3M 2011 Annual Report Download - page 100

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NOTE 13. Fair Value Measurements
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are
measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the
exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used
in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable inputs are inputs market participants
would use in valuing the asset or liability developed based on market data obtained from sources independent of the
Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market
participants would use in valuing the asset or liability developed based upon the best information available in the
circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs
(other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are
unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale
marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance
Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net
investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to
these financial assets and liabilities. Separately, there were no material fair value measurements with respect to
nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements
on a recurring basis for 2011 and 2010.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with
respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the
respective financial assets and liabilities measured at fair value.
Available-for-sale marketable securities — except auction rate securities:
Marketable securities, except auction rate securities, are valued utilizing multiple sources. A weighted average price
is used for these securities. Market prices are obtained for these securities from a variety of industry standard data
providers, security master files from large financial institutions, and other third-party sources. These multiple prices
are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies
U.S. treasury securities as level 1, while all other marketable securities (excluding auction rate securities) are
classified as level 2. Marketable securities are discussed further in Note 9.
Available-for-sale marketable securities — auction rate securities only:
As discussed in Note 9, auction rate securities held by 3M failed to auction since the second half of 2007. As a result,
investments in auction rate securities are valued utilizing third-party indicative bid levels in markets that are not active
and broker-dealer valuation models that utilize inputs such as current/forward interest rates, current market
conditions and credit default swap spreads. 3M classifies these securities as level 3.
Available-for-sale investments:
Investments include equity securities that are traded in an active market. Closing stock prices are readily available
from active markets and are used as being representative of fair value. 3M classifies these securities as level 1.
Derivative instruments:
The Company’s derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required
to be recorded at fair value. The Company’s derivatives that are recorded at fair value include foreign currency
forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the
hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to
hedge 3M’s net investment are not impacted by the fair value measurement standard under ASC 820, as the debt