3M 2007 Annual Report Download - page 51

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impaired. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate
that the carrying amount of an asset (asset group) may not be recoverable. 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. The estimated reductions are based on the sales terms,
historical experience, trend analysis and projected market conditions in the various markets served. Sales, use, value-
added and other excise taxes are not recognized in revenue.
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 it has stand-alone value to the customer, the 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, and no revenue is 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
significant off-balance-sheet credit exposure related to its customers.
Advertising and merchandising: These costs are charged to operations in the year incurred, and totaled $469 million in
2007, $471 million in 2006 and $457 million in 2005.
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, development and related expenses totaled
$1.368 billion in 2007, $1.522 billion in 2006 and $1.274 billion in 2005. In 2006, this included a $95 million in-process
research and development charge (discussed in Note 2) and $75 million in restructuring actions (Note 4). Research and
development expenses, covering basic scientific research and the application of scientific advances in the development of
new and improved products and their uses, totaled $788 million in 2007 compared to $943 million in 2006, decreasing
due to the $95 million for purchased in-process research and development discussed above and also due to the
pharmaceuticals business divestiture (Note 2). Research and development expenses totaled $818 million in 2005.
Related expenses primarily include technical support provided by 3M to customers who are using existing 3M products,
and internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain
patents.
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.
Environmental: Environmental expenditures relating to existing conditions caused by past operations that do not
contribute to current or future revenues are expensed. Reserves for liabilities for anticipated remediation costs are
recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the
completion of feasibility studies or the Company’s commitment to a plan of action. Environmental expenditures for