3M 2014 Annual Report Download - page 104

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NOTE 12. Fair Value Measurements
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured
at fair value on a recurring basis and nonrecurring basis. Under the standard, 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. The standard 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:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to 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. The information in the following paragraphs and tables primarily addresses matters relative to these financial
assets and liabilities. 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 for 2014
and 2013.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect
to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial
assets and liabilities measured at fair value.
Available-for-sale marketable securities — except auction rate securities and certain U.S. municipal securities:
Marketable securities, except auction rate securities and certain U.S. municipal securities, are valued utilizing multiple
sources. A weighted average price is used for these securities. Market prices are obtained for these securities from a
variety of industry standard data providers, security master files from large financial institutions, and other third-party
sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair
value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding auction
rate securities and certain U.S. municipal securities) are classified as level 2. Marketable securities are discussed further
in Note 8.
Available-for-sale marketable securities — auction rate securities and certain U.S. municipal securities only:
Auction rate securities held by 3M failed to auction since the second half of 2007. As a result, investments in auction rate
securities are valued utilizing third-party indicative bid levels in markets that are not active and broker-dealer valuation
models that utilize inputs such as current/forward interest rates, current market conditions and credit default swap
spreads. 3M classifies these securities as level 3. In the fourth quarter 2014, 3M sold all remaining auction rate securities
out of their portfolio and no longer has a balance at December 31, 2014.
In the fourth quarter 2014, 3M obtained a municipal bond with the City of Nevada, Missouri, which represent 3M’s only
U.S. municipal securities holding as of December 31, 2014. Due to the nature of this security, the valuation method
utilized will include the financial health of the City of Nevada, any recent municipal bond issuances by Nevada, and
macroeconomic considerations related to the direction of interest rates and the health of the overall municipal bond
market, and as such will be classified as a level 3 security. 3M’s other U.S. municipal securities holdings at December 31,
2013 were classified as level 2.
Available-for-sale investments:
Investments include equity securities that are traded in an active market. Closing stock prices are readily available from
active markets and are used as being representative of fair value. 3M classifies these securities as level 1.