3M 2011 Annual Report Download - page 36

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In 2009, in response to then-difficult global economic conditions, the Company reduced its capital spending
significantly.
3M is striving to increase its manufacturing and sourcing capacity outside the United States in order to more closely
align its production capability with its sales in major geographic regions. The initiative is expected to help improve
customer service, lower transportation costs, and reduce working capital requirements.
CRITICAL ACCOUNTING ESTIMATES
Information regarding significant accounting policies is included in Note 1. As stated in Note 1, the preparation of
financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes its most critical accounting estimates relate to legal proceedings, the Company’s pension and
postretirement obligations, asset impairments and income taxes. Senior management has discussed the
development, selection and disclosure of its critical accounting estimates with the Audit Committee of 3M’s Board of
Directors.
Legal Proceedings:
The categories of claims for which the Company has a probable and estimable liability, the amount of its liability
accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal
proceedings. Please refer to the section entitled “Process for Disclosure and Recording of Liabilities and Insurance
Receivables Related to Legal Proceedings” (contained in “Legal Proceedings” in Note 14) for additional information
about such estimates.
Pension and Postretirement Obligations:
3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees
outside the United States. The U.S. defined-benefit pension plan was closed to new participants effective January 1,
2009. The Company accounts for its defined benefit pension and postretirement health care and life insurance
benefit plans in accordance with Accounting Standard Codification (ASC) 715, Compensation ² Retirement
Benefits, in measuring plan assets and benefit obligations and in determining the amount of net periodic benefit cost.
ASC 715 requires employers to recognize the underfunded or overfunded status of a defined benefit pension or
postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded
status in the year in which the changes occur through accumulated other comprehensive income, which is a
component of stockholders’ equity. While the company believes the valuation methods used to determine the fair
value of plan assets are appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date.
Pension benefits associated with these plans are generally based primarily on each participant’s years of service,
compensation, and age at retirement or termination. Two critical assumptions, the discount rate and the expected
return on plan assets, are important elements of expense and liability measurement. See Note 11 for additional
discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and
expenses.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement
date for its pension and postretirement benefit plans. The discount rate reflects the current rate at which the
associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield
of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and
amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of
4.15% for U.S. pension and 4.04% for U.S. postretirement benefits to be appropriate as of December 31, 2011,
which represents a decrease from the 5.23% and 5.09% rates, respectively, used as of December 31, 2010. The
weighted average discount rate for international pension plans as of December 31, 2011 was 4.58%, a decrease
from the 5.04% rate used as of December 31, 2010.