REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 6

3M CoAnnouncement

10/02/2017 17:41

- Part 6: For the preceding part double click  ID:nRSJ6609We 

completed. 
 
For arrangements (or portions of arrangements) falling within software revenue recognition standards and that do not
involve significant production, modification, or customization, revenue for each software or software-related element is
recognized when the Company has VSOE of the fair value of all of the undelivered elements and applicable criteria have been
met for the delivered elements. When the arrangements involve significant production, modification or customization,
long-term construction-type accounting involving proportional performance is generally employed. 
 
For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless
historical evidence indicates the costs are incurred on other than a straight-line basis. License fee revenue is recognized
as earned, and no revenue is recognized until the inception of the license term. 
 
On occasion, agreements will contain milestones, or 3M will recognize revenue based on proportional performance. For these
agreements, and depending on the specifics, 3M may recognize revenue upon completion of a substantive milestone, or in
proportion to costs incurred to date compared with the estimate of total costs to be incurred. 
 
Accounts receivable and allowances: Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
The Company maintains allowances for bad debts, cash discounts, product returns and various other items. The allowance for
doubtful accounts and product returns is based on the best estimate of the amount of probable credit losses in existing
accounts receivable and anticipated sales returns. The Company determines the allowances based on historical write-off
experience by industry and regional economic data and historical sales returns. The Company reviews the allowance for
doubtful accounts monthly. The Company does not have any significant off-balance-sheet credit exposure related to its
customers. 
 
Advertising and merchandising: These costs are charged to operations in the period incurred, and totaled $385 million in
2016, $368 million in 2015 and $407 million in 2014. 
 
Research, development and related expenses: These costs are charged to operations in the period incurred and are shown on a
separate line of the Consolidated Statement of Income. Research, development and related expenses totaled $1.735 billion in
2016, $1.763 billion in 2015 and $1.770 billion in 2014. Research and development expenses, covering basic scientific
research and the application of scientific advances in the development of new and improved products and their uses, totaled
$1.225 billion in 2016, $1.223 billion in 2015 and $1.193 billion in 2014. Related expenses primarily include technical
support; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain
patents; amortization of externally acquired patents and externally acquired in-process research and development; and
gains/losses associated with certain corporate approved investments in R&D-related ventures, such as equity method effects
and impairments. 
 
Internal-use software: The Company capitalizes direct costs of services used in the development of internal-use software.
Amounts capitalized are amortized over a period of three to seven years, generally on a straight-line basis, unless another
systematic and rational basis is more representative of the software's use. Amounts are reported as a component of either
machinery and equipment or capital leases within property, plant and equipment. 
 
Environmental: Environmental expenditures relating to existing conditions caused by past operations that do not contribute
to current or future revenues are expensed. Reserves for liabilities related to anticipated remediation costs are recorded
on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of
feasibility studies, the Company's commitment to a plan of action, or approval by regulatory agencies. Environmental
expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated
over their estimated useful lives. 
 
Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this approach,
deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts
and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when
uncertainty regarding their realizability exists. As of December 31, 2016 and 2015, the Company had valuation allowances of
$47 million and $31 million on its deferred tax assets, respectively. The increase in valuation allowance at December 31,
2016 relates to certain international jurisdictions with taxable loss carryforwards that are expected to expire prior to
utilization. The Company recognizes and measures its uncertain tax positions based on the rules under ASC 740, Income
Taxes. 
 
Earnings per share: The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings
per share attributable to 3M common shareholders is the result of the dilution associated with the Company's stock-based
compensation plans. Certain options outstanding under these stock-based compensation plans during the years 2016, 2015 and
2014 were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they
would have had an anti-dilutive effect (3.6 million average options for 2016, 5.0 million average options for 2015, and 1.4
million average options for 2014. The computations for basic and diluted earnings per share for the years ended December 31
follow: 
 
Earnings Per Share Computations 
 
                                                                                                                         
 (Amounts in millions, except per share amounts)                              2016         2015     2014     
 Numerator:                                                                                                              
 Net income attributable to 3M                                                $     5,050        $  4,833    $  4,956    
                                                                                                                         
 Denominator:                                                                                                            
 Denominator for weighted average 3M common shares outstanding - basic              604.7           625.6       649.2    
                                                                                                                         
 Dilution associated with the Company's stock-based compensation plans              14.0            11.6        12.8     
                                                                                                                         
 Denominator for weighted average 3M common shares outstanding - diluted            618.7           637.2       662.0    
                                                                                                                         
 Earnings per share attributable to 3M common shareholders - basic            $     8.35         $  7.72     $  7.63     
 Earnings per share attributable to 3M common shareholders - diluted          $     8.16         $  7.58     $  7.49     
 
 
Stock-based compensation: The Company recognizes compensation expense for its stock-based compensation programs, which
include stock options, restricted stock, restricted stock units, performance shares, and the General Employees' Stock
Purchase Plan (GESPP). Under applicable accounting standards, the fair value of share-based compensation is determined at
the grant date and the recognition of the related expense is recorded over the period in which the share-based compensation
vests. Refer to the New Accounting Pronouncements section that follows for discussion of Accounting Standards Update (ASU)
No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which 3M adopted on January 1, 2016. 
 
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive income (loss) are
presented in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Changes in Equity.
Accumulated other comprehensive income (loss) is composed of foreign currency translation effects (including hedges of net
investments in international companies), defined benefit pension and postretirement plan adjustments, unrealized gains and
losses on available-for-sale debt and equity securities, and unrealized gains and losses on cash flow hedging instruments. 
 
Derivatives and hedging activities: All derivative instruments within the scope of ASC 815, Derivatives and Hedging, are
recorded on the balance sheet at fair value. The Company uses interest rate swaps, currency and commodity price swaps, and
foreign currency forward and option contracts to manage risks generally associated with foreign exchange rate, interest
rate and commodity market volatility. All hedging instruments that qualify for hedge accounting are designated and
effective as hedges, in accordance with U.S. generally accepted accounting principles. If the underlying hedged transaction
ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current
earnings. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current
earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the
cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company does not
hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives. 
 
Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps,
currency swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair
value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and
credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into
master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master
netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a
result of multiple, separate derivative transactions. The Company does not anticipate nonperformance by any of these
counterparties. 3M has elected to present the fair value of derivative assets and liabilities within the Company's
consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements
and may otherwise qualify for net presentation. 
 
Fair value measurements: 3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and
liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is
defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market
participants would use in valuing the asset or liability developed based on market data obtained from sources independent
of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants
would use in valuing the asset or liability developed based upon the best information available in the circumstances. The
hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices)
that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for
the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. 
 
Acquisitions: The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This
standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among
other things, the determination of acquisition-date fair value of consideration paid in a business combination (including
contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition
accounting. 
 
New Accounting Pronouncements 
 
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers,
and in August 2015 issued ASU No. 2015-14, which amended the standard as to effective date. The ASU provides a single
comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance, including industry-specific guidance. The standard's stated core principle is that an
entity should recognize revenue to 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. To achieve
this core principle the ASU includes provisions within a five step model that includes identifying the contract with a
customer, identifying the performance obligations in the contract, determining the transaction price, allocating the
transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance
obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and
requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. During 2016, the FASB also issued ASU No. 2016-08, Principal versus Agent Considerations
(Reporting Revenue Gross versus Net); ASU No. 2016-10, Identifying Performance Obligations and Licensing; ASU No. 2016-12,
Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers which amend ASU No. 2014-09. These amendments include clarification of principal
versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to
a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide
the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party
to provide the underlying goods or services (i.e., the entity is the agent in the transaction). The amendments clarify, in
terms of identifying performance obligations, how entities would determine whether promised goods or services are
separately identifiable from other promises in a contract and, therefore, would be accounted for separately. The guidance
allows entities to disregard goods or services that are immaterial in the context of a contract and provides an accounting
policy election to account for shipping and handling activities as fulfillment costs rather than as additional promised
services. With regard to the licensing, the amendments clarify how an entity would evaluate the nature of its promise in
granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point
in time. The amendments also address implementation issues relative to transition (adding a practical expedient for
contract modifications and clarifying what constitutes a completed contract when employing full or modified retrospective
transition methods), collectability, noncash consideration, and the presentation of sales and other similar-type taxes
(allowing entities to exclude sales-type taxes collected from transaction price). Finally, the amendments make certain
technical corrections and provide additional guidance in the areas of disclosure of performance obligations, provisions for
losses on certain types of contracts, scoping, and other areas. Overall, ASU No. 2014-09, as amended, provides for either
full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period
presented. For 3M, the ASU is effective January 1, 2018. The Company is continuing to evaluate the standard's impact on
3M's consolidated results of operations and financial condition. 3M has conducted initial analyses, developed project
management relative to the process of adopting this ASU, and is currently completing detailed contract reviews to determine
necessary adjustments to existing accounting policies and to support an evaluation of the standard's impact on the
Company's consolidated results of operations and financial condition. For the majority of 3M's revenue arrangements, no
significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be
superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services.
However, in addition to expanded disclosures regarding revenue, the ASU could, for example, impact the timing of revenue
recognition in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently
utilized. The Company currently anticipates utilizing the modified retrospective method of adoption on January 1, 2018. 
 
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes guidance related
to both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. With respect to the VIE
model, the standard changes, among other things, the identification of variable interests associated with fees paid to a
decision maker or service provider, the VIE characteristics for a limited partner or similar entity, and the primary
beneficiary determination. With respect to the VOE model, the ASU eliminates the presumption that a general partner
controls a limited partnership or similar entity unless the presumption can otherwise be overcome. Under the new guidance,
a general partner would largely not consolidate a partnership or similar entity under the VOE model. The Company adopted
this ASU effective January 1, 2016. Because 3M did not have significant involvement with entities subject to consolidation
considerations impacted by the VIE model changes or with limited partnerships potentially impacted by the VOE model
changes, the adoption did not have a material impact on the Company's consolidated results of operations and financial
condition. 
 
In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Arrangement, which requires
a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a
software license, the customer would account for fees related to the software license element in a manner consistent with
accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license,
the customer would account for the arrangement as a service contract. An arrangement would contain a software license
element if both (1) the customer has the contractual right to take possession of the software at any time during the
hosting period without significant penalty and (2) it is feasible for the customer to either run the software on its own
hardware or contract with another party unrelated to the vendor to host the software. 3M adopted this ASU prospectively to
arrangements entered into, or materially modified beginning January 1, 2016. The adoption did not have a material impact on
3M's consolidated results of operations and financial condition. 
 
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which modifies existing
requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount
requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin.
The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider
replacement cost or NRV less an approximately normal profit margin when measuring inventory. For 3M, this standard is
effective prospectively beginning January 1, 2017. The Company does not expect this ASU to have a material impact on 3M's
consolidated results of operations and financial condition. 
 
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities, which revises the accounting related to (1) the classification and measurement of investments in equity
securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU
also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance
requires the fair value measurement of investments in equity securities and other ownership interests in an entity,
including investments in partnerships, unincorporated joint ventures and limited liability companies (collectively, equity
securities) that do not result in consolidation and are not accounted for under the equity method. Entities will need to
measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize
unrealized holding gains and losses on equity securities they classify under current guidance as available for sale in
other comprehensive income (OCI). They also will no longer be able to use the cost method of accounting for equity
securities that do not have readily determinable fair values. Instead, for these types of equity investments that do not
otherwise qualify for the net asset value practical expedient, entities will be permitted to elect a practicability
exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly
transactions). The ASU also establishes an incremental recognition and disclosure requirement related to the presentation
of fair value changes of financial liabilities for which the fair value option (FVO) has been elected. Under this guidance,
an entity would be required to separately present in OCI the portion of the total fair value change attributable to
instrument-specific credit risk as opposed to reflecting the entire amount in earnings. For derivative liabilities for
which the FVO has been elected, however, any changes in fair value attributable to instrument-specific credit risk would
continue to be presented in net income, which is consistent with current guidance. For 3M, this standard is effective
beginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative
to equity securities without readily determinable fair values which is applied prospectively. The Company is currently
assessing this ASU's impact on 3M's consolidated results of operations and financial condition. 
 
In February 2016, the FASB issued ASU No. 2016-02, Leases, replacing existing lease accounting guidance. The new standard
introduces a lessee model that would require entities to recognize assets and liabilities for most leases, but recognize
expenses on their income statements in a manner similar to current accounting. The ASU does not make fundamental changes to
existing lessor accounting. However, it modifies what qualifies as a sales-type and direct financing lease and related
accounting and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09, such
as evaluating how collectability should be considered and determining when profit can be recognized. The guidance
eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. The
standard requires modified retrospective transition by which it is applied at the beginning of the earliest comparative
period presented in the year of adoption. For 3M, the ASU is effective January 1, 2019. Information under existing lease
guidance with respect to rent expense for operating leases and the Company's minimum lease payments for capital and
operating leases with non-cancelable terms in excess one year as of December 31, 2016 is included in Note 14. The Company
is currently assessing this ASU's impact on 3M's consolidated results of operations and financial condition. 
 
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarifies
guidance used to determine if debt instruments that contain contingent put or call options would require separation of the
embedded put or call feature from the debt instrument and trigger accounting for the feature as a derivative with changes
in fair value recorded through income. Under the new guidance, fewer put or call options embedded in debt instruments would
require derivative accounting. For 3M, this ASU is effective January 1, 2017. The Company's outstanding debt with embedded
put provisions does not require separate derivative accounting under existing guidance. As a result, 3M does not expect
this ASU to have a material impact on the Company's consolidated results of operations and financial condition. 
 
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which
eliminates the existing requirement to apply the equity method of accounting retrospectively (revising prior periods as if
the equity method had always been applied) when an entity obtains significant influence over a previously held investment.
The new guidance would require the investor to apply the equity method prospectively from the date the investment qualifies
for the equity method. The investor would add the carrying value of the existing investment to the cost of any additional
investment to determine the initial cost basis of the equity method investment. For 3M, this ASU is effective January 1,
2017 on a prospective basis, with early adoption permitted. 3M would apply this guidance to investments that transition to
the equity method after the adoption date. 
 
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies
certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income
taxes and forfeitures, as well as classifications in the statement of cash flows. With respect to income taxes, under
current guidance, when a share-based payment award such as a stock option or restricted stock unit (RSU) is granted to an
employee, the fair value of the award is generally recognized over the vesting period. However, the related deduction from
taxes payable is based on the award's intrinsic value at the time of exercise (for an option) or on the fair value upon
vesting of the award (for RSUs), which can be either greater (creating an excess tax benefit) or less (creating a tax
deficiency) than the compensation cost recognized in the financial statements. Excess tax benefits are recognized in
additional paid-in capital (APIC) within equity, and tax deficiencies are similarly recognized in APIC to the extent there
is a sufficient APIC amount (APIC pool) related to previously recognized excess tax benefits. Under the new guidance, all
excess tax benefits/deficiencies would be recognized as income tax benefit/expense in the statement of income. The new
ASU's income tax aspects also impact the calculation of diluted earnings per share by excluding excess tax
benefits/deficiencies from the calculation of assumed proceeds available to repurchase shares under the treasury stock
method. Relative to forfeitures, the new standard allows an entity-wide accounting policy election either to continue to
estimate the number of awards that will be forfeited or to account for forfeitures as they occur. The new guidance also
impacts classifications within the statement of cash flows by no longer requiring inclusion of excess tax benefits as both
a hypothetical cash outflow within cash flows from operating activities and hypothetical cash inflow within cash flows from
financing activities. Instead, excess tax benefits would be classified in operating activities in the same manner as other
cash flows related to income taxes. Additionally, the new ASU requires cash payments to tax authorities when an employer
uses a net-settlement feature to withhold shares to meet statutory tax withholding provisions to be presented as financing
activity (eliminating previous diversity in practice). For 3M, this standard is required effective January 1, 2017, with
early adoption permitted. The Company early adopted ASU No. 2016-09 as of January 1, 2016. Prospectively beginning January
1, 2016, excess tax benefits/deficiencies have been reflected as income tax benefit/expense in the statement of income
resulting in a $184 million tax benefit in 2016. The extent of excess tax benefits/deficiencies is subject to variation in
3M stock price and timing/extent of RSU vestings and employee stock option exercises. 3M's adoption of this ASU also
resulted in associated excess tax benefits being classified as operating activity in the same manner as other cash flows
related to income taxes in the statement of cash flows prospectively beginning January 1, 2016. Based on the adoption
methodology applied, the statement of cash flows classification of prior periods has not changed. In addition, 3M did not
change its accounting principles relative to elements of this standard and continued its existing practice of estimating
the number of awards that will be forfeited. 
 
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises
guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an
approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the
impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the
current expected credit losses model) applies to most financial assets measured at amortized cost and certain other
instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and
off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current
other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a
portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However,
rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS
debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances,
a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU
is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard's provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is adopted. The Company is currently assessing this ASU's impact on 3M's consolidated result of operations and financial
condition. 
 
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is
intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the
statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of
zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of
insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying
cash receipts and payments that have aspects of more than one class of cash flows. For 3M, this ASU is effective January 1,
2018, with early adoption permitted. The standard requires application using a retrospective transition method. The Company
does not expect this ASU to have a material impact on 3M's consolidated results of operations and financial condition. 
 
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which modifies
existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax
consequences of intra-entity transfers of assets. The ASU indicates that the current exception to income tax accounting
that requires companies to defer the income tax effects of certain intercompany transactions would apply only to
intercompany inventory transactions. That is, the exception would no longer apply to intercompany sales and transfers of
other assets (e.g., intangible assets). Under the existing exception, income tax expense associated with intra-entity
profits in an intercompany sale or transfer of assets is eliminated from earnings. Instead, that cost is deferred and
recorded on the balance sheet (e.g., as a prepaid asset) until the assets leave the consolidated group. Similarly, the
entity is prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or
transfer. For 3M, this ASU is effective January 1, 2018, with early adoption permitted as of January 1, 2017. The standard
requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period
of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany
transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax
assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing
guidance but would recognize under the new guidance. While 3M could initiate additional relevant transactions prior to this
ASU's adoption date, based on deferred tax amounts related to applicable past intercompany transactions as of December 31,
2016, the Company does not expect this ASU to have a material impact on 3M's consolidated results of operations and
financial condition. 
 
In October 2016, the FASB issued ASU No. 2016-17, Interests Held through Related Parties That Are under Common Control,
which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a variable
interest entity (VIE) through a common control party determines whether it is the primary beneficiary of the VIE as part of
the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only
its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the
decision maker to treat the common control party's interest in the VIE as if the decision maker held the interest itself.
As a result of the ASU, in certain cases, previous consolidation conclusions may change. For 3M, the standard is effective
January 1, 2017 with retrospective application to January 1, 2016. 3M does not have significant involvement with entities
subject to consolidation considerations impacted by VIE model factors. As a result, 3M does not expect this ASU to have a
material impact on the Company's consolidated results of operations and financial condition. 
 
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance on the classification and
presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted
cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a
result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the
statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be
disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. For
3M, this ASU is effective January 1, 2018, with early adoption permitted. Entities are required to apply the standard's
provisions on a retrospective basis. 3M does not expect this ASU to have a material impact on the Company's consolidated
results of operations and financial condition. 
 
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing
definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an
acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair
value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable
assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a
business, the set would need to include an input and a substantive process that together significantly contribute to the
ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas
of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be
considered businesses. For 3M, this ASU is effective January 1, 2018 on a prospective basis with early adoption permitted.
3M would apply this guidance to applicable transactions after the adoption date. 
 
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard,
goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not
to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine
goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a
reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination.
For 3M, this ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted.
3M would apply this guidance to applicable impairment tests after the adoption date. 
 
NOTE 2.  Acquisitions and Divestitures 
 
Acquisitions: 
 
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to,
among other factors, growth markets and adjacent product lines or technologies. 
 
Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses
and synergies expected to arise after 3M's acquisition of these businesses. Pro forma information related to acquisitions
was not included because the impact on the Company's consolidated results of operations was not considered to be material. 
 
In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases
interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions
are largely reflected as additional asset purchase and investment activity. 
 
2016 acquisitions: 
 
During 2016, 3M completed the acquisition of Semfinder AG and Sembrowser AG (collectively "Semfinder") along with an
additional immaterial acquisition, the impacts of which on the consolidated balance sheet were not considered material. In
September 2016, 3M (Health Care Business) acquired all of the outstanding shares of Semfinder, headquartered in
Kreuzlingen, Switzerland. Semfinder is a leading developer of precision software that enables efficient coding of medical
procedures in multiple languages. The purchase price paid for these business combinations (net of cash acquired) during
2016 aggregated to $16 million. 
 
Adjustments in 2016 to the preliminary purchase price allocations of other acquisitions within the allocation period
primarily related to the identification of contingent liabilities and certain tax-related items aggregating to
approximately $35 million along with other balances related to the 2015 acquisition of Capital Safety Group S.A.R.L. The
change to provisional amounts resulted in an immaterial impact to the results of operations in the third quarter of 2016, a
portion of which related to earlier quarters in the measurement period. 
 
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2016 totaled $4 million. The
associated finite-lived intangible assets acquired in 2016 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of 8 years (lives ranging from two to 20 years). Acquired in-process research
and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying
arrangements impacted the determination of their useful lives were not material. 
 
2015 acquisitions: 
 
In March 2015, 3M (Health Care Business) purchased all of the outstanding shares of Ivera Medical Corp., headquartered in
San Diego, California. Ivera Medical Corp. is a manufacturer of health care products that disinfect and protect devices
used for access into a patient's bloodstream. In addition, in the first quarter of 2015, 3M (Industrial Business) purchased
the remaining interest in a former equity method investment for an immaterial amount. 
 
In August 2015, 3M (Safety and Graphics Business) acquired all of the outstanding shares of Capital Safety Group S.A.R.L.,
with operating headquarters in Bloomington, Minnesota, from KKR & Co. L.P. for $1.7 billion, net of cash acquired. The net
assets acquired included the assumption of $0.8 billion of debt. Capital Safety is a leading global provider of fall
protection equipment. 
 
In August 2015, 3M (Industrial Business) acquired the assets and liabilities associated with Polypore International, Inc.'s
Separations Media business (hereafter referred to as Membrana), headquartered in Wuppertal, Germany, for $1.0 billion.
Membrana is a leading provider of microporous membranes and modules for filtration in the life sciences, industrial and
specialty segments. 
 
The impact on the consolidated balance sheet of the purchase price allocations related to 2015 acquisitions and assigned
weighted-average intangible asset lives, including adjustments relative to other acquisitions within the measurement
period, follows. Adjustments in 2015 to the preliminary allocations primarily related to the identification and valuation
of certain indefinite-lived intangible assets. The change to provisional amounts resulted in an immaterial impact to
results of operations in the fourth quarter of 2015, a portion of which relates to earlier quarters in the measurement
period. 
 
                                                                                                                                                                                                                      
                                                                2015 Acquisition Activity         
                                                                                                                                                                                                      Finite-Lived    
                                                                                                                                                                                    Intangible-Asset                
 (Millions)                                                     Capital                           Polypore Separations                                            Weighted-Average                    
 Asset (Liability)                                              Safety                            Media (Membrana)         Other    Total       Lives (Years)     
 Accounts receivable                                            $                          66                           $  30       $      7                   $  103                                                 
 Inventory                                                                                 63                              35              4                      102                                                 
 Other current assets                                                                      10                              1               1                      12                                                  
 Property, plant, and equipment                                                            36                              128             7                      171                                                 
 Purchased finite-lived intangible assets:                                                                                                                                                                            
 Customer related intangible assets                                                        445                             270             40                     755                                 16              
 Patents                                                                                   44                              11              7                      62                                  7               
 Other technology-based intangible assets                                                  85                              42              1                      128                                 7               
 Definite-lived tradenames                                                                 26                              6               1                      33                                  16              
 Other amortizable intangible assets                                                       -                               -               2                      2                                   4               
 Purchased indefinite-lived intangible assets                                              520                             -               -                      520                                                 
 Purchased goodwill                                                                        1,764                           636             95                     2,495                                               
 Accounts payable and other liabilities, net of other assets                               (105)                           (122)           (5)                    (232)                                               
 Interest bearing debt                                                                     (766)                           -               -                      (766)                                               
 Deferred tax asset/(liability)                                                            (464)                           -               (7)                    (471)                                               
                                                                                                                                                                                                                      
 Net assets acquired                                            $                          1,724                        $  1,037    $      153                 $  2,914                                               
                                                                                                                                                                                                                      
 Supplemental information:                                                                                                                                                                                            
 Cash paid                                                      $                          1,758                        $  1,037    $      154                 $  2,949                                               
 Less: Cash acquired                                                                       34                              -               1                      35                                                  
 Cash paid, net of cash acquired                                $                          1,724                        $  1,037    $      153                 $  2,914                                               
 
 
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2015 totaled $1.0 billion. The
associated finite-lived intangible assets acquired in 2015 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of 14 years (lives ranging from two to 20 years). Indefinite-lived intangible
assets of $520 million relate to certain tradenames associated with the Capital Safety acquisition which have been in
existence for over 55 years, have a history of leading market-share positions, have been and are intended to be
continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite
period of time. Acquired in-process research and development and identifiable intangible assets for which significant
assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not
material. 
 
2014 acquisitions: 
 
3M completed one business combination during 2014, the impact of which on the consolidated balance sheet was not considered
material. In April 2014, 3M (Health Care Business) purchased all of the outstanding equity interests of Treo Solutions LLC,
headquartered in Troy, New York. Treo Solutions LLC is a provider of data analytics and business intelligence to healthcare
payers and providers. The purchase price paid for this business combination (net of cash acquired) and the impact of other
matters (net) during 2014 aggregated to $94 million. 
 
Separately, as discussed in Note 6, during 2014, 3M (via Sumitomo 3M Limited) purchased Sumitomo Electric Industries,
Ltd.'s 25 percent interest in 3M's consolidated Sumitomo 3M Limited subsidiary for 90 billion Japanese Yen. Because 3M
already had a controlling interest in this consolidated subsidiary, this transaction was separately recorded as a financing
activity in the statement of cash flows. 
 
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2014 totaled $34 million. The
associated finite-lived intangible assets acquired in 2014 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of six years (lives ranging from three to 10 years). Acquired in-process
research and development and identifiable intangible assets for which significant assumed renewals or extensions of
underlying arrangements impacted the determination of their useful lives were not material. 
 
Divestitures: 
 
3M may divest certain businesses from time to time based upon review of the Company's portfolio considering, among other
items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in
addition to considering if selling the businesses results in the greatest value creation for the Company and for
shareholders. 
 
In January 2015, 3M (Electronics and Energy Business) completed the sale of its global Static Control business to Desco
Industries Inc., based in Chino, California. 2014 sales of this business were $46 million. This transaction was not
considered material. 
 
In the fourth quarter of 2015, 3M (Safety and Graphics Business) entered into agreements with One Equity Partners Capital
Advisors L.P. (OEP) to sell the assets of 3M's library systems business. The sales of the North American business and the
majority of the business outside of North America closed in October and November 2015, respectively. The sale of the
remainder of the library systems business closed in the first quarter of 2016 (discussed further below). In December 2015,
3M (Safety and Graphics Business) also completed the sale of Faab Fabricauto, a wholly-owned subsidiary of 3M, to Hills
Numberplates Limited. The library systems business, part of the Traffic Safety and Security Division, delivers circulation
management solutions to library customers with on-premise hardware and software, maintenance and service, and an emerging
cloud-based digital lending platform. Faab Fabricauto, also part of the Traffic Safety and Security Division, is a leading
French manufacturer of license plates and signage solutions. The aggregate cash proceeds relative to the 2015 global
library systems and Faab Fabricauto divestiture transactions was $104 million. The Company recorded a net pre-tax gain of
$40 million (approximately $10 million after tax) in 2015 as a result of the sale and any adjustment of carrying value. 
 
In the first quarter of 2016, 3M (Safety and Graphics Business) completed the sale of the remainder of the assets of 3M's
library systems business to One Equity Partners Capital Advisors L.P. (OEP). 3M had previously sold the North American
business and the majority of the business outside of North America to OEP in the fourth quarter of 2015. The library
systems business delivers circulation management solutions to library customers with on-premise hardware and software,
maintenance and service, and an emerging cloud-based digital lending platform. Also in the first quarter of 2016, 3M
(Industrial Business) sold to Innovative Chemical Products Group, a portfolio company of Audax Private Equity, the assets
of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam). This business is a provider of
pressurized polyurethane foam adhesive formulations and systems into the residential roofing, commercial roofing and
insulation and industrial foam segments in the United States with annual sales of approximately $20 million. The Company
recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sales of these businesses (recorded
in selling, general and administrative expenses). 
 
In October 2016, 3M (Industrial Business) sold the assets of its temporary protective films business to Pregis LLC. This
business, with annual sales of approximately $50 million, is a provider of adhesive-backed temporary protective films used
in a broad range of industries. In December 2016, 3M (Electronics and Energy Business) sold the assets of its cathode
battery technology out-licensing business, with annual sales of approximately $10 million, to UMICORE. The aggregate
selling price relative to these two businesses was $86 million. The Company recorded a pre-tax gain of $71 million in the
fourth quarter of 2016 as a result of the sales of these businesses (recorded in selling, general and administrative
expenses). 
 
In December 2016, 3M (Safety and Graphics Business) announced that it agreed to sell its identity management business to
Gemalto N.V. for $850 million, subject to closing and other adjustments. This business, with 2016 sales of approximately
$205 million, is a leader in identity management solutions providing biometric hardware and software that enable identity
verification and authentication, as well as secure materials and document readers. The transaction is expected to close
during the first half of 2017. In January 2017, 3M (Safety and Graphics Business) sold the assets of its safety
prescription eyewear business, with annual sales of approximately $45 million, to HOYA Vision Care. The Company expects a
pre-tax gain of approximately $500 million as a result of these two divestitures. The amounts of major assets and
liabilities associated with these disposal groups classified as held-for-sale as of December 31, 2016 include accounts
receivable; property, plant and equipment (net); intangible assets; and deferred revenue (other current liabilities) of
approximately $25 million, $25 million, $35 million, and $35 million, respectively. In addition, approximately $270 million
of goodwill is estimated to be attributable to these businesses as of December 31, 2016 based upon relative fair value.
These amounts have not been segregated and are classified within the existing corresponding line items on the Company's
consolidated balance sheet. The aggregate operating income of these two businesses was less than $20 million in each of
2016, 2015 and 2014. 
 
NOTE 3.  Goodwill and Intangible Assets 
 
Purchased goodwill from acquisitions totaled $14 million in 2016, none of which is deductible for tax purposes. The
acquisition activity in the following table also includes the net impact of adjustments to the preliminary allocation of
purchase price within the one year measurement-period following prior acquisitions, which increased goodwill by $39 million
during 2016. Purchased goodwill from acquisitions totaled $2.5 billion in 2015, $636 million of which is deductible for tax
purposes. The amounts in the "Translation and other" column in the following table primarily relate to changes in foreign
currency exchange rates. The goodwill balance by business segment follows: 
 
Goodwill 
 
                                                                                                                                                                   
                           Dec. 31, 

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