3M 2012 Annual Report Download - page 58
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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 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 shareholders’ equity.
Although local currencies are typically considered as the functional currencies outside the United States, under
Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity’s
parent is assumed to be that entity’s functional currency when the economic environment of a foreign entity is highly
inflationary—generally when its cumulative inflation is approximately 100 percent or more for the three years that precede
the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.0
percent of 3M’s consolidated operating income for 2012. 3M determined that the cumulative inflation rate of Venezuela in
November 2009 and since has exceeded 100 percent. Accordingly, the financial statements of the Venezuelan subsidiary
were remeasured as if its functional currency were that of its parent beginning January 1, 2010.
Regulations in Venezuela require the purchase and sale of foreign currency to be made at official rates of exchange that
are fixed from time to time by the Venezuelan government. Certain laws in the country, however, provided an exemption
for the purchase and sale of certain securities and resulted in an indirect “parallel” market through which companies
obtained foreign currency without having to purchase it from Venezuela’s Commission for the Administration of Foreign
Exchange (CADIVI). In May 2010, the Venezuelan government took control of the previously freely-traded parallel market.
The government-controlled rate that emerged under the new Transaction System for Foreign Currency Denominated
Securities (SITME) is not as unfavorable as the previous parallel rate in comparison to the official rates. As previously
disclosed, as of December 31, 2009 (prior to the change in functional currency of 3M’s Venezuelan subsidiary in
January 2010), 3M changed to use of the parallel exchange rate for translation of the financial statements of its
Venezuelan subsidiary. Beginning January 1, 2010, as discussed above, the financial statements of the Venezuelan
subsidiary are remeasured as if its functional currency were that of its parent. This remeasurement utilized the parallel
rate through May 2010 and the SITME rate thereafter.
The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Other factors notwithstanding, the
change in functional currency of this subsidiary and associated remeasurement beginning January 1, 2010 as a result of
Venezuela’s economic environment decreased net sales of the Venezuelan subsidiary by approximately two-thirds in
2010 in comparison to 2009 (based on exchange rates at 2009 year-end), but did not otherwise have a material impact on
operating income and 3M’s consolidated results of operations.
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 acquired.
Marketable securities: The classification of marketable securities as current or non-current is dependent upon
management’s intended holding period, the security’s maturity date and liquidity considerations based on market
conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are
classified as non-current. 3M reviews impairments associated with its marketable securities in accordance with the
measurement guidance provided by ASC 320, Investments-Debt and Equity Securities, when determining the
classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an
unrealized loss being recorded in the other comprehensive income component of shareholders’ equity. Such an