3M 2006 Annual Report Download - page 53

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rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment
grade ratings by recognized ratings agencies. Using this methodology, the Company determined a discount rate of
5.75% to be appropriate as of December 31, 2006, which is an increase of 0.25 of a percentage point from the rate
used as of December 31, 2005.
A significant element in determining the Company's pension expense in accordance with SFAS No. 87 is the expected
return on plan assets, which is based on historical results for similar allocations among asset classes. For the U.S.
SHQVLRQSODQWKH&RPSDQ\¶VDVVXPSWLRQfor the expected return on plan assets was 8.75% for 2006 and will remain
at 8.75% for 2007. Refer to Note 11 for information on how this rate is determined.
As of December 31, 2005, the Company converted to the RP (Retirement Plans) 2000 Mortality Table for calculating
the year-end 2005 U.S. pension and postretirement obligations and 2006 expense. The impact of this change
increased the year-end 2005 U.S. Projected Benefit Obligations for pension by $385 million, the year-end 2005 U.S.
Accumulated Benefit Obligations for pension by $349 million and the 2005 U.S. Accumulated Postretirement Benefit
Obligation by $93 million. This change also increased pension expenses for 2006 by $64 million and postretirement
expenses by $17 million.
For the year ended December 31, 2006, the Company recognized total consolidated pre-tax pension expense (after
settlements, curtailments and special termination benefits) of $347 million, up from $331 million in 2005. Pension
expense (before settlements, curtailments and special termination benefits) is anticipated to decrease to
approximately $174 million in 2007. For the pension plans, holding all other factors constant, an increase/decrease in
2007 pension expense by approximately $24 million for U.S. pension plans and approximately $9 million for
international pension plans. Also, holding all other factors constant, an increase/decrease in the discount rate used to
Note 11 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.
Asset Impairments:
3M net property, plant and equipment totaled $5.9 billion as of December 31, 2006. 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. During the
fourth quarter of 2006, the Company sold its branded pharmaceuticals business. In exiting this business, the
Company incurred $61 million of asset impairments for this business as assets that were not sold with the
transactions did not have future value to the Company. During the fourth quarter of 2006 the Company also decided to
exit certain product lines, resulting in fixed and intangible asset impairment costs of $83 million. The fair value of the
assets impacted by these product exits was determined based on discounted cash flows. See Note 4 for further
details of the 2006 restructuring actions.
3M goodwill totaled approximately $4.1 billion as of December 31, 2006, 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. 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WKHUHSRUWLQJXQLW¶VQHWDVVHWVH[FHHGVWKHHVWLPDWHG
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
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also
provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. This Interpretation is effective as of January 1, 2007 and the
cumulative effects, if any, of applying this Interpretation will be recorded as an adjustment to retained earnings as of
January 1, 2007. The Company does not expect the adoptiRQRI),1WRKDYHDPDWHULDOLPSDFWRQ0¶V
consolidated results of operations or financial condition.
approximately $32 million for U.S. pension plans and approximately $17 million for international pension plans. See
the expected long-term rate of return on plan assets of 0.25 of a percentage point would decrease/increase
measure plan liabilities of 0.25 of a percentage point would decrease/increase 2006 pension expense by