International Business Machines Corp. (IBM)

Analysis of Revenues

Difficulty: Advanced

Revenue Recognition Accounting Policy

Effective January 1, 2018, IBM 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 impact related to adopting the new standard was not material. Certain changes resulting from adopting the new standard, such as terminology differences, impacted IBM’s description of its significant accounting policies in 2018.

IBM 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 IBM expects to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, IBM estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. IBM’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.

IBM 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. IBM 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 IBM’s experience with similar types of contracts is limited. IBM’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 IBM, taking into consideration the type of client, the type of transaction and the specific facts and circumstances of each arrangement.

IBM’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, IBM 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 IBM with a significant benefit of financing, in which case the contract contains a significant financing component. As a practical expedient, IBM does not account for significant financing components if the period between when IBM 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 IBM’s Global Financing business and include explicit financing terms.

IBM 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 IBM is acting as an agent between the client and the vendor, and gross when IBM is the principal for the transaction. To determine whether IBM is an agent or principal, IBM 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 IBM has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.

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

IBM 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.

Source: 10-K (filing date: 2019-02-26).

Revenues as Reported

International Business Machines Corp., Income Statement, Revenues

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Cognitive Solutions 18,481  18,453  18,187  17,841  19,689 
Global Business Services 16,817  16,348  16,700  17,166  19,512 
Cognitive Solutions & Industry Services 35,298  34,801  34,887  35,007  39,201 
Technology Services & Cloud Platforms 34,462  34,277  35,337  35,142  38,889 
Systems 8,034  8,194  7,714  9,547  12,294 
Global Financing 1,590  1,696  1,692  1,839  2,034 
Reportable segments external revenue 79,384  78,968  79,630  81,535  92,418 
Other revenue 207  171  289  206  375 
IBM consolidated revenue 79,591  79,139  79,919  81,741  92,793 

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

Item Description The company
IBM consolidated revenue Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss). International Business Machines Corp.’s iBM consolidated revenue declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 level.