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 and six months ended June 30, 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 June 30, 2018 and December 31, 2017 was $512 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 $110 million and $390 million of the December 31, 2017 balance was recognized as revenue during the three and six months ended June 30, 2018, respectively. 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				Six months ended
	June 30,				June 30,
Net Sales (Millions)	2018		2017		2018		2017
Abrasives	$	473	$	437	$	948	$	867
Adhesives and Tapes		1,165		1,096		2,318		2,171
Advanced Materials		317		287		621		574
Automotive and Aerospace		519		489		1,078		997
Automotive Aftermarket		438		418		856		835
Separation and Purification		238		219		474		439
Other Industrial		(2)		—		(3)		(1)
Total Industrial Business Group	$	3,148	$	2,946	$	6,292	$	5,882

Commercial Solutions	$	502	$	457	$	987	$	900
Personal Safety		957		721		1,919		1,428
Roofing Granules		99		96		200		193
Transportation Safety		257		295		493		598
Other Safety and Graphics		—		—		(1)		—
Total Safety and Graphics Business Group	$	1,815	$	1,569	$	3,598	$	3,119

Drug Delivery	$	119	$	120	$	238	$	241
Food Safety		84		76		166		149
Health Information Systems		205		195		410		386
Medical Solutions		772		729		1,548		1,443
Oral Care		342		330		696		666
Other Health Care		(2)		(1)		(2)		(1)
Total Health Care Business Group	$	1,520	$	1,449	$	3,056	$	2,884

Electronics	$	925	$	883	$	1,856	$	1,761
Energy		411		404		831		817
Other Electronics and Energy		1		3		—		3
Total Electronics and Energy Business Group	$	1,337	$	1,290	$	2,687	$	2,581

Consumer Health Care	$	100	$	104	$	202	$	206
Home Care		255		253		524		514
Home Improvement		507		460		954		868
Stationery and Office		351		340		650		632
Other Consumer		10		12		20		22
Total Consumer Business Group	$	1,223	$	1,169	$	2,350	$	2,242

Corporate and Unallocated	$	12	$	2	$	12	$	3
Elimination of Dual Credit		(665)		(615)		(1,327)		(1,216)
Total Company	$	8,390	$	7,810	$	16,668	$	15,495


	Three months ended June 30, 2018
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,182	$	870	$	777	$	318	$	1	$	3,148
Safety and Graphics			747		419		443		206		—		1,815
Health Care			703		292		381		145		(1)		1,520
Electronics and Energy			244		899		131		63		—		1,337
Consumer			742		236		138		105		2		1,223
Corporate and Unallocated			8		1		1		4		(2)		12
Elimination of Dual Credit			(278)		(213)		(113)		(60)		(1)		(665)
Total Company		$	3,348	$	2,504	$	1,758	$	781	$	(1)	$	8,390


	Six months ended June 30, 2018
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	2,282	$	1,814	$	1,562	$	634	$	—	$	6,292
Safety and Graphics			1,399		916		879		404		—		3,598
Health Care			1,405		591		775		286		(1)		3,056
Electronics and Energy			473		1,810		276		129		(1)		2,687
Consumer			1,352		508		279		211		—		2,350
Corporate and Unallocated			8		—		1		3		—		12
Elimination of Dual Credit			(527)		(459)		(222)		(119)		—		(1,327)
Total Company		$	6,392	$	5,180	$	3,550	$	1,548	$	(2)	$	16,668


	Three months ended June 30, 2017
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,114	$	810	$	709	$	314	$	(1)	$	2,946
Safety and Graphics			639		370		364		195		1		1,569
Health Care			697		261		353		137		1		1,449
Electronics and Energy			233		855		136		67		(1)		1,290
Consumer			694		231		139		105		—		1,169
Corporate and Unallocated			2		2		—		(1)		(1)		2
Elimination of Dual Credit			(252)		(207)		(96)		(60)		—		(615)
Total Company		$	3,127	$	2,322	$	1,605	$	757	$	(1)	$	7,810


	Six months ended June 30, 2017
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	2,196	$	1,663	$	1,405	$	619	$	(1)	$	5,882
Safety and Graphics			1,220		801		715		383		—		3,119
Health Care			1,387		521		706		270		—		2,884
Electronics and Energy			464		1,706		279		132		—		2,581
Consumer			1,281		490		265		207		(1)		2,242
Corporate and Unallocated			3		1		—		—		(1)		3
Elimination of Dual Credit			(483)		(427)		(188)		(118)		—		(1,216)
Total Company		$	6,068	$	4,755	$	3,182	$	1,493	$	(3)	$	15,495