3M 2011 Annual Report Download - page 58

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Intangible assets: Intangible assets include patents, tradenames and other intangible assets acquired from an
independent party. Intangible assets with an indefinite life, namely certain tradenames, are not amortized. Intangible
assets with a definite life are amortized generally on a straight-line basis, with useful lives ranging from one to 20
years. Indefinite-lived intangible assets are tested for impairment annually, and are tested for impairment between
annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be
impaired. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate
that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when
the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of
the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over
its fair value. Fair value is generally determined using a discounted cash flow analysis. Costs related to internally
developed intangible assets, such as patents, are expensed as incurred, primarily in “Research, development and
related expenses.”
Restructuring actions: Restructuring actions generally include significant actions involving employee-related
severance charges, contract termination costs, and impairment of assets associated with such actions. Employee-
related severance charges are largely based upon distributed employment policies and substantive severance plans.
These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which
typically is when management approves the associated actions. Severance amounts for which affected employees
were required to render service in order to receive benefits at their termination dates were measured at the date such
benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining
service periods. Contract termination and other charges primarily reflect costs to terminate a contract before the end
of its term (measured at fair value at the time the Company provided notice to the counterparty) or costs that will
continue to be incurred under the contract for its remaining term without economic benefit to the Company. Asset
impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’
carrying values over their fair values.
Revenue (sales) recognition: The Company sells a wide range of products to a diversified base of customers around
the world and has no material concentration of credit risk. Revenue is recognized when the risks and rewards of
ownership have substantively transferred to customers. This condition normally is met when the product has been
delivered or upon performance of services. The Company records estimated reductions to revenue or records
expense for customer and distributor incentives, primarily comprised of rebates and free goods, at the time of the
initial sale. These sales incentives are accounted for in accordance with ASC 605, Revenue Recognition. The
estimated reductions of revenue for rebates are based on the sales terms, historical experience, trend analysis and
projected market conditions in the various markets served. Since the Company serves numerous markets, the rebate
programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to
customers for achieving defined volume levels or growth objectives. Free goods are accounted for as an expense
and recorded in cost of sales. Sales, use, value-added and other excise taxes are not recognized in revenue.
The vast majority of 3M’s sales agreements are for standard products and services with customer acceptance
occurring upon delivery of the product or performance of the service. However, to a limited extent 3M also enters into
agreements that involve multiple elements (such as equipment, installation and service), software, or non-standard
terms and conditions.
For non-software multiple-element arrangements, in connection with 3M’s prospective adoption of Accounting
Standards Updated (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements²a consensus of the FASB
Emerging Issues Task Force, to new or materially modified arrangements beginning in 2011, the Company
recognizes revenue for delivered elements when they have stand-alone value to the customer, they have been
accepted by the customer, and for which there are only customary refund or return rights. Arrangement consideration
is allocated to the deliverables by use of the relative selling price method. The selling price used for each deliverable
is based on vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not
available, or estimated selling price if neither VSOE nor TPE is available. Estimated selling price is determined in a
manner consistent with that used to establish the price to sell the deliverable on a standalone basis. For applicable
pre-existing arrangements, 3M recognizes revenue for delivered elements when the fair values of the undelivered
items are known and allocation of consideration to the delivered items is most often based on the residual method. In
addition to the preceding conditions under ASU No. 2009-13 and for applicable pre-existing arrangements,
equipment revenue is not recorded until the installation has been completed if equipment acceptance is dependent
upon installation or if installation is essential to the functionality of the equipment. Installation revenues are not
recorded until installation has been completed.
For arrangements (or portions of arrangements) falling within software revenue recognition standards and that do not
involve significant production, modification, or customization, revenue for each software or software-related element