3M 2005 Annual Report Download - page 68

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flow analysis. The Company completed its annual goodwill impairment test in the fourth quarter of 2005 and
determined that no goodwill was impaired.
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, 2005. 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, such as patents, are expensed as incurred, primarily in
“Research, development and related expenses”.
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, with these estimated reductions based on sales
terms, historical experience, trend analysis and projected market conditions in the various markets served.
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 of the delivered elements 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 to date
compared with the estimate of total costs to be 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 items. 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 $457 million
in 2005, $433 million in 2004 and $405 million in 2003.
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 $798 million in 2005, $759 million in 2004 and $749 million in 2003. Related expenses primarily
include technical support provided to customers for existing products by 3M laboratories and internally developed
patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents.