3M 2005 Annual Report Download - page 52

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decrease/increase U.S. 2006 pension expense by approximately $22 million for U.S. pension plans and
approximately $7 million for international pension plans. Also, holding all other factors constant, an
increase/decrease in the discount rate used to measure plan liabilities by 0.25 percentage points would
decrease/increase 2006 pension expense by approximately $31 million for U.S. pension plans and approximately
$7 million for international pension plans. See Note 10 to the Consolidated Financial Statements for details of the
impact of a one percentage point change in assumed health care trend rates on the postretirement health care
benefit expense and obligation.
Potential Asset Impairment Issues:
3M net property, plant and equipment totaled approximately $5.6 billion at December 31, 2005. Management
makes estimates and assumptions in preparing the consolidated financial statements for which actual results will
emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business,
including assets of acquired businesses. These estimates and assumptions are closely monitored by
management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be
shortened or an impairment recorded based on a change in the expected use of the asset or performance of the
related business reporting unit.
3M goodwill totaled approximately $3.5 billion at December 31, 2005, which, based on impairment testing, is not
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 had 18 reporting units at December 31, 2005. 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.
NEW ACCOUNTING PRONOUNCEMENTS
As of December 31, 2005, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” (FIN 47). This accounting standard applies to the fair value of a liability for an asset
retirement obligation associated with the retirement of tangible long-lived assets and where the liability can be
reasonably estimated. Conditional asset retirement obligations exist for certain of the Company’s long-term assets.
The fair value of these obligations is recorded as liabilities on a discounted basis. Over time the liabilities are
accreted for the change in the present value and the initial capitalized costs are depreciated over the useful lives of
the related assets. The adoption of FIN 47 resulted in the recognition of an asset retirement obligation liability of
$59 million and an after tax charge of $35 million, which is reflected as a cumulative change in accounting principle
in the Consolidated Statement of Income. The pro forma effect of applying this guidance in all prior periods
presented was determined not to be material.
Effective January 1, 2006, 3M adopted SFAS No. 123 (revised 2004), “Share-Based Payment”, which requires 3M to
expense stock-based compensation expense. The Company is adopting SFAS No. 123R using the modified
retrospective method. All prior periods will be adjusted to give effect to the fair-value-based method of accounting for
awards granted in fiscal years beginning on or after January 1, 1995. Stock-based compensation disclosures in Note 1
reflect pro forma expense of $.14 cents per diluted share in 2005. The 2006 impact of adopting SFAS No. 123R is
estimated to be approximately $.16 per diluted share with an estimated $0.02 per diluted share cost in the first
quarter, an estimated $0.08 per diluted share cost in the second quarter, and an estimated $0.03 per diluted share
cost in both the third and fourth quarters. The pro forma impact of stock-based compensation on net income and
earnings per share provided in Note 1 for the years ended December 31, 2005, 2004 and 2003, was recognized
over the nominal vesting period, whereby if an employee retired before the end of the vesting period, the
Company would recognize any remaining unrecognized compensation cost at the date of retirement. SFAS No.
123R requires recognition under a non-substantive vesting period approach, requiring compensation expense
recognition when an employee is eligible to retire. 3M employees in the U.S. are eligible to retire beginning at age
55 and after having completed five years of service. Approximately 25 to 30% of the number of stock-based
compensation awards are made to this population. The Company will change to the non-substantive vesting
period approach for new stock compensation grants made after the Company’s adoption of SFAS No. 123R on
January 1, 2006. Therefore, primarily beginning in May 2006 with the annual Management Stock Ownership
Program grant, immediate expensing of those stock-based compensation awards granted to employees eligible to
retire will result in a higher compensation expense than historically recognized in comparable prior periods. The
total expense in 2006 and beyond will depend on several variables, including the number of share-based awards
granted, the fair value of those awards, and the period the vesting of those awards is recognized over; therefore the
actual expense may be different from this estimate.