3M 2007 Annual Report Download - page 35

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Pension benefits associated with these plans are generally based primarily on each participant’s years of service,
compensation, and age at retirement or termination. Two critical assumptions, the discount rate and the expected
return on plan assets, are important elements of expense and liability measurement. The assumed health care trend
rate is the most significant postretirement health care assumption. See Note 11 for additional discussion of actuarial
assumptions used in determining pension and postretirement health care liabilities and expenses.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date
for the U.S. pension and postretirement benefit plans. The discount rate reflects the current rate at which the
associated liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks at
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
6.00% to be appropriate as of December 31, 2007, which is an increase of 0.25 of a percentage point from the rate
used as of December 31, 2006.
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.
pension plan, the Company’s assumption for the expected return on plan assets was 8.75% for 2007 and will be
reduced to 8.50% for 2008. Refer to Note 11 for information on how this rate is determined.
For the year ended December 31, 2007, the Company recognized total consolidated pre-tax pension expense (after
settlements, curtailments and special termination benefits) of $190 million, down from $347 million in 2006. Pension
expense (before settlements, curtailments and special termination benefits) is anticipated to decrease to
approximately $90 million in 2008. For the pension plans, holding all other factors constant, an increase/decrease in
the expected long-term rate of return on plan assets of 0.25 of a percentage point would decrease/increase 2008
pension expense by approximately $26 million for U.S. pension plans and approximately $11 million for international
pension plans. Also, holding all other factors constant, an increase/decrease in the discount rate used to measure
plan liabilities of 0.25 of a percentage point would decrease/increase 2008 pension expense by approximately $32
million for U.S. pension plans and approximately $21 million for international pension plans. See 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 $6.6 billion as of December 31, 2007. 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.
Impairments recorded in 2007 and 2006 related to restructuring actions and other exit activities are discussed in
Note 4.
3M goodwill totaled approximately $4.6 billion as of December 31, 2007, 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 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.
Income Taxes:
The extent of 3M’s operations involves dealing with uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and
international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit
issues in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional
taxes will be due. As of January 1, 2007, the Company follows FIN 48 guidance to record these liabilities (refer to
Note 8 for additional information). The Company adjusts these reserves in light of changing facts and circumstances;
however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is
materially different from the Company’s current estimate of the tax liabilities. If the Company’s estimate of tax liabilities
proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these
amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax
benefits being recognized in the period when the Company determines the liabilities are no longer necessary.