Significant Accounting Policies

3 Months Ended

Mar. 31, 2021

Significant Accounting Policies

Significant Accounting Policies

NOTE 1. Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K.

Effective in the first quarter of 2021, 3M made the following changes. Information provided herein reflects the impact of these changes for all periods presented.

● Change in accounting principle for net periodic pension and postretirement plan cost. See below for additional information.

● Change in measure of segment operating performance used by 3M’s chief operating decision maker—impacting 3M’s disclosed measure of segment profit/loss (business segment operating income). See additional information in Note 16.

● Change in alignment of certain products within 3M’s Consumer business segment—creating the Consumer Health and Safety Division. See additional information in Note 16.

Change in Accounting Principle for Determining Net Periodic Pension and Postretirement Plan Cost

In the first quarter of 2021, 3M changed the method it uses to calculate the market-related value of fixed income securities included in its pension and other postretirement plan assets. The market-related value is used to determine the expected return on plan assets and the amortization of net unamortized actuarial gains or losses expense components of net periodic benefit cost. The Company previously used the calculated value approach for all plan assets, deferring over three years the impact on these amounts of asset gains or losses that differed from expected returns. 3M changed to the fair value approach for calculating market-related value for the fixed income class of plan assets, which does not involve deferring the impact of excess plan asset gains or losses in the determination of these two components of net periodic benefit cost. 3M considers the use of the fair value approach preferrable to the calculated value approach as it results in a more current reflection of impacts of changes in value of these plan assets in the determination of net periodic benefit cost. Additionally, given the plans’ liability-driven investment strategy whereby the changes in value of the fixed income plan assets should offset changes in the value of the plans’ liabilities, this approach more closely aligns the expected return on plan assets expense component with the value reflected in the plans’ funded status. This change was applied retrospectively to all periods presented within 3M’s financial statements. The change did not impact consolidated operating income or net cash provided by operating activities but did impact the previously reported portion of pension and postretirement net periodic benefit cost (benefit) that was included within non-operating other expense (income) along with related consolidated income items such as net income and earnings per share. Other impacts included related changes to previously reported consolidated other comprehensive income, retained earnings, accumulated other comprehensive income (loss), and associated line items within the determination of net cash provided by operating activities. For classes of plan assets other than fixed income investments, the Company continues to use the calculated value approach to determine their market-related value.

The adoption of this change impacted previously reported amounts included herein as indicated in the tables below.

Consolidated Statement of Income	Three months ended
	March 31, 2020
	Under Prior
(Millions, except per share amounts)	Method		As Adjusted
Other expense (income), net	$	96	$	75
Income before income taxes	$	1,567	$	1,588
Provision for income taxes		273		278
Income of consolidated group	$	1,294	$	1,310
Net income including noncontrolling interest	$	1,294	$	1,310
Net income attributable to 3M	$	1,292	$	1,308
Earnings per share attributable to 3M common shareholders — basic	$	2.24	$	2.27
Earnings per share attributable to 3M common shareholders — diluted	$	2.22	$	2.25

Consolidated Statement of Comprehensive Income	Three months ended
	March 31, 2020
	Under Prior
(Millions)	Method		As Adjusted
Net income including noncontrolling interest	$	1,294	$	1,310
Other comprehensive income (loss), net of tax:
Defined benefit pension and postretirement plans adjustment	$	119	$	108
Total other comprehensive income (loss), net of tax	$	(278)	$	(289)
Comprehensive income (loss) including noncontrolling interest	$	1,016	$	1,021
Comprehensive income (loss) attributable to 3M	$	1,017	$	1,022

Consolidated Balance Sheet	As of December 31, 2020
	Under Prior
(Millions)	Method		As Adjusted
Retained Earnings	$	43,761	$	43,821
Accumulated other comprehensive income (loss)	$	(7,661)	$	(7,721)

Consolidated Statement of Cash Flows	Three months ended
	March 31, 2020
	Under Prior
(Millions)	Method		As Adjusted
Net income including noncontrolling interest	$	1,294	$	1,310
Company pension and postretirement expense	$	98	$	77
Other — net	$	(457)	$	(452)

The cumulative adjustment as of January 1, 2020, the beginning of the earliest period presented in the consolidated financial statements included herein, was a $5 million reduction to each of retained earnings and accumulated other comprehensive loss.

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 were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would have had an anti-dilutive effect (8.7 million and 19.2 million average

options for the three months ended March 31, 2021 and 2020, respectively). The computations for basic and diluted earnings per share follow:

Earnings Per Share Computations

	Three months ended
	March 31,
(Amounts in millions, except per share amounts)	2021		2020
Numerator:
Net income attributable to 3M	$	1,624	$	1,308
Denominator:
Denominator for weighted average 3M common shares outstanding – basic		580.5		576.8
Dilution associated with the Company’s stock-based compensation plans		5.8		4.7
Denominator for weighted average 3M common shares outstanding – diluted		586.3		581.5
Earnings per share attributable to 3M common shareholders – basic	$	2.80	$	2.27
Earnings per share attributable to 3M common shareholders – diluted	$	2.77	$	2.25

New Accounting Pronouncements

Refer to Note 1 in 3M’s 2020 Annual Report on Form 10-K for a more detailed discussion of the standards in the tables that follow, except for those pronouncements issued subsequent to the most recent Form 10-K filing date for which separate, more detailed discussion is provided below as applicable.

Standards Adopted During the Current Fiscal Year
Standard	Relevant Description	Effective Date for 3M	Impact and Other Matters
ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740)	Eliminates certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combination that result in a step-up in the tax basis of goodwill.	January 1, 2021	Adoption of this ASU did not have a material impact on 3M’s consolidated results of operations and financial condition.
ASU No. 2020-01, Clarifying the Interactions between Topic 321, Investments—Equity Securities, Topic 323, Investments—Equity Method and Joint Ventures, and Topic 815, Derivatives and Hedging	Clarifies when accounting for certain equity securities, a Company should consider observable transactions before applying or upon discontinuing the equity method of accounting for the purposes of applying the measurement alternative. Indicates when determining the accounting for certain derivatives, a Company should not consider if the underlying securities would be accounted for under the equity method or fair value option.	January 1, 2021	Adoption of this ASU did not have a material impact on 3M’s consolidated results of operations and financial condition.
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope	Provides temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates, such as SOFR.	Effective upon ASUs’ issuances in 2020 & 2021	With the beginning of the phase out of LIBOR at the end of 2021, 3M continues to evaluate commercial contracts that may utilize LIBOR and will continue to monitor developments during the LIBOR transition period.