NOTE 2. Revenue

The Company adopted ASU No. 2014-09 and related standards (collectively, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers), as described in Note 1, on January 1, 2018 using the modified retrospective method of adoption. Prior periods have not been restated. Due to the cumulative net impact of adopting ASC 606, the January 1, 2018 balance of retained earnings was increased by less than $2 million, primarily relating to the accelerated recognition for software installation service and training revenue. This cumulative impact reflects retrospective application of ASC 606 only to contracts that were not completed as of January 1, 2018. Further, the Company applied the practical expedient permitting the effect of all contract modifications that occurred before January 1, 2018 to be aggregated in the transition accounting. The impact of applying ASC 606 as compared with previous guidance applied to revenues and costs was not material for the three months ended March 31, 2018.

Performance Obligations:

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 or significant payment terms extended to customers. The vast majority of 3M’s customer arrangements contain a single performance obligation to transfer manufactured goods as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and, therefore, not distinct. However, to a limited extent 3M also enters into customer arrangements that involve intellectual property out-licensing, multiple performance obligations (such as equipment, installation and service), software with coterminous post-contract support, services and non-standard terms and conditions.

Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods/services have been delivered as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. In limited arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as 3M completes the performance obligation(s).

Revenue is recognized at the transaction price which the Company expects to be entitled. When determining the transaction price, 3M estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for 3M are customer rebates, trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction to revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes are primarily derived from the following inputs: sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. Because 3M serves numerous markets, the sales incentive programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Free goods are accounted for as an expense and recorded in cost of sales. Product returns are recorded as a reduction to revenue based on anticipated sales returns that occur in the normal course of business. 3M primarily has assurance-type warranties that do not result in separate performance obligations. Sales, use, value-added, and other excise taxes are not recognized in revenue. The Company has elected to present revenue net of sales taxes and other similar taxes.

For substantially all arrangements recognized over time, the Company applies the “right to invoice” practical expedient. As a result, 3M recognizes revenue at the invoice amount when the entity has a right to invoice a customer at an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.

For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using 3M’s best estimate of the standalone selling price of each distinct good or service in the contract.

The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.

Contract Balances:

Deferred income (current portion) as of March 31, 2018 and December 31, 2017 was $519 million and $513 million, respectively, and primarily relates to revenue that is recognized over time for one-year software license contracts, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral of income for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $280 million of the December 31, 2017 balance was recognized as revenue during the first quarter of 2018. The amount of noncurrent deferred income is not considered significant.

Exemptions and Practical Expedients Applied or Elected:

3M applies ASC 606 utilizing the following allowable exemptions or practical expedients:

Exemption to not disclose the unfulfilled performance obligation balance for contracts with an original length of one year or less.

Practical expedient relative to costs of obtaining a contract by expensing sales commissions when incurred because the amortization period would have been one year or less.

Portfolio approach practical expedient relative to estimation of variable consideration.

“Right to invoice” practical expedient based on 3M’s right to invoice the customer at an amount that reasonably represents the value to the customer of 3M’s performance completed to date.

Election to present revenue net of sales taxes and other similar taxes.

Sales-based royalty exemption permitting future intellectual property out-licensing royalty payments to be excluded from the otherwise required remaining performance obligations disclosure.

Disaggregated revenue information:

The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods:


	Three months ended
	March 31,
Net Sales (Millions)	2018		2017
Abrasives	$	475	$	430
Adhesives and Tapes		1,153		1,075
Advanced Materials		304		287
Automotive and Aerospace		559		508
Automotive Aftermarket		418		417
Separation and Purification		236		220
Other Industrial		(1)		(1)
Total Industrial Business Group	$	3,144	$	2,936

Commercial Solutions	$	485	$	443
Personal Safety		962		707
Roofing Granules		101		97
Transportation Safety		236		303
Other Safety and Graphics		(1)		—
Total Safety and Graphics Business Group	$	1,783	$	1,550

Drug Delivery	$	119	$	121
Food Safety		82		73
Health Information Systems		205		191
Medical Consumables		776		714
Oral Care		354		336
Other Health Care		—		—
Total Health Care Business Group	$	1,536	$	1,435

Electronics	$	931	$	878
Energy		420		413
Other Electronics and Energy		(1)		—
Total Electronics and Energy Business Group	$	1,350	$	1,291

Consumer Health Care	$	102	$	102
Home Care		269		261
Home Improvement		447		408
Stationery and Office		299		292
Other Consumer		10		10
Total Consumer Business Group	$	1,127	$	1,073

Corporate and Unallocated	$	—	$	1
Elimination of Dual Credit		(662)		(601)
Total Company	$	8,278	$	7,685


	Three months ended March 31, 2018
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,100	$	944	$	785	$	316	$	(1)	$	3,144
Safety and Graphics			652		497		436		198		—		1,783
Health Care			702		299		394		141		—		1,536
Electronics and Energy			229		911		145		66		(1)		1,350
Consumer			610		272		141		106		(2)		1,127
Corporate and Unallocated			—		(1)		—		(1)		2		—
Elimination of Dual Credit			(249)		(246)		(109)		(59)		1		(662)
Total Company		$	3,044	$	2,676	$	1,792	$	767	$	(1)	$	8,278


	Three months ended March 31, 2017
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,082	$	853	$	696	$	305	$	—	$	2,936
Safety and Graphics			581		431		351		188		(1)		1,550
Health Care			690		260		353		133		(1)		1,435
Electronics and Energy			231		851		143		65		1		1,291
Consumer			587		259		126		102		(1)		1,073
Corporate and Unallocated			1		(1)		—		1		—		1
Elimination of Dual Credit			(231)		(220)		(92)		(58)		—		(601)
Total Company		$	2,941	$	2,433	$	1,577	$	736	$	(2)	$	7,685