3M 2007 Annual Report Download - page 52

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46
capital projects that contribute to current or future operations generally are capitalized and depreciated over their
estimated useful lives.
Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this approach,
deferred income taxes represent the expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax
assets when uncertainty regarding their reliability exists. As of December 31, 2007, no significant valuation allowances
were recorded.
Earnings per share: The difference in the weighted average shares outstanding for calculating basic and diluted earnings
per share is attributable to the dilution associated with the Company’s stock-based compensation plans. Certain
Management Stock Ownership Program average options outstanding during the years 2007, 2006 and 2005 were not
included in the computation of diluted earnings per share because they would not have had a dilutive effect (21.6 million
average options for 2007, 31.5 million average options for 2006, and 15.4 million average options for 2005). As
discussed in Note 10, the conditions for conversion related to the Company’s Convertible Notes have never been met. If
the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the
Company has the intent and ability to settle this debt security in cash. Accordingly, there was no impact on 3M’s diluted
earnings per share. The computations for basic and diluted earnings per share for the years ended December 31 follow:
Earnings Per Share Computations
(Amounts in millions, except per share amounts) 2007 2006 2005
Numerator:
Net income $4,096 $3,851 $3,111
Denominator:
Denominator for weighted average common
shares outstanding – basic 718.3 747.5 764.9
Dilution associated with the Company’s
stock-based compensation plans 13.7 13.5 16.4
Denominator for weighted average common
shares outstanding – diluted 732.0 761.0 781.3
Earnings per share – basic $ 5.70 $ 5.15 $ 4.07
Earnings per share – diluted $ 5.60 $ 5.06 $ 3.98
Stock-based compensation: In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123 (revised 2004). SFAS No. 123R supersedes APB Opinion No. 25. Under APB Opinion No. 25, no compensation
expense is recognized for employee stock option grants if the exercise price of the Company’s stock option grants is
at or above the fair market value of the underlying stock on the date of grant. Under SFAS No. 123R, compensation
expense is recognized for both the General Employees’ Stock Purchase Plan (GESPP) and the Management Stock
Ownership Plan (MSOP). SFAS No. 123R requires the determination of the fair value of the share-based
compensation at the grant date and the recognition of the related expense over the period in which the share-based
compensation vests. The Company adopted SFAS No. 123R effective January 1, 2006. The Company adopted SFAS
No. 123R using the modified retrospective method. All prior periods have been restated to give effect to the fair-value-
based method of accounting for awards granted in fiscal years beginning on or after January 1, 1995. The Company
believes that the modified retrospective application of this standard achieves the highest level of clarity and
comparability among the presented periods. On November 10, 2005, the FASB issued FASB Staff Position No. FAS
123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (the FSP).
The FSP provides that companies may elect to use a specified "short-cut" method to calculate the historical pool of
windfall tax benefits upon adoption of SFAS No. 123R. The Company elected to use the “short-cut” method when it
adopted SFAS No. 123R on January 1, 2006. Refer to Note 15 for additional information.
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive income
(loss) are presented in the Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income.
Accumulated other comprehensive income (loss) is composed of foreign currency translation effects (including hedges of
net investments in international companies), defined benefit pension plan adjustments, unrealized gains and losses on
available-for-sale debt and equity securities, and unrealized gains and losses on cash flow hedging instruments.