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 nine months ended September 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 revenue (current portion) as of September 30, 2018 and December 31, 2017 was $614 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 for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $70 million and $460 million of the December 31, 2017 balance was recognized as revenue during the three and nine months ended September 30, 2018, respectively. The amount of noncurrent deferred revenue 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				Nine months ended
	September 30,				September 30,
Net Sales (Millions)	2018		2017		2018		2017
Abrasives	$	427	$	441	$	1,375	$	1,308
Adhesives and Tapes		1,164		1,170		3,482		3,341
Advanced Materials		314		281		935		855
Automotive and Aerospace		499		490		1,577		1,487
Automotive Aftermarket		397		414		1,253		1,249
Separation and Purification		224		228		698		667
Other Industrial		(2)		(1)		(5)		(2)
Total Industrial Business Group	$	3,023	$	3,023	$	9,315	$	8,905

Commercial Solutions	$	439	$	444	$	1,426	$	1,344
Personal Safety		881		732		2,800		2,160
Roofing Granules		83		98		283		291
Transportation Safety		259		279		752		877
Other Safety and Graphics		(2)		(2)		(3)		(2)
Total Safety and Graphics Business Group	$	1,660	$	1,551	$	5,258	$	4,670

Drug Delivery	$	102	$	137	$	340	$	378
Food Safety		83		78		249		227
Health Information Systems		208		197		618		583
Medical Solutions		734		756		2,282		2,199
Oral Care		317		318		1,013		984
Other Health Care		1		(1)		(1)		(2)
Total Health Care Business Group	$	1,445	$	1,485	$	4,501	$	4,369

Electronics	$	1,103	$	1,095	$	2,959	$	2,856
Energy		339		419		1,170		1,236
Other Electronics and Energy		1		1		1		4
Total Electronics and Energy Business Group	$	1,443	$	1,515	$	4,130	$	4,096

Consumer Health Care	$	96	$	111	$	298	$	317
Home Care		249		263		773		777
Home Improvement		518		517		1,472		1,385
Stationery and Office		362		376		1,012		1,008
Other Consumer		10		12		30		34
Total Consumer Business Group	$	1,235	$	1,279	$	3,585	$	3,521

Corporate and Unallocated	$	35	$	3	$	47	$	6
Elimination of Dual Credit		(689)		(684)		(2,016)		(1,900)
Total Company	$	8,152	$	8,172	$	24,820	$	23,667


	Three months ended September 30, 2018
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,137	$	898	$	683	$	308	$	(3)	$	3,023
Safety and Graphics			678		411		381		191		(1)		1,660
Health Care			687		282		340		137		(1)		1,445
Electronics and Energy			212		1,079		95		57		—		1,443
Consumer			779		221		129		107		(1)		1,235
Corporate and Unallocated			34		(1)		(2)		—		4		35
Elimination of Dual Credit			(262)		(269)		(99)		(59)		—		(689)
Total Company		$	3,265	$	2,621	$	1,527	$	741	$	(2)	$	8,152


	Nine months ended September 30, 2018
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	3,419	$	2,712	$	2,245	$	942	$	(3)	$	9,315
Safety and Graphics			2,077		1,327		1,260		595		(1)		5,258
Health Care			2,092		873		1,115		423		(2)		4,501
Electronics and Energy			685		2,889		371		186		(1)		4,130
Consumer			2,131		729		408		318		(1)		3,585
Corporate and Unallocated			42		(1)		(1)		3		4		47
Elimination of Dual Credit			(789)		(728)		(321)		(178)		—		(2,016)
Total Company		$	9,657	$	7,801	$	5,077	$	2,289	$	(4)	$	24,820


	Three months ended September 30, 2017
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	1,111	$	883	$	700	$	331	$	(2)	$	3,023
Safety and Graphics			612		393		352		195		(1)		1,551
Health Care			730		263		354		140		(2)		1,485
Electronics and Energy			233		1,069		142		71		—		1,515
Consumer			785		242		139		112		1		1,279
Corporate and Unallocated			3		(1)		—		1		—		3
Elimination of Dual Credit			(251)		(269)		(98)		(66)		—		(684)
Total Company		$	3,223	$	2,580	$	1,589	$	784	$	(4)	$	8,172


	Nine months ended September 30, 2017
Net Sales (Millions)		United States		Asia Pacific		Europe, Middle East and Africa		Latin America and Canada		Other Unallocated		Worldwide
Industrial		$	3,307	$	2,546	$	2,105	$	950	$	(3)	$	8,905
Safety and Graphics			1,832		1,194		1,067		578		(1)		4,670
Health Care			2,117		784		1,060		410		(2)		4,369
Electronics and Energy			697		2,775		421		203		—		4,096
Consumer			2,066		732		404		319		—		3,521
Corporate and Unallocated			6		—		—		1		(1)		6
Elimination of Dual Credit			(734)		(696)		(286)		(184)		—		(1,900)
Total Company		$	9,291	$	7,335	$	4,771	$	2,277	$	(7)	$	23,667