Company Quick10K Filing
Quick10K
IBM Credit
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
8-K 2019-07-22 Earnings, Exhibits
8-K 2019-07-19 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-04-18 Earnings, Exhibits
8-K 2019-02-05 Earnings, Other Events, Exhibits
8-K 2018-11-27 Exhibits
8-K 2018-10-22 Earnings, Exhibits
8-K 2018-07-23 Earnings, Exhibits
8-K 2018-07-19 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-20 Earnings, Exhibits
8-K 2018-02-01 Exhibits
8-K 2018-01-30 Earnings, Exhibits
DUG Dutch Oven Gold Group 5,290
BTLN Brightlane 48
MFON Mobivity Holdings 46
SFEG Santa Fe Gold 29
TSSI TSS 15
ASTI Ascent Solar Technologies 0
CYPW Cyclone Power Technologies 0
JDCC Deere John Capital 0
USRM US Stem Cell 0
SLFC Springleaf Finance 0
IBMC 2019-06-30
Part I- Financial Information
Item 1. Consolidated Financial Statements:
Item 2.
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits
EX-31.1 ibmc-20190630ex311fa5a89.htm
EX-31.2 ibmc-20190630ex312907857.htm
EX-32.1 ibmc-20190630ex321417749.htm
EX-32.2 ibmc-20190630ex322a32cc4.htm

IBM Credit Earnings 2019-06-30

IBMC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

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Table of Contents

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 JUNE 30, 2019

000-55786

(Commission file number)

IBM CREDIT LLC

(Exact name of registrant as specified in its charter)

Delaware

    

22-2351962

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS employer identification number)

Armonk, New York

    

10504

(Address of principal executive offices)

(Zip Code)

914-765-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(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 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 No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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.

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

Securities registered pursuant to Section 12(b) of the Act:

None.

All of the limited liability company interests ("Interests") in the registrant are held by an affiliate of the registrant. None of the Interests are publicly traded.

REDUCED DISCLOSURE FORMAT

IBM Credit LLC, an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM), meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

Table of Contents

Index

    

Page

Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Statement of Earnings for the three and six months ended June 30, 2019 and 2018

3

Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2019 and 2018

4

Consolidated Statement of Financial Position at June 30, 2019 and December 31, 2018

5

Consolidated Statement of Cash Flows for the six months ended June 30, 2019 and 2018

6

Consolidated Statement of Changes in Member’s Interest for the three and six months ended June 30, 2019 and 2018

7

Notes to Consolidated Financial Statements

9

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

35

Item 4. Controls and Procedures

53

Part II - Other Information:

Item 1. Legal Proceedings

53

Item 6. Exhibits

53

2

Table of Contents

Part I— Financial Information

Item 1. Consolidated Financial Statements:

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in millions)

    

2019

    

2018

    

2019

    

2018

Revenue

  

 

  

  

 

  

Financing revenue

$

339

$

352

$

743

$

717

Operating lease revenue

70

80

149

165

Total revenue

$

410

$

433

$

892

$

882

Financing cost (related party cost for the three and six months: $58 and $131 in 2019, $75 and $134 in 2018)

$

137

$

125

$

297

$

227

Depreciation of equipment under operating lease

43

48

88

96

Net margin

$

230

$

259

$

507

$

559

Expense and other (income)

Selling, general and administrative

$

97

$

104

$

194

$

203

Provision for/(benefit from) credit losses

(8)

25

(4)

34

Other (income) and expense

5

(17)

(13)

(16)

Total expense and other (income)

$

94

$

111

$

178

$

221

Income before income taxes

$

136

$

148

$

330

$

339

Provision for income taxes

23

31

173

73

Net income

$

113

$

117

$

156

$

266

(Amounts may not add due to rounding.)

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

3

Table of Contents

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in millions)

    

2019

    

2018

    

2019

    

2018

Net income

$

113

$

117

$

156

$

266

Other comprehensive income/(loss), before tax:

Foreign currency translation

16

(168)

20

(98)

Retirement-related benefit plans (1)

0

0

0

1

Other comprehensive income/(loss), before tax

17

(168)

20

(97)

Income tax (expense)/benefit related to items of other comprehensive income

2

(27)

5

(16)

Other comprehensive income/(loss), net of tax

$

19

$

(195)

$

25

$

(113)

Total comprehensive income

$

132

$

(78)

$

181

$

152

(1)Amounts presented relate to multiple-employer plans.

(Amounts may not add due to rounding.)

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

4

Table of Contents

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

At June 30, 

At December 31, 

(Dollars in millions)

    

2019

    

2018

Assets:

 

  

  

Cash and cash equivalents

$

1,732

$

1,828

Financing receivables

 

18,740

 

25,848

(net of allowances of $161 in 2019 and $174 in 2018)

Equipment under operating leases

295

386

(net of accumulated depreciation of $260 in 2019 and $283 in 2018)

Financing receivables from IBM

 

3,703

 

3,609

Receivables purchased/participated from IBM

 

4,275

 

5,433

(net of allowances of $11 in 2019 and $18 in 2018)

Other receivables from IBM

329

2,019

Other assets

 

422

 

373

Total assets

$

29,495

$

39,497

Liabilities:

Accounts payable

$

518

$

1,705

Accounts payable to IBM

1,170

3,044

Debt

 

9,598

 

10,954

Debt payable to IBM

 

14,641

 

19,580

Taxes

 

608

 

547

Other liabilities

 

235

 

246

Total liabilities

$

26,771

$

36,076

Member’s interest:

 

Member's interest

2,733

3,216

Retained earnings

238

Accumulated other comprehensive income/(loss)

 

(8)

(33)

Total member's interest

$

2,724

$

3,420

Total liabilities and member’s interest

$

29,495

$

39,497

(Amounts may not add due to rounding.)

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

5

Table of Contents

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

Six Months Ended June 30, 

(Dollars in millions)

    

2019

    

2018

    

Cash flows from operating activities:

 

  

 

  

 

Net income

$

156

$

266

Adjustments to reconcile net income to cash provided by operating activities:

 

 

Provision for/(benefit from) credit losses

 

(4)

 

34

Depreciation

 

88

 

96

Deferred taxes

 

27

 

(28)

Net (gain)/loss on asset sales and other

 

(44)

 

(48)

Change in operating assets and liabilities:

 

 

Other assets/other liabilities

 

(198)

 

209

Net cash provided by operating activities

$

26

$

529

Cash flows from investing activities:

 

 

  

Originations of financing receivables

$

(6,872)

$

(7,310)

Collection of financing receivables

 

7,446

 

7,111

Short-term financing receivables - net (1)

 

4,884

 

1,065

Purchase of equipment under operating leases

 

(29)

 

(130)

Proceeds from disposition of equipment under operating lease

 

32

 

28

Other receivables from IBM - net

1,697

(1,769)

Other investing activities - net

 

39

 

81

Net cash provided by/(used in) investing activities

$

7,197

$

(924)

Cash flows from financing activities:

 

 

  

Proceeds from issuance of debt from IBM

$

5,858

$

6,882

Principal payments on debt from IBM

 

(5,903)

 

(6,377)

Proceeds from issuance of debt

 

500

 

2,413

Principal payments on debt

 

(431)

 

(560)

Short-term borrowings from/(repayments to) IBM - net (1)

 

(4,914)

 

(2,667)

Short-term borrowings/(repayments) - net (1)

 

(1,486)

 

463

Contributions from IBM

145

Distributions to IBM

(942)

(490)

Net cash used in financing activities

$

(7,318)

$

(191)

Effect of exchange rate changes on cash and cash equivalents

$

0

$

(14)

Net change in cash and cash equivalents

$

(96)

$

(600)

Cash and cash equivalents at January 1

 

1,828

 

2,680

Cash and cash equivalents at June 30

$

1,732

$

2,080

(1)Short-term represents original maturities of 90 days or less.

(Amounts may not add due to rounding.)

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

6

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Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST

(UNAUDITED)

Accumulated

Other

Total

Member's

Retained

Comprehensive

Member’s

(Dollars in millions)

    

Interest

    

Earnings

    

Income/(Loss)

    

Interest

Member’s Interest, April 1, 2019

$

3,191

$

$

(27)

$

3,164

Net income plus other comprehensive income/(loss):

 

  

 

  

 

  

 

  

Net income

 

 

113

 

  

 

113

Other comprehensive income/(loss), net of tax

 

  

 

  

 

19

 

19

Total comprehensive income/(loss)

 

  

 

  

 

  

$

132

Contributions from IBM

Distributions to IBM

(459)

(113)

(572)

Member’s Interest, June 30, 2019

$

2,733

$

$

(8)

$

2,724

(Amounts may not add due to rounding.)

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

Accumulated

Other

Total

Member's

Retained

Comprehensive

Member’s

(Dollars in millions)

    

Interest

    

Earnings

    

Income/(Loss)

    

Interest

Member’s Interest, April 1, 2018

$

3,067

$

$

234

$

3,302

Net income plus other comprehensive income/(loss):

 

  

 

  

 

  

 

  

Net income

 

 

117

 

  

 

117

Other comprehensive income/(loss), net of tax

 

  

 

  

 

(195)

 

(195)

Total comprehensive income/(loss)

 

  

 

  

 

  

$

(78)

Contributions from IBM

145

145

Distributions to IBM

Member’s Interest, June 30, 2018

$

3,212

$

117

$

39

$

3,369

(Amounts may not add due to rounding.)

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

7

Table of Contents

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST – (CONTINUED)

(UNAUDITED)

Accumulated

Other

Total

Member's

Retained

Comprehensive

Member’s

(Dollars in millions)

Interest

    

Earnings

    

Income/(Loss)

    

Interest

Member’s Interest, January 1, 2019

$

3,216

$

238

$

(33)

$

3,420

Net income plus other comprehensive income/(loss):

  

 

Net income

 

156

  

 

156

Other comprehensive income/(loss), net of tax

 

25

  

 

25

Total comprehensive income/(loss)

 

  

$

181

Contributions from IBM (1)

 

64

  

 

64

Distributions to IBM

(547)

(395)

(942)

Member’s Interest, June 30, 2019

$

2,733

$

$

(8)

$

2,724

(1) Includes $64 million non-cash equity contribution from IBM. Refer to note 9, "Relationship with IBM and Related Party Transactions."

(Amounts may not add due to rounding.)

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

Accumulated

Other

Total

Member's

Retained

Comprehensive

Member’s

(Dollars in millions)

    

Interest

    

Earnings

    

Income/(Loss)

    

Interest

Member’s Interest, January 1, 2018

$

3,101

$

302

$

158

$

3,562

Cumulative effect of change in accounting principle (1)

  

 

5

(5)

Net income plus other comprehensive income/(loss):

 

Net income

 

266

  

 

266

Other comprehensive income/(loss), net of tax

 

(113)

  

 

(113)

Total comprehensive income/(loss)

 

  

$

152

Contributions from IBM

145

  

 

145

Distributions to IBM

(34)

(456)

(490)

Member’s Interest, June 30, 2018

$

3,212

$

117

$

39

$

3,369

(1) Reflects the adoption of the FASB guidance on stranded tax effects. 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

Table of Contents

Notes to Consolidated Financial Statements:

1. Basis of Presentation:

The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit 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.

Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Distributions by the company to IBM are considered first to be a return of profit as reflected in retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of member’s interest as reflected in the Consolidated Statement of Financial Position.

Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.

The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.

All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.

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 Consolidated Financial Statements included in the company’s 2018 Form 10-K.

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 which changed the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020 with early adoption of certain provisions permitted. The company early adopted the provision in the fair value guidance that removed the Level 1/ Level 2 transfer disclosures. The company is evaluating the adoption date for the remaining changes. As the guidance is

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Notes to Consolidated Financial Statements — (continued)

a change to disclosures only, the company does not expect the guidance to have a material impact in the consolidated financial results.

In June 2016, with amendments in 2018 and 2019, 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 was established that is evaluating the financial instruments portfolio and the system, process and policy change requirements and continues to make substantial progress. 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. The company will adopt the guidance as of the effective date and is continuing to evaluate the impact.

Standards Implemented

The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance also made 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 company adopted the guidance effective January 1, 2019 using the transition option whereby prior comparative periods were not retrospectively presented in the consolidated financial statements. The company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. There are no material impacts of adoption from a lessee perspective as there are no material lease arrangements in which the company is a lessee. Refer to note 4, “Leases,” for additional information, including further discussion on the impact of adoption.

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 U.S. tax reform from accumulated other comprehensive income/(loss) (AOCI) to retained earnings. The guidance was 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 ceases 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 the actual cessation date. At adoption on January 1, 2018, $5 million was reclassified from AOCI to retained earnings.

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 was 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.

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 on January 1, 2018 using the modified-retrospective transition method. The company concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results.

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Table of Contents

Notes to Consolidated Financial Statements — (continued)

3. 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.

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.

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Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following tables present the company’s financial assets and liabilities that are measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018.

(Dollars in millions)

 

At June 30, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents (1)

Time deposits and certificates of deposit

 

$

 

$

807

 

$

 

$

807

Money market funds

5

5

Total

5

807

812

Derivative assets (2)

 

46

 

 

46

Total assets

$

5

$

853

$

$

858

Liabilities:

Derivative liabilities (3)

$

$

15

$

$

15

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2)Included within other assets in the Consolidated Statement of Financial Position.
(3)Included within other liabilities in the Consolidated Statement of Financial Position.

(Dollars in millions)

 

At December 31, 2018

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents (1)

 

  

 

  

 

  

 

  

Time deposits and certificates of deposit

$

$

792

$

$

792

Money market funds

 

5

 

 

 

5

Total

 

5

 

792

 

 

797

Derivative assets (2)

 

 

18

 

 

18

Total assets

$

5

$

810

$

$

815

Liabilities:

 

  

 

  

 

  

 

  

Derivative liabilities (3)

$

$

37

$

$

37

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2)Included within other assets in the Consolidated Statement of Financial Position.
(3)Included within other liabilities in the Consolidated Statement of Financial Position.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) 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.

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, 2019 and December 31, 2018, the difference between the carrying amount and estimated fair value for 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.

12

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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, which includes debt payable to IBM, 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 (including debt payable to IBM) was $17,443 million and $17,276 million and the estimated fair value was $17,560 million and $17,199 million at June 30, 2019 and December 31, 2018, 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.

Derivative Financial Instruments

The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match-fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At June 30, 2019, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $46 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $15 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $15 million. At December 31, 2018, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $18 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $37 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $11 million.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the capital markets to fund its operations. 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 enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2019 and December 31, 2018, the total notional amount of the company's interest rate swap contracts with IBM was $3,350 million at both periods. The weighted average remaining maturity of these instruments at June 30, 2019 and December 31, 2018, was approximately 1.9 years and 2.4 years, respectively. These interest rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at June 30, 2019 and December 31, 2018.

13

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2019 and December 31, 2018, the total notional amount of derivative contracts with IBM designated as net investment hedges was $1,255 million and $1,986 million, respectively. The weighted average remaining maturity of these instruments was 0.2 years at both periods.

Foreign Currency Asset/Liability Management

The company enters into foreign exchange derivative contracts to manage foreign currency exposur