3M 2007 Annual Report Download - page 50

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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 significant 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 year-end exchange rates.
Income and expense items are translated at average rates of exchange prevailing during the year. Cumulative translation
adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Reclassifications: Certain amounts in the prior years’ consolidated financial statements have been reclassified to
conform to the current year presentation.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and temporary investments with maturities of
three months or less when purchased.
Investments: Investments primarily include the cash surrender value of life insurance policies, real estate not used in the
business, venture capital and equity-method investments. Unrealized gains and losses relating to investments classified
as available-for-sale are recorded as a component of accumulated other comprehensive income (loss) in stockholders’
equity.
Inventories: Inventories are stated at the lower of cost or market, with cost generally determined on a first-in, first-out
basis.
Property, plant and equipment: Property, plant and equipment, including capitalized interest and internal engineering
costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-line
method based on the estimated useful lives of the assets. The estimated useful lives of buildings and improvements
primarily range from 10 to 40 years, with the majority in the range of 20 to 40 years. The estimated useful lives of
machinery and equipment primarily range from three to 15 years, with the majority in the range of five to 10 years. Fully
depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets
and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal,
is charged or credited to operations. Property, plant and equipment amounts are reviewed for impairment 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 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.
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, and will be
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. 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. The majority of goodwill relates to and is assigned directly to specific reporting units. 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. The Company completed its annual goodwill impairment test in the fourth quarter of 2007 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 one 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