REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
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U.S. dollars; the impact of currency
fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and
losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that
year-on-year derivative and other transaction gains and losses had the following effects on pre-tax income: 2016 ($69
million decrease) and 2015 ($180 million increase).
An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one
percent price change would result in a pre-tax cost or savings of approximately $70 million per year. The global energy
exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $40 million per
year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and
natural gas.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
A complete summary of Form 10-K content, including the index to financial statements, is found at the beginning of this
document.
Management's Responsibility for Financial Reporting
Management is responsible for the integrity and objectivity of the financial information included in this report. The
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America. Where necessary, the financial statements reflect estimates based on management's judgment.
Management has established and maintains a system of internal control over financial reporting for the Company and its
subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable
assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and
procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly
presented. The Company's system of internal control over financial reporting is supported by widely communicated written
policies, including business conduct policies, which are designed to require all employees to maintain high ethical
standards in the conduct of Company affairs. Internal auditors continually review the accounting and control system.
3M Company
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting.
Management conducted an assessment of the Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework (2013). Based on the assessment, management concluded that, as of December 31, 2016, the Company's internal
control over financial reporting is effective.
The Company's internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which is included herein, which expresses
an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31,
2016.
3M Company
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of 3M Company
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income,
comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of
3M Company and its subsidiaries (the "Company") at December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express
opinions on these financial statements and on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 9, 2017
3M Company and Subsidiaries
Consolidated Statement of Income
Years ended December 31
(Millions, except per share amounts) 2016 2015 2014
Net sales $ 30,109 $ 30,274 $ 31,821
Operating expenses
Cost of sales 15,040 15,383 16,447
Selling, general and administrative expenses 6,111 6,182 6,469
Research, development and related expenses 1,735 1,763 1,770
Total operating expenses 22,886 23,328 24,686
Operating income 7,223 6,946 7,135
Interest expense and income
Interest expense 199 149 142
Interest income (29) (26) (33)
Total interest expense - net 170 123 109
Income before income taxes 7,053 6,823 7,026
Provision for income taxes 1,995 1,982 2,028
Net income including noncontrolling interest $ 5,058 $ 4,841 $ 4,998
Less: Net income attributable to noncontrolling interest 8 8 42
Net income attributable to 3M $ 5,050 $ 4,833 $ 4,956
Weighted average 3M common shares outstanding - basic 604.7 625.6 649.2
Earnings per share attributable to 3M common shareholders - basic $ 8.35 $ 7.72 $ 7.63
Weighted average 3M common shares outstanding - diluted 618.7 637.2 662.0
Earnings per share attributable to 3M common shareholders - diluted $ 8.16 $ 7.58 $ 7.49
Cash dividends paid per 3M common share $ 4.44 $ 4.10 $ 3.42
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Comprehensive Income
Years ended December 31
(Millions) 2016 2015 2014
Net income including noncontrolling interest $ 5,058 $ 4,841 $ 4,998
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (331) (586) (942)
Defined benefit pension and postretirement plans adjustment (524) 489 (1,562)
Debt and equity securities, unrealized gain (loss) - - 2
Cash flow hedging instruments, unrealized gain (loss) (33) 25 107
Total other comprehensive income (loss), net of tax (888) (72) (2,395)
Comprehensive income (loss) including noncontrolling interest 4,170 4,769 2,603
Comprehensive (income) loss attributable to noncontrolling interest (6) (6) (48)
Comprehensive income (loss) attributable to 3M $ 4,164 $ 4,763 $ 2,555
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Balance Sheet
At December 31
(Dollars in millions, except per share amount) 2016 2015
Assets
Current assets
Cash and cash equivalents $ 2,398 $ 1,798
Marketable securities - current 280 118
Accounts receivable - net of allowances of $88 and $91 4,392 4,154
Inventories
Finished goods 1,629 1,655
Work in process 1,039 1,008
Raw materials and supplies 717 855
Total inventories 3,385 3,518
Other current assets 1,271 1,398
Total current assets 11,726 10,986
Marketable securities - non-current 17 9
Investments 128 117
Property, plant and equipment 23,499 23,098
Less: Accumulated depreciation (14,983) (14,583)
Property, plant and equipment - net 8,516 8,515
Goodwill 9,166 9,249
Intangible assets - net 2,320 2,601
Prepaid pension benefits 52 188
Other assets 981 1,218
Total assets $ 32,906 $ 32,883
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt $ 972 $ 2,044
Accounts payable 1,798 1,694
Accrued payroll 678 644
Accrued income taxes 299 332
Other current liabilities 2,472 2,404
Total current liabilities 6,219 7,118
Long-term debt 10,678 8,753
Pension and postretirement benefits 4,018 3,520
Other liabilities 1,648 2,024
Total liabilities $ 22,563 $ 21,415
Commitments and contingencies (Note 14)
Equity
3M Company shareholders' equity:
Common stock par value, $.01 par value $ 9 $ 9
Shares outstanding - 2016: 596,726,278
Shares outstanding - 2015: 609,330,124
Additional paid-in capital 5,061 4,791
Retained earnings 37,907 36,296
Treasury stock (25,434) (23,308)
Accumulated other comprehensive income (loss) (7,245) (6,359)
Total 3M Company shareholders' equity 10,298 11,429
Noncontrolling interest 45 39
Total equity $ 10,343 $ 11,468
Total liabilities and equity $ 32,906 $ 32,883
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Changes in Equity
Years Ended December 31
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Dollars in millions, except per share amounts) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2013 $ 17,669 $ 4,384 $ 32,137 $ (15,385) $ (3,913) $ 446
Net income 4,998 4,956 42
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (942) (948) 6
Defined benefit pension and post-retirement plans adjustment (1,562) (1,562) -
Debt and equity securities - unrealized gain (loss) 2 2 -
Cash flow hedging instruments - unrealized gain (loss) 107 107 -
Total other comprehensive income (loss), net of tax (2,395)
Dividends declared ($3.59 per share, Note 6) (2,297) (2,297)
Purchase of subsidiary shares (870) (434) 25 (461)
Stock-based compensation, net of tax impacts 438 438
Reacquired stock (5,643) (5,643)
Issuances pursuant to stock option and benefit plans 963 (758) 1,721
Balance at December 31, 2014 $ 12,863 $ 4,388 $ 34,038 $ (19,307) $ (6,289) $ 33
Net income 4,841 4,833 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (586) (584) (2)
Defined benefit pension and post-retirement plans adjustment 489 489 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) 25 25 -
Total other comprehensive income (loss), net of tax (72)
Dividends declared ($3.075 per share, Note 6) (1,913) (1,913)
Stock-based compensation, net of tax impacts 412 412
Reacquired stock (5,304) (5,304)
Issuances pursuant to stock option and benefit plans 641 (662) 1,303
Balance at December 31, 2015 $ 11,468 $ 4,800 $ 36,296 $ (23,308) $ (6,359) $ 39
Net income 5,058 5,050 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (331) (329) (2)
Defined benefit pension and post-retirement plans adjustment (524) (524) -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain/(loss) (33) (33) -
Total other comprehensive income (loss), net of tax (888)
Dividends declared ($4.44 per share, Note 6) (2,678) (2,678)
Stock-based compensation 270 270
Reacquired stock (3,699) (3,699)
Issuances pursuant to stock option and benefit plans 812 (761) 1,573
Balance at December 31, 2016 $ 10,343 $ 5,070 $ 37,907 $ (25,434) $ (7,245) $ 45
Supplemental share information 2016 2015 2014
Treasury stock
Beginning balance 334,702,932 308,898,462 280,736,817
Reacquired stock 22,602,748 34,072,584 40,664,061
Issuances pursuant to stock options and benefit plans (9,998,902) (8,268,114) (12,502,416)
Ending balance 347,306,778 334,702,932 308,898,462
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Cash Flows
Years ended December 31
(Millions) 2016 2015 2014
Cash Flows from Operating Activities
Net income including noncontrolling interest $ 5,058 $ 4,841 $ 4,998
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities
Depreciation and amortization 1,474 1,435 1,408
Company pension and postretirement contributions (383) (267) (215)
Company pension and postretirement expense 251 556 391
Stock-based compensation expense 298 276 280
Deferred income taxes 7 395 (146)
Excess tax benefits from stock-based compensation - (154) (167)
Changes in assets and liabilities
Accounts receivable (313) (58) (268)
Inventories 57 3 (113)
Accounts payable 148 9 75
Accrued income taxes (current and long-term) 101 (744) 206
Other - net (36) 128 177
Net cash provided by operating activities 6,662 6,420 6,626
Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E) (1,420) (1,461) (1,493)
Proceeds from sale of PP&E and other assets 58 33 135
Acquisitions, net of cash acquired (16) (2,914) (94)
Purchases of marketable securities and investments (1,410) (652) (1,280)
Proceeds from maturities and sale of marketable securities and investments 1,247 1,952 2,034
Proceeds from sale of businesses 142 123 -
Other investing (4) 102 102
Net cash used in investing activities (1,403) (2,817) (596)
Cash Flows from Financing Activities
Change in short-term debt - net (797) 860 27
Repayment of debt (maturities greater than 90 days) (992) (800) (1,625)
Proceeds from debt (maturities greater than 90 days) 2,832 3,422 2,608
Purchases of treasury stock (3,753) (5,238) (5,652)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans 804 635 968
Dividends paid to shareholders (2,678) (2,561) (2,216)
Excess tax benefits from stock-based compensation - 154 167
Purchase of noncontrolling interest - - (861)
Other - net (42) (120) (19)
Net cash used in financing activities (4,626) (3,648) (6,603)
Effect of exchange rate changes on cash and cash equivalents (33) (54) (111)
Net increase (decrease) in cash and cash equivalents 600 (99) (684)
Cash and cash equivalents at beginning of year 1,798 1,897 2,581
Cash and cash equivalents at end of period $ 2,398 $ 1,798 $ 1,897
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
Notes to Consolidated Financial Statements
NOTE 1. Significant Accounting Policies
Consolidation: 3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products.
All subsidiaries are consolidated. All intercompany transactions are eliminated. As used herein, the term "3M" or "Company"
refers to 3M Company and subsidiaries unless the context indicates otherwise.
Basis of presentation: Certain consolidated balance sheet amounts relative to prior periods have been immaterially revised
to correct the Company's application of Accounting Standards Codification (ASC) 450, Contingencies, with respect to its
respirator mask/asbestos liability associated with pending and future claims and related defense costs. This correction
reflects the inclusion of all potentially relevant years rather than a subset of future years when estimating this
liability. See Note 14 for further detail. 3M assessed the materiality of this correction to prior periods' financial
statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. (SAB) 99, Materiality, and
SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, codified in ASC 250, Presentation of Financial Statements. The Company concluded that the correction was not
material to prior periods and therefore, amendments of previously filed reports are not required. In accordance with ASC
250, 3M corrected prior periods presented herein by revising the consolidated balance sheet amounts, including associated
deferred taxes. Period to period changes in previous estimates of probable loss were similar to those of the revised
amounts. Accordingly, the correction had no impact on consolidated results of operations and cash flows for the periods
presented, as this correction originates in periods prior to those presented in the annual report. The impact of this
revision on the Company's previously reported consolidated balance sheet, consolidated statement of changes in equity, and
related amounts in Notes 5, 8, 14 and 16 is as follows:
December 31, 2015 December 31, 2014
(Millions) Previously Reported Adjustment As Revised Previously Reported Adjustment As Revised
Other assets $ 1,053 $ 165 $ 1,218 $ 1,769 $ 165 $ 1,934
Total assets 32,718 165 32,883 31,209 165 31,374
Other liabilities 1,580 444 2,024 1,555 444 1,999
Total liabilities 20,971 444 21,415 18,067 444 18,511
Retained earnings 36,575 (279) 36,296 34,317 (279) 34,038
Total 3M Company shareholders' equity 11,708 (279) 11,429 13,109 (279) 12,830
Total equity 11,747 (279) 11,468 13,142 (279) 12,863
As the correction originates in periods prior to those presented in this annual report, the previously reported amounts of
retained earnings and total equity as of December 31, 2013 of $32,416 million and $17,948 million, respectively, in the
consolidated statement of changes in equity have each been reduced by $279 million.
Foreign currency translation: Local currencies generally are considered the functional currencies outside the United
States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of
the period reported. Income and expense items are translated at month-end exchange rates of each applicable month.
Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in
shareholders' equity.
Although local currencies are typically considered as the functional currencies outside the United States, under ASC 830,
Foreign Currency Matters, the reporting currency of a foreign entity's parent is assumed to be that entity's functional
currency when the economic environment of a foreign entity is highly inflationary-generally when its cumulative inflation
is approximately 100 percent or more for the three years that precede the beginning of a reporting period. 3M has a
subsidiary in Venezuela with operating income representing less than 1.0 percent of 3M's consolidated operating income for
2016. Since January 1, 2010, the financial statements of the Venezuelan subsidiary have been remeasured as if its
functional currency were that of its parent.
The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these
rates with local currency. Such rates and conditions have been and continue to be subject to change. In January 2014, the
Venezuelan government announced that the National Center for Foreign Commerce (CENCOEX), had assumed the role with respect
to the continuation of the existing official exchange rate, significantly expanded the use of a second currency auction
exchange mechanism called the Complementary System for Foreign Currency Acquirement (or SICAD1), and issued exchange
regulations indicating the SICAD1 rate of exchange would be used for payments related to international investments. In late
March 2014, the Venezuelan government launched a third foreign exchange mechanism, SICAD2, which it later replaced with
another foreign currency exchange platform in February 2015 called the Marginal System of Foreign Currency (SIMADI). The
SIMADI rate was described as being derived from daily private bidders and buyers exchanging offers through authorized
agents. This rate was approved and published by the Venezuelan Central Bank. In March 2016, the Venezuelan government
effected a replacement of its preferential CENCOEX rate with Tipo de Cambio Protegido (DIPRO), described as available
largely for essential imports; eliminated its SICAD exchange mechanism; and replaced its SIMADI rate with Tipo de Cambio
Complementario (DICOM), published by the Venezuelan Central Bank and described as fluctuating in rate based on supply and
demand.
The financial statements of 3M's Venezuelan subsidiary were remeasured utilizing the official CENCOEX (or its predecessor)
rate into March 2014, the SICAD1 rate beginning in late March 2014, the SICAD2 rate beginning in June 2014, and the DICOM
rate (or its SIMADI predecessor) beginning in February 2015. 3M's uses of these rates were based upon evaluation of a
number of factors including, but not limited to, the exchange rate the Company's Venezuelan subsidiary may legally use to
convert currency, settle transactions or pay dividends; the probability of accessing and obtaining currency by use of a
particular rate or mechanism; and the Company's intent and ability to use a particular exchange mechanism. Other factors
notwithstanding, remeasurement impacts of the changes in use of these exchange rates did not have material impacts on 3M's
consolidated results of operations or financial condition.
The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Changes in applicable exchange rates
or exchange mechanisms may continue in the future. These changes could impact the rate of exchange applicable to remeasure
the Company's net monetary assets (liabilities) denominated in Venezuelan Bolivars (VEF). As of December 31, 2016, the
Company had a balance of net monetary assets denominated in VEF of less than 1.5 billion VEF and the DIPRO and DICOM
exchange rates were approximately 10 VEF and 670 VEF per U.S. dollar, respectively.
A need to deconsolidate the Company's Venezuelan subsidiary's operations may result from a lack of exchangeability of
VEF-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government
regulations in Venezuela. 3M monitors factors such as its ability to access various exchange mechanisms; the impact of
government regulations on the Company's ability to manage its Venezuelan subsidiary's capital structure, purchasing,
product pricing, and labor relations; and the current political and economic situation within Venezuela. Based upon such
factors as of December 31, 2016, the Company continues to consolidate its Venezuelan subsidiary. As of December 31, 2016,
the balance of intercompany receivables due from this subsidiary and its equity balance were not significant.
Reclassifications: Certain amounts in the prior years' consolidated financial statements have been reclassified to conform
to the current year presentation.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and temporary investments with maturities of three
months or less when acquired.
Marketable securities: The classification of marketable securities as current or non-current is based on the nature of the
securities and availability for use in current operations. 3M reviews impairments associated with its marketable securities
in accordance with the measurement guidance provided by ASC 320, Investments-Debt and Equity Securities, when determining
the classification of the impairment as "temporary" or "other-than-temporary". A temporary impairment charge results in an
unrealized loss being recorded in the other comprehensive income component of shareholders' equity. Such an unrealized loss
does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The
factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows,
credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as other factors.
Investments: Investments primarily include equity method, cost method, and available-for-sale equity investments.
Available-for-sale investments are recorded at fair value. Unrealized gains and losses relating to investments classified
as available-for-sale are recorded as a component of accumulated other comprehensive income (loss) in shareholders'
equity.
Other assets: Other assets include deferred income taxes, product and other insurance receivables, the cash surrender value
of life insurance policies, and other long-term assets. Investments in life insurance are reported at the amount that could
be realized under contract at the balance sheet date, with any changes in cash surrender value or contract value during the
period accounted for as an adjustment of premiums paid. Cash outflows and inflows associated with life insurance activity
are included in "Purchases of marketable securities and investments" and "Proceeds from maturities and sale of marketable
securities and investments," respectively.
Inventories: Inventories are stated at the lower of cost or market, with cost generally determined on a first-in, first-out
basis.
Property, plant and equipment: Property, plant and equipment, including capitalized interest and internal engineering
costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-line
method based on the estimated useful lives of the assets. The estimated useful lives of buildings and improvements
primarily range from ten to forty years, with the majority in the range of twenty to forty years. The estimated useful
lives of machinery and equipment primarily range from three to fifteen years, with the majority in the range of five to ten
years. Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon
disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from
disposal, is charged or credited to operations. Property, plant and equipment amounts are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss recorded
is calculated by the excess of the asset's carrying value over its fair value. Fair value is generally determined using a
discounted cash flow analysis.
Conditional asset retirement obligations: A liability is initially recorded at fair value for an asset retirement
obligation associated with the retirement of tangible long-lived assets in the period in which it is incurred if a
reasonable estimate of fair value can be made. Conditional asset retirement obligations exist for certain long-term assets
of the Company. The obligation is initially measured at fair value using expected present value techniques. Over time the
liabilities are accreted for the change in their present value and the initial capitalized costs are depreciated over the
remaining useful lives of the related assets. The asset retirement obligation liability was $111 million and $102 million
at December 31, 2016 and 2015, respectively.
Goodwill: Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth
quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that
would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level, with
all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but can be
combined when reporting units within the same segment have similar economic characteristics. 3M did not combine any of its
reporting units for impairment testing. An impairment loss generally would be recognized when the carrying amount of the
reporting unit's net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting
unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry
groups, or by using a discounted cash flow analysis. Companies have the option to first assess qualitative factors to
determine whether the fair value of a reporting unit is not "more likely than not" less than its carrying amount, which is
commonly referred to as "Step 0". 3M has chosen not to apply Step 0 for 2016 or prior period annual goodwill assessments.
Intangible assets: Intangible asset types include customer related, patents, other technology-based, tradenames and other
intangible assets acquired from an independent party. Intangible assets with a definite life are amortized over a period
ranging from one to twenty years on a systematic and rational basis (generally straight line) that is representative of the
asset's use. The estimated useful lives vary by category, with customer related largely between seven to seventeen years,
patents largely between five to thirteen years, other technology-based largely between two to fifteen years, definite lived
tradenames largely between three and twenty years, and other intangibles largely between two to ten years. Costs related to
internally developed intangible assets, such as patents, are expensed as incurred, primarily in "Research, development and
related expenses."
Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the
carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount
of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of
the impairment loss recorded is calculated by the excess of the asset's carrying value over its fair value. Fair value is
generally determined using a discounted cash flow analysis.
Intangible assets with an indefinite life, namely certain tradenames, are not amortized. Indefinite-lived intangible assets
are tested for impairment annually, and are tested for impairment between annual tests if an event occurs or circumstances
change that would indicate that the carrying amount may be impaired. An impairment loss generally would be recognized when
the fair value is less than the carrying value of the indefinite-lived intangible asset.
Restructuring actions: Restructuring actions generally include significant actions involving employee-related severance
charges, contract termination costs, and impairment or accelerated depreciation/amortization of assets associated with such
actions. Employee-related severance charges are largely based upon distributed employment policies and substantive
severance plans. These charges are reflected in the quarter when the actions are probable and the amounts are estimable,
which typically is when management approves the associated actions. Severance amounts for which affected employees were
required to render service in order to receive benefits at their termination dates were measured at the date such benefits
were communicated to the applicable employees and recognized as expense over the employees' remaining service periods.
Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured
at fair value at the time the Company provided notice to the counterparty) or costs that will continue to be incurred under
the contract for its remaining term without economic benefit to the Company. Asset impairment charges related to intangible
assets and property, plant and equipment reflect the excess of the assets' carrying values over their fair values.
Revenue (sales) recognition: The Company sells a wide range of products to a diversified base of customers around the world
and has no material concentration of credit risk. Revenue is recognized when the risks and rewards of ownership have
substantively transferred to customers. This condition normally is met when the product has been delivered or upon
performance of services. The Company records estimated reductions to revenue or records expense for customer and
distributor incentives, primarily comprised of rebates and free goods, at the time of the initial sale. These sales
incentives are accounted for in accordance with ASC 605, Revenue Recognition. The estimated reductions of revenue for
rebates are based on the sales terms, historical experience, trend analysis and projected market conditions in the various
markets served. Since the Company serves numerous markets, the rebate programs offered vary across businesses, but the most
common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives.
Free goods are accounted for as an expense and recorded in cost of sales. Sales, use, value-added and other excise taxes
are not recognized in revenue.
The vast majority of 3M's sales agreements are for standard products and services with customer acceptance occurring upon
delivery of the product or performance of the service. However, to a limited extent 3M also enters into agreements that
involve multiple elements (such as equipment, installation and service), software, or non-standard terms and conditions.
For non-software multiple-element arrangements, the Company recognizes revenue for delivered elements when they have
stand-alone value to the customer, they have been accepted by the customer, and for which there are only customary refund
or return rights. Arrangement consideration is allocated to the deliverables by use of the relative selling price method.
The selling price used for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party
evidence (TPE) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. Estimated selling
price is determined in a manner consistent with that used to establish the price to sell the deliverable on a standalone
basis. In addition to the preceding conditions, equipment revenue is not recorded until the installation has been completed
if equipment acceptance is dependent upon installation or if installation is essential to the functionality of the
equipment. Installation revenues are not recorded until installation has been
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