3M 2004 Annual Report Download - page 71

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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 on a straight-line basis, with estimated useful lives ranging from
two to 20 years. Indefinite-lived intangible assets are tested for impairment annually, and will be 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 a carrying amount of an asset (asset group) may not be recoverable. The Company
has determined that no material impairments existed as of December 31, 2004. 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 to be 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 are expensed as incurred.
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 for customer and
distributor incentives, such as rebates, at the time of the initial sale.
The 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. 3M also enters into agreements that contain multiple-
elements (such as equipment, installation and service) or non-standard terms and conditions. For multiple-element
arrangements, 3M recognizes revenue for delivered elements when the delivered item has stand-alone value to the
customer, fair values of undelivered elements are known, customer acceptance has occurred, and there are only
customary refund or return rights related to the delivered elements. In addition to the preceding conditions, 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 prepaid service contracts, sales revenue is recognized on a straight-line
basis over the term of the contract, unless historical evidence indicates the costs are incurred on other than a
straight-line basis. License fee revenue is recognized as earned, with no revenue recognized until the inception of
the license term. On occasion, agreements will contain milestones, or 3M will recognize revenue based on
proportional performance. For these agreements, and depending on the specifics, 3M may recognize revenue upon
completion of a substantive milestone, or in proportion to costs incurred.
Accounts Receivable and Allowances: Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The Company maintains allowances for bad debts, cash discounts, product returns and various
other adjustments. The allowance for doubtful accounts and product returns is based on the best estimate of the
amount of probable credit losses in existing accounts receivable and anticipated sales returns. The Company
determines the allowances based on historical write-off experience by industry and regional economic data and
historical sales returns. The Company reviews the allowance for doubtful accounts monthly. The Company does
not have any off-balance-sheet credit exposure related to its customers.
Advertising and merchandising: These costs are charged to operations in the year incurred, and totaled $433 million
in 2004, $405 million in 2003 and $372 million in 2002.
Research, development and related expenses: These costs are charged to operations in the year incurred and are
shown on a separate line of the Consolidated Statement of Income. Research and development expenses, covering
basic scientific research and the application of scientific advances to the development of new and improved products
and their uses, totaled $759 million in 2004, $749 million in 2003 and $738 million in 2002. Related expenses primarily
include technical support provided to customers for existing products by 3M laboratories.
Internal-use software: The Company capitalizes direct costs of materials and services used in the development of
internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of three to five years
and are reported as a component of machinery and equipment within property, plant and equipment.