Fair value is defined 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. The company classifies certain assets and liabilities based on the following fair value hierarchy:

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:

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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.

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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.

The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in very liquid and highly rated investment grade securities.

The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. No impairments for credit losses and no material non-credit impairments were recorded for the three and six months ended June 30, 2022 and 2021, respectively.

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, 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 non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three and six months ended June 30, 2022 and 2021, respectively.

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021.


	Fair Value
	Hierarchy	At June 30, 2022				At December 31, 2021
(Dollars in millions)	Level	Assets (8)		Liabilities (9)		Assets (8)		Liabilities (9)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	2,602	$	N/A	$	1,903	$	N/A
Money market funds	1		933		N/A		263		N/A
U.S. government securities (2)	2		—		N/A		599		N/A
Total cash equivalents		$	3,535	$	N/A	$	2,766	$	N/A
Equity investments (3)	1		—		N/A		0		N/A
Kyndryl common stock (4)	1		436		N/A		807		N/A
Secured borrowing (4)	2		N/A		218		N/A		—
Debt securities-current (2)(5)	2		524		N/A		600		N/A
Debt securities-noncurrent (2)(6)	2,3		31		N/A		37		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2		2		82		12		—
Foreign exchange contracts	2		717		348		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		11		26		21		42
Equity contracts (7)	1,2		5		95		6		4
Total		$	5,261	$	769	$	4,608	$	162

(1)	Included within cash and cash equivalents in the Consolidated Balance Sheet.

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

(3)	Included within investments and sundry assets in the Consolidated Balance Sheet.

(4)	Refer to “Kyndryl Common Stock” below for additional information.

(5)	U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.

(6)	Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.

(7)	Level 1 includes immaterial amounts related to equity futures contracts.

(8)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at June 30, 2022 were $723 million and $11 million, respectively, and at December 31, 2021 were $358 million and $40 million, respectively.

(9)	The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at June 30, 2022 were $266 million and $285 million, respectively, and at December 31, 2021 were $60 million and $103 million, respectively.

N/A – not applicable

Kyndryl Common Stock

On November 3, 2021, IBM completed the separation of Kyndryl and retained 19.9 percent of the shares of Kyndryl common stock with the intent to dispose of the shares within twelve months of the separation.

On May 18, 2022, the company borrowed an aggregate principal amount of $357 million under a short-term credit facility with a third-party financial institution, the proceeds of which will be used to repay certain of the company’s existing indebtedness. On May 23, 2022, the company completed a debt-for-equity exchange where 22.3 million shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest (the Shares), were exchanged at a strike price of $13.95 per share to extinguish $311 million of the company’s indebtedness under the short-term credit facility (the Exchange). The remaining portion of the short-term credit facility was repaid with $46 million of cash.

In connection with the Exchange, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in the Shares. Upon settlement of

the swap, which will occur no later than November 2, 2022, IBM will either receive or pay an amount derived from the difference between the volume-weighted average price (VWAP) of the Kyndryl shares over the outstanding term of the swap and the strike price of $13.95 per share. As a result, the most significant input into the valuation of the swap is the price of Kyndryl shares. The fair value of the swap at June 30, 2022 was $88 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement.

As a result of the swap, the transfer of the Shares pursuant to the Exchange does not qualify as a true sale, and therefore the Shares remain on the company’s Consolidated Balance Sheet at June 30, 2022. Relatedly, the portion of the company’s indebtedness under the short-term credit facility that was extinguished pursuant to the Exchange has been classified as a secured borrowing within short-term debt in the Consolidated Balance Sheet. The company has elected to record the debt at fair value based on changes in the value of the Shares underlying the debt. The fair value of the debt was $218 million at June 30, 2022. In electing the fair value option, the company recognizes changes in fair value of the debt in other (income) and expense, which amounted to $93 million for the three and six months ended June 30, 2022. The contractual principal balance of the debt was $311 million at June 30, 2022. Both the Shares and the debt are expected to be entirely derecognized from the company’s Consolidated Balance Sheet upon settlement of the swap, which will occur no later than November 2, 2022.

The 19.9 percent retained interest in the Kyndryl shares is accounted for at fair value which amounted to $436 million and $807 million at June 30, 2022 and December 31, 2021, respectively, and is included within prepaid expenses and other current assets in the Consolidated Balance Sheet. An unrealized loss of $56 million and $278 million, net of adjustment for the mark-to-market on the related debt as described above was recorded in other (income) and expense in the Consolidated Income Statement for the three and six months ended June 30, 2022, respectively.

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 and including short-term finance lease liabilities) 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 June 30, 2022 and December 31, 2021, 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 (including long-term finance lease liabilities) 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 $44,328 million and $44,917 million, and the estimated fair value was $42,143 million and $49,465 million at June 30, 2022 and December 31, 2021, 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.