3M 2006 Annual Report Download - page 72

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Derivatives and hedging activities: All derivative instruments are recorded on the balance sheet at fair value. The
Company uses interest rate swaps, currency swaps, and 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. 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 10 in this document).
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards BRDUG)$6%LVVXHG6)$61R³(PSOR\HUV¶$FFRXQWLQJ
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
5´5HIHUWR1RWHIRUDGGLWLRQDOinformation concerning this standard.
In June 2006, the FASB issued Interpretation No. 48 (FIN ³$FFRXQWLQJIRU8QFHUWDLQW\LQ,QFRPH7D[HVDQ
LQWHUSUHWDWLRQRI)$6%6WDWHPHQW1R´5HIHUWR1RWH 8 for additional information concerning this standard.
,Q)HEUXDU\WKH)$6%LVVXHG6)$61R³+\EULG,QVWUXPHQWV´6)$61RDPHQGV6)$61RDQG
6)$61R³$FFRXQWLQJIRU7UDQVIHUVDQG6HUYLFLQJRI)LQDQFLDO$VVHWVDQG([WLQJXLVKPHQWVRI/LDELOLWLHV´6)$6
No. 155 also resolves issues addressed in Statement 133 Implementation Issue No. D1, ³$SSOLFDWLRQRI6WDWHPHQW
WR%HQHILFLDO,QWHUHVWVLQ6HFXULWL]HG)LQDQFLDO$VVHWV´ SFAS No. 155: a) permits fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, c)
establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, d)
clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and e) amends
SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is
effective for all financial instruments acquired or issued aIWHUWKHEHJLQQLQJRIDQHQWLW\¶VILrst fiscal year that begins
after September 15, 2006 (January 1, 2007 for 3M). The Company is currently evaluating the impact of this standard,
but would not expect SFAS No. 155 to have a material impact RQ0¶VFRQVROLGDWHGUHVXOWVRIRSHUDWLRQVRUILQDQFLDO
condition.
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definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify
the source of information used in fair value measurements, and requires new disclosures of assets and liabilities
measured at fair value based on their level in the hierarchy. SFAS No. 157 is effective for all fiscal years beginning
after November 15, 2007 (January 1, 2008 for 3M) and is to be applied prospectively. The Company is currently
evaluating the impacts and disclosures of this standard, but would not expect SFAS No. 157 to have a material impact
RQ0¶VFRQVROLGDWHGUHVXOWVRIRSHUations or financial condition.
As of December 31, 2005, the Company adopted FASB InteUSUHWDWLRQ1R³$FFRXQWLQJIRU&RQGLWLRQDO$VVHW
5HWLUHPHQW2EOLJDWLRQV´),17KLVDFFRXQWLQJVWDQGDUGDSSOLHs 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 FHUWDLQRIWKH&RPSDQ\¶VORQJWHUPDVVHWV7KHIDLUYDOXH
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 at December 31, 2005, and an after-tax charge of $35 million for 2005, 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. At December 31, 2006, the asset retirement
obligation liability was $57 million.
,Q6HSWHPEHUWKH)$6%¶V(PHUJLQJ,VVXHV7DVN)RUFHILQDOL]HG(,7),VVXH1R³7KH(IIHFWRI
&RQWLQJHQWO\&RQYHUWLEOH'HEWRQ'LOXWHG(DUQLQJVSHU6KDUH´WKDWZRXOGUHTXLUH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 10). In SeptemEHUWKH)$6%UHYLVHGLWV'HFHPEHU([SRVXUH
'UDIW6)$61R5³(DUQLQJVSHU6KDUH±DQDPHQGPHQWRI)$6%6WDWHPHQW1R´ anticipated to be effective