3M 2005 Annual Report Download - page 71

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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. The Company does not hold or issue
derivative financial instruments for trading purposes and is not a party to leveraged derivatives. However, the
Company does have contingently convertible debt that, if conditions for conversion are met, is convertible into
shares of 3M common stock (refer to Note 8 in this document).
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 effective December 31, 2005, 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
effect of 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.
In December 2004, the FASB issued SFAS No. 123 (revised 2004). SFAS No. 123R supersedes APB Opinion No.
25. Under APB Opinion No. 25, no compensation expense is recognized for employee stock option grants if the
exercise price of the Company’s stock option grants is at or above the fair market value of the underlying stock on
the date of grant. SFAS No. 123R requires the determination of the fair value of the share-based compensation at
the grant date and the recognition of the related expense over the period in which the share-based compensation
vests. The original effective date for SFAS No. 123R for the Company was July 1, 2005. However, on April 14,
2005, the Securities and Exchange Commission (SEC) adopted a new rule that amends the effective dates for
SFAS No. 123R. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their
next fiscal year, instead of the next reporting period, that begins after June 15, 2005. Therefore, the Company
adopted SFAS No. 123R effective January 1, 2006. 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. The 2006 impact of adopting SFAS No.
123R is estimated to be approximately $.16 per diluted share, which reflects expense for both the GESPP and
MSOP.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”, which provides
guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax
expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act creates a
temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85%
dividends received deduction for certain dividends from controlled foreign corporations. FSP No. 109-2 states that
an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs
Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. During
2005, the Company completed its evaluation of the repatriation provision and, in the second quarter of 2005,
recognized $75 million, net of available foreign tax credits, of related tax liability as a result of its repatriation plan.
In 2005, the Company repatriated approximately $1.8 billion of foreign earnings into the United States pursuant to
the provisions of the Jobs Act.
In September 2004, the FASB’s Emerging Issues Task Force finalized EITF Issue No. 04-08, “The Effect of
Contingently Convertible Debt on Diluted Earnings per Share” that would require the dilutive effect of shares from
contingently convertible debt to be included in the diluted earnings per share calculation regardless of whether the
contingency has been met. The Company has $616 million in aggregate face amount of 30-year zero coupon
senior notes that are convertible into approximately 5.8 million shares of common stock if certain conditions are
met. These conditions have never been met (see Note 8). In September 2005, the FASB revised its December
2003 Exposure Draft SFAS No. 128R, “Earnings per Share –an amendment of FASB Statement No. 128”
anticipated to be effective for fiscal periods ending after June 15, 2006. The proposed SFAS No. 128R further
addresses contingently convertible debt and several other issues. Unless the Company takes steps to modify
certain terms of this debt security, EITF Issue No. 04-08 and proposed SFAS No. 128R (when effective) would
result in an increase of approximately 5.8 million shares to diluted shares outstanding to give effect to the
contingent issuance of shares. Also, using the if-converted method, net income for the diluted earnings per share