3M 2014 Annual Report Download - page 39

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requires employers to recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan
as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which
the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity.
While the company believes the valuation methods used to determine the fair value of plan assets are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting date.
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. See Note 10 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
its 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. The Company sets its rate to reflect the yield of a portfolio of high
quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected
future benefits. Using this methodology, the Company determined a discount rate of 4.10% for the primary U.S. qualified
pension plan and 4.07% for U.S. postretirement plans to be appropriate as of December 31, 2014, which represents a
decrease from the 4.98% and 4.83% rates, respectively, used as of December 31, 2013. The weighted average discount
rate for international pension plans as of December 31, 2014 was 3.11%, a decrease from the 4.02% rate used as of
December 31, 2013.
A significant element in determining the Company’s pension expense in accordance with ASC 715 is the expected return
on plan assets, which is based on historical results for similar allocations among asset classes. For the primary U.S.
qualified pension plan, the expected long-term rate of return on an annualized basis for 2015 is 7.75%, unchanged from
2013. Refer to Note 10 for information on how the 2014 rate was determined. Return on assets assumptions for
international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset
allocations and expected long-term rate of return assumptions. The weighted average expected return for the international
pension plan is 5.90% for 2015, compared to 5.83% for 2014.
For the year ended December 31, 2014, the Company recognized total consolidated defined benefit pre-tax pension and
postretirement expense (after settlements, curtailments, special termination benefits and other) of $391 million, down from
$553 million in 2013. Defined benefit pension and postretirement expense (before settlements, curtailments, special
termination benefits and other) is anticipated to increase to $601 million in 2015, an increase of $210 million compared to
2014. For the pension plans, holding all other factors constant, a 0.25 percentage point increase/decrease in the expected
long-term rate of return on plan assets would decrease/increase 2015 pension expense by approximately $34 million for
U.S. pension plans and approximately $15 million for international pension plans. Also, holding all other factors constant,
a 0.25 percentage point increase in the discount rate used to measure plan liabilities would decrease 2015 pension
expense by approximately $33 million for U.S. pension plans and approximately $24 million for international pension
plans. In addition, a 0.25 percentage point decrease in the discount rate used to measure plan liabilities would increase
2015 pension expense by approximately $34 million for U.S. pension plans and approximately $26 million for international
pension plans.
Asset Impairments:
As of December 31, 2014, net property, plant and equipment totaled $8.5 billion and net identifiable intangible assets
totaled $1.4 billion. 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 asset group.
3M goodwill totaled approximately $7.1 billion as of December 31, 2014. 3M’s annual goodwill impairment testing is
performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all
goodwill assigned to a reporting unit. 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. At 3M, reporting units
generally correspond to a division. 3M did not combine any of its reporting units for impairment testing.
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