3M 2010 Annual Report Download - page 102

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96
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
used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates
and not with respect to other factors that may impact fair value.
3M has determined that foreign currency forwards and commodity price swaps will be considered level 1
measurements as these are traded in active markets which have identical asset or liabilities, while currency swaps,
foreign currency options, interest rate swaps and cross-currency swaps will be considered level 2. For level 2
derivatives, 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign
currency exchange rates, volatilities, and interest rates. The level 2 derivative positions are primarily valued using
standard calculations/models that use as their basis readily observable market parameters. Industry standard data
providers are 3M’s primary source for forward and spot rate information for both interest rates and currency rates,
with resulting valuations periodically validated through third-party or counterparty quotes and a net present value
stream of cash flows model.