3M 2014 Annual Report Download - page 62

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whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be
recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. 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.
Conditional asset retirement obligations: A liability is initially recorded at fair value for an asset retirement obligation
associated with the retirement of tangible long-lived assets in the period in which it is incurred if a reasonable estimate of
fair value can be made. Conditional asset retirement obligations exist for certain long-term assets of the Company. The
obligation is initially measured at fair value using expected present value techniques. Over time the liabilities are accreted
for the change in their present value and the initial capitalized costs are depreciated over the remaining useful lives of the
related assets. The asset retirement obligation liability was $96 million and $90 million at December 31, 2014 and 2013,
respectively.
Goodwill: Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth
quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that
would indicate the carrying amount may be impaired. 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. 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 the reporting unit multiplied by a price/earnings ratio for comparable
industry groups, or by using a discounted cash flow analysis. Companies have the option to first assess qualitative factors
to determine whether the fair value of a reporting unit is not “more likely than not” less than its carrying amount, which is
commonly referred to as “Step 0”. 3M has chosen not to apply Step 0 for 2014 or prior.
Intangible assets: Intangible asset types include customer related, patents, other technology-based, tradenames and
other intangible assets acquired from an independent party. Intangible assets with a definite life are amortized over a
period ranging from one to twenty years on a systematic and rational basis (generally straight line) that is representative
of the asset’s use. The estimated useful lives vary by category, with customer related largely between two to ten years,
patents largely between five to ten years, other technology-based largely between five to twelve years, definite lived
tradenames largely between two and twenty years, and other intangibles largely between two to ten years. Costs related
to internally developed intangible assets, such as patents, are expensed as incurred, primarily in “Research, development
and related expenses.”
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.
Intangible assets with an indefinite life, namely certain tradenames, are not amortized. 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. An impairment loss generally would
be recognized when the fair value is less than the carrying value of the indefinite-lived intangible asset.
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.