3M 2011 Annual Report Download - page 59

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is recognized when the Company has VSOE of the fair value of all of the undelivered elements and applicable criteria
have been met for the delivered elements. When the arrangements involve significant production, modification or
customization, long-term construction-type accounting involving proportional performance is generally employed.
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 period incurred, and totaled $518
million in 2011, $512 million in 2010 and $414 million in 2009.
Research, development and related expenses: These costs are charged to operations in the period incurred and are
shown on a separate line of the Consolidated Statement of Income. Research, development and related expenses
totaled $1.570 billion in 2011, $1.434 billion in 2010 and $1.293 billion in 2009. 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 $1.036 billion in 2011, $919 million in 2010 and $838 million in 2009.
Related expenses primarily include technical support provided by 3M to customers who are using existing 3M
products; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and
maintain patents; and amortization of acquired 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 over a period of three to seven years, generally on a
straight-line basis, unless another systematic and rational basis is more representative of the software’s use.
Amounts are reported as a component of either machinery and equipment or capital leases 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 related to 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
capital projects that contribute to current or future operations generally are capitalized and depreciated over their
estimated useful lives.
Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this
approach, deferred income taxes represent the expected future tax consequences of temporary differences between
the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its
deferred tax assets when uncertainty regarding their realizability exists. As of December 31, 2011 and 2010, the
Company recorded $82 million and $128 million, respectively, of valuation allowances. The Company follows
accounting guidance related to accounting for uncertainty in income taxes to record uncertainties and judgments in
the application of complex tax regulations in a multitude of jurisdictions (refer to Note 8 for additional information).
Earnings per share: The difference in the weighted average 3M shares outstanding for calculating basic and diluted
earnings per share attributable to 3M common shareholders is the result of the dilution associated with the
Company’s stock-based compensation plans. Certain options outstanding under these stock-based compensation
plans during the years 2011, 2010 and 2009 were not included in the computation of diluted earnings per share
attributable to 3M common shareholders because they would not have had a dilutive effect (17.4 million average
options for 2011, 26.3 million average options for 2010, and 54.3 million average options for 2009). As discussed in
Note 10, the conditions for conversion related to the Company’s Convertible Notes were not met. If the conditions for
conversion were met, 3M could have chosen to pay in cash and/or common stock; however, if this occurred, the