REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 6
13/02/2018 07:15
- Part 6: For the preceding part double click ID:nRSM6559Ee
2015
Numerator:
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Denominator:
Denominator for weighted average 3M common shares outstanding - basic 597.5 604.7 625.6
Dilution associated with the Company's stock-based compensation plans 15.2 14.0 11.6
Denominator for weighted average 3M common shares outstanding - diluted 612.7 618.7 637.2
Earnings per share attributable to 3M common shareholders - basic $ 8.13 $ 8.35 $ 7.72
Earnings per share attributable to 3M common shareholders - diluted $ 7.93 $ 8.16 $ 7.58
Stock-based compensation: The Company recognizes compensation expense for its
stock-based compensation programs, which include stock options, restricted
stock, restricted stock units (RSUs), 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. However, with respect to income taxes, 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 deferred tax benefit
recognized as compensation cost is recognized in the financial statements.
Beginning in 2016, as a result of 3M's adoption of Accounting Standards Update
(ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
these excess tax benefits/deficiencies are recognized as income tax
benefit/expense in the statement of income and, within the statement of cash
flows, are classified in operating activities in the same manner as other cash
flows related to income taxes. 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. Prior to 2016, excess tax benefits were
recognized in additional paid-in capital within equity, and, with respect to
statement of cash flows, were reflected as a financing cash inflow. Based on
the adoption methodology of ASU No. 2016-09 applied, periods prior to 2016
were not changed.
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
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 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 and the
Company has concluded that it will utilize the modified retrospective method
of adoption. The Company has completed analyses, executed project management
relative to the process of adopting this ASU, and conducted detailed contract
reviews to complete necessary adjustments to existing accounting policies and
quantify the ASU's effect. For most of 3M's revenue arrangements, there are no
impacts 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. 3M also engages
in some arrangements for which software industry-specific guidance (which the
ASU supersedes) is presently utilized. The Company also considered these
arrangements in the detailed contract reviews that have been conducted. While
3M will provide expanded disclosures as a result of ASU No. 2014-09, it does
not expect this standard to have a material impact on its consolidated results
of operations and financial condition.
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. 3M adopted this standard prospectively beginning January 1, 2017.
The adoption did not 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. This provision does not apply to
derivative instruments required to be measured at fair value with changes in
fair value recognized in current earnings. 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. Because the
Company has historically held limited amounts of equity securities (less than
$75 million in aggregate at December 31, 2017), and has not elected the FVO
with respect to material financial liabilities, it does not expect this
standard to have a material impact on its 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, 2017 is included in Note 15. 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 was effective January 1, 2017. The Company's outstanding debt with
embedded put provisions did not require separate derivative accounting under
existing guidance. As a result, the adoption of this standard did not 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 was effective January 1, 2017 on a prospective
basis. 3M will apply this guidance to investments that transition to the
equity method after the adoption date.
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.
The Company early adopted ASU No. 2016-15 as of January 1, 2017. Since the
associated changes in classification were immaterial to all prior periods
presented, no impact was reflected in the Company's pre-2017 consolidated
results of operations and financial condition presented.
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.
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. Based on deferred tax amounts related to applicable past
intercompany transactions as of December 31, 2017, 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 was 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, the adoption of this ASU did not 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. The Company early adopted ASU No. 2016-18 as
of January 1, 2017. Due to the immaterial use of restricted cash and
restricted cash equivalents, no impact was reflected in the Company's pre-2017
consolidated results of operations and financial condition presented.
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 adopted this ASU in the fourth quarter of 2017 in
conjunction with its annual goodwill impairment testing. The adoption did not
have an impact on 3M's consolidated results of operations and financial
condition.
In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of
Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets. This ASU addresses scope-related questions that arose after the FASB
issued its revenue guidance in ASU No. 2014-09, Revenue from Contracts with
Customers. The new standard clarifies the accounting for derecognition of
nonfinancial assets and defines what is considered an in substance
nonfinancial asset. Nonfinancial assets largely relate to items such as real
estate, ships and intellectual property that do not constitute a business. The
new ASU impacts entities derecognizing (e.g. selling) nonfinancial assets (or
in substance nonfinancial assets), including partial interests therein, when
the purchaser is not a customer. Under the new guidance, the seller would
apply certain recognition and measurement principles of ASU No. 2014-09,
Revenue from Contracts with Customers, even though the purchaser is not a
customer. For 3M, this new standard is effective coincident with the Company's
January 1, 2018 adoption of ASU No. 2014-09. The Company does not expect this
ASU to have a material impact on 3M's consolidated results of operations and
financial condition.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This
ASU changes how employers that sponsor defined benefit pension and/or other
postretirement benefit plans present the net periodic benefit cost in the
income statement. Under the new standard, only the service cost component of
net periodic benefit cost would be included in operating expenses and only the
service cost component would be eligible for capitalization into assets such
as inventory. All other net periodic benefit costs components (such as
interest, expected return on plan assets, prior service cost amortization and
actuarial gain/loss amortization) would be reported outside of operating
income. For 3M, this ASU is effective January 1, 2018 on a retrospective
basis; however, guidance limiting the capitalization to only the service cost
component is applied on prospective basis. The components of 3M's net periodic
defined benefit pension and postretirement benefit costs are presented in Note
12. These include components totaling a benefit of $129 million, $195 million,
and a detriment of $34 million, for the fiscal years 2017, 2016, and 2015,
respectively, that would no longer be included within operating expenses and
instead would be reported outside of income from operations under the new
standard. Further, the capitalization of service cost change is not expected
to have a material impact on 3M's consolidated results of operations and
financial condition.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on
Purchased Callable Debt Securities, which amends the amortization period for
certain purchased callable debt securities held at a premium. Under existing
standards, entities generally amortize the premium as an adjustment of yield
over the contractual life of the instrument. The new guidance shortens the
amortization period to the earliest call date for certain callable debt
securities that have explicit, noncontingent call features and are callable at
a fixed price and preset date. The amendments do not require an accounting
change for securities held at a discount. For 3M, this ASU is effective
January 1, 2019 with a modified retrospective transition resulting in a
cumulative-effect adjustment to retained earnings as of the beginning of the
first reporting period in which the guidance is adopted. Early adoption is
permitted. 3M's marketable security portfolio includes very limited instances
of callable debt securities held at a premium. As a result, the Company does
not expect this ASU to have a material impact on 3M's consolidated results of
operations and financial condition.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification
Accounting, that clarifies when changes to the terms or conditions of a
share-based payment award must be accounted for as a modification. The general
model for accounting for modifications of share-based payment awards is to
record the incremental value arising from the changes as additional
compensation cost. Under the new standard, fewer changes to the terms of an
award would require accounting under this modification model. For 3M, this ASU
is effective January 1, 2018, with early adoption permitted. Because the
Company does not typically make changes to the terms or conditions of its
issued share-based payment awards, 3M does not expect this ASU to have a
material impact on its consolidated results of operations and financial
condition.
In May 2017, the FASB issued ASU No. 2017-10, Determining the Customer of the
Operation Services, that clarifies how an operating entity determines the
customer of the operation services for transactions within the scope of a
service concession arrangement. Service concession arrangements are typically
agreements between a grantor and an operating entity whereby the operating
entity will operate the grantor's infrastructure (i.e. airports, roadways,
bridges, and prisons) for a specified period of time. The operating entity
also may be required to maintain the infrastructure and provide
capital-intensive maintenance to enhance or extend its life. In such
arrangements, typically the operation services (i.e. operation and maintenance
of a roadway) would be used by third parties (i.e. drivers). The ASU clarifies
that the grantor, not the third party, is the customer of the operation
services in such arrangements. For 3M, this new standard is effective
coincident with the Company's January 1, 2018 adoption of ASU No. 2014-09.
Because the Company is not typically a party to agreements within the scope of
accounting for service concession arrangements, 3M does not expect this ASU to
have a material impact on its consolidated results of operations and financial
condition.
In July 2017, the FASB issued ASU No. 2017-11, (Part I) Accounting for Certain
Financial Instruments with Down Round Features, (Part II) Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. The new standard applies to issuers of
financial instruments with down-round features. A down-round provision is a
term in an equity-linked financial instrument (i.e. a freestanding warrant
contract or an equity conversion feature embedded within a host debt or equity
contract) that triggers a downward adjustment to the instrument's strike price
(or conversion price) if equity shares are issued at a lower price (or
equity-linked financial instruments are issued at a lower strike price) than
the instrument's then-current strike price. The purpose of the feature is
typically to protect the instrument's counterparty from future issuances of
equity shares at a more favorable price. The ASU amends (1) the classification
of such instruments as liabilities or equity by revising the certain guidance
relative to evaluating if they must be accounted for as derivative instruments
and (2) the guidance on recognition and measurement of freestanding
equity-classified instruments. For 3M, this ASU is effective January 1, 2019,
with early adoption permitted. Because the Company has not issued financial
instruments with down-round features, 3M does not expect this ASU to have a
material impact on its consolidated results of operations and financial
condition.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to
Accounting for Hedging Activities. The ASU amends existing guidance to
simplify the application of hedge accounting in certain situations and allow
companies to better align their hedge accounting with their risk management
activities. Existing standards contain certain requirements for an instrument
to qualify for hedge accounting relative to initial and ongoing assessments of
hedge effectiveness. While an initial quantitative test to establish the hedge
relationship is highly effective would still be required, the new ASU permits
subsequent qualitative assessments for certain hedges instead of a
quantitative test and expands the timeline for performing the initial
quantitative assessment. The ASU also simplifies related accounting by
eliminating the requirement to separately measure and report hedge
ineffectiveness. Instead, for qualifying cash flow and net investment hedges,
the entire change in fair value (including the amount attributable to
ineffectiveness) will be recorded within other comprehensive income and
reclassified to earnings in the same income statement line that is used to
present the earnings effect of the hedged item when the hedged item affects
earnings. For fair value hedges, generally, the entire change in fair value of
the hedging instrument would also be presented in the same income statement
line as the hedged item. The new standard also simplifies the accounting for
fair value hedges of interest rate risks and expands an entity's ability to
hedge nonfinancial and financial risk components. In addition, the guidance
also eases certain documentation requirements, modifies the accounting for
components excluded from the assessment of hedge effectiveness, and requires
additional tabular disclosures of derivative and hedge-related information.
For 3M, this ASU is effective January 1, 2019, with a modified retrospective
transition resulting in a cumulative-effect adjustment recorded to the opening
balance of retained earnings as of the adoption date. Early adoption is
permitted. The Company is currently assessing this ASU's impact on 3M's
consolidated results of operations and financial condition.
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.
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.
2017 acquisitions:
In September 2017, 3M purchased all of the ownership interests of Elution
Technologies, LLC, a Vermont-based manufacturer of test kits that help enable
food and beverage companies ensure their products are free from certain
potentially harmful allergens such as peanuts, soy or milk. Elution is
reported within the Company's Health Care business.
In October 2017, 3M completed the acquisition of the underlying legal entities
and associated assets of Scott Safety, which is headquartered in Monroe, North
Carolina, from Johnson Controls for $2.0 billion of cash, net of cash
acquired. Scott Safety is a premier manufacturer of innovative products,
including self-contained breathing apparatus systems, gas and flame detection
instruments, and other safety devices that complement 3M's personal safety
portfolio. The business had revenues of approximately $570 million in 2016.
Scott Safety is reported within 3M's Safety and Graphics business. The
allocation of purchase consideration related to Scott Safety is considered
preliminary with provisional amounts primarily related to intangible assets
and certain tax-related, contingent liability and working capital items. 3M
expects to finalize the allocation of purchase price within the one year
measurement-period following the acquisition.
Pro forma information related to acquisitions has not been included because
the impact on the Company's consolidated results of operations was not
considered material. The following table shows the impact on the consolidated
balance sheet of the purchase price allocations related to 2017 acquisitions
and assigned finite-lived intangible asset weighted-average lives.
2017 Acquisition Activity
Finite-Lived
Intangible-Asset
(Millions) Scott Weighted-Average
Asset (Liability) Safety Other Total Lives (Years)
Accounts receivable $ 100 $ - $ 100
Inventory 79 - 79
Other current assets 10 - 10
Property, plant, and equipment 74 - 74
Purchased finite-lived intangible assets:
Customer related intangible assets 439 3 442 15
Other technology-based intangible assets 125 2 127 10
Definite-lived tradenames 285 - 285 17
Other amortizable intangible assets - 1 1 5
Purchased goodwill 1,296 6 1,302
Accounts payable and other liabilities (100) - (100)
Deferred tax asset/(liability) (297) - (297)
Net assets acquired $ 2,011 $ 12 $ 2,023
Supplemental information:
Cash paid $ 2,020 $ 12 $ 2,032
Less: Cash acquired 9 - 9
Cash paid, net of cash acquired $ 2,011 $ 12 $ 2,023
Purchased identifiable finite-lived intangible assets related to acquisition
activity in 2017 totaled $855 million. The associated finite-lived intangible
assets acquired in 2017 will be amortized on a systematic and rational basis
(generally straight line) over a weighted-average life of 15 years (lives
ranging from four to 17 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.
2016 acquisitions:
In September 2016, 3M 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. Semfinder is
reported within 3M's Health Care business.
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 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 and is reported within 3M's Health
Care business. In addition, in the first quarter of 2015, 3M purchased the
remaining interest in a former equity method investment reported within 3M's
Industrial business for an immaterial amount.
In August 2015, 3M 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 and is reported within
3M's Safety and Graphics business.
In August 2015, 3M 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 and is
reported within 3M's Industrial business.
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.
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 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 and
was reported within 3M's Electronics and Energy business.
In the fourth quarter of 2015, 3M 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
also completed the sale of Faab Fabricauto, a wholly-owned subsidiary of 3M,
to Hills Numberplates Limited. The library systems business, part of the
former 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 former 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
within 3M's Safety and Graphics business a net pre-tax gain of $40 million in
2015 as a result of the sale and any adjustment of carrying value.
In the first quarter of 2016, 3M 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 which was reported within 3M's Safety and Graphics business.
Also in the first quarter of 2016, 3M 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 and was reported within 3M's Industrial business.
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.
In October 2016, 3M 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 and was reported within 3M's Industrial business. In
December 2016, 3M sold the assets of its cathode battery technology
out-licensing business, with annual sales of approximately $10 million, to
UMICORE. This business was reported within 3M's Electronics and Energy
business. 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.
In January 2017, 3M sold the assets of its safety prescription eyewear
business, with annual sales of approximately $45 million, to HOYA Vision Care.
The Company recorded a pre-tax gain of $29 million in the first quarter of
2017 as a result of this sale, which was reported within the Company's Safety
and Graphics business.
In May 2017, 3M completed the related sale or transfer of control, as
applicable, of its identity management business to Gemalto N.V. This business,
with 2016 sales of approximately $205 million, is a leading provider in
identity management solutions, including biometric hardware and software
- More to follow, for following part double click ID:nRSM6559Eg (2,068) (3,753) (5,238)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans 734 804 635
Dividends paid to shareholders (2,803) (2,678) (2,561)
Excess tax benefits from stock-based compensation - - 154
Other - net (121) (42) (120)
Net cash used in financing activities (2,655) (4,626) (3,648)
Effect of exchange rate changes on cash and cash equivalents 156 (33) (54)
Net increase (decrease) in cash and cash equivalents 655 600 (99)
Cash and cash equivalents at beginning of year 2,398 1,798 1,897
Cash and cash equivalents at end of period $ 3,053 $ 2,398 $ 1,798
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 amounts in the prior years' consolidated financial statements have been reclassified to
conform to the current year presentation.
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.
3M has a subsidiary in Venezuela, the financial statements of which are remeasured under Accounting Standards Codification
(ASC) 830, Foreign Currency Matters, as if its functional currency were that of its parent because Venezuela's economic
environment is considered highly inflationary. The operating income of this subsidiary is immaterial as a percent of 3M's
consolidated operating income for 2017. The Venezuelan government sets official rates of exchange and conditions precedent
to purchase foreign currency at these rates with local currency. The government also operates various expanded secondary
currency exchange mechanisms that have been eliminated and replaced from time to time. Such rates and conditions have been
and continue to be subject to change. For the periods presented, the financial statements of 3M's Venezuelan subsidiary
were remeasured utilizing the rate associated with the secondary auction mechanism, Tipo de Cambio Complementario, which
was redesigned by the Venezuelan government in June 2017 (DICOM2), or its predecessor. During the same periods, the
Venezuelan government's official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor. 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. The Company continues to monitor these circumstances. 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, 2017, the
Company had a balance of net monetary assets denominated in VEF of less than 10 billion VEF and the DIPRO and DICOM2
exchange rates were approximately 10 VEF and 3,300 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 a
review of factors as of December 31, 2017, the Company continues to consolidate its Venezuelan subsidiary. As of December
31, 2017, the balance of accumulated other comprehensive loss associated with this subsidiary was approximately $145
million and the amount of intercompany receivables due from this subsidiary and its total equity balance were not
significant.
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: Marketable securities include available-for-sale debt securities and are recorded at fair value.
Cost of securities sold use the first in, first out (FIFO) method. The classification of marketable securities as current
or non-current is based on the 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 accumulated other comprehensive income as a 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. Amounts are reclassified out of accumulated other comprehensive
income and into earnings upon sale or "other-than-temporary" impairment.
Investments: Investments primarily include equity method, cost method, and available-for-sale equity investments.
Available-for-sale investments are recorded at fair value at each reporting date and subject to ASC 320, as described
above.
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 direct
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 other than capitalized internally developed software are retained in
property, plant and equipment 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 $106 million and $111 million
at December 31, 2017 and 2016, 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 are required
to 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. The impairment loss is measured as the amount by which the carrying value of
the reporting unit's net assets exceeds its estimated fair value. 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 its 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 eight 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 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 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 $411 million in
2017, $385 million in 2016 and $368 million in 2015.
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 $1.850 billion in
2017, $1.735 billion in 2016 and $1.763 billion in 2015. 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
$1.335 billion in 2017, $1.225 billion in 2016 and $1.223 billion in 2015. 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, and external software
acquired for use as, 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. Fully depreciated internal-use software assets are removed from property, plant and equipment and accumulated
depreciation accounts.
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, 2017 and 2016, the Company had valuation allowances of
$81 million and $47 million on its deferred tax assets, respectively. The increase in valuation allowance at December 31,
2017 relates to certain U.S. and international jurisdictions with taxable loss or tax credit 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 2017, 2016 and
2015 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 (0.8 million average options for 2017, 3.6 million average options for 2016, and 5.0
million average options for 2015). 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) 2017 2016 2015
Numerator:
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Denominator:
Denominator for weighted average 3M common shares outstanding - basic 597.5 604.7 625.6
Dilution associated with the Company's stock-based compensation plans 15.2 14.0 11.6
Denominator for weighted average 3M common shares outstanding - diluted 612.7 618.7 637.2
Earnings per share attributable to 3M common shareholders - basic $ 8.13 $ 8.35 $ 7.72
Earnings per share attributable to 3M common shareholders - diluted $ 7.93 $ 8.16 $ 7.58
Stock-based compensation: The Company recognizes compensation expense for its stock-based compensation programs, which
include stock options, restricted stock, restricted stock units (RSUs), 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. However, with respect to income taxes, 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 deferred
tax benefit recognized as compensation cost is recognized in the financial statements. Beginning in 2016, as a result of
3M's adoption of Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
these excess tax benefits/deficiencies are recognized as income tax benefit/expense in the statement of income and, within
the statement of cash flows, are classified in operating activities in the same manner as other cash flows related to
income taxes. 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. Prior to 2016, excess tax benefits were recognized in additional paid-in
capital within equity, and, with respect to statement of cash flows, were reflected as a financing cash inflow. Based on
the adoption methodology of ASU No. 2016-09 applied, periods prior to 2016 were not changed.
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 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 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 and the Company has concluded that it will utilize the modified retrospective method of adoption.
The Company has completed analyses, executed project management relative to the process of adopting this ASU, and conducted
detailed contract reviews to complete necessary adjustments to existing accounting policies and quantify the ASU's effect.
For most of 3M's revenue arrangements, there are no impacts 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. 3M also engages in some arrangements for which software industry-specific guidance
(which the ASU supersedes) is presently utilized. The Company also considered these arrangements in the detailed contract
reviews that have been conducted. While 3M will provide expanded disclosures as a result of ASU No. 2014-09, it does not
expect this standard to have a material impact on its consolidated results of operations and financial condition.
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. 3M adopted this standard
prospectively beginning January 1, 2017. The adoption did not 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. This provision does not apply to
derivative instruments required to be measured at fair value with changes in fair value recognized in current earnings. 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.
Because the Company has historically held limited amounts of equity securities (less than $75 million in aggregate at
December 31, 2017), and has not elected the FVO with respect to material financial liabilities, it does not expect this
standard to have a material impact on its 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, 2017 is included in Note 15. 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 was effective January 1, 2017. The Company's outstanding debt with embedded
put provisions did not require separate derivative accounting under existing guidance. As a result, the adoption of this
standard did not 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 was effective January 1,
2017 on a prospective basis. 3M will apply this guidance to investments that transition to the equity method after the
adoption date.
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. The Company early adopted ASU No.
2016-15 as of January 1, 2017. Since the associated changes in classification were immaterial to all prior periods
presented, no impact was reflected in the Company's pre-2017 consolidated results of operations and financial condition
presented.
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
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