3M 2004 Annual Report Download - page 70

44
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 significant subsidiaries are consolidated. All significant intercompany transactions are eliminated. As
used herein, the term “3M” or “Company” refers to 3M Company and subsidiaries unless the context indicates
otherwise.
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 year-end exchange rates.
Income and expense items are translated at average rates of exchange prevailing during the year. Cumulative
translation adjustments are recorded as a component of accumulated other comprehensive income in stockholders’
equity.
Reclassifications: Certain prior period balance sheet amounts have been reclassified to conform with the current
year presentation.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and temporary investments with maturities of
three months or less when purchased.
Investments: Investments primarily include the cash surrender value of life insurance policies, real estate not used in
the business, venture capital and equity-method investments. Unrealized gains and losses relating to investments
classified as available-for-sale are recorded as a component of accumulated other comprehensive income (loss) in
stockholders’ equity.
Inventories: Inventories are stated at lower of cost or market, with cost generally determined on a first-in, first-out
basis.
Property, plant and equipment: Property, plant and equipment, including capitalized interest and internal engineering
costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-
line method based on the estimated useful lives of the assets. The estimated useful lives of buildings and
improvements primarily range from 10 to 40 years, with the majority in the range of 20 to 40 years. Machinery and
equipment estimated useful lives primarily range from three to 15 years, with the majority in the range of five to 10
years. Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon
disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less
proceeds from disposal, is charged or credited to operations. Property, plant and equipment amounts are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset
group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual
disposition. The amount of the impairment loss to be 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.
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, and will be 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. Reporting units are one level below the business segment level, but can be combined when reporting units
within the same segment have similar economic characteristics. 3M has 18 reporting units at December 31, 2004.
The majority of goodwill relates to and is assigned directly to a specific reporting unit. An impairment loss
generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated
fair value of the reporting unit. The estimated fair value of a reporting unit is determined using earnings for the
reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash
flow analysis. The Company completed its assessment of any potential impairment upon adoption of this standard
and performs annual assessments. The Company completed its annual goodwill impairment test in the fourth
quarter of 2004 and determined that no goodwill was impaired.