3M 2008 Annual Report Download - page 87

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subsidiaries. This swap converts U.S. dollar-based variable interest payments to yen-based variable interest
payments associated with the notional amount.
The unrealized gain recorded in cumulative translation related to net investment hedging at December 31, 2008 was
$44 million. The unrealized loss recorded in cumulative translation related to net investment hedging at
December 31, 2007 was $28 million.
Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, increased net income
by approximately $160 million in 2008, $150 million in 2007 and $20 million in 2006. This estimate includes the effect
of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of
goods between 3M operations in the United States and abroad; and transaction gains and losses, including
derivative instruments designed to reduce foreign currency exchange rate risks other than instruments hedging
foreign currency risks on tax obligations. 3M estimates that year-on-year derivative and other transaction gains and
losses increased net income by approximately $40 million in 2008, increased net income by approximately $10
million in 2007 and had an immaterial impact on net income in 2006.
Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate
swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company’s risk is
limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use
of credit approvals and credit limits, and by selecting major international banks and financial institutions as
counterparties. The Company does not anticipate nonperformance by any of these counterparties. During the second
quarter of 2006, the Company entered into a credit support agreement with one of its primary derivatives
counterparties. Under this agreement either party is required to post eligible collateral when the market value of
transactions covered by the agreement exceeds specified thresholds, thus limiting credit exposure for both parties.
NOTE 13. Fair Value Measurements
As discussed in Note 1, 3M adopted SFAS No. 157, “Fair Value Measurements,” (as impacted by FSP Nos. 157-1
and 157-2) effective January 1, 2008, 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.
Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS
No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would use in valuing the asset or liability developed
based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability
developed based upon the best information available in the circumstances. The hierarchy is broken down into three
levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
At 3M, effective January 1, 2008, fair value under SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2)
principally applied to financial asset and liabilities such as available-for-sale marketable securities, available-for-sale
investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments.
Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. These items were
previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value
used for these mark-to-markets is now applied using SFAS No. 157. The information in the following paragraphs and
tables primarily addresses matters relative to these financial assets and liabilities. The information incorporates
guidance of FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not
Active,” which was effective for 3M beginning with the quarter ended September 30, 2008. Separately, there were no
material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at
fair value in the Company’s financial statements on a recurring basis subsequent to the effective date of SFAS
No. 157 (as impacted by FSP Nos. 157-1 and 157-2).