected to be material. These impacts are recorded on a prospective basis. The company continues to estimate forfeitures in conjunction with measuring stock-based compensation cost. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. The FASB also issued guidance in May 2017 and June 2018, which relates to the accounting for modifications of share-based payment awards and accounting for share-based payments issued to non-employees, respectively. The company adopted the guidance for modifications in the second quarter of 2017, and guidance for non-employees’ payments in the second quarter of 2018. The guidance had no impact in the consolidated financial results.

Revenue Recognition

Effective January 1, 2018, the company adopted the new accounting standard related to the recognition of revenue in contracts with customers under the modified retrospective transition method.  This method was applied to contracts that were not complete as of the date of initial application. The following is a summary of new and/or revised significant accounting policies, which relate primarily to revenue and cost recognition. Refer to note A, “Significant Accounting Policies,” in the company’s 2017 Annual Report for the policies in effect for revenue and cost prior to January 1, 2018 and for all other significant accounting policies.

Revenue

The company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, the company estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. The company’s contracts may include terms that could cause variability in the transaction price, including, for example, rebates, volume discounts, service-level penalties, and performance bonuses or other forms of contingent revenue.

The company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The company may not be able to reliably estimate contingent revenue in certain long-term arrangements due to uncertainties that are not expected to be resolved for a long period of time or when the company’s experience with similar types of contracts is limited. The company’s arrangements infrequently include contingent revenue. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the company, taking into consideration the type of client, the type of transaction and the specific facts and circumstances of each arrangement.

The company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days. Invoices are generally issued as control transfers and/or as services are rendered. Additionally, in determining the transaction price, the company adjusts the promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of payments agreed to by the parties to the contract provide the client or the company with a significant benefit of financing, in which case the contract contains a significant financing component. As a practical expedient, the company does not account for significant financing components if the period between when the company transfers the promised product or service to the client and when the client pays for that product or service will be one year or less. Most arrangements that contain a financing component are financed through the company’s Global Financing business and include explicit financing terms.

The company may include subcontractor services or third-party vendor equipment or software in certain integrated services arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is the principal for the transaction. To determine whether the company is an agent or principal, the company considers whether it obtains control of the products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most notably whether the company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.

The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has economic substance apart from the company and the reseller is considered the principal for the transaction with the end-user client.

The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.

In addition to the aforementioned general policies, the following are the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue.

Arrangements with Multiple Performance Obligations

The company’s global capabilities as a cognitive solutions and cloud platform company include services, software, hardware and related financing. The company enters into revenue arrangements that may consist of any combination of these products and services based on the needs of its clients. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements may also include financing provided by the company. These arrangements consist of multiple products and services, whereby the hardware and software may be delivered in one period and the software support and hardware maintenance services are delivered over time. In another example, the company may assist the client in building and running an enterprise information technology (IT) environment utilizing a private cloud on a long-term basis and the client periodically purchases hardware and/or software products from the company to upgrade or expand the facility. The services delivered on the cloud are provided on a continuous basis across multiple reporting periods, and the hardware and software products are provided in each period the products are purchased.

The company continues to build new products and offerings and continuously reinvent its platforms and delivery methods, including through the use of cloud and as-a-Service models. These are not separate businesses; they are offerings across the segments that address market opportunities in analytics, data, cloud and security. Revenue from these offerings follows the specific revenue recognition policies for arrangements with multiple performance obligations and for each major category of revenue, depending on the type of offering, which are comprised of services, hardware and/or software.

To the extent that a product or service in multiple performance obligation arrangements is subject to other specific accounting guidance, such as leasing guidance, that product or service is accounted for in accordance with such specific guidance. For all other products or services in these arrangements, the criteria below are considered to determine when the products or services are distinct and how to allocate the arrangement consideration to each distinct performance obligation. A performance obligation is a promise in a contract with a client to transfer products or services that are distinct. If the company enters into two or more contracts at or near the same time, the contracts may be combined and accounted for as one contract, in which case the company determines whether the products or services in the combined contract are distinct. A product or service that is promised to a client is distinct if both of the following criteria are met:

· The client can benefit from the product or service either on its own or together with other resources that are readily available to the client (that is, the product or service is capable of being distinct); and

· The company’s promise to transfer the product or service to the client is separately identifiable from other promises in the contract (that is, the product or service is distinct within the context of the contract).

If these criteria are not met, the company determines an appropriate measure of progress based on the nature of its overall promise for the single performance obligation. When products and services are distinct, the arrangement consideration is allocated to each performance obligation on a relative standalone selling price basis. The revenue policies in the Services, Hardware and/or Software sections below are then applied to each performance obligation, as applicable.

To the extent the company grants the customer the option to acquire additional products or services in one of these arrangements, the company accounts for the option as a distinct performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., a discount incremental to the range of discounts typically given for the product or service), in which case the client in effect pays in advance for the option to purchase future products or services. The company recognizes revenue when those future products or services are transferred or when the option expires.

Services

The company’s primary services offerings include infrastructure services, including outsourcing, and other managed services; application management services; global process services (GPS); maintenance and support; and consulting, including the design and development of complex IT systems to a client’s specifications (e.g., design and build). Many of these services can be delivered entirely or partially through cloud or as-a-Service delivery models. The company’s services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.

In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time. In design and build arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g., when the asset is built at the customer site) or because the company’s performance does not create an asset with an alternative use and the company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the benefits provided as the company performs the services.

In outsourcing, other managed services, application management, GPS and other cloud-based services arrangements, the company determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.

Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenue from as-a-Service type contracts, such as Infrastructure-as-a-Service, is recognized either on a straight-line basis or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether the contract has usage-based metrics). If the as-a-Service contract includes setup activities, those promises in the arrangement are evaluated to determine if they are distinct.

Revenue related to maintenance and support services and extended warranty is recognized on a straight-line basis over the period of performance because the company is standing ready to provide services.

In fixed-price design and build contracts, revenue is recognized based on progress towards completion of the performance obligation using a cost-to-cost measure of progress (i.e., percentage-of-completion (POC) method of accounting). Revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. Due to the nature of the work performed in these arrangements, the estimation of cost at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known by the company.

The company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost measure of progress in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For other types of services contracts, any losses are recorded as incurred.

In some services contracts, the company bills the client prior to recognizing revenue from performing the services. In other services contracts, the company performs the services prior to billing the client. When the company performs services prior to billing the client in design and build contracts, the right to consideration is typically subject to milestone completion or client acceptance and the unbilled accounts receivable is classified as a contract asset. Refer to page 85 of the company’s 2017 Annual Report for the amount of deferred income and unbilled accounts receivable at December 31, 2017 and 2016.

Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions.

Hardware

The company’s hardware offerings include the sale or lease of system servers and storage solutions. These products can also be delivered through as-a-Service or cloud delivery models, such as Storage-as-a-Service. The company also offers installation services for its more complex hardware products. Hardware offerings are often sold with distinct maintenance services, described under the Services section above.

Revenue from hardware sales is recognized when control has transferred to the customer which typically occurs when the hardware has been shipped to the client, risk of loss has transferred to the client and the company has a present right to payment for the hardware. In limited circumstances when a hardware sale includes client acceptance provisions, revenue is recognized either when client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. Revenue from hardware sales-type leases is recognized at the beginning of the lease term. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.

Revenue from as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. Installation services are accounted for as distinct performance obligations with revenue recognized as the services are performed. Any cost of standard warranties is accrued when the corresponding revenue is recognized. Shipping and handling activities that occur after the client has obtained control of a product are accounted for as an activity to fulfill the promise to transfer the product rather than as an additional promised service and, therefore, no revenue is deferred and recognized over the shipping period.

Software

The company’s software offerings include solutions software, which contains many of the company’s strategic areas including analytics, data and security; transaction processing software, which primarily runs mission-critical systems for clients; integration software, which helps clients to create, connect and optimize their applications data and infrastructure; and, operating systems software, which provides operating systems for IBM Z and Power Systems hardware. Many of these offerings can be delivered entirely or partially through as-a-Service or cloud delivery models, while others are delivered as on-premise software licenses.

Revenue from perpetual (one-time charge) license software is recognized at a point in time at the inception of the arrangement when control transfers to the client, if the software license is distinct from the post-contract support offered by the company. In limited circumstances, when the software requires continuous updates to provide the intended functionality, the software license and post-contract support are not distinct and revenue for the single performance obligation is recognized over time as the post-contract support is provided. This is only applicable to certain security software perpetual licenses offered by the company. Prior to the adoption of the new revenue standard, the company recognized revenue for these software licenses at a point in time at the inception of the arrangement. This change did not have a material impact on the company’s financial statements.

Revenue from post-contract support is recognized over the contract term on a straight-line basis because the company is providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term.

Revenue from software hosting or Software-as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services section above. In software hosting arrangements, the rights provided to the client (e.g., ownership of a license, contract termination provisions and the feasibility of the client to operate the software) are considered in determining whether the arrangement includes a license. In arrangements that include a software license, the associated revenue is recognized in accordance with the software license recognition policy above rather than over time as a service.

Revenue from term license software is recognized at a point in time for the committed term of the contract (which is typically one month due to client termination rights). However, if the amount of consideration to be paid in exchange for the license depends on client usage, revenue is recognized when the usage occurs.

Financing

Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.

Standalone Selling Price

The company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which the company would sell a promised product or service separately to a client. In most cases, the company is able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances to similar clients. The company typically establishes a standalone selling price range for its products and services which are reassessed on a periodic basis or when facts and circumstances change.

In certain instances, the company may not be able to establish a standalone selling price range based on observable prices and the company estimates the standalone selling price. The company estimates SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. Additionally, in certain circumstances, the company may estimate SSP for a product or service by applying the residual approach. This approach has been most commonly used when certain perpetual software licenses are only sold bundled with one year of post-contract support and a price has not been established for the software. Estimating SSP is a formal process that includes review and approval by the company’s management.

Services Costs

Recurring operating costs for services contracts are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the cost-to-cost measure of progress are deferred and recognized based on the labor costs incurred to date (i.e., the measure of progress), as a percentage of the total estimated labor costs to fulfill the contract as control transfers over time for these performance obligations. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts and other cloud-based services contracts (i.e., setup costs) are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs consist of transition and setup costs related to the installation of systems and processes and other deferred fulfillment costs, including, prepaid assets used in services contracts (i.e., prepaid software or prepaid maintenance), and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to the client of the services to which the asset relates. Additionally, fixed assets associated with these contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the carrying amount of the asset to the remaining amount of consideration the company expects to receive for the services to which the asset relates, less the costs that relate directly to providing those services that have not yet been recognized. If the carrying amount is deemed not recoverable, an impairment loss is recognized.

In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services.

Software Costs

Certain eligible, non-recurring costs incurred in the initial phases of Software-as-a-Service contracts are deferred and amortized over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the policy described for Services Costs. Recurring operating costs in these contracts are recognized as incurred.

Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis over the expected customer relationship period if the company expects to recover those costs. The company previously expensed these costs as incurred. The expected customer relationship is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years. Expected renewal periods are only included in the expected customer relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The company has determined that certain commissions programs meet the requirements to be capitalized. Some commission programs are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized. Additionally, as a practical expedient, the company expenses costs to obtain a contract as incurred if the amortization period would have been a year or less. These costs are included in selling, general and administrative expenses.

Product Warranties

The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for standard warranty terms are recognized when revenue is recorded for the related product. The company estimates its warranty costs standard to the product based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period because the company is providing a service of standing ready to provide services over such term.

Contract Assets and Notes and Accounts Receivable—Trade

The company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the company’s contract assets represent unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized, revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract liabilities) at the contract level. At January 1, 2018 and September 30, 2018 contract assets of $557 million and $510 million, respectively, are included in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. At December 31, 2017, these assets were classified as notes and accounts receivable-trade in the Consolidated Statement of Financial Position.

An allowance for contract assets, if needed, and uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.

Remaining Performance Obligations

The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

Transition Disclosures

In accordance with the modified retrospective method transition requirements, the company will present the financial statement line items impacted and adjusted to compare to presentation under the prior GAAP for each of the interim and annual periods during the first year of adoption of the new revenue standard.

Financial Instruments and Fair Value Measurement

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

· Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

· Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

· Level 3—Unobservable inputs for the asset or liability.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

· Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

· Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Certain non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Effective January 1, 2018, the company adopted the new FASB guidance on recognition, measurement, presentation and disclosure of financial instruments using the cumulative catch-up transition method. Under the new standard, the company measures equity investments at fair value with changes recognized in net income. Based on the method of adoption, prior year information has not been updated to conform with the new guidance.

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Derivative Financial Instruments

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.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies.

Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements.

In the Consolidated Statement of Financial Position, 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. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Statement of Financial Position.

The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

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).

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges.

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. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose.

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years.

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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately ten years.

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 Statement of Earnings.

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 selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. 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 Statement of Earnings.

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings.

Financing Receivables

Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days.

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

Stock-Based Compensation

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period.

Segments

Performance measurement is based on operating pre-tax income from continuing operations. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance.

Acquisitions

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition.

Commitments and Contingencies

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons.

Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote.

Income Taxes

U.S. Tax Reform

All components of the provisional charge were based on the company’s estimates as of December 31, 2017. Specifically, the transition tax, any foreign tax costs, as well as the remeasurement of deferred tax balances are provisional and were calculated based on existing tax law and the best information available as of the date of estimate.

The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment, conclusion of the effects of the “Global Intangible Low-Taxed Income” (“GILTI”) provisions, further refinement of the company’s calculations, additional guidance that may be issued by the U.S. government, among other items. The company is still evaluating the Act’s GILTI provisions and has not yet elected an accounting policy. The company has not completed its assessment and the tax charge remains provisional.

The charge will be finalized in the fourth quarter of 2018 which is within the 12-month time limit provided by the SEC.

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Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2018

Revenue Recognition

Schedule of disaggregation of revenue

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the three months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	2,910	$	—	$	—	$	—	$	—	$	—	$	2,910
Transaction Processing Software	1,238		—		—		—		—		—		1,238
Consulting	—		1,900		—		—		—		—		1,900
Global Process Services	—		314		—		—		—		—		314
Application Management	—		1,915		—		—		—		—		1,915
Infrastructure Services	—		—		5,595		—		—		—		5,595
Technical Support Services	—		—		1,707		—		—		—		1,707
Integration Software	—		—		990		—		—		—		990
Systems Hardware	—		—		—		1,339		—		—		1,339
Operating Systems Software	—		—		—		397		—		—		397
Global Financing*	—		—		—		—		388		—		388
Other Revenue	—		—		—		—		—		62		62
Total	$	4,148	$	4,130	$	8,292	$	1,736	$	388	$	62	$	18,756

* Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the three months	Total
ended September 30, 2018:	Revenue
Americas	$	8,853
Europe/Middle East/Africa	5,827
Asia Pacific	4,076
Total	$	18,756

Revenue by Major Products/Service Offerings

					Technology
(Dollars in millions)			Global		Services &
For the nine months	Cognitive		Business		Cloud				Global				Total
ended September 30, 2018:	Solutions		Services		Platforms		Systems		Financing		Other		Revenue
Solutions Software	$	9,080	$	—	$	—	$	—	$	—	$	—	$	9,080
Transaction Processing Software	3,946		—		—		—		—		—		3,946
Consulting	—		5,698		—		—		—		—		5,698
Global Process Services	—		934		—		—		—		—		934
Application Management	—		5,863		—		—		—		—		5,863
Infrastructure Services	—		—		17,188		—		—		—		17,188
Technical Support Services	—		—		5,239		—		—		—		5,239
Integration Software	—		—		3,106		—		—		—		3,106
Systems Hardware	—		—		—		4,187		—		—		4,187
Operating Systems Software	—		—		—		1,225		—		—		1,225
Global Financing*	—		—		—		—		1,188		—		1,188
Other Revenue	—		—		—		—		—		176		176
Total	$	13,027	$	12,495	$	25,533	$	5,412	$	1,188	$	176	$	57,830

*Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)
For the nine months	Total
ended September 30, 2018:	Revenue
Americas	$	26,772
Europe/Middle East/Africa	18,410
Asia Pacific	12,648
Total	$	57,830

Schedule of reconciliation of contract balances

	At September 30,		At January 1,
(Dollars in millions)	2018		2018 (as adjusted)
Notes and accounts receivable-trade (net of allowances of $310 and $297 at September 30, 2018 and January 1, 2018, respectively)	$	7,071	$	8,295
Contract assets (1)	510		557
Deferred income (current)	10,704		11,493
Deferred income (noncurrent)	3,507		3,758

(1) Included within prepaid expenses and other current assets in the Consolidated Statement of Financial Position.

Schedule of deferred contract costs

	At September 30,
(Dollars in millions)	2018
Capitalized costs to obtain a contract	$	681
Deferred costs to fulfill a contract:
Deferred setup costs	2,123
Other deferred fulfillment costs	2,003
Total deferred costs (1)	$	4,808

(1) Of the total, $2,227 million is current and $2,581 million is noncurrent. Prior to January 1, 2018, the current and noncurrent balance of deferred costs were included within prepaid expenses and other current assets and investments and sundry assets, respectively.

Accounting Standards Update 2014-09, Revenue from Contracts with Customers

Revenue Recognition

Schedule of transition disclosures

Consolidated Statement of Earnings Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the three months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	18,756	$	4		$	18,760
Cost	9,953		—			9,953
Gross profit	8,803		4			8,807
Selling, general and administrative expense	4,363		(28		)	4,335
Income from continuing operations before income taxes	2,996		33			3,029
Provision for/(benefit from) income taxes	304		8			313
Net income	$	2,694	$	24		$	2,718
Earnings/(loss) per share of common stock:
Assuming dilution	$	2.94	$	0.03		$	2.97
Basic	$	2.95	$	0.03		$	2.98

	As reported under		Adjustments to			Adjusted
(Dollars in millions except per share amounts)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Revenue	$	57,830	$	(10	)	$	57,821
Cost	31,582		0			31,582
Gross profit	26,249		(10		)	26,239
Selling, general and administrative expense	14,665		(32		)	14,633
Income from continuing operations before income taxes	6,908		23			6,930
Provision for/(benefit from) income taxes	138		5			143
Net income	$	6,777	$	17		$	6,794
Earnings/(loss) per share of common stock:
Assuming dilution	$	7.36	$	0.02		$	7.38
Basic	$	7.39	$	0.02		$	7.41

Consolidated Statement of Financial Position Impacts

	As reported under			Adjustments to			Adjusted
(Dollars in millions)	new revenue			convert to			amounts under
At September 30, 2018:	standard			prior GAAP			prior GAAP
Assets:
Notes and accounts receivable - trade (net of allowances)	$	7,071		$	574		$	7,645
Deferred costs (current)	2,227			(280		)	1,947
Prepaid expenses and other current assets	2,388			(510		)	1,878
Deferred taxes	4,436			179			4,615
Deferred costs (noncurrent)	2,581			(402		)	2,179
Investments and sundry assets	2,272			—			2,272
Total assets	$	121,990		$	(439	)	$	121,551
Liabilities:
Taxes	$	2,502		$	—		$	2,502
Deferred income (current)	10,704			51			10,754
Deferred income (noncurrent)	3,507			(5		)	3,502
Total liabilities	$	102,071		$	46		$	102,117
Equity:
Retained earnings	$	158,612		$	(507	)	$	158,106
AOCI	(27,820		)	22			(27,798		)
Total stockholders’ equity	19,918			(484		)	19,434
Total liabilities and stockholders’ equity	$	121,990		$	(439	)	$	121,551

Consolidated Statement of Cash Flows Impacts

	As reported under		Adjustments to			Adjusted
(Dollars in millions)	new revenue		convert to			amounts under
For the nine months ended September 30, 2018:	standard		prior GAAP			prior GAAP
Cash flows from operating activities:
Net income	$	6,777	$	17		$	6,794
Adjustments to reconcile net income to cash provided by operating activities:
Changes in operating assets and liabilities, net of acquisitions/divestitures	631		(17		)	614
Net cash provided by operating activities	$	11,128	$	—		$	11,128

XML

Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2018

Financial Instruments

Financial assets and financial liabilities measured at fair value on a recurring basis

(Dollars in millions)
At September 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,238	$	—	$	8,238	(6)
Money market funds	26		—		—		26
Total	$	26	$	8,238	$	—	$	8,263
Equity investments (2)	11		—		—		11
Debt securities - current (3)	—		2,932		—		2,932		(6)
Derivative assets (4)	9		685		—		694		(7)
Total assets	$	46	$	11,854	$	—	$	11,900
Liabilities:
Derivative liabilities (5)	$	2	$	413	$	—	$	415	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3) Included within marketable securities in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investmentsand sundry assets in the Consolidated Statement of Financial Position at September 30, 2018 were $312 million and $382 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at September 30, 2018 were $122 million and $292million, respectively.

(6) Available-for-sale debt securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the ConsolidatedStatement of Financial Position, the total derivative asset and liability positions each would have been reduced by $285 million.

(Dollars in millions)
At December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,066	$	—	$	8,066
Commercial paper	—		96		—		96
Money market funds	26		—		—		26
Canadian government securities	—		398		—		398
Total	$	26	$	8,560	$	—	$	8,586	(6)
Equity investments (2)	4		—		—		4
Debt securities - current (3)	—		608		—		608		(6)
Debt securities - noncurrent (2)	4		7		—		11
Derivative assets (4)	—		942		—		942		(7)
Total assets	$	33	$	10,117	$	—	$	10,151
Liabilities:
Derivative liabilities (5)	$	—	$	415	$	—	$	415	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3) U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investmentsand sundry assets in the Consolidated Statement of Financial Position at December 31, 2017 were $185 million and$757 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and otherliabilities in the Consolidated Statement of Financial Position at December 31, 2017 were $377 million and $38million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the ConsolidatedStatement of Financial Position, the total derivative asset and liability positions each would have been reduced by $255 million.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	9/30/2018		12/31/2017		Classification	9/30/2018		12/31/2017
Designated as hedging instruments:
Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2	Other accrued expenses and liabilities	$	11	$	—
	Investments and sundry assets	237		459		Other liabilities	145		34
Foreign exchange contracts	Prepaid expenses and other current assets	281		111		Other accrued  expenses and liabilities	52		318
	Investments and sundry assets	145		298		Other liabilities	147		3
	Fair value of derivative assets	$	664	$	870	Fair value of derivative liabilities	$	356	$	355
Not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	18	$	61	Other accrued expenses and liabilities	$	53	$	57
Equity contracts	Prepaid expenses and other current assets	12		12		Other accrued expenses and liabilities	6		3
	Fair value of derivative assets	$	30	$	72	Fair value of derivative liabilities	$	59	$	60
Total derivatives		$	694	$	942		$	415	$	415
Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	—	$	—
Long-term debt		N/A		N/A			6,294		6,471
		N/A		N/A			$	6,294	$	6,471
Total		$	694	$	942		$	6,709	$	6,886

N/A - not applicable

(1) Debt designated as hedging instruments are reported at carrying value.

Amounts related to cumulative basis adjustments for fair value hedges

(Dollars in millions)

Line Item in the	Carrying Amount of the			Cumulative Amount of Fair Value Hedging Adjustment
Consolidated Statement of Financial Position	Hedged Item			Included in the Carrying
in which the Hedged Item is Included	Assets/(Liabilities)			Amount of Assets/(Liabilities)
Short-term debt	$	(1,539	)	$	10
Long-term debt	$	(8,567	)	$	(208	)(1)

(1) Includes ($178) million of hedging adjustments on discontinued hedging relationships.

Effect of Derivative Instruments in the Consolidated Statement of Earnings

(Dollars in millions)									Other
For the three months	Cost of		Cost of		Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales		Financing		Expense		Expense			Expense
Total	$	8,040	$	1,625	$	287	$	4,363	$	275		$	191
Gains/(losses) of total hedge activity	1		8		15		47		(63		)	(21		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives						Being Hedged(2)
For the three months ended September 30:	Earnings Line Item	2018			2017			2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(27	)	$	(3	)	$	33	$	20
	Interest expense	(26		)	(3		)	33		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(55		)	(35		)	N/A		N/A
Equity contracts	SG&A expense	40			31			N/A		N/A
Total		$	(69	)	$	(10	)	$	66	$	41

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(46	)	$	(70	)	Interest expense	$	(36	)	$	(7	)	$	—	$	—
							Other (income) and expense	(8		)	64			—		(1		)
							Cost of sales	8			1			—		—
							Cost of services	1			20			—		—
							SG&A expense	7			(6		)	—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			8		0
contracts	86			(507		)	Interest expense	—			—			9		8
Total	$	40		$	(577	)		$	(28	)	$	73		$	18	$	7

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity.

(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4) Instruments in net investment hedges include derivative and non-derivative instruments.

(Dollars in millions)										Other
For the nine months	Cost of		Cost of			Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales			Financing		Expense		Expense			Expense
Total	$	25,519	$	5,216		$	846	$	14,665	$	968		$	530
Gains/(losses) of total hedge activity	29		(15		)	56		24		(449		)	(53		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the nine months ended September 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(138	)	$	37	$	170	$	22
	Interest expense	(128		)	34		157		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(148		)	74		N/A		N/A
Equity contracts	SG&A expense	38			88		N/A		N/A
Total		$	(377	)	$	233	$	327	$	42

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the nine months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(134	)	$	(198	)	Interest expense	$	(108	)	$	(21	)	$	—	$	—
							Other (income) and expense	(301		)	275			—		2
							Cost of sales	(15		)	23			—		—
							Cost of services	29			47			—		—
							SG&A expense	(14		)	23			—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			24		0
contracts	509			(1,513		)	Interest expense	—			—			25		34
Total	$	375		$	(1,712	)		$	(408	)	$	347		$	49	$	37

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity.

(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4) Instruments in net investment hedges include derivative and non-derivative instruments.

XML

Financing Receivables (Tables)

9 Months Ended

Sep. 30, 2018

Financing Receivables

Summary of the components of financing receivables

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At September 30, 2018:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	6,566		$	9,397		$	12,259		$	28,222
Unearned income	(502		)	(30		)	(576		)	(1,108		)
Recorded Investment	$	6,064		$	9,367		$	11,683		$	27,114
Allowance for credit losses	(103		)	(12		)	(210		)	(325		)
Unguaranteed residual value	549			—			—			549
Guaranteed residual value	90			—			—			90
Total financing receivables, net	$	6,599		$	9,355		$	11,473		$	27,427
Current portion	$	2,764		$	9,355		$	7,130		$	19,249
Noncurrent portion	$	3,836		$	—		$	4,343		$	8,179

	Investment in						Client Loan and
	Sales-Type and			Commercial			Installment Payment
(Dollars in millions)	Direct Financing			Financing			Receivables/
At December 31, 2017:	Leases			Receivables			(Loans)			Total
Financing receivables, gross	$	7,128		$	11,649		$	13,311		$	32,087
Unearned income	(535		)	(32		)	(644		)	(1,210		)
Recorded Investment	$	6,593		$	11,617		$	12,667		$	30,877
Allowance for credit losses	(103		)	(21		)	(211		)	(336		)
Unguaranteed residual value	630			—			—			630
Guaranteed residual value	100			—			—			100
Total financing receivables, net	$	7,220		$	11,596		$	12,456		$	31,272
Current portion	$	2,900		$	11,596		$	7,226		$	21,721
Noncurrent portion	$	4,320		$	—		$	5,230		$	9,550

Schedule of financing receivables and allowance for credit losses by portfolio segment

(Dollars in millions)
At September 30, 2018:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,526		$	1,377		$	1,161		$	6,064
Loan receivables	6,118			3,313			2,252			11,683
Ending balance	$	9,644		$	4,690		$	3,413		$	17,747
Recorded investment collectively evaluated for impairment	$	9,484		$	4,634		$	3,338		$	17,456
Recorded investment individually evaluated for impairment	$	161		$	56		$	75		$	291
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	108			52			51			211
Total	$	172		$	61		$	82		$	314
Write-offs	$	(5	)	$	(1	)	$	(3	)	$	(9	)
Recoveries	0			0			2			2
Provision	10			10			2			21
Other*	(9		)	(2		)	(4		)	(15		)
Ending balance at September 30, 2018	$	167		$	68		$	78		$	313
Lease receivables	$	61		$	12		$	29		$	103
Loan receivables	$	106		$	55		$	48		$	210
Related allowance, collectively evaluated for impairment	$	42		$	15		$	5		$	62
Related allowance, individually evaluated for impairment	$	125		$	52		$	73		$	250

* Primarily represents translation adjustments.

(Dollars in millions)
At December 31, 2017:	Americas			EMEA			Asia Pacific			Total
Recorded investment
Lease receivables	$	3,911		$	1,349		$	1,333		$	6,593
Loan receivables	6,715			3,597			2,354			12,667
Ending balance	$	10,626		$	4,946		$	3,687		$	19,259
Recorded investment collectively evaluated for impairment	$	10,497		$	4,889		$	3,604		$	18,990
Recorded investment individually evaluated for impairment	$	129		$	57		$	83		$	269
Allowance for credit losses
Beginning balance at January 1, 2017
Lease receivables	$	54		$	4		$	76		$	133
Loan receivables	169			18			89			276
Total	$	223		$	22		$	165		$	410
Write-offs	$	(51	)	$	(1	)	$	(85	)	$	(137	)
Recoveries	1			1			0			2
Provision	(8		)	29			(4		)	16
Other*	7			11			6			24
Ending balance at December 31, 2017	$	172		$	61		$	82		$	314
Lease receivables	$	63		$	9		$	31		$	103
Loan receivables	$	108		$	52		$	51		$	211
Related allowance, collectively evaluated for impairment	$	43		$	15		$	6		$	64
Related allowance, individually evaluated for impairment	$	128		$	46		$	76		$	250

* Primarily represents translation adjustments.

Schedule of past due financing receivables

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At September 30, 2018:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,526	$	268	$	213	$	27	$	59
EMEA	1,377		26		10		2		17
Asia Pacific	1,161		36		8		2		29
Total lease receivables	$	6,064	$	330	$	230	$	31	$	105
Americas	$	6,118	$	382	$	276	$	27	$	128
EMEA	3,313		62		23		4		77
Asia Pacific	2,252		78		31		8		49
Total loan receivables	$	11,683	$	523	$	330	$	39	$	254
Total	$	17,747	$	853	$	561	$	70	$	359

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $291 million is individually evaluated for impairment with a related allowance of $250 million.

					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2017:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)(3)
Americas	$	3,911	$	239	$	197	$	29	$	44
EMEA	1,349		32		5		3		27
Asia Pacific	1,333		57		23		3		36
Total lease receivables	$	6,593	$	328	$	225	$	36	$	107
Americas	$	6,715	$	345	$	254	$	38	$	96
EMEA	3,597		90		17		0		74
Asia Pacific	2,354		63		12		3		54
Total loan receivables	$	12,667	$	498	$	283	$	41	$	224
Total	$	19,259	$	825	$	507	$	77	$	331

(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2) Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3) Recast to conform to current period presentation, which includes billed impaired amounts.

Schedule of net recorded investment by credit quality indicator

(Dollars in millions)	Lease Receivables						Loan Receivables
At September 30, 2018:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	385	$	54	$	87	$	668	$	128	$	169
A1 – A3	741		167		434		1,285		400		845
Baa1 – Baa3	796		416		278		1,381		994		541
Ba1 – Ba2	754		432		184		1,308		1,032		358
Ba3 – B1	459		185		88		797		443		172
B2 – B3	298		100		52		517		239		102
Caa – D	32		10		8		55		23		16
Total	$	3,465	$	1,365	$	1,132	$	6,012	$	3,258	$	2,203

(Dollars in millions)	Lease Receivables						Loan Receivables
At December 31, 2017:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit ratings:
Aaa – Aa3	$	422	$	49	$	68	$	724	$	129	$	120
A1 – A3	855		190		544		1,469		502		961
Baa1 – Baa3	980		371		337		1,683		982		596
Ba1 – Ba2	730		448		184		1,253		1,186		325
Ba3 – B1	443		192		89		760		508		157
B2 – B3	367		77		64		630		204		113
Caa – D	51		13		18		88		34		31
Total	$	3,847	$	1,340	$	1,302	$	6,607	$	3,545	$	2,303

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2018

Stock-Based Compensation

Stock-based compensation cost included in income from continuing operations

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2018			2017			2018			2017
Cost	$	19		$	22		$	60		$	68
Selling, general and administrative	95			88			264			277
Research, development and engineering	15			13			47			43
Pre-tax stock-based compensation cost	$	129		$	123		$	371		$	388
Income tax benefits	(29		)	(41		)	(88		)	(128		)
Total net stock-based compensation cost	$	100		$	82		$	283		$	260

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Segments (Tables)

9 Months Ended

Sep. 30, 2018

Segments

Revenue and Pre-tax Income by Segment

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the three months ended September 30, 2018:
External revenue	$	4,148		$	4,130		$	8,292		$	1,736		$	388		$	18,694
Internal revenue	639			77			240			181			338			1,476
Total revenue	$	4,787		$	4,207		$	8,533		$	1,917		$	726		$	20,170
Pre-tax income from continuing operations	$	1,629		$	579		$	1,075		$	209		$	308		$	3,801
Revenue year-to-year change	(4.8		)%	0.5		%	(1.0		)%	(1.6		)%	4.0		%	(1.5		)%
Pre-tax income year-to-year change	(0.9		)%	30.9		%	(8.6		)%	(37.9		)%	26.9		%	(1.1		)%
Pre-tax income margin	34.0		%	13.8		%	12.6		%	10.9		%	42.5		%	18.8		%
For the three months ended September 30, 2017:
External revenue	$	4,400		$	4,093		$	8,457		$	1,721		$	427		$	19,098
Internal revenue	629			92			164			227			272			1,384
Total revenue	$	5,030		$	4,185		$	8,621		$	1,948		$	698		$	20,482
Pre-tax income from continuing operations *	$	1,643		$	442		$	1,177		$	337		$	243		$	3,843
Pre-tax income margin *	32.7		%	10.6		%	13.7		%	17.3		%	34.8		%	18.8		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the nine months ended September 30, 2018:
External revenue	$	13,027		$	12,495		$	25,533		$	5,412		$	1,188		$	57,655
Internal revenue	2,122			249			550			576			1,240			4,738
Total revenue	$	15,149		$	12,744		$	26,083		$	5,989		$	2,428		$	62,392
Pre-tax income from continuing operations	$	4,718		$	1,109		$	2,395		$	352		$	1,042		$	9,616
Revenue year-to-year change	0.8		%	2.2		%	2.0		%	10.2		%	11.8		%	2.8		%
Pre-tax income year-to-year change	4.3		%	7.1		%	(15.8		)%	58.8		%	24.8		%	1.7		%
Pre-tax income margin	31.1		%	8.7		%	9.2		%	5.9		%	42.9		%	15.4		%
For the nine months ended September 30, 2017:
External revenue	$	13,021		$	12,196		$	25,079		$	4,863		$	1,246		$	56,405
Internal revenue	2,001			271			497			571			925			4,265
Total revenue	$	15,022		$	12,467		$	25,576		$	5,434		$	2,171		$	60,670
Pre-tax income from continuing operations *	$	4,522		$	1,035		$	2,845		$	222		$	835		$	9,459
Pre-tax income/(loss) margin *	30.1		%	8.3		%	11.1		%	4.1		%	38.5		%	15.6		%

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

Reconciliation of segment revenue to IBM as reported

(Dollars in millions)
For the three months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	20,170		$	20,482
Eliminations of internal transactions	(1,476		)	(1,384		)
Other revenue	62			56
Total consolidated revenue	$	18,756		$	19,153

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Revenue:
Total reportable segments	$	62,392		$	60,670
Eliminations of internal transactions	(4,738		)	(4,265		)
Other revenue	176			192
Total consolidated revenue	$	57,830		$	56,597

Reconciliation of segment pre-tax income to IBM as reported

(Dollars in millions)
For the three months ended September 30:	2018			2017
Pre-tax income from continuing operations:
Total reportable segments	$	3,801		$	3,843	*
Amortization of acquired intangible assets	(207		)	(238		)
Acquisition-related (charges)/income	(2		)	0
Non-operating retirement-related (costs)/income	(389		)	(273		)*
Eliminations of internal transactions	(116		)	(126		)
Unallocated corporate amounts	(91		)	(141		)
Total pre-tax income from continuing operations	$	2,996		$	3,065

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

(Dollars in millions)
For the nine months ended September 30:	2018			2017
Pre-tax income from continuing operations:
Total reportable segments	$	9,616		$	9,459	*
Amortization of acquired intangible assets	(613		)	(731		)
Acquisition-related (charges)/income	(3		)	(19		)
Non-operating retirement-related (costs)/income	(1,185		)	(969		)*
Eliminations of internal transactions	(625		)	(515		)
Unallocated corporate amounts	(283		)	(294		)
Total pre-tax income from continuing operations	$	6,908		$	6,931

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

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Equity Activity (Tables)

9 Months Ended

Sep. 30, 2018

Equity Activity

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(22	)	$	(22	)	$	(44	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(46	)	$	11		$	(35	)
Reclassification of (gains)/losses to:
Cost of sales	(8		)	3			(6		)
Cost of services	(1		)	0			(1		)
SG&A expense	(7		)	2			(5		)
Other (income) and expense	8			(2		)	6
Interest expense	36			(9		)	27
Total unrealized gains/(losses) on cash flow hedges	$	(18	)	$	4		$	(14	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	(1		)	1			(1		)
Curtailments and settlements	2			0			1
Amortization of prior service (credits)/costs	(18		)	5			(13		)
Amortization of net (gains)/losses	737			(196		)	540
Total retirement-related benefit plans	$	719		$	(191	)	$	527
Other comprehensive income/(loss)	$	678		$	(209	)	$	470

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	89		$	195		$	284
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1	)	$	1		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(70	)	$	20		$	(50	)
Reclassification of (gains)/losses to:
Cost of sales	(1		)	1			(1		)
Cost of services	(20		)	8			(12		)
SG&A expense	6			(1		)	4
Other (income) and expense	(64		)	25			(39		)
Interest expense	7			(3		)	4
Total unrealized gains/(losses) on cash flow hedges	$	(143	)	$	49		$	(94	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	1			0			1
Curtailments and settlements	2			(1		)	1
Amortization of prior service (credits)/costs	(22		)	7			(15		)
Amortization of net (gains)/losses	733			(242		)	491
Total retirement-related benefit plans	$	713		$	(235	)	$	479
Other comprehensive income/(loss)	$	658		$	11		$	669

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2018:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(535	)	$	(128	)	$	(663	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(1	)
Reclassification of (gains)/losses to other (income) and expense	—			—			—
Total net changes related to available-for-sale securities	$	(2	)	$	1		$	(1	)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(134	)	$	39		$	(95	)
Reclassification of (gains)/losses to:
Cost of sales	15			(4		)	11
Cost of services	(29		)	7			(22		)
SG&A expense	14			(4		)	10
Other (income) and expense	301			(76		)	225
Interest expense	108			(27		)	81
Total unrealized gains/(losses) on cash flow hedges	$	274		$	(63	)	$	210
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	(1	)	$	0		$	(1	)
Net (losses)/gains arising during the period	83			(22		)	60
Curtailments and settlements	7			(2		)	5
Amortization of prior service (credits)/costs	(55		)	15			(40		)
Amortization of net (gains)/losses	2,231			(607		)	1,624
Total retirement-related benefit plans	$	2,264		$	(616	)	$	1,648
Other comprehensive income/(loss)	$	2,001		$	(807	)	$	1,194

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the nine months ended September 30, 2017:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	213		$	581		$	794
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	2		$	0		$	1
Reclassification of (gains)/losses to other (income) and expense		1			0			0
Total net changes related to available-for-sale securities	$	2		$	0		$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(198	)	$	53		$	(146	)
Reclassification of (gains)/losses to:
Cost of sales	(23		)	6			(17		)
Cost of services	(47		)	18			(29		)
SG&A expense	(23		)	6			(17		)
Other (income) and expense	(275		)	106			(169		)
Interest expense	21			(8		)	13
Total unrealized gains/(losses) on cash flow hedges	$	(545	)	$	180		$	(365	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	106			(36		)	70
Curtailments and settlements	3			(1		)	2
Amortization of prior service (credits)/costs	(66		)	23			(43		)
Amortization of net (gains)/losses	2,156			(739		)	1,417
Total retirement-related benefit plans	$	2,200		$	(754	)	$	1,446
Other comprehensive income/(loss)	$	1,869		$	7		$	1,877

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 9, “Retirement-Related Benefits,” for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2018	$	35		$	(2,834	)	$	(23,796	)	$	3		$	(26,592	)
Cumulative effect of a change in accounting principle **	5			46			(2,471		)	(2)			(2,422		)
Other comprehensive income before reclassifications	(95		)	(663		)	65			(1		)	(695		)
Amount reclassified from accumulated other comprehensive income	305			—			1,584			—			1,889
Total change for the period	$	210		$	(663	)	$	1,648		$	(1	)	$	1,194
September 30, 2018	$	250		$	(3,451	)	$	(24,618	)	$	0		$	(27,820	)

*    Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

**Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, “Accounting Changes”.

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2017	$	319		$	(3,603	)	$	(26,116	)	$	2	$	(29,398	)
Other comprehensive income before reclassifications	(146		)	794			72			1		721
Amount reclassified from accumulated other comprehensive income	(219		)	—			1,374			0		1,155
Total change for the period	$	(365	)	$	794		$	1,446		$	2	$	1,877
September 30, 2017	$	(46	)	$	(2,809	)	$	(24,670	)	$	4	$	(27,521	)

*  Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Retirement-Related Benefits (Tables)

9 Months Ended

Sep. 30, 2018

Retirement-Related Benefits

Pre-tax cost for all retirement-related plans

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	705	$	592	19.0	%
Nonpension postretirement plans — cost	49		61		(19.5	)
Total	$	754	$	653	15.5	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2018		2017		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	2,152	$	1,915	12.3	%
Nonpension postretirement plans — cost	149		182		(18.3	)
Total	$	2,300	$	2,097	9.7	%

Components of the cost/(income) for the company's pension plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	104		$	106
Interest cost (1)	430			478			204			215
Expected return on plan assets (1)	(675		)	(753		)	(330		)	(340		)
Amortization of prior service costs/(credits) (1)	4			4			(20		)	(25		)
Recognized actuarial losses (1)	381			334			346			387
Curtailments and settlements (1)	—			—			2			2
Multi-employer plans	—			—			9			11
Other costs (1)	—			—			5			(85		)
Total net periodic pension (income)/cost of defined benefit plans	$	140		$	63		$	318		$	271
Cost of defined contribution plans	152			156			95			102
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	292		$	219		$	413		$	373

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	—		$	—		$	309		$	308
Interest cost (1)	1,289			1,435			630			622
Expected return on plan assets (1)	(2,026		)	(2,260		)	(1,017		)	(985		)
Amortization of prior service costs/(credits) (1)	12			12			(62		)	(73		)
Recognized actuarial losses (1)	1,144			1,003			1,057			1,120
Curtailments and settlements (1)	—			—			7			3
Multi-employer plans	—			—			29			30
Other costs (1)	—			—			16			(76		)
Total net periodic pension (income)/cost of defined benefit plans	$	419		$	190		$	969		$	950
Cost of defined contribution plans	457			475			306			301
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$	876		$	665		$	1,276		$	1,250

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

Components of the cost/(income) for the company's nonpension postretirement plans

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the three months ended September 30:	2018			2017			2018			2017
Service cost	$	3		$	4		$	1		$	1
Interest cost (1)	33			38			11			14
Expected return on plan assets (1)	—			—			(1		)	(2		)
Amortization of prior service costs/(credits) (1)	(2		)	(2		)	0			0
Recognized actuarial losses (1)	2			5			1			2
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	37		$	45		$	12		$	16

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

(Dollars in millions)	U.S. Plan						Non-U.S. Plans
For the nine months ended September 30:	2018			2017			2018			2017
Service cost	$	10		$	11		$	4		$	4
Interest cost (1)	99			115			34			43
Expected return on plan assets (1)	—			—			(4		)	(6		)
Amortization of prior service costs/(credits) (1)	(6		)	(6		)	0			0
Recognized actuarial losses (1)	7			15			4			5
Curtailments and settlements (1)	—			—			0			0
Total nonpension postretirement plans cost recognized in Consolidated Statement of Earnings	$	111		$	135		$	38		$	47

(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Statement of Earnings.

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Intangible Assets Including Goodwill (Tables)

9 Months Ended

Sep. 30, 2018

Intangible Assets Including Goodwill

Intangible asset balances by major asset class

	At September 30, 2018
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,572	$	(784	)	$	788
Client relationships	2,273		(1,247		)	1,026
Completed technology	2,509		(1,560		)	949
Patents/trademarks	661		(324		)	337
Other*	56		(21		)	34
Total	$	7,071	$	(3,937	)	$	3,134

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

	At December 31, 2017
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,600	$	(790	)	$	810
Client relationships	2,358		(1,080		)	1,278
Completed technology	2,586		(1,376		)	1,210
Patents/trademarks	668		(256		)	413
Other*	47		(16		)	31
Total	$	7,260	$	(3,518	)	$	3,742

* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

Intangible assets, future amortization expense

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2018 (for Q4)	$	140	$	198	$	338
2019	393		676		1,070
2020	203		564		768
2021	51		451		502
2022	—		382		382

Changes in goodwill balances by reportable segment

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/18		Additions		Adjustments			Divestitures			Adjustments*			9/30/18
Cognitive Solutions	$	19,665	$	10	$	0		$	(1	)	$	(148	)	$	19,526
Global Business Services	4,813		24		(4		)	—			(51		)	4,782
Technology Services & Cloud Platforms	10,447		—		0			—			(86		)	10,361
Systems	1,862		—		—			—			(6		)	1,857
Total	$	36,788	$	34	$	(4	)	$	(1	)	$	(291	)	$	36,526

* Primarily driven by foreign currency translation.

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/17		Additions		Adjustments			Divestitures			Adjustments*		12/31/17
Cognitive Solutions	$	19,484	$	3	$	(38	)	$	(20	)	$	235	$	19,665
Global Business Services	4,607		—		2			—			204		4,813
Technology Services & Cloud Platforms	10,258		13		(2		)	—			179		10,447
Systems	1,850		—		0			—			13		1,862
Total	$	36,199	$	16	$	(38	)	$	(20	)	$	631	$	36,788

* Primarily driven by foreign currency translation.

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2018

Borrowings

Short-Term Debt

	At September 30,		At December 31,
(Dollars in millions)	2018		2017
Commercial paper	$	3,986	$	1,496
Short-term loans	173		276
Long-term debt — current maturities	6,773		5,214
Total	$	10,932	$	6,987

Long-Term Debt

		Balance		Balance
(Dollars in millions)	Maturities	9/30/2018		12/31/2017
U.S. dollar debt (weighted-average interest rate at September 30, 2018):*
7.6%	2018	$	1,634	$	4,640
2.9%	2019	5,474		5,540
2.2%	2020	3,347		3,416
2.5%	2021	5,001		4,129
2.4%	2022	3,533		3,481
3.3%	2023	2,395		1,547
3.6%	2024	2,013		2,000
7.0%	2025	600		600
3.5%	2026	1,350		1,350
4.7%	2027	969		969
6.5%	2028	313		313
3.7%	2030	32		—
5.9%	2032	600		600
8.0%	2038	83		83
5.6%	2039	745		745
4.0%	2042	1,107		1,107
7.0%	2045	27		27
4.7%	2046	650		650
7.1%	2096	316		316
		$	30,192	$	31,515
Other currencies (average interest rate at September 30, 2018, in parentheses):*
Euros (1.5%)	2019–2029	$	10,162	$	10,502
Pound sterling (2.7%)	2020–2022	1,369		1,420
Japanese yen (0.3%)	2022–2026	1,281		1,291
Other (6.6%)	2019–2022	446		717
		$	43,450	$	45,445
Less: net unamortized discount		808		826
Less: net unamortized debt issuance costs		79		93
Add: fair value adjustment**		198		526
		$	42,762	$	45,052
Less: current maturities		6,773		5,214
Total		$	35,989	$	39,837

*Includes notes, debentures, bank loans, secured borrowings and capital lease obligations.

**   The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

Pre-swap annual contractual obligations of long-term debt outstanding

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, 2018, are as follows:

(Dollars in millions)	Total
2018 (for Q4)	$	1,724
2019	7,034
2020	6,286
2021	6,139
2022	4,320
2023 and beyond	17,946
Total	$	43,450

Interest on Debt

(Dollars in millions)
For the nine months ended September 30:	2018		2017
Cost of financing	$	568	$	496
Interest expense	530		451
Interest capitalized	3		(1		)
Total interest paid and accrued	$	1,101	$	947

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Commitments (Tables)

9 Months Ended

Sep. 30, 2018

Commitments

Changes in warranty liabilities

Standard Warranty Liability

(Dollars in millions)	2018			2017
Balance at January 1	$	152		$	156
Current period accruals	84			107
Accrual adjustments to reflect actual experience	(31		)	(3		)
Charges incurred	(93		)	(126		)
Balance at September 30	$	112		$	134

Extended Warranty Liability

(Dollars in millions)	2018			2017
Aggregate deferred revenue at January 1	$	566		$	531
Revenue deferred for new extended warranty contracts	138			175
Amortization of deferred revenue	(178		)	(198		)
Other*	(12		)	24
Aggregate deferred revenue at September 30	$	514		$	533
Current portion	$	242		$	258
Noncurrent portion	$	273		$	275

* Other primarily consists of foreign currency translation adjustments.

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Earnings Per Share of Common Stock (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share of Common Stock

Computation of basic and diluted earnings per share

	For the Three Months Ended
	September 30, 2018		September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	911,152,848		929,437,441
Add – Incremental shares under stock-based compensation plans	2,566,139		2,236,234
Add – Incremental shares associated with contingently issuable shares	1,493,644		1,553,754
Number of shares on which diluted earnings per share is calculated	915,212,631		933,227,429
Income from continuing operations (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax (millions)	2		0
Net income on which basic earnings per share is calculated (millions)	$	2,694	$	2,726
Income from continuing operations (millions)	$	2,692	$	2,726
Net income applicable to contingently issuable shares (millions)	—		0
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	2,692	$	2,726
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	2		0
Net income on which diluted earnings per share is calculated (millions)	$	2,694	$	2,726
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	2.94	$	2.92
Discontinued operations	0.00		0.00
Total	$	2.94	$	2.92
Basic
Continuing operations	$	2.95	$	2.93
Discontinued operations	0.00		0.00
Total	$	2.95	$	2.93

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	915,632,501			935,600,777
Add – Incremental shares under stock compensation plans	3,000,429			3,213,758
Add – Incremental shares associated with contingently issuable shares	1,373,960			1,394,930
Number of shares on which diluted earnings per share is calculated	920,006,890			940,209,466
Income from continuing operations (millions)	$	6,770		$	6,811
Income/(loss) from discontinued operations, net of tax (millions)	7			(3		)
Net income on which basic earnings per share is calculated (millions)	$	6,777		$	6,807
Income from continuing operations (millions)	$	6,770		$	6,811
Net income applicable to contingently issuable shares (millions)	(1		)	(2		)
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	6,769		$	6,809
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	7			(3		)
Net income on which diluted earnings per share is calculated (millions)	$	6,776		$	6,806
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	7.36		$	7.24
Discontinued operations	0.01			0.00
Total	$	7.37		$	7.24
Basic
Continuing operations	$	7.39		$	7.28
Discontinued operations	0.01			0.00
Total	$	7.40		$	7.28

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Basis of Presentation - Noncontrolling Interest (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Other (Income) and Expense
Noncontrolling interest amounts, net of tax	$ 6.2	$ 4.4	$ 17.9	$ 11.5

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Accounting Changes - Leases, Tax Reform, Net Benefit Cost (Details) - USD ($) $ in Millions		3 Months Ended			9 Months Ended			12 Months Ended
	Jan. 01, 2018	Sep. 30, 2018	Sep. 30, 2017		Sep. 30, 2018	Sep. 30, 2017		Dec. 31, 2017
Accounting Changes
Operating lease commitments								$ 6,600
Reclassification from AOCI to retained earnings for stranded tax effects of U.S. tax reform	$ (2,420)
Total cost		$ 9,953	$ 10,172	[1]	$ 31,582	$ 30,703	[1]
Selling, general and administrative		4,363	4,606	[1]	14,665	14,666	[1]
Research, development and engineering		$ 1,252	1,291	[1]	$ 4,021	4,212	[1]
Accounting Standards Update 2016-02, Leases
Accounting Changes
Lease receivables that would have been reclassified under new guidance to loan receivables on lease termination								$ 450
Accounting Standards Update 2017-07, Improving the Presentation of Net Benefit Cost | Adjustments for adoption of guidance | Other (Income) and Expense
Accounting Changes
Total cost			(181)			(529)
Selling, general and administrative			(42)			(293)
Research, development and engineering			$ (51)			$ (148)

[1] Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

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Accounting Changes - Revenue Recognition (Details) - USD ($) $ in Millions	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Accounting Changes
Deferred costs	$ 4,808
Deferred tax assets	4,436		$ 4,862
Retained earnings	158,612		$ 153,126
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjustments to convert to prior GAAP
Accounting Changes
Net contract assets		$ 557
Deferred costs		737
Deferred income		29
Deferred tax assets	179	(184)
Retained earnings	$ (507)	$ 524

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Accounting Changes - Intra-Entity Transfers (Details) $ / shares in Units, $ in Millions	1 Months Ended	3 Months Ended		9 Months Ended
	Jan. 31, 2017 item	Sep. 30, 2018 USD ($) $ / shares	Sep. 30, 2017 USD ($) $ / shares	Sep. 30, 2018 USD ($) item $ / shares	Sep. 30, 2017 USD ($) $ / shares	Dec. 31, 2017 USD ($)		Jan. 01, 2017 USD ($)
Accounting Changes
Investments and sundry assets		$ 2,272		$ 2,272		$ 2,783	[1]
Prepaid expenses and other current assets		2,388		2,388		1,860	[1],[2]
Deferred tax assets		4,436		4,436		4,862
Retained earnings		158,612		158,612		$ 153,126
Provision for (benefit from) income taxes		304	$ 339	138	$ 120
Income from continuing operations		2,692	2,726	6,770	6,811
Net income		$ 2,694	$ 2,726	$ 6,777	$ 6,807
Earnings per share, basic (in dollars per share) | $ / shares		$ 2.95	$ 2.93	$ 7.40	$ 7.28
Earnings per share, diluted (in dollars per share) | $ / shares		$ 2.94	$ 2.92	$ 7.37	$ 7.24
Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory
Accounting Changes
Number of transactions within scope of new guidance | item				0
Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory | Early adoption
Accounting Changes
Investments and sundry assets								$ (95)
Prepaid expenses and other current assets								(47)
Deferred tax assets								244
Retained earnings								$ 102
Number of transactions within scope of new guidance | item	1
Provision for (benefit from) income taxes					$ (582)
Income from continuing operations					582
Net income					$ 582
Earnings per share, basic (in dollars per share) | $ / shares					$ 0.62
Earnings per share, diluted (in dollars per share) | $ / shares					$ 0.62

[1] Recast to conform to current period presentation.

[2] Recast to reflect adoption of the FASB guidance on restricted cash.

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Revenue Recognition - Billing and Financing Components (Details)	9 Months Ended
	Sep. 30, 2018
Revenue Recognition
Payment due period from receipt of invoice, per standard billing terms	30 days
Practical expedient, financing components	true

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Revenue Recognition - Contract Terms (Details)	9 Months Ended
	Sep. 30, 2018
Services | Minimum
Contract terms
Contract term, high end of range	10 years
Services | Maximum
Contract terms
Contract term, low end of range	1 year
Term License Software
Contract terms
Committed contract term	1 month

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Revenue Recognition - Incremental Costs of Obtaining a Contract (Details)	9 Months Ended
	Sep. 30, 2018
Incremental Costs of Obtaining a Contract
Practical expedient, incremental costs of obtaining a contract	true
Minimum
Incremental Costs of Obtaining a Contract
Capitalized costs to obtain contract, expected customer relationship period as amortization period	3 years
Maximum
Incremental Costs of Obtaining a Contract
Capitalized costs to obtain contract, expected customer relationship period as amortization period	6 years

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Revenue Recognition - Product Warranties (Details)	9 Months Ended
	Sep. 30, 2018
Minimum
Product Warranties
Product warranty term	1 year
Maximum
Product Warranties
Product warranty term	3 years

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Revenue Recognition - Contract Assets (Details) - USD ($) $ in Millions	Sep. 30, 2018	Jan. 01, 2018
Revenue Recognition
Contract assets	$ 510	$ 557

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Revenue Recognition - Disaggregation of Revenue by Major Products/Service Offerings (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue by Major Products/Service Offerings
Total Revenue	$ 18,756	$ 19,153	$ 57,830	$ 56,597
Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	18,694	19,098	57,655	56,405
Other revenue
Revenue by Major Products/Service Offerings
Total Revenue	62	56	176	192
Cognitive Solutions | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	4,148	4,400	13,027	13,021
Global Business Services | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	4,130	4,093	12,495	12,196
Technology Services & Cloud Platforms | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	8,292	8,457	25,533	25,079
Systems | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	1,736	1,721	5,412	4,863
Global Financing | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Total Revenue	388	$ 427	1,188	$ 1,246
Solutions Software
Revenue by Major Products/Service Offerings
Total Revenue	2,910		9,080
Solutions Software | Cognitive Solutions | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	2,910		9,080
Transaction Processing Software
Revenue by Major Products/Service Offerings
Total Revenue	1,238		3,946
Transaction Processing Software | Cognitive Solutions | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	1,238		3,946
Consulting
Revenue by Major Products/Service Offerings
Total Revenue	1,900		5,698
Consulting | Global Business Services | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	1,900		5,698
Global Process Services
Revenue by Major Products/Service Offerings
Total Revenue	314		934
Global Process Services | Global Business Services | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	314		934
Application Management
Revenue by Major Products/Service Offerings
Total Revenue	1,915		5,863
Application Management | Global Business Services | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	1,915		5,863
Infrastructure Services
Revenue by Major Products/Service Offerings
Total Revenue	5,595		17,188
Infrastructure Services | Technology Services & Cloud Platforms | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	5,595		17,188
Technical Support Services
Revenue by Major Products/Service Offerings
Total Revenue	1,707		5,239
Technical Support Services | Technology Services & Cloud Platforms | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	1,707		5,239
Integration Software
Revenue by Major Products/Service Offerings
Total Revenue	990		3,106
Integration Software | Technology Services & Cloud Platforms | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	990		3,106
Systems Hardware
Revenue by Major Products/Service Offerings
Total Revenue	1,339		4,187
Systems Hardware | Systems | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	1,339		4,187
Operating Systems Software
Revenue by Major Products/Service Offerings
Total Revenue	397		1,225
Operating Systems Software | Systems | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Revenue	397		1,225
Global Financing
Revenue by Major Products/Service Offerings
Total Revenue	388		1,188
Global Financing | Global Financing | Business Segments, Excluding Intersegment Revenue
Revenue by Major Products/Service Offerings
Financial Services Revenue	388		1,188
Other Revenue
Revenue by Major Products/Service Offerings
Total Revenue	62		176
Other Revenue | Other revenue
Revenue by Major Products/Service Offerings
Revenue	$ 62		$ 176

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Revenue Recognition - Disaggregation of Revenue by Geography (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue by Geography
Revenues	$ 18,756	$ 19,153	$ 57,830	$ 56,597
Americas
Revenue by Geography
Revenues	8,853		26,772
EMEA
Revenue by Geography
Revenues	5,827		18,410
Asia Pacific
Revenue by Geography
Revenues	$ 4,076		$ 12,648

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Revenue Recognition - Remaining Performance Obligations (Details) $ in Billions	9 Months Ended
	Sep. 30, 2018 USD ($)
Revenue Recognition
Practical expedient, remaining performance obligations	true
Remaining performance obligations related to customer contracts that are unsatisfied or partially unsatisfied	$ 119

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Revenue Recognition - Remaining Performance Obligations, Expected Timing of Satisfaction (Details)	Sep. 30, 2018
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2018-10-01
Remaining Performance Obligations
Percentage of remaining performance obligation expected to be recognized	60.00%
Duration of expected recognition period for remaining performance obligation	2 years
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-10-01
Remaining Performance Obligations
Percentage of remaining performance obligation expected to be recognized	35.00%
Duration of expected recognition period for remaining performance obligation	3 years

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Revenue Recognition - Performance Obligations Satisfied or Partially Satisfied in Prior Periods (Details) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018
Revenue Recognition
Revenue reduced for performance obligations satisfied (or partially satisfied) in previous periods	$ (25)	$ (50)

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Revenue Recognition - Reconciliation of Contract Balances (Details) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Reconciliation of Contract Balances
Notes and accounts receivable - trade (net of allowances)	$ 7,071	$ 7,071	$ 8,295	$ 8,928
Notes and accounts receivable - trade, allowances	310	310	297	297
Contract assets	510	510	557
Deferred income (current)	10,704	10,704	11,493	11,552
Deferred income (noncurrent)	3,507	3,507	$ 3,758	$ 3,746
Revenue recognized that was included in deferred income at the beginning of the period	$ 3,800	$ 8,000

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Revenue Recognition - Deferred Contract Costs (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017	[1]
Deferred Contract Costs
Deferred contract costs	$ 4,808
Deferred contract costs, current	2,227		$ 1,820
Deferred contract costs, noncurrent	2,581		$ 2,136
Amortization of deferred contract costs	929
Impairment of deferred contract costs
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjustments for adoption of guidance
Deferred Contract Costs
Deferred contract costs		$ 737
Costs to obtain a contract
Deferred Contract Costs
Deferred contract costs	681
Deferred setup costs
Deferred Contract Costs
Deferred contract costs	2,123
Other deferred fulfillment costs
Deferred Contract Costs
Deferred contract costs	$ 2,003

[1] Recast to conform to current period presentation.

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Revenue Recognition - Transition Disclosures, Statement of Earnings (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017		Sep. 30, 2018	Sep. 30, 2017
Transition Disclosures
Revenue	$ 18,756	$ 19,153		$ 57,830	$ 56,597
Cost	9,953	10,172	[1]	31,582	30,703	[1]
Gross profit	8,803	8,981	[1]	26,249	25,894	[1]
Selling, general and administrative	4,363	4,606	[1]	14,665	14,666	[1]
Income from continuing operations before income taxes	2,996	3,065		6,908	6,931
Provision for (benefit from) income taxes	304	339		138	120
Net income	$ 2,694	$ 2,726		$ 6,777	$ 6,807
Earnings/(loss) per share of common stock:
Assuming dilution (in dollars per share)	$ 2.94	$ 2.92		$ 7.36	$ 7.24
Basic (in dollars per share)	$ 2.95	$ 2.93		$ 7.39	$ 7.28
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjustments to convert to prior GAAP
Transition Disclosures
Revenue	$ 4			$ (10)
Cost				0
Gross profit	4			(10)
Selling, general and administrative	(28)			(32)
Income from continuing operations before income taxes	33			23
Provision for (benefit from) income taxes	8			5
Net income	$ 24			$ 17
Earnings/(loss) per share of common stock:
Assuming dilution (in dollars per share)	$ 0.03			$ 0.02
Basic (in dollars per share)	$ 0.03			$ 0.02
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjusted amounts under prior GAAP
Transition Disclosures
Revenue	$ 18,760			$ 57,821
Cost	9,953			31,582
Gross profit	8,807			26,239
Selling, general and administrative	4,335			14,633
Income from continuing operations before income taxes	3,029			6,930
Provision for (benefit from) income taxes	313			143
Net income	$ 2,718			$ 6,794
Earnings/(loss) per share of common stock:
Assuming dilution (in dollars per share)	$ 2.97			$ 7.38
Basic (in dollars per share)	$ 2.98			$ 7.41

[1] Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

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Revenue Recognition - Transition Disclosures, Statement of Financial Position (Details) - USD ($) $ in Millions	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017		Sep. 30, 2017	Dec. 31, 2016
Assets:
Notes and accounts receivable - trade (net of allowances)	$ 7,071	$ 8,295	$ 8,928
Deferred costs (current)	2,227		1,820	[1]
Prepaid expenses and other current assets	2,388		1,860	[1],[2]
Deferred taxes	4,436		4,862
Deferred costs (noncurrent)	2,581		2,136	[1]
Investments and sundry assets	2,272		2,783	[1]
Total assets	121,990		125,356
Liabilities:
Taxes	2,502		4,219
Deferred income (current)	10,704	11,493	11,552
Deferred income (noncurrent)	3,507	3,758	3,746
Total liabilities	102,071		107,631
Equity:
Retained earnings	158,612		153,126
AOCI	(27,820)		(26,592)
Total stockholders' equity	19,918		17,725		$ 19,757	$ 18,392
Total liabilities and stockholders' equity	121,990		$ 125,356
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjustments to convert to prior GAAP
Assets:
Notes and accounts receivable - trade (net of allowances)	574
Deferred costs (current)	(280)
Prepaid expenses and other current assets	(510)
Deferred taxes	179	(184)
Deferred costs (noncurrent)	(402)
Total assets	(439)
Liabilities:
Deferred income (current)	51
Deferred income (noncurrent)	(5)
Total liabilities	46
Equity:
Retained earnings	(507)	$ 524
AOCI	22
Total stockholders' equity	(484)
Total liabilities and stockholders' equity	(439)
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjusted amounts under prior GAAP
Assets:
Notes and accounts receivable - trade (net of allowances)	7,645
Deferred costs (current)	1,947
Prepaid expenses and other current assets	1,878
Deferred taxes	4,615
Deferred costs (noncurrent)	2,179
Investments and sundry assets	2,272
Total assets	121,551
Liabilities:
Taxes	2,502
Deferred income (current)	10,754
Deferred income (noncurrent)	3,502
Total liabilities	102,117
Equity:
Retained earnings	158,106
AOCI	(27,798)
Total stockholders' equity	19,434
Total liabilities and stockholders' equity	$ 121,551

[1] Recast to conform to current period presentation.

[2] Recast to reflect adoption of the FASB guidance on restricted cash.

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Revenue Recognition - Transition Disclosures, Statement of Cash Flows (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net income	$ 6,777	$ 6,807
Adjustments to reconcile net income to cash provided by operating activities
Changes in operating assets and liabilities, net of acquisitions/divestitures	631	312
Net cash provided by operating activities	11,128	$ 10,991
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjustments to convert to prior GAAP
Cash flows from operating activities:
Net income	17
Adjustments to reconcile net income to cash provided by operating activities
Changes in operating assets and liabilities, net of acquisitions/divestitures	(17)
Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Adjusted amounts under prior GAAP
Cash flows from operating activities:
Net income	6,794
Adjustments to reconcile net income to cash provided by operating activities
Changes in operating assets and liabilities, net of acquisitions/divestitures	614
Net cash provided by operating activities	$ 11,128

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Financial Instruments - Fair Value Measurements (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Financial assets and financial liabilities measured at fair value on a recurring basis:
Debt securities - current	$ 2,932	$ 608
Derivative assets	694	942
Derivative liabilities	415	415
Potential reduction in net position of total derivative assets	285	255
Recurring
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	8,263	8,586
Equity investments	11	4
Debt securities - current	2,932	608
Debt securities - noncurrent		11
Derivative assets	694	942
Total assets	11,900	10,151
Derivative liabilities	415	415
Potential reduction in net position of total derivative assets	285	255
Potential reduction in net position of total derivative liabilities	285	255
Recurring | Prepaid expenses and other current assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	312	185
Recurring | Investments and sundry assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	382	757
Recurring | Other accrued expenses and liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	122	377
Recurring | Other liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	292	38
Recurring | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	8,238	8,066
Recurring | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents		96
Recurring | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	26	26
Recurring | Canadian government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents		398
Recurring | Level 1
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	26	26
Equity investments	11	4
Debt securities - noncurrent		4
Derivative assets	9
Total assets	46	33
Derivative liabilities	2
Recurring | Level 1 | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	26	26
Recurring | Level 2
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	8,238	8,560
Debt securities - current	2,932	608
Debt securities - noncurrent		7
Derivative assets	685	942
Total assets	11,854	10,117
Derivative liabilities	413	415
Recurring | Level 2 | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	$ 8,238	8,066
Recurring | Level 2 | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents		96
Recurring | Level 2 | Canadian government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents		$ 398

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Financial Instruments - Not Measured at Fair Value (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Long-Term Debt
Carrying amount of long-term debt	$ 35,989	$ 39,837
Fair value of long-term debt	$ 37,636	$ 42,264

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Financial Instruments - Available-For-Sale Securities (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Sales of available-for-sale securities
Gross realized gains (before taxes) - new guidance
Gross realized losses (before taxes) - new guidance
Gross realized gains (before taxes) - prior year guidance
Gross realized losses (before taxes) - prior year guidance
Net changes related to available-for-sale securities, net of tax:
Net unrealized gains/(losses) arising during the period
Maximum contractual maturities of substantially all available-for-sale debt securities			1 year

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Financial Instruments - Derivatives, Offsetting (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Derivative Financial Instruments
Fair value of derivative instruments under collateralized arrangements in a liability position	$ 120	$ 126
Collateral posted on derivative instruments	$ 0	0
Maximum spread on credit default swap agreements before full collateralization is required	2.50%
Fair value of total derivative instruments, Assets	$ 694	942
Liabilities included in master netting arrangements	285	255
Obligation to return cash collateral	11	114
Non-cash collateral received	0	0
Net exposure related to derivative assets recorded in the Statement of Financial Position	398	572
Net position related to derivative liabilities recorded in the Statement of Financial Position	130	160
Cash collateral rehypothecated	0	0
Other receivables
Derivative Financial Instruments
Right to reclaim cash collateral	0	0
Accounts payable
Derivative Financial Instruments
Obligation to return cash collateral	$ 11	$ 114

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Financial Instruments - Derivatives, Other Information (Details) $ in Millions	9 Months Ended	12 Months Ended
	Sep. 30, 2018 USD ($) instrument	Dec. 31, 2017 USD ($) instrument
Derivative instruments in fair value hedges | Interest rate swaps
Derivative Financial Instruments
Notional amount	$ 9,900	$ 9,100
Average remaining maturity	4 years 3 months 18 days	4 years 9 months 18 days
Derivative instruments in cash flow hedges | Interest rate swaps
Derivative Financial Instruments
Notional amount	$ 0	$ 0
Derivative instruments in cash flow hedges | Forward-starting interest rate swaps
Derivative Financial Instruments
Number of derivative instruments outstanding | instrument	0	0
Derivative instruments in cash flow hedges | Foreign exchange forward contracts
Derivative Financial Instruments
Maximum length of time hedged	4 years
Notional amount	$ 9,200	$ 7,800
Average remaining maturity	8 months 12 days	8 months 12 days
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges	$ 202	$ 27
Gains (losses) expected to be reclassified to net income within the next 12 months	$ 199
Derivative instruments in cash flow hedges | Cross-currency swaps
Derivative Financial Instruments
Maximum length of time hedged	10 years
Notional amount	$ 6,500	6,500
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges	141	42
Gains (losses) expected to be reclassified to net income within the next 12 months	202
Instruments in net investment hedges
Derivative Financial Instruments
Notional amount	$ 6,400	$ 7,000
Average remaining maturity	2 months 12 days	2 months 12 days
Not designated as hedging instruments - economic hedges | Foreign exchange contracts
Derivative Financial Instruments
Notional amount	$ 7,600	$ 11,500
Not designated as hedging instruments - economic hedges | Foreign exchange contracts | Maximum
Derivative Financial Instruments
Term of contract	1 year
Not designated as hedging instruments - economic hedges | Equity contracts hedging employee compensation obligations
Derivative Financial Instruments
Notional amount	$ 1,300	$ 1,300
Not designated as hedging instruments - economic hedges | Equity contracts hedging investment securities
Derivative Financial Instruments
Number of derivative instruments outstanding | instrument	0	0
Not designated as hedging instruments - economic hedges | Warrants qualifying as derivatives
Derivative Financial Instruments
Number of derivative instruments outstanding | instrument	0	0
Not designated as hedging instruments - economic hedges | Credit default swaps
Derivative Financial Instruments
Number of derivative instruments outstanding | instrument	0	0

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Financial Instruments - Derivatives, Fair Value (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	$ 694	$ 942
Fair value of total derivative instruments, Liabilities	415	415
Short-term debt	10,932	6,987
Long-term debt (excluding current portion)	35,989	39,837
Fair value of total derivative liabilities and debt	6,709	6,886
Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	664	870
Fair value of total derivative instruments, Liabilities	356	355
Designated as hedging instruments | Instruments in net investment hedges
Fair Values of Derivative Instruments
Long-term debt (excluding current portion)	6,294	6,471
Total debt designated as hedging instruments	6,294	6,471
Not designated as hedging instruments - economic hedges
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	30	72
Fair value of total derivative instruments, Liabilities	59	60
Prepaid expenses and other current assets | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets		2
Prepaid expenses and other current assets | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	281	111
Prepaid expenses and other current assets | Foreign exchange contracts | Not designated as hedging instruments - economic hedges
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	18	61
Prepaid expenses and other current assets | Equity contracts | Not designated as hedging instruments - economic hedges
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	12	12
Investments and sundry assets | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	237	459
Investments and sundry assets | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	145	298
Other accrued expenses and liabilities | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	11
Other accrued expenses and liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	52	318
Other accrued expenses and liabilities | Foreign exchange contracts | Not designated as hedging instruments - economic hedges
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	53	57
Other accrued expenses and liabilities | Equity contracts | Not designated as hedging instruments - economic hedges
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	6	3
Other liabilities | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	145	34
Other liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	$ 147	$ 3

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Financial Instruments - Cumulative Basis Adjustments for Fair Value Hedges (Details) $ in Millions	Sep. 30, 2018 USD ($)
Short-term debt
Amounts recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges
Carrying Amount of the Hedged Item Assets/(Liabilities)	$ (1,539)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Assets/(Liabilities)	10
Long-term debt
Amounts recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges
Carrying Amount of the Hedged Item Assets/(Liabilities)	(8,567)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Assets/(Liabilities)	(208)
Hedging adjustments on discontinued hedging relationships	$ (178)

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Financial Instruments - Effect of Hedge Activity on Income and Expense (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	$ (2,996)	$ (3,065)	$ (6,908)	$ (6,931)
Cost of Services
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	8,040		25,519
Gains/(losses) of total hedge activity	1		29
Cost of Sales
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	1,625		5,216
Gains/(losses) of total hedge activity	8		(15)
Cost of financing
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	287		846
Gains/(losses) of total hedge activity	15		56
SG&A Expense
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	4,363		14,665
Gains/(losses) of total hedge activity	47		24
Other (Income) and Expense
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	275		968
Gains/(losses) of total hedge activity	(63)		(449)
Interest expense
Derivative Instruments, Gain (Loss)
Loss (income) from continuing operations before income taxes	191		530
Gains/(losses) of total hedge activity	$ (21)		$ (53)

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Financial Instruments - Derivatives, Gains and Losses (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Derivative Instruments, Gain (Loss)
Gain (loss) recognized in earnings on derivatives	$ (69)	$ (10)	$ (377)	$ 233
Gain (loss) recognized in earnings attributable to risk being hedged	66	41	327	42
Gains (losses) excluded from the assessment of hedge effectiveness for fair value hedges
Gains (losses) excluded from the assessment of hedge effectiveness for cash value hedges
Gains (losses) associated with underlying exposure that did not occur or was not expected to occur for cash flow hedges
Cash flow hedges and net investment hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI	40	(577)	375	(1,712)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	(28)	73	(408)	347
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing	18	7	49	37
Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI	(46)	(70)	(134)	(198)
Foreign exchange contracts | Instruments in net investment hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI	86	(507)	509	(1,513)
Cost of financing | Interest rate contracts | Derivative instruments in fair value hedges
Derivative Instruments, Gain (Loss)
Gain (loss) recognized in earnings on derivatives	(27)	(3)	(138)	37
Gain (loss) recognized in earnings attributable to risk being hedged	33	20	170	22
Cost of financing | Foreign exchange contracts | Instruments in net investment hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing	8	0	24	0
Interest expense | Interest rate contracts | Derivative instruments in fair value hedges
Derivative Instruments, Gain (Loss)
Gain (loss) recognized in earnings on derivatives	(26)	(3)	(128)	34
Gain (loss) recognized in earnings attributable to risk being hedged	33	20	157	20
Interest expense | Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	(36)	(7)	(108)	(21)
Interest expense | Foreign exchange contracts | Instruments in net investment hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing	9	8	25	34
Other (Income) and Expense | Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	(8)	64	(301)	275
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing		(1)		2
Other (Income) and Expense | Foreign exchange contracts | Not designated as hedging instruments - economic hedges
Derivative Instruments, Gain (Loss)
Gain (loss) recognized in earnings on derivatives	(55)	(35)	(148)	74
Cost of Sales | Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	8	1	(15)	23
Cost of Services | Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	1	20	29	47
SG&A Expense | Foreign exchange contracts | Derivative instruments in cash flow hedges
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Reclassified from AOCI	7	(6)	(14)	23
SG&A Expense | Equity contracts | Not designated as hedging instruments - economic hedges
Derivative Instruments, Gain (Loss)
Gain (loss) recognized in earnings on derivatives	$ 40	$ 31	$ 38	$ 88

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Financing Receivables - Payment Terms (Details)	9 Months Ended
	Sep. 30, 2018
Lease receivables | Minimum
Financing receivables
Financing receivable, payment terms	2 years
Lease receivables | Maximum
Financing receivables
Financing receivable, payment terms	6 years
Commercial financing receivables | Minimum
Financing receivables
Financing receivable, payment terms	30 days
Commercial financing receivables | Maximum
Financing receivables
Financing receivable, payment terms	90 days
Loan receivables | Maximum
Financing receivables
Financing receivable, payment terms	7 years

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Financing Receivables - Components of Financing Receivables (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017	Dec. 31, 2016
Components of the company's financing receivables
Financing receivables, gross	$ 28,222	$ 32,087
Unearned income	(1,108)	(1,210)
Recorded Investment	27,114	30,877
Allowance for credit losses	(325)	(336)
Unguaranteed residual value	549	630
Guaranteed residual value	90	100
Total financing receivables, net	27,427	31,272
Current portion	19,249	21,721
Noncurrent portion	8,179	9,550
Financing receivables pledged as collateral for borrowings	754	773
Financing receivables held for sale	0	0
Lease receivables
Components of the company's financing receivables
Financing receivables, gross	6,566	7,128
Unearned income	(502)	(535)
Recorded Investment	6,064	6,593
Allowance for credit losses	(103)	(103)	$ (133)
Unguaranteed residual value	549	630
Guaranteed residual value	90	100
Total financing receivables, net	6,599	7,220
Current portion	2,764	2,900
Noncurrent portion	3,836	4,320
Commercial financing receivables
Components of the company's financing receivables
Financing receivables, gross	9,397	11,649
Unearned income	(30)	(32)
Recorded Investment	9,367	11,617
Allowance for credit losses	(12)	(21)
Total financing receivables, net	9,355	11,596
Current portion	9,355	11,596
Loan receivables
Components of the company's financing receivables
Financing receivables, gross	12,259	13,311
Unearned income	(576)	(644)
Recorded Investment	11,683	12,667
Allowance for credit losses	(210)	(211)	$ (276)
Total financing receivables, net	11,473	12,456
Current portion	7,130	7,226
Noncurrent portion	$ 4,343	$ 5,230

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Financing Receivables - By Portfolio Segment (Details) $ in Millions	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) item	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Financing receivables
Recorded investment	$ 27,114		$ 27,114		$ 30,877
Allowance for credit losses:
Allowance for credit losses, beginning balance			336
Allowance for credit losses, ending balance	325		$ 325		336
Total Lease Receivable and Loan Receivable Portfolio Segments
Financing receivables
Number of portfolio segments | item			2
Number of classes of financing receivable | item			3
Recorded investment	17,747		$ 17,747		19,259
Recorded investment collectively evaluated for impairment	17,456		17,456		18,990
Recorded investment individually evaluated for impairment	291		291		269
Allowance for credit losses:
Allowance for credit losses, beginning balance			314	$ 410	410
Write-offs			(9)		(137)
Recoveries			2		2
Provision			21		16
Other			(15)		24
Allowance for credit losses, ending balance	313		313		314
Related allowance, collectively evaluated for impairment	62		62		64
Related allowance, individually evaluated for impairment	250		250		250
Interest income recognized on impaired leases and loans
Interest income recognized on a cash basis
Total Lease Receivable and Loan Receivable Portfolio Segments | Americas
Financing receivables
Recorded investment	9,644		9,644		10,626
Recorded investment collectively evaluated for impairment	9,484		9,484		10,497
Recorded investment individually evaluated for impairment	161		161		129
Allowance for credit losses:
Allowance for credit losses, beginning balance			172	223	223
Write-offs			(5)		(51)
Recoveries			0		1
Provision			10		(8)
Other			(9)		7
Allowance for credit losses, ending balance	167		167		172
Related allowance, collectively evaluated for impairment	42		42		43
Related allowance, individually evaluated for impairment	125		125		128
Average recorded investment of impaired leases and loans	143	156	136	165
Total Lease Receivable and Loan Receivable Portfolio Segments | EMEA
Financing receivables
Recorded investment	4,690		4,690		4,946
Recorded investment collectively evaluated for impairment	4,634		4,634		4,889
Recorded investment individually evaluated for impairment	56		56		57
Allowance for credit losses:
Allowance for credit losses, beginning balance			61	22	22
Write-offs			(1)		(1)
Recoveries			0		1
Provision			10		29
Other			(2)		11
Allowance for credit losses, ending balance	68		68		61
Related allowance, collectively evaluated for impairment	15		15		15
Related allowance, individually evaluated for impairment	52		52		46
Average recorded investment of impaired leases and loans	56	31	56	27
Total Lease Receivable and Loan Receivable Portfolio Segments | Asia Pacific
Financing receivables
Recorded investment	3,413		3,413		3,687
Recorded investment collectively evaluated for impairment	3,338		3,338		3,604
Recorded investment individually evaluated for impairment	75		75		83
Allowance for credit losses:
Allowance for credit losses, beginning balance			82	165	165
Write-offs			(3)		(85)
Recoveries			2		0
Provision			2		(4)
Other			(4)		6
Allowance for credit losses, ending balance	78		78		82
Related allowance, collectively evaluated for impairment	5		5		6
Related allowance, individually evaluated for impairment	73		73		76
Average recorded investment of impaired leases and loans	76	$ 101	79	131
Lease receivables
Financing receivables
Recorded investment	6,064		6,064		6,593
Allowance for credit losses:
Allowance for credit losses, beginning balance			103	133	133
Write-offs			(6)		(55)
Provision			4		9
Allowance for credit losses, ending balance	103		103		103
Lease receivables | Americas
Financing receivables
Recorded investment	3,526		3,526		3,911
Allowance for credit losses:
Allowance for credit losses, beginning balance			63	54	54
Allowance for credit losses, ending balance	61		61		63
Lease receivables | EMEA
Financing receivables
Recorded investment	1,377		1,377		1,349
Allowance for credit losses:
Allowance for credit losses, beginning balance			9	4	4
Allowance for credit losses, ending balance	12		12		9
Lease receivables | Asia Pacific
Financing receivables
Recorded investment	1,161		1,161		1,333
Allowance for credit losses:
Allowance for credit losses, beginning balance			31	76	76
Allowance for credit losses, ending balance	29		29		31
Loan receivables
Financing receivables
Recorded investment	11,683		11,683		12,667
Allowance for credit losses:
Allowance for credit losses, beginning balance			211	276	276
Write-offs			(3)		(82)
Provision			17		7
Allowance for credit losses, ending balance	210		210		211
Loan receivables | Americas
Financing receivables
Recorded investment	6,118		6,118		6,715
Allowance for credit losses:
Allowance for credit losses, beginning balance			108	169	169
Allowance for credit losses, ending balance	106		106		108
Loan receivables | EMEA
Financing receivables
Recorded investment	3,313		3,313		3,597
Allowance for credit losses:
Allowance for credit losses, beginning balance			52	18	18
Allowance for credit losses, ending balance	55		55		52
Loan receivables | Asia Pacific
Financing receivables
Recorded investment	2,252		2,252		2,354
Allowance for credit losses:
Allowance for credit losses, beginning balance			51	$ 89	89
Allowance for credit losses, ending balance	$ 48		$ 48		$ 51

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Financing Receivables - Past Due (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Past Due Financing Receivable
Total Recorded Investment	$ 27,114	$ 30,877
Total Lease Receivable and Loan Receivable Portfolio Segments
Past Due Financing Receivable
Total Recorded Investment	17,747	19,259
Recorded Investment Not Accruing	359	331
Recorded investment, impaired financing receivables with related allowance	291	269
Impaired financing receivables, related allowance	250	250
Total Lease Receivable and Loan Receivable Portfolio Segments | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	853	825
Recorded Investment > 90 Days and Accruing	561	507
Billed Invoices > 90 Days and Accruing	70	77
Total Lease Receivable and Loan Receivable Portfolio Segments | Americas
Past Due Financing Receivable
Total Recorded Investment	9,644	10,626
Total Lease Receivable and Loan Receivable Portfolio Segments | EMEA
Past Due Financing Receivable
Total Recorded Investment	4,690	4,946
Total Lease Receivable and Loan Receivable Portfolio Segments | Asia Pacific
Past Due Financing Receivable
Total Recorded Investment	3,413	3,687
Lease receivables
Past Due Financing Receivable
Total Recorded Investment	6,064	6,593
Recorded Investment Not Accruing	105	107
Lease receivables | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	330	328
Recorded Investment > 90 Days and Accruing	230	225
Billed Invoices > 90 Days and Accruing	31	36
Lease receivables | Americas
Past Due Financing Receivable
Total Recorded Investment	3,526	3,911
Recorded Investment Not Accruing	59	44
Lease receivables | Americas | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	268	239
Recorded Investment > 90 Days and Accruing	213	197
Billed Invoices > 90 Days and Accruing	27	29
Lease receivables | EMEA
Past Due Financing Receivable
Total Recorded Investment	1,377	1,349
Recorded Investment Not Accruing	17	27
Lease receivables | EMEA | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	26	32
Recorded Investment > 90 Days and Accruing	10	5
Billed Invoices > 90 Days and Accruing	2	3
Lease receivables | Asia Pacific
Past Due Financing Receivable
Total Recorded Investment	1,161	1,333
Recorded Investment Not Accruing	29	36
Lease receivables | Asia Pacific | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	36	57
Recorded Investment > 90 Days and Accruing	8	23
Billed Invoices > 90 Days and Accruing	2	3
Loan receivables
Past Due Financing Receivable
Total Recorded Investment	11,683	12,667
Recorded Investment Not Accruing	254	224
Loan receivables | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	523	498
Recorded Investment > 90 Days and Accruing	330	283
Billed Invoices > 90 Days and Accruing	39	41
Loan receivables | Americas
Past Due Financing Receivable
Total Recorded Investment	6,118	6,715
Recorded Investment Not Accruing	128	96
Loan receivables | Americas | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	382	345
Recorded Investment > 90 Days and Accruing	276	254
Billed Invoices > 90 Days and Accruing	27	38
Loan receivables | EMEA
Past Due Financing Receivable
Total Recorded Investment	3,313	3,597
Recorded Investment Not Accruing	77	74
Loan receivables | EMEA | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	62	90
Recorded Investment > 90 Days and Accruing	23	17
Billed Invoices > 90 Days and Accruing	4	0
Loan receivables | Asia Pacific
Past Due Financing Receivable
Total Recorded Investment	2,252	2,354
Recorded Investment Not Accruing	49	54
Loan receivables | Asia Pacific | Total Past Due > 90 days
Past Due Financing Receivable
Recorded Investment > 90 Days	78	63
Recorded Investment > 90 Days and Accruing	31	12
Billed Invoices > 90 Days and Accruing	$ 8	$ 3

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Financing Receivables - Credit Quality Indicators (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Net recorded investment for each class of receivables, by credit quality indicator
Troubled debt restructurings of financing receivables
Lease receivables | Americas
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	3,465	3,847
Lease receivables | Americas | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	385	422
Lease receivables | Americas | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	741	855
Lease receivables | Americas | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	796	980
Lease receivables | Americas | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	754	730
Lease receivables | Americas | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	459	443
Lease receivables | Americas | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	298	367
Lease receivables | Americas | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	32	51
Lease receivables | EMEA
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,365	1,340
Lease receivables | EMEA | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	54	49
Lease receivables | EMEA | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	167	190
Lease receivables | EMEA | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	416	371
Lease receivables | EMEA | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	432	448
Lease receivables | EMEA | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	185	192
Lease receivables | EMEA | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	100	77
Lease receivables | EMEA | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	10	13
Lease receivables | Asia Pacific
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,132	1,302
Lease receivables | Asia Pacific | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	87	68
Lease receivables | Asia Pacific | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	434	544
Lease receivables | Asia Pacific | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	278	337
Lease receivables | Asia Pacific | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	184	184
Lease receivables | Asia Pacific | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	88	89
Lease receivables | Asia Pacific | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	52	64
Lease receivables | Asia Pacific | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	8	18
Loan receivables | Americas
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	6,012	6,607
Loan receivables | Americas | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	668	724
Loan receivables | Americas | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,285	1,469
Loan receivables | Americas | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,381	1,683
Loan receivables | Americas | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,308	1,253
Loan receivables | Americas | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	797	760
Loan receivables | Americas | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	517	630
Loan receivables | Americas | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	55	88
Loan receivables | EMEA
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	3,258	3,545
Loan receivables | EMEA | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	128	129
Loan receivables | EMEA | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	400	502
Loan receivables | EMEA | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	994	982
Loan receivables | EMEA | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	1,032	1,186
Loan receivables | EMEA | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	443	508
Loan receivables | EMEA | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	239	204
Loan receivables | EMEA | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	23	34
Loan receivables | Asia Pacific
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	2,203	2,303
Loan receivables | Asia Pacific | Aaa - Aa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	169	120
Loan receivables | Asia Pacific | A1 - A3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	845	961
Loan receivables | Asia Pacific | Baa1 - Baa3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	541	596
Loan receivables | Asia Pacific | Ba1 - Ba2
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	358	325
Loan receivables | Asia Pacific | Ba3 - B1
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	172	157
Loan receivables | Asia Pacific | B2 - B3
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	102	113
Loan receivables | Asia Pacific | Caa - D
Net recorded investment for each class of receivables, by credit quality indicator
Financing receivables, net recorded investment	$ 16	$ 31

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Stock-Based Compensation (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ 129	$ 123	$ 371	$ 388
Income tax benefits	(29)	(41)	(88)	(128)
Total net stock-based compensation cost	100	82	283	260
Pre-tax stock-based compensation cost increase (decrease)	6		(17)
Pre-tax stock-based compensation cost increase (decrease) related to conversion of stock-based awards of acquired entities	(1)		(4)
Stock-based compensation cost, unrecognized, related to non-vested awards	805		$ 805
Stock-based compensation cost, unrecognized, related to non-vested awards, weighted average period of recognition			2 years 6 months
Performance share units
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost increase (decrease)	8
Restricted stock units
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost increase (decrease)	(1)		$ (13)
Cost
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	19	22	60	68
SG&A Expense
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	95	88	264	277
Research, development and engineering
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ 15	$ 13	$ 47	$ 43

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Segments - Results of Continuing Operations (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Segments
Revenue	$ 18,756	$ 19,153	$ 57,830	$ 56,597
Pre-tax income from continuing operations	2,996	3,065	6,908	6,931
Business Segments, Excluding Intersegment Revenue
Segments
Revenue	18,694	19,098	57,655	56,405
Business Segments, Excluding Intersegment Revenue | Cognitive Solutions
Segments
Revenue	4,148	4,400	13,027	13,021
Business Segments, Excluding Intersegment Revenue | Global Business Services
Segments
Revenue	4,130	4,093	12,495	12,196
Business Segments, Excluding Intersegment Revenue | Technology Services & Cloud Platforms
Segments
Revenue	8,292	8,457	25,533	25,079
Business Segments, Excluding Intersegment Revenue | Systems
Segments
Revenue	1,736	1,721	5,412	4,863
Business Segments, Excluding Intersegment Revenue | Global Financing
Segments
Revenue	388	427	1,188	1,246
Internal transactions
Segments
Revenue	(1,476)	(1,384)	(4,738)	(4,265)
Pre-tax income from continuing operations	(116)	(126)	(625)	(515)
Internal transactions | Cognitive Solutions
Segments
Revenue	(639)	(629)	(2,122)	(2,001)
Internal transactions | Global Business Services
Segments
Revenue	(77)	(92)	(249)	(271)
Internal transactions | Technology Services & Cloud Platforms
Segments
Revenue	(240)	(164)	(550)	(497)
Internal transactions | Systems
Segments
Revenue	(181)	(227)	(576)	(571)
Internal transactions | Global Financing
Segments
Revenue	(338)	(272)	(1,240)	(925)
Business Segments
Segments
Revenue	20,170	20,482	62,392	60,670
Pre-tax income from continuing operations	$ 3,801	$ 3,843	$ 9,616	$ 9,459
Revenue year-to-year change (as a percent)	(1.50%)		2.80%
Pre-tax income year-to-year change (as a percent)	(1.10%)		1.70%
Pre-tax income/(loss) margin (as a percent)	18.80%	18.80%	15.40%	15.60%
Business Segments | Cognitive Solutions
Segments
Revenue	$ 4,787	$ 5,030	$ 15,149	$ 15,022
Pre-tax income from continuing operations	$ 1,629	$ 1,643	$ 4,718	$ 4,522
Revenue year-to-year change (as a percent)	(4.80%)		0.80%
Pre-tax income year-to-year change (as a percent)	(0.90%)		4.30%
Pre-tax income/(loss) margin (as a percent)	34.00%	32.70%	31.10%	30.10%
Business Segments | Global Business Services
Segments
Revenue	$ 4,207	$ 4,185	$ 12,744	$ 12,467
Pre-tax income from continuing operations	$ 579	$ 442	$ 1,109	$ 1,035
Revenue year-to-year change (as a percent)	0.50%		2.20%
Pre-tax income year-to-year change (as a percent)	30.90%		7.10%
Pre-tax income/(loss) margin (as a percent)	13.80%	10.60%	8.70%	8.30%
Business Segments | Technology Services & Cloud Platforms
Segments
Revenue	$ 8,533	$ 8,621	$ 26,083	$ 25,576
Pre-tax income from continuing operations	$ 1,075	$ 1,177	$ 2,395	$ 2,845
Revenue year-to-year change (as a percent)	(1.00%)		2.00%
Pre-tax income year-to-year change (as a percent)	(8.60%)		(15.80%)
Pre-tax income/(loss) margin (as a percent)	12.60%	13.70%	9.20%	11.10%
Business Segments | Systems
Segments
Revenue	$ 1,917	$ 1,948	$ 5,989	$ 5,434
Pre-tax income from continuing operations	$ 209	$ 337	$ 352	$ 222
Revenue year-to-year change (as a percent)	(1.60%)		10.20%
Pre-tax income year-to-year change (as a percent)	(37.90%)		58.80%
Pre-tax income/(loss) margin (as a percent)	10.90%	17.30%	5.90%	4.10%
Business Segments | Global Financing
Segments
Revenue	$ 726	$ 698	$ 2,428	$ 2,171
Pre-tax income from continuing operations	$ 308	$ 243	$ 1,042	$ 835
Revenue year-to-year change (as a percent)	4.00%		11.80%
Pre-tax income year-to-year change (as a percent)	26.90%		24.80%
Pre-tax income/(loss) margin (as a percent)	42.50%	34.80%	42.90%	38.50%

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Segments - Revenue Reconciliation (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue
Revenue	$ 18,756	$ 19,153	$ 57,830	$ 56,597
Business Segments
Revenue
Revenue	20,170	20,482	62,392	60,670
Internal transactions
Revenue
Revenue	(1,476)	(1,384)	(4,738)	(4,265)
Other revenue
Revenue
Revenue	$ 62	$ 56	$ 176	$ 192

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Segments - Pre-Tax Income Reconciliation (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Pre-tax income from continuing operations
Amortization of acquired intangible assets	$ (207)	$ (238)	$ (613)	$ (731)
Acquisition-related (charges)/income	(2)	0	(3)	(19)
Non-operating retirement-related (costs)/income	(389)	(273)	(1,185)	(969)
Income from continuing operations before income taxes	2,996	3,065	6,908	6,931
Business Segments
Pre-tax income from continuing operations
Income from continuing operations before income taxes	3,801	3,843	9,616	9,459
Internal transactions
Pre-tax income from continuing operations
Income from continuing operations before income taxes	(116)	(126)	(625)	(515)
Unallocated corporate amounts
Pre-tax income from continuing operations
Income from continuing operations before income taxes	$ (91)	$ (141)	$ (283)	$ (294)

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Equity Activity - Reclassifications and Taxes (Details) - USD ($) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017		Sep. 30, 2018	Sep. 30, 2017
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Cost	$ 9,953	$ 10,172	[1]	$ 31,582	$ 30,703	[1]
SG&A expense	4,363	4,606	[1]	14,665	14,666	[1]
Other (income) and expense	275	159	[1]	968	751	[1]
Interest expense	191	168		530	451
Provision for (benefit from) income taxes	304	339		138	120
Net (income) loss	(2,694)	(2,726)		(6,777)	(6,807)
Other comprehensive income/(loss)				1,194	1,877
Sales
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Cost	1,625	1,584	[1]	5,216	4,779	[1]
Services
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Cost	8,040	8,265	[1]	25,519	25,034	[1]
Accumulated Other Comprehensive Income/(Loss)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Net of Tax Amount				(695)	721
Reclassification/amortization, Net of Tax Amount				1,889	1,155
Other comprehensive income/(loss), Before Tax Amount	678	658		2,001	1,869
Other comprehensive income/(loss), Tax (Expense)/Benefit	(209)	11		(807)	7
Other comprehensive income/(loss)	470	669		1,194	1,877
Foreign Currency Translation Adjustments
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Net of Tax Amount				(663)	794
Other comprehensive income/(loss), Before Tax Amount	(22)	89		(535)	213
Other comprehensive income/(loss), Tax (Expense)/Benefit	(22)	195		(128)	581
Other comprehensive income/(loss)	(44)	284		(663)	794
Net Unrealized Gains/(Losses) on Available-For-Sale Securities
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Before Tax Amount	0	(1)		(2)	2
Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit	0	1		1	0
Unrealized gains/(losses) arising during the period, Net of Tax Amount	0	0		(1)	1
Reclassification/amortization, Net of Tax Amount					0
Other comprehensive income/(loss), Before Tax Amount	0	(2)		(2)	2
Other comprehensive income/(loss), Tax (Expense)/Benefit	0	1		1	0
Other comprehensive income/(loss)	0	(1)		(1)	2
Net Unrealized Gains/(Losses) on Available-For-Sale Securities | Reclassifications
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Other (income) and expense		0			1
Provision for (benefit from) income taxes		0			0
Net (income) loss		0			0
Net Unrealized Gains/(Losses) on Cash Flow Hedges
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Before Tax Amount	(46)	(70)		(134)	(198)
Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit	11	20		39	53
Unrealized gains/(losses) arising during the period, Net of Tax Amount	(35)	(50)		(95)	(146)
Reclassification/amortization, Net of Tax Amount				305	(219)
Other comprehensive income/(loss), Before Tax Amount	(18)	(143)		274	(545)
Other comprehensive income/(loss), Tax (Expense)/Benefit	4	49		(63)	180
Other comprehensive income/(loss)	(14)	(94)		210	(365)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications
Reclassifications and Taxes Related to Items of Other Comprehensive Income
SG&A expense	(7)	6		14	(23)
Other (income) and expense	8	(64)		301	(275)
Interest expense	36	7		108	21
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Sales
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Cost	(8)	(1)		15	(23)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Services
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Cost	(1)	(20)		(29)	(47)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Cost of Sales
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Provision for (benefit from) income taxes	3	1		(4)	6
Net (income) loss	(6)	(1)		11	(17)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Cost of Services
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Provision for (benefit from) income taxes	0	8		7	18
Net (income) loss	(1)	(12)		(22)	(29)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | SG&A Expense
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Provision for (benefit from) income taxes	2	(1)		(4)	6
Net (income) loss	(5)	4		10	(17)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Other (Income) and Expense
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Provision for (benefit from) income taxes	(2)	25		(76)	106
Net (income) loss	6	(39)		225	(169)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Interest expense
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Provision for (benefit from) income taxes	(9)	(3)		(27)	(8)
Net (income) loss	27	4		81	13
Net Change Retirement-Related Benefit Plans
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Net of Tax Amount				65	72
Reclassification/amortization, Net of Tax Amount				1,584	1,374
Other comprehensive income/(loss), Before Tax Amount	719	713		2,264	2,200
Other comprehensive income/(loss), Tax (Expense)/Benefit	(191)	(235)		(616)	(754)
Other comprehensive income/(loss)	527	479		1,648	1,446
Retirement-Related Benefit Plans, Prior Service Costs/(Credits)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Before Tax Amount	0	0		(1)	0
Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit	0	0		0	0
Unrealized gains/(losses) arising during the period, Net of Tax Amount	0	0		(1)	0
Reclassification/amortization, Before Tax Amount	(18)	(22)		(55)	(66)
Reclassification/amortization, Tax (Expense)/Benefit	5	7		15	23
Reclassification/amortization, Net of Tax Amount	(13)	(15)		(40)	(43)
Retirement-Related Benefit Plans, Net Gains/(Losses)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Before Tax Amount	(1)	1		83	106
Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit	1	0		(22)	(36)
Unrealized gains/(losses) arising during the period, Net of Tax Amount	(1)	1		60	70
Reclassification/amortization, Before Tax Amount	737	733		2,231	2,156
Reclassification/amortization, Tax (Expense)/Benefit	(196)	(242)		(607)	(739)
Reclassification/amortization, Net of Tax Amount	540	491		1,624	1,417
Retirement-Related Benefit Plans, Curtailments and Settlements
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Unrealized gains/(losses) arising during the period, Before Tax Amount	2	2		7	3
Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit	0	(1)		(2)	(1)
Unrealized gains/(losses) arising during the period, Net of Tax Amount	$ 1	$ 1		$ 5	$ 2

[1] Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.

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Equity Activity - AOCI Rollforward (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				$ 17,725	$ 18,392
Other comprehensive income/(loss)				1,194	1,877
Balance at the End of the Period		$ 19,918	$ 19,757	19,918	19,757
Accumulated Other Comprehensive Income/(Loss)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				(26,592)	(29,398)
Other comprehensive income before reclassifications				(695)	721
Amount reclassified from accumulated other comprehensive income				1,889	1,155
Other comprehensive income/(loss)		470	669	1,194	1,877
Balance at the End of the Period		(27,820)	(27,521)	(27,820)	(27,521)
Accumulated Other Comprehensive Income/(Loss) | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Cumulative Effect Of Prospective Application Of New Accounting Principle, Net Of Tax	[1]			(2,422)
Net Unrealized Gains/(Losses) on Cash Flow Hedges
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				35	319
Other comprehensive income before reclassifications		(35)	(50)	(95)	(146)
Amount reclassified from accumulated other comprehensive income				305	(219)
Other comprehensive income/(loss)		(14)	(94)	210	(365)
Balance at the End of the Period		250	(46)	250	(46)
Net Unrealized Gains/(Losses) on Cash Flow Hedges | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Cumulative Effect Of Prospective Application Of New Accounting Principle, Net Of Tax				5
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				(2,834)	(3,603)
Other comprehensive income before reclassifications				(663)	794
Other comprehensive income/(loss)		(44)	284	(663)	794
Balance at the End of the Period		(3,451)	(2,809)	(3,451)	(2,809)
Foreign Currency Translation Adjustments | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Cumulative Effect Of Prospective Application Of New Accounting Principle, Net Of Tax				46
Net Change Retirement-Related Benefit Plans
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				(23,796)	(26,116)
Other comprehensive income before reclassifications				65	72
Amount reclassified from accumulated other comprehensive income				1,584	1,374
Other comprehensive income/(loss)		527	479	1,648	1,446
Balance at the End of the Period		(24,618)	(24,670)	(24,618)	(24,670)
Net Change Retirement-Related Benefit Plans | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Cumulative Effect Of Prospective Application Of New Accounting Principle, Net Of Tax				(2,471)
Net Unrealized Gains/(Losses) on Available-For-Sale Securities
Accumulated Other Comprehensive Income (Loss) (net of tax)
Balance at the Beginning of the Period				3	2
Other comprehensive income before reclassifications		0	0	(1)	1
Amount reclassified from accumulated other comprehensive income					0
Other comprehensive income/(loss)		0	(1)	(1)	2
Balance at the End of the Period		$ 0	$ 4	0	$ 4
Net Unrealized Gains/(Losses) on Available-For-Sale Securities | Accounting Standards Updates 2016-01 (Financial Instruments), 2017-12 (Hedging) and 2018-02 (Stranded Tax Effects)
Accumulated Other Comprehensive Income (Loss) (net of tax)
Cumulative Effect Of Prospective Application Of New Accounting Principle, Net Of Tax				$ (2)

[1] Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note 2, "Accounting Changes".

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Retirement-Related Benefits - All Retirement Plans Cost (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Retirement-Related Benefits
Defined benefit and contribution pension plans - cost	$ 705	$ 592	$ 2,152	$ 1,915
Nonpension postretirement plans - cost	49	61	149	182
Total	$ 754	$ 653	$ 2,300	$ 2,097
Year-to-year percent change, defined benefit and contribution pension plans cost (as a percent)	19.00%		12.30%
Year-to-year percent change, nonpension postretirement plans cost (as a percent)	(19.50%)		(18.30%)
Year-to-year percent change, total (as a percent)	15.50%		9.70%

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Retirement-Related Benefits - Cost of Pension Plans (Details) - USD ($) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2012	Sep. 30, 2018	Sep. 30, 2017
Cost/(Income) of Pension Plans
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	$ 705	$ 592		$ 2,152	$ 1,915
U.S.
Cost/(Income) of Pension Plans
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	292	219		876	665
U.S. | Pension Plans
Cost/(Income) of Pension Plans
Interest cost	$ 430	$ 478		$ 1,289	$ 1,435
Interest cost - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Expected return on plan assets	$ (675)	$ (753)		$ (2,026)	$ (2,260)
Expected return on plan assets - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Amortization of prior service costs/(credits)	$ 4	$ 4		$ 12	$ 12
Amortization of prior service costs/(credits) - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Recognized actuarial losses	$ 381	$ 334		$ 1,144	$ 1,003
Recognized actuarial losses - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Total net periodic pension / nonpension (income)/cost of defined benefit plans	$ 140	$ 63		$ 419	$ 190
Cost of defined contribution plans	152	156		457	475
Non-U.S.
Cost/(Income) of Pension Plans
Total defined benefit and contribution pension plans cost recognized in the Consolidated Statement of Earnings	413	373		1,276	1,250
Non-U.S. | Pension Plans
Cost/(Income) of Pension Plans
Service cost	104	106		309	308
Interest cost	$ 204	$ 215		$ 630	$ 622
Interest cost - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Expected return on plan assets	$ (330)	$ (340)		$ (1,017)	$ (985)
Expected return on plan assets - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Amortization of prior service costs/(credits)	$ (20)	$ (25)		$ (62)	$ (73)
Amortization of prior service costs/(credits) - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Recognized actuarial losses	$ 346	$ 387		$ 1,057	$ 1,120
Recognized actuarial losses - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Curtailments and settlements	$ 2	$ 2		$ 7	$ 3
Curtailments and settlements - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Multi-employer plans	$ 9	$ 11		$ 29	$ 30
Other costs	$ 5	$ (85)		$ 16	$ (76)
Other costs - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense		ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Total net periodic pension / nonpension (income)/cost of defined benefit plans	$ 318	$ 271		$ 969	$ 950
Cost of defined contribution plans	$ 95	102		$ 306	301
Non-U.S. | Pension Plans | Litigation in United Kingdom regarding defined benefit plans | SG&A Expense
Cost/(Income) of Pension Plans
Other costs		$ (91)	$ 162		$ (91)

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Retirement-Related Benefits - Non-US and Multi-Employer Contributions (Details) - Pension Plans, Including Multi-employer Plans - Non-U.S. - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
RETIREMENT-RELATED BENEFITS
Expected current year contributions to non-U.S. defined benefit plans	$ 400
Contributions by employer to defined benefit plans	275	$ 301
Contributions by employer - Cash	117	124
Contributions by employer - Noncash	$ 157	$ 176

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Retirement-Related Benefits - Nonpension Postretirement Cost (Details) - Nonpension Postretirement Plans - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
U.S.
Retirement-related plans cost
Service cost	$ 3	$ 4	$ 10	$ 11
Interest cost	$ 33	$ 38	$ 99	$ 115
Interest cost - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Amortization of prior service costs/(credits)	$ (2)	$ (2)	$ (6)	$ (6)
Amortization of prior service costs/(credits) - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Recognized actuarial losses	$ 2	$ 5	$ 7	$ 15
Recognized actuarial losses - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Total net periodic pension / nonpension (income)/cost of defined benefit plans	$ 37	$ 45	$ 111	$ 135
Non-U.S.
Retirement-related plans cost
Service cost	1	1	4	4
Interest cost	$ 11	$ 14	$ 34	$ 43
Interest cost - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Expected return on plan assets	$ (1)	$ (2)	$ (4)	$ (6)
Expected return on plan assets - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Amortization of prior service costs/(credits)	$ 0	$ 0	$ 0	$ 0
Amortization of prior service costs/(credits) - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Recognized actuarial losses	$ 1	$ 2	$ 4	$ 5
Recognized actuarial losses - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Curtailments and settlements	$ 0	$ 0	$ 0	$ 0
Curtailments and settlements - income statement location	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense	ibm:OtherIncomeAndExpense
Total net periodic pension / nonpension (income)/cost of defined benefit plans	$ 12	$ 16	$ 38	$ 47

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Retirement-Related Benefits - Nonpension Postretirement Contributions (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Nonpension Postretirement Plans | U.S.
RETIREMENT-RELATED BENEFITS
Contributions by employer - Noncash	$ 275	$ 259

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Acquisitions (Details) $ in Millions	9 Months Ended
	Sep. 30, 2018 USD ($) entity
Acquisitions
Number of acquisitions	2
Aggregate acquisitions cost | $	$ 49
Percentage of business acquired (as a percent)	100.00%
Cognitive Solutions
Acquisitions
Number of acquisitions	1
Global Business Services
Acquisitions
Number of acquisitions	1

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Intangible Assets Including Goodwill - Intangible Assets by Class (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Intangible asset balances by major asset class
Gross Carrying Amount	$ 7,071	$ 7,260
Accumulated Amortization	(3,937)	(3,518)
Net Carrying Amount	3,134	3,742
Capitalized software
Intangible asset balances by major asset class
Gross Carrying Amount	1,572	1,600
Accumulated Amortization	(784)	(790)
Net Carrying Amount	788	810
Client relationships
Intangible asset balances by major asset class
Gross Carrying Amount	2,273	2,358
Accumulated Amortization	(1,247)	(1,080)
Net Carrying Amount	1,026	1,278
Completed technology
Intangible asset balances by major asset class
Gross Carrying Amount	2,509	2,586
Accumulated Amortization	(1,560)	(1,376)
Net Carrying Amount	949	1,210
Patents/trademarks
Intangible asset balances by major asset class
Gross Carrying Amount	661	668
Accumulated Amortization	(324)	(256)
Net Carrying Amount	337	413
Other intangible assets
Intangible asset balances by major asset class
Gross Carrying Amount	56	47
Accumulated Amortization	(21)	(16)
Net Carrying Amount	$ 34	$ 31

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Intangible Assets Including Goodwill - Intangible Assets Activity (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Intangible Assets Including Goodwill
Net carrying amount decrease			$ 608
Intangible asset amortization expense	$ 348	$ 383	1,031	$ 1,161
Retirement of fully amortized intangible assets			$ 612

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Intangible Assets Including Goodwill - Future Amortization (Details) $ in Millions	Sep. 30, 2018 USD ($)
Future amortization expense, by year
2018 (for Q4)	$ 338
2019	1,070
2020	768
2021	502
2022	382
Capitalized software
Future amortization expense, by year
2018 (for Q4)	140
2019	393
2020	203
2021	51
Acquired intangibles
Future amortization expense, by year
2018 (for Q4)	198
2019	676
2020	564
2021	451
2022	$ 382

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Intangible Assets Including Goodwill - Goodwill by Segment (Details) - USD ($) $ in Millions	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Changes in Goodwill Balances
Beginning Balance	$ 36,788	$ 36,199
Goodwill Additions	34	16
Purchase Price Adjustments	(4)	(38)
Divestitures	(1)	(20)
Foreign Currency Translation and Other Adjustments	(291)	631
Ending Balance	36,526	36,788
Goodwill impairment losses	0	0
Goodwill accumulated impairment losses	0	0
Cognitive Solutions
Changes in Goodwill Balances
Beginning Balance	19,665	19,484
Goodwill Additions	10	3
Purchase Price Adjustments	0	(38)
Divestitures	(1)	(20)
Foreign Currency Translation and Other Adjustments	(148)	235
Ending Balance	19,526	19,665
Global Business Services
Changes in Goodwill Balances
Beginning Balance	4,813	4,607
Goodwill Additions	24
Purchase Price Adjustments	(4)	2
Foreign Currency Translation and Other Adjustments	(51)	204
Ending Balance	4,782	4,813
Technology Services & Cloud Platforms
Changes in Goodwill Balances
Beginning Balance	10,447	10,258
Goodwill Additions		13
Purchase Price Adjustments	0	(2)
Foreign Currency Translation and Other Adjustments	(86)	179
Ending Balance	10,361	10,447
Systems
Changes in Goodwill Balances
Beginning Balance	1,862	1,850
Purchase Price Adjustments		0
Foreign Currency Translation and Other Adjustments	(6)	13
Ending Balance	$ 1,857	$ 1,862

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Borrowings - Short-Term Debt (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Short-term debt disclosures
Long-term debt - current maturities	$ 6,773	$ 5,214
Total short-term debt	10,932	6,987
Commercial paper
Short-term debt disclosures
Short-term debt	$ 3,986	$ 1,496
Weighted-average interest rates for short-term debt (as a percent)	2.20%	1.50%
Short-term loans
Short-term debt disclosures
Short-term debt	$ 173	$ 276
Weighted-average interest rates for short-term debt (as a percent)	8.30%	8.80%

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Borrowings - Long-Term Debt, Components (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Borrowings
Long-term debt, gross	$ 43,450	$ 45,445
Less: net unamortized discount	808	826
Less: net unamortized debt issuance cost	79	93
Add: fair value adjustment	198	526
Long-term debt (including current maturities)	42,762	45,052
Less: current maturities	6,773	5,214
Long-term debt (excluding current portion)	35,989	39,837
IBM International Group Capital, LLC
Borrowings
Long-term debt, gross	$ 0
IBM International Group Capital, LLC
Borrowings
Ownership interest in subsidiary (as a percent)	100.00%
U.S. dollars
Borrowings
Long-term debt, gross	$ 30,192	31,515
Euros
Borrowings
Long-term debt, gross	$ 10,162	10,502
Debt instrument, weighted-average interest rate (as a percent)	1.50%
Pound sterling
Borrowings
Long-term debt, gross	$ 1,369	1,420
Debt instrument, weighted-average interest rate (as a percent)	2.70%
Japanese yen
Borrowings
Long-term debt, gross	$ 1,281	1,291
Debt instrument, weighted-average interest rate (as a percent)	0.30%
Other
Borrowings
Long-term debt, gross	$ 446	717
Debt instrument, weighted-average interest rate (as a percent)	6.60%
Maturing 2018 | U.S. dollars
Borrowings
Long-term debt, gross	$ 1,634	4,640
Debt instrument, weighted-average interest rate (as a percent)	7.60%
Maturing 2019 | U.S. dollars
Borrowings
Long-term debt, gross	$ 5,474	5,540
Debt instrument, weighted-average interest rate (as a percent)	2.90%
Maturing 2020 | U.S. dollars
Borrowings
Long-term debt, gross	$ 3,347	3,416
Debt instrument, weighted-average interest rate (as a percent)	2.20%
Maturing 2021 | U.S. dollars
Borrowings
Long-term debt, gross	$ 5,001	4,129
Debt instrument, weighted-average interest rate (as a percent)	2.50%
Maturing 2022 | U.S. dollars
Borrowings
Long-term debt, gross	$ 3,533	3,481
Debt instrument, weighted-average interest rate (as a percent)	2.40%
Maturing 2023 | U.S. dollars
Borrowings
Long-term debt, gross	$ 2,395	1,547
Debt instrument, weighted-average interest rate (as a percent)	3.30%
Maturing 2024 | U.S. dollars
Borrowings
Long-term debt, gross	$ 2,013	2,000
Debt instrument, weighted-average interest rate (as a percent)	3.60%
Maturing 2025 | U.S. dollars
Borrowings
Long-term debt, gross	$ 600	600
Debt instrument, weighted-average interest rate (as a percent)	7.00%
Maturing 2026 | U.S. dollars
Borrowings
Long-term debt, gross	$ 1,350	1,350
Debt instrument, weighted-average interest rate (as a percent)	3.50%
Maturing 2027 | U.S. dollars
Borrowings
Long-term debt, gross	$ 969	969
Debt instrument, weighted-average interest rate (as a percent)	4.70%
Maturing 2028 | U.S. dollars
Borrowings
Long-term debt, gross	$ 313	313
Debt instrument, weighted-average interest rate (as a percent)	6.50%
Maturing 2030 | U.S. dollars
Borrowings
Long-term debt, gross	$ 32
Debt instrument, weighted-average interest rate (as a percent)	3.70%
Maturing 2032 | U.S. dollars
Borrowings
Long-term debt, gross	$ 600	600
Debt instrument, weighted-average interest rate (as a percent)	5.90%
Maturing 2038 | U.S. dollars
Borrowings
Long-term debt, gross	$ 83	83
Debt instrument, weighted-average interest rate (as a percent)	8.00%
Maturing 2039 | U.S. dollars
Borrowings
Long-term debt, gross	$ 745	745
Debt instrument, weighted-average interest rate (as a percent)	5.60%
Maturing 2042 | U.S. dollars
Borrowings
Long-term debt, gross	$ 1,107	1,107
Debt instrument, weighted-average interest rate (as a percent)	4.00%
Maturing 2045 | U.S. dollars
Borrowings
Long-term debt, gross	$ 27	27
Debt instrument, weighted-average interest rate (as a percent)	7.00%
Maturing 2046 | U.S. dollars
Borrowings
Long-term debt, gross	$ 650	650
Debt instrument, weighted-average interest rate (as a percent)	4.70%
Maturing 2096 | U.S. dollars
Borrowings
Long-term debt, gross	$ 316	316
Debt instrument, weighted-average interest rate (as a percent)	7.10%
Debt securities issued in 2017 | IBM Credit LLC
Borrowings
Fixed and floating rate debt securities issued		$ 3,000
Debt securities issued during first quarter of 2018 | IBM Credit LLC
Borrowings
Fixed and floating rate debt securities issued	$ 2,000

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Borrowings - Long-Term Debt, Covenants (Details) $ in Millions	9 Months Ended
	Sep. 30, 2018 USD ($)
Borrowings
Limit based on net tangible assets	10.00%
Credit Facilities
Borrowings
Minimum net interest expense ratio	2.20
Default provision on credit facility	$ 500

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Borrowings - Pre-Swap Obligations (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Pre-swap annual contractual obligations of long-term debt outstanding
2018 (for Q4)	$ 1,724
2019	7,034
2020	6,286
2021	6,139
2022	4,320
2023 and beyond	17,946
Total	$ 43,450	$ 45,445

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Borrowings - Interest on Debt (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Interest on Debt
Interest capitalized	$ 3
Interest capitalized		$ (1)
Total interest paid and accrued	1,101	947
Cost of financing
Interest on Debt
Interest paid	568	496
Interest expense
Interest on Debt
Interest paid	$ 530	$ 451

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Borrowings - Lines of Credit (Details) - Credit Facilities - USD ($) $ in Millions	Jul. 19, 2018	Jul. 18, 2018	Sep. 30, 2018
Lines of Credit
Revolving line of credit, borrowings outstanding			$ 0
Five-Year Credit Agreement
Lines of Credit
Revolving line of credit, amount	$ 10,250
Revolving line of credit, term	5 years
Revolving line of credit, expiration date	Jul. 20, 2023
364-Day Credit Agreement, 2018
Lines of Credit
Revolving line of credit, amount	$ 2,500
Revolving line of credit, term	364 days
364-Day Credit Agreement, 2017
Lines of Credit
Revolving line of credit, amount		$ 2,500
Revolving line of credit, term		364 days
Three-Year Credit Agreement
Lines of Credit
Revolving line of credit, amount	$ 2,500
Revolving line of credit, term	3 years
Revolving line of credit, expiration date	Jul. 20, 2021

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Contingencies (Details) $ in Millions				1 Months Ended	9 Months Ended
	Aug. 07, 2017 USD ($)	Feb. 13, 2014 USD ($)	Jul. 18, 2012 USD ($)	May 31, 2015 defendant	Sep. 30, 2018 USD ($) country claim	Oct. 30, 2017 claim
SCO v. IBM
Loss Contingencies
Number of remaining claims | claim						1
IBM v. State Of Indiana
Loss Contingencies
Duration of trial			42 days
Amount of award to IBM		$ 50	$ 52
Amount of award against IBM	$ 128
Net amount awarded against IBM	$ 78
Individual Participants Of Defined Benefit Plans vs. IBM United Kingdom
Loss Contingencies
Claims pending | claim					290
Litigation Case In United States District Court regarding divesting Microelectronics business, alleging violations of the Employee Retirement Income Security Act
Loss Contingencies
Number of officers or executives named as defendants | defendant				3
Brazil Tax Matters
Loss Contingencies
Damages sought, value					$ 900
Minimum
Loss Contingencies
Clients' presence in number of countries | country					175

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Commitments - Extensions of Credit (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Extended lines of credit
Commitments, guarantees:
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients	$ 8,537	$ 8,111
Financing for client purchase agreements
Commitments, guarantees:
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients	$ 3,798	$ 3,569

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Commitments - Financial Guarantees (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Financial guarantees
Guarantor obligations
Guarantor obligations, maximum exposure	$ 15	$ 19

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Commitments - Standard Warranty Liability (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Movement in standard warranty liability
Beginning Balance	$ 152	$ 156
Current period accruals	84	107
Accrual adjustments to reflect actual experience	(31)	(3)
Charges incurred	(93)	(126)
Ending Balance	$ 112	$ 134

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Commitments - Extended Warranty Liability (Details) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Sep. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Movement in deferred income
Amortization of deferred revenue	$ (3,800)	$ (8,000)
Current portion	10,704	10,704		$ 11,493	$ 11,552
Noncurrent portion	3,507	3,507		$ 3,758	$ 3,746
Extended Warranty
Movement in deferred income
Beginning Balance		566	$ 531
Revenue deferred for new extended warranty contracts		138	175
Amortization of deferred revenue		(178)	(198)
Other		(12)	24
Ending Balance	514	514	533
Current portion	242	242	258
Noncurrent portion	$ 273	$ 273	$ 275

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Taxes - (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Taxes
Provision for income taxes	$ 304	$ 339	$ 138	$ 120
Effective tax rate (as a percent)	10.20%	11.00%	2.00%	1.70%
Unrecognized tax benefits
Decrease in amount of unrecognized tax benefits			$ 892
Unrecognized tax benefits	$ 6,139		6,139
Offsetting tax benefits associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes	599		599
Net unrecognized tax benefit amount that, if recognized, would favorably affect the company's effective tax rate	5,540		5,540
India Tax Authorities
Taxes
Prepaid taxes	$ 636		$ 636

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Taxes - U.S. Tax Reform (Details) - USD ($) $ in Millions	3 Months Ended			9 Months Ended	12 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2018	Dec. 31, 2017
Taxes
U.S. corporate tax rate (as a percent)				21.00%
Provisional charge from enactment of U.S. tax reform			$ 5,475		$ 5,475
Benefit for effect of tax law changes on deferred tax assets and liabilities			$ 270		$ 270
Additional provisional charge/(benefit) related to U.S. tax reform	$ (14)	$ 107

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Earnings Per Share of Common Stock - Computation (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	911,152,848	929,437,441	915,632,501	935,600,777
Add - Incremental shares under stock-based compensation plans (in shares)	2,566,139	2,236,234	3,000,429	3,213,758
Add - Incremental shares associated with contingently issuable shares (in shares)	1,493,644	1,553,754	1,373,960	1,394,930
Number of shares on which diluted earnings per share is calculated	915,212,631	933,227,429	920,006,890	940,209,466
Net income on which basic earnings per share is calculated:
Income from continuing operations	$ 2,692	$ 2,726	$ 6,770	$ 6,811
Income/(loss) from discontinued operations, net of tax	2	0	7	(3)
Net income on which basic earnings per share is calculated	2,694	2,726	6,777	6,807
Net income on which diluted earnings per share is calculated:
Income from continuing operations	2,692	2,726	6,770	6,811
Net income applicable to contingently issuable shares		0	(1)	(2)
Income from continuing operations on which diluted earnings per share is calculated	2,692	2,726	6,769	6,809
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated	2	0	7	(3)
Net income on which diluted earnings per share is calculated	$ 2,694	$ 2,726	$ 6,776	$ 6,806
Assuming dilution
Continuing operations (in dollars per share)	$ 2.94	$ 2.92	$ 7.36	$ 7.24
Discontinued operations (in dollars per share)	0.00	0.00	0.01	0.00
Total (in dollars per share)	2.94	2.92	7.37	7.24
Basic
Continuing operations (in dollars per share)	2.95	2.93	7.39	7.28
Discontinued operations (in dollars per share)	0.00	0.00	0.01	0.00
Total (in dollars per share)	$ 2.95	$ 2.93	$ 7.40	$ 7.28

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Earnings Per Share of Common Stock - Antidilutive Stock Options (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Stock options
Antidilutive stock options
Outstanding stock options not included in the computation of diluted earnings per share (in shares)	388,335	399,844	264,628	146,795

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Subsequent Events - Dividend and Stock Repurchase (Details) - Subsequent Events $ / shares in Units, $ in Billions	Oct. 30, 2018 USD ($) $ / shares
Subsequent Events
Dividend declared (in dollars per share) | $ / shares	$ 1.57
Dividend declared, date	Oct. 30, 2018
Dividend payable, date	Dec. 10, 2018
Shareholders of record, date	Nov. 09, 2018
Additional funds authorized for use in the stock repurchase program | $	$ 4.0

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Subsequent Events - Red Hat Acquisition (Details) - USD ($) $ / shares in Units, $ in Millions		9 Months Ended
	Oct. 28, 2018	Sep. 30, 2018
Subsequent Events
Estimated transaction value		$ 49
Subsequent Events | Bridge Loan Credit Facility | Expected
Subsequent Events
Term of debt instrument	364 days
Credit facility committed amount	$ 20,000
Subsequent Events | Red Hat, Inc. | Expected
Subsequent Events
Cash to be paid to acquiree shareholders (in dollars per share)	$ 190
Estimated transaction value	$ 34,000