Edgar Filing: INTERNATIONAL BUSINESS MACHINES CORP

FORM 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 MARCH 31, 2016

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 ý No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ☐

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

Large accelerated filer ý				Accelerated filer ☐

Non-accelerated filer ☐				Smaller reporting company ☐
(Do not check if a smaller reporting company)

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

The registrant had 959,961,852 shares of common stock outstanding at March 31, 2016.

Index

		Page
Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Statement of Earnings for the three months ended March 31, 2016 and 2015		3

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2016 and 2015		4

Consolidated Statement of Financial Position at March 31, 2016 and December 31, 2015		5

Consolidated Statement of Cash Flows for the three months ended March 31, 2016 and 2015		7

Consolidated Statement of Changes in Equity for the three months ended March 31, 2016 and 2015		8

Notes to Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		42

Item 4. Controls and Procedures		72

Part II - Other Information:

Item 1. Legal Proceedings		72

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities		72

Item 6. Exhibits		73

Part I - Financial Information

Item 1. Consolidated Financial Statements :

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

			Three Months Ended March 31,
(Dollars in millions except per share amounts)			2016		2015
Revenue:
	Services	$	12,391	$	12,366
	Sales		5,879		6,757
	Financing		414		467
Total revenue			18,684		19,590
Cost:
	Services		8,382		8,278
	Sales		1,378		1,625
	Financing		238		235
Total cost			9,999		10,138
Gross profit			8,686		9,452
Expense and other (income):
	Selling, general and administrative		6,012		5,362
	Research, development and engineering		1,458		1,298
	Intellectual property and custom development income		(217)		(173)
	Other (income) and expense		253		(143)
	Interest expense		147		108
Total expense and other (income)			7,652		6,451
Income from continuing operations before income taxes			1,034		3,001
Provision for/(benefit from) income taxes			(983)		585
Income from continuing operations		$	2,016	$	2,415
Loss from discontinued operations, net of tax			(3)		(88)
Net income		$	2,014	$	2,328

Earnings/(loss) per share of common stock:
	Assuming dilution:
	Continuing operations	$	2.09	$	2.44
	Discontinued operations		0.00		(0.09)
	Total	$	2.09	$	2.35
	Basic:
	Continuing operations	$	2.09	$	2.45
	Discontinued operations		0.00		(0.09)
	Total	$	2.09	$	2.36

Weighted-average number of common shares outstanding: (millions)
	Assuming dilution		964.4		992.3
	Basic		961.7		988.1

Cash dividend per common share		$	1.30	$	1.10

(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)



			Three Months Ended March 31,
(Dollars in millions)				2016		2015
Net income			$	2,014	$	2,328
Other comprehensive income/(loss), before tax:
	Foreign currency translation adjustments			239		(452)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period		(36)		32
		Reclassification of (gains)/losses to net income		37		0
	Total net changes related to available-for-sale securities			1		32
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period		(265)		619
		Reclassification of (gains)/losses to net income		(91)		(249)
	Total unrealized gains/(losses) on cash flow hedges			(356)		370
	Retirement-related benefit plans:
		Prior service costs/(credits)		—		5
		Net (losses)/gains arising during the period		(147)		(77)
		Curtailments and settlements		5		4
		Amortization of prior service (credits)/costs		(25)		(26)
		Amortization of net (gains)/losses		690		835
	Total retirement-related benefit plans			522		740
Other comprehensive income/(loss), before tax				406		690
Income tax (expense)/benefit related to items of other comprehensive income				202		(657)
Other comprehensive income/(loss)				608		33
Total comprehensive income/(loss)			$	2,622	$	2,361

(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)

ASSETS

				At March 31,		At December 31,
(Dollars in millions)				2016		2015
Assets:
	Current assets:
		Cash and cash equivalents		$	14,354	$	7,686
		Marketable securities			515		508
		Notes and accounts receivable - trade (net of allowances of $336
			in 2016 and $367 in 2015)		8,527		8,333
		Short-term financing receivables (net of allowances of $529 in 2016
			and $490 in 2015)		16,646		19,020
		Other accounts receivable (net of allowances of $55 in 2016 and
			$51 in 2015)		1,557		1,201
		Inventories, at lower of average cost or market:
			Finished goods		393		352
			Work in process and raw materials		1,296		1,199
		Total inventories			1,690		1,551
		Prepaid expenses and other current assets			4,334		4,205
	Total current assets				47,623		42,504
	Property, plant and equipment				29,627		29,342
		Less: Accumulated depreciation			18,717		18,615
	Property, plant and equipment — net				10,910		10,727
	Long-term financing receivables (net of allowances of $154 in 2016
		and $118 in 2015)			9,266		10,013
	Prepaid pension assets				2,332		1,734
	Deferred taxes				4,809		4,822
	Goodwill				34,322		32,021
	Intangible assets — net				4,373		3,487
	Investments and sundry assets				5,223		5,187
	Total assets			$	118,856	$	110,495

(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION – (CONTINUED)
(UNAUDITED)

LIABILITIES AND EQUITY

					At March 31,		At December 31,
(Dollars in millions)					2016		2015
Liabilities:
	Current liabilities:
		Taxes			$	2,203	$	2,847
		Short-term debt				5,303		6,461
		Accounts payable				5,302		6,028
		Compensation and benefits				3,444		3,560
		Deferred income				12,609		11,021
		Other accrued expenses and liabilities				5,804		4,353
	Total current liabilities					34,664		34,269
	Long-term debt					40,254		33,428
	Retirement and nonpension postretirement benefit obligations					16,939		16,504
	Deferred income					3,662		3,771
	Other liabilities					8,264		8,099
	Total liabilities					103,784		96,071
Equity:
IBM stockholders’ equity:
	Common stock, par value $0.20 per share, and additional paid-in capital					53,439		53,262
		Shares authorized: 4,687,500,000
		Shares issued:		2016 - 2,222,272,532
				2015 - 2,221,223,449
	Retained earnings					146,888		146,124
	Treasury stock - at cost					(156,404)		(155,518)
		Shares:	2016 - 1,262,310,680
			2015 - 1,255,494,724
	Accumulated other comprehensive income/(loss)					(28,998)		(29,607)
	Total IBM stockholders’ equity					14,925		14,262
Noncontrolling interests						147		162
Total equity						15,072		14,424
Total liabilities and equity					$	118,856	$	110,495


(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

		Three Months Ended March 31,
(Dollars in millions)			2016		2015
Cash flows from operating activities:
Net income		$	2,014	$	2,328
Adjustments to reconcile net income to cash provided by operating activities
	Depreciation		677		670
	Amortization of intangibles		347		298
	Stock-based compensation		133		127
	Net (gain)/loss on asset sales and other		172		352
	Changes in operating assets and liabilities, net of acquisitions/divestitures		2,302		(165)
Net cash provided by operating activities			5,645		3,610

Cash flows from investing activities:
	Payments for property, plant and equipment		(956)		(857)
	Proceeds from disposition of property, plant and equipment		129		47
	Investment in software		(144)		(113)
	Acquisition of businesses, net of cash acquired		(2,590)		(148)
	Divestitures of businesses, net of cash transferred		47		19
	Non-operating finance receivables — net		1,358		1,615
	Purchases of marketable securities and other investments		(1,041)		(819)
	Proceeds from disposition of marketable securities and other investments		1,169		816
Net cash (used in)/provided by investing activities			(2,028)		560

Cash flows from financing activities:
	Proceeds from new debt		8,085		2,290
	Payments to settle debt		(2,211)		(2,824)
	Short-term borrowings/(repayments) less than 90 days — net		(910)		(776)
	Common stock repurchases		(939)		(1,165)
	Common stock transactions — other		59		161
	Cash dividends paid		(1,250)		(1,088)
Net cash provided by/(used in) financing activities			2,834		(3,402)

Effect of exchange rate changes on cash and cash equivalents			217		(449)
Net change in cash and cash equivalents			6,668		319

Cash and cash equivalents at January 1			7,686		8,476
Cash and cash equivalents at March 31		$	14,354	$	8,796

(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

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, 2016	$	53,262	$	146,124	$	(155,518)	$	(29,607)	$	14,262	$	162	$	14,424
Net income plus other
comprehensive income/(loss)
Net income				2,014						2,014				2,014
Other comprehensive income/(loss)								608		608				608
Total comprehensive income/(loss)									$	2,622			$	2,622
Cash dividends paid –
common stock				(1,250)						(1,250)				(1,250)
Common stock issued under
employee plans (1,049,083 shares)		185								185				185
Purchases (216,803 shares) and
sales (40,129 shares) of treasury
stock under employee plans – net				0		(22)				(22)				(22)
Other treasury shares purchased,
not retired (6,639,282 shares)						(863)				(863)				(863)
Changes in other equity		(9)								(9)				(9)
Changes in noncontrolling interests												(14)		(14)
Equity - March 31, 2016	$	53,439	$	146,888	$	(156,404)	$	(28,998)	$	14,925	$	147	$	15,072

	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, 2015	$	52,666	$	137,793	$	(150,715)	$	(27,875)	$	11,868	$	146	$	12,014
Net income plus other
comprehensive income/(loss)
Net income				2,328						2,328				2,328
Other comprehensive income/(loss)								33		33				33
Total comprehensive income/(loss)									$	2,361			$	2,361
Cash dividends paid –
common stock				(1,088)						(1,088)				(1,088)
Common stock issued under
employee plans (2,125,560 shares)		259								259				259
Purchases (363,779 shares) and
sales (187,271 shares) of treasury
stock under employee plans – net				(3)		(33)				(35)				(35)
Other treasury shares purchased,
not retired (7,738,744 shares)						(1,227)				(1,227)				(1,227)
Changes in other equity		3								3				3
Changes in noncontrolling interests												3		3
Equity - March 31, 2015	$	52,928	$	139,030	$	(151,975)	$	(27,842)	$	12,141	$	148	$	12,289

(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

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. Refer to the company's 2015 Annual Report on pages 64 to 67 for a discussion of the company's critical accounting estimates.

In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments, but did not impact the company’s Consolidated Financial Statements. Refer to note 6, “Segments,” on pages 26 to 27 for additional information on the changes in reportable segments. The periods presented in this Form 10-Q are reported on a comparable basis. The company intends to file a revised 2015 Annual Report in a Form 8-K in the second quarter of 2016 to reclassify its historical segment information to reflect these changes.

In the first quarter 2016, the company classified certain properties, primarily office space, as held for sale. As a result of the company's reassessment of its real estate portfolio, certain properties were approved for sale and are being actively marketed. The sales are expected to be completed within twelve months. A pre-tax impairment charge of $252 million was recorded to other income (expense) related to the applicable land, buildings and furniture and fixtures. The pre-tax charge reflected the difference between the net book value and the fair value (estimated proceeds) less the estimated costs to sell the properties. The fair value of these assets was not material at March 31, 2016.

In the first quarter of 2016, the company reported a benefit from income taxes of $983 million, and its effective tax rate was (95.1) percent. This was primarily driven by the resolution of a long-standing non-U.S. tax matter in February 2016. See Taxes on pages 56 to 57 for additional information.

On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The assets and liabilities of the Microelectronics business were reported as held for sale at December 31, 2014, and the operating results of the Microelectronics business have been reported as discontinued operations. The transaction closed on July 1, 2015. Refer to note 9, “Acquisitions/Divestitures,” for additional information on the transaction.

Noncontrolling interest amounts of $1.3 million and $1.2 million, net of tax, for the three months ended March 31, 2016 and 2015, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

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 2015 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 March 2016, the Financial Accounting Standards Board (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 is effective January 1, 2017 and early adoption is permitted. The company is currently evaluating the impact of the new guidance.

Notes to Consolidated Financial Statements – (continued)

In February 2016, the FASB issued guidance 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 and 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 is currently evaluating the impact of the new guidance and the effective date. The company’s operating lease commitments were $6.4 billion at December 31, 2015.

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to 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 will depict 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 disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. The company is continuing to evaluate the impact of the new guidance in the consolidated financial results.

Standards Implemented

In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company reclassified current deferred tax assets of $2.0 billion at December 31, 2014 to deferred tax assets and current deferred tax liabilities of $19 million at December 31, 2014 to other liabilities from other accrued expenses and liabilities in the Consolidated Statement of Financial Position. In order to offset deferred tax assets and liabilities for presentation as a single noncurrent amount by tax jurisdiction, the company also reclassified $178 million at December 31, 2014 from deferred tax assets to other liabilities in the Consolidated Statement of Financial Position.

In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. The guidance did not have a material impact in the consolidated financial results.

In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance was effective January 1, 2016. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results.

In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted it on a prospective basis. The guidance did not have a material impact in the consolidated financial results.

Notes to Consolidated Financial Statements – (continued)

In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company had debt issuance costs of $95 million and $74 million at March 31, 2016 and December 31, 2015, respectively. Debt issuance costs were previously included in investments and sundry assets in the Consolidated Statement of Financial Position.

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 financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. 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 equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.

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. During the three months ended March 31, 2016, the company recorded an impairment on certain

Notes to Consolidated Financial Statements – (continued)

assets that are classified as held for sale. See note 1, “Basis of Presentation,” for additional information. There were no material impairments of non-financial assets for the three months ended March 31, 2015.

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.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015.

(Dollars in millions)
At March 31, 2016			Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	5,784	$	—	$	5,784
		Commercial paper		—		325		—		325
		Money market funds		3,076		—		—		3,076
		U.S. government securities		—		1,300		—		1,300
		Canadian government securities		—		463		—		463
		Other securities		—		162		—		162
	Total			3,076		8,034		—		11,109	(6)
	Debt securities - current (2)			—		514		—		514	(6)
	Debt securities - noncurrent (3)			1		7		—		8
	Available-for-sale equity investments (3)			9		—		—		9
	Derivative assets (4)
		Interest rate contracts		—		876		—		876
		Foreign exchange contracts		—		206		—		206
		Equity contracts		—		48		—		48
	Total			—		1,129		—		1,129	(7)
Total assets			$	3,086	$	9,685	$	—	$	12,770	(7)
Liabilities:
	Derivative liabilities (5)
		Foreign exchange contracts	$	—	$	460	$	—	$	460
		Equity contracts		—		1		—		1
		Interest rate contracts		—		0		—		0
Total liabilities			$	—	$	461	$	—	$	461	(7)

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

(2) U.S. government securities, time deposits and certificates of deposit reported as marketable securities in the

Consolidated Statement of Financial Position.

(3) Included within investments and sundry assets 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 March 31, 2016 were $165 million

and $964 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 March 31, 2016 were $443 million and $18

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 $270 million.

Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)
At December 31, 2015			Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	2,856	$	—	$	2,856
		Money market funds		2,069		—		—		2,069
		Other securities		—		18		—		18
	Total			2,069		2,874		—		4,943	(6)
	Debt securities - current (2)			—		506		—		506	(6)
	Debt securities - noncurrent (3)			1		6		—		8
	Trading security investments (3)			28		—		—		28
	Available-for-sale equity investments (3)			192		—		—		192
	Derivative assets (4)
		Interest rate contracts		—		656		—		656
		Foreign exchange contracts		—		332		—		332
		Equity contracts		—		6		—		6
	Total			—		994		—		994	(7)
Total assets			$	2,290	$	4,381	$	—	$	6,671	(7)
Liabilities:
	Derivative liabilities (5)
		Foreign exchange contracts	$	—	$	164	$	—	$	164
		Equity contracts		—		19		—		19
		Interest rate contracts		—		3		—		3
Total liabilities			$	—	$	186	$	—	$	186	(7)

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

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of

Financial Position.

(3) Included within investments and sundry assets 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, 2015 were $292 million and

$702 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, 2015 were $164 million and $22

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 $139 million.

There were no transfers between Levels 1 and 2 for the three months ended March 31, 2016 and the year ended December 31, 2015.

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