3M 2008 Annual Report Download - page 56

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Stock-based compensation: The Company recognizes compensation expense for both its General Employees’ Stock
Purchase Plan (GESPP) and the Long-Term Incentive Plan (LTIP). Under SFAS No. 123R, “Share-Based Payment”,
and related interpretations, the fair value of the share-based compensation is determined at the grant date and the
recognition of the related expense is recorded over the period in which the share-based compensation vests. The
Company adopted SFAS No. 123R effective January 1, 2006, using the modified retrospective method. All prior
periods were restated 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 Company elected to use a specified “short-cut” method to calculate the
historical pool of windfall tax benefits upon adoption of SFAS No. 123R. Refer to Note 16 for additional information.
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive
income (loss) are presented in the Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive
Income. Accumulated other comprehensive income (loss) is composed of foreign currency translation effects
(including hedges of net investments in international companies), defined benefit pension and postretirement plan
adjustments, unrealized gains and losses on available-for-sale debt and equity securities, and unrealized gains and
losses on cash flow hedging instruments.
Derivatives and hedging activities: All derivative instruments within the scope of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” are recorded on the balance sheet at fair value. The Company uses
interest rate swaps, currency and commodity price swaps, and foreign currency 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 June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), “Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 was effective as of
January 1, 2007. Refer to Note 8 for additional information concerning this standard.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value
Measurements.” SFAS No. 157 establishes a single 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. This
statement applies under other accounting pronouncements that require or permit fair value measurements. In
February 2008, the FASB issued Staff Positions (FSPs) No. 157-1 and No. 157-2, which, respectively, remove
leasing transactions from the scope of SFAS No. 157 and defer its effective date for one year relative to certain
nonfinancial assets and liabilities. As a result, the application of the definition of fair value and related disclosures of
SFAS No. 157 (as impacted by these two FSPs) was effective for 3M beginning January 1, 2008 on a prospective
basis with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all
financial assets and liabilities. This adoption did not have a material impact on 3M’s consolidated results of
operations or financial condition. The remaining aspects of SFAS No. 157 for which the effective date was deferred
under FSP No. 157-2 have been evaluated by the Company. Areas impacted by the deferral relate to nonfinancial
assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring
basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups
measured at fair value for an impairment assessment. The effects of these remaining aspects of SFAS No. 157 are
to be applied by 3M to fair value measurements prospectively beginning January 1, 2009. The Company does not
expect them to have a material impact on 3M’s consolidated results of operations or financial condition. Refer to Note
13 for disclosures required by this new pronouncement.
In early October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active,” which amended SFAS No. 157 to illustrate key considerations in determining
the fair value of a financial asset in an inactive market. This FSP was effective for 3M beginning with the quarter
ended September 30, 2008. Its additional guidance was incorporated in the measurements of fair value of applicable
financial assets disclosed in Note 13 and did not have a material impact on 3M’s consolidated results of operations or
financial condition.