3M 2014 Annual Report Download - page 60

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Notes to Consolidated Financial Statements
NOTE 1. Significant Accounting Policies
Consolidation: 3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products.
All subsidiaries are consolidated. All significant intercompany transactions are eliminated. As used herein, the term “3M”
or “Company” refers to 3M Company and subsidiaries unless the context indicates otherwise.
Foreign currency translation: Local currencies generally are considered the functional currencies outside the United
States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of
the period reported. Income and expense items are translated at month-end exchange rates of each applicable month.
Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in
shareholders’ equity.
Although local currencies are typically considered as the functional currencies outside the United States, under
Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity’s
parent is assumed to be that entity’s functional currency when the economic environment of a foreign entity is highly
inflationary—generally when its cumulative inflation is approximately 100 percent or more for the three years that precede
the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.0
percent of 3M’s consolidated operating income for 2014. 3M has determined that the cumulative inflation rate of
Venezuela has exceeded, and continues to exceed, 100 percent since November 2009. Accordingly, since January 1,
2010, the financial statements of the Venezuelan subsidiary have been remeasured as if its functional currency were that
of its parent.
The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at
these rates with local currency. Such rates and conditions are subject to change. For the periods presented through
January 2013, this rate was set under the Transaction System for Foreign Currency Denominated Securities (SITME). In
February 2013, the Venezuelan government announced a devaluation of its currency and the elimination of the SITME
market. As a result, the official exchange rate controlled by the Commission for the Administration of Foreign Exchange
(CADIVI) changed to a rate less favorable than the previous SITME rate.
In January 2014, the Venezuelan government announced that a new agency, the National Center for Foreign Commerce
(CENCOEX), had assumed the previous role of CADIVI with respect to the continuation of the existing official exchange
rate; significantly expanded the use of a second foreign exchange mechanism called the Complementary System for
Foreign Currency Acquirement (or SICAD1); and issued exchange regulations indicating the SICAD1 rate of exchange
would be used for payments related to international investments. The SICAD1 exchange mechanism, a complementary
currency auction system, had previously been created for purchases of foreign currency by only certain eligible importers
and tourists. The government had begun publishing the SICAD1 rate resulting from currency auctions in December 2013.
In late March 2014, the Venezuelan government launched a third foreign exchange mechanism, SICAD2, which relies on
U.S. dollar cash and U.S. dollar denominated bonds offered by the Venezuelan Central Bank, PDVSA (the Venezuelan
national oil and gas company) and certain private companies. SICAD2 was announced as being available to all industry
sectors and that its use would not be restricted as to purpose.
Since January 1, 2010, as discussed above, the financial statements of 3M’s Venezuelan subsidiary have been
remeasured as if its functional currency were that of its parent. For the periods presented, this remeasurement utilized the
SITME rate through January 2013, the official CADIVI/CENCOEX rate beginning in February 2013, the SICAD1 rate
beginning in March 2014, and the SICAD2 rate beginning in June 2014. 3M’s use of SICAD1 and subsequently SICAD2
was based upon evaluation of a number of factors including, but not limited to, the exchange rate the Company’s
Venezuelan subsidiary may legally use to convert currency, settle transactions or pay dividends; the probability of
accessing and obtaining currency by use of a particular rate or mechanism; and the Company’s intent and ability to use a
particular exchange mechanism. Other factors notwithstanding, the elimination of the SITME rate and use of the
CADIVI/CENCOEX exchange rate beginning in February 2013, use of the SICAD1 rate beginning in March 2014, and use
of the SICAD2 rate beginning in June 2014 did not have a material impact on 3M’s consolidated results of operations or
financial condition.
The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Changes in applicable exchange
rates or exchange mechanisms may continue in the future. These changes could impact the rate of exchange applicable
to remeasure the Company’s net monetary assets (liabilities) denominated in Venezuelan Bolivars (VEF). As of December
31, 2014, the Company had a balance of net monetary liabilities denominated in VEF of less than 150 million VEF and the