.Analysis of Income Taxes
Difficulty: Advanced
Income Tax Accounting Policy
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. 3M records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of December 31, 2017 and 2016, 3M had valuation allowances of $81 million and $47 million on its deferred tax assets, respectively. The increase in valuation allowance at December 31, 2017 relates to certain U.S. and international jurisdictions with taxable loss or tax credit carryforwards that are expected to expire prior to utilization. 3M recognizes and measures its uncertain tax positions based on the rules under ASC 740, Income Taxes.
Source: 3M Co., Annual Report
Income Tax Expense (Benefit)
3M Co., income tax expense (benefit), continuing operations
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Federal | |||||
| | State | |||||
| | International | |||||
| | Currently payable | |||||
| | Federal | |||||
| | State | |||||
| | International | |||||
| | Deferred | |||||
| | Tax Cuts and Jobs Act (TCJA) non-current transition tax provision | |||||
| | Provision for income taxes |
Source: Based on data from 3M Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Currently payable | The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations. | 3M Co.'s currently payable declined from 2015 to 2016 and from 2016 to 2017. |
| Deferred | The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations. | 3M Co.'s deferred increased from 2015 to 2016 and from 2016 to 2017. |
| Provision for income taxes | The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy. | 3M Co.'s provision for income taxes increased from 2015 to 2016 and from 2016 to 2017. |
Effective Income Tax Rate (EITR)
3M Co., effective income tax rate (EITR) reconciliation
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Statutory U.S. tax rate | % | % | % | % | % |
| | State income taxes, net of federal benefit | % | % | % | % | % |
| | International income taxes, net | % | % | % | % | % |
| | U.S. TCJA, net impacts | % | % | % | % | % |
| | U.S. research and development credit | % | % | % | % | % |
| | Reserves for tax contingencies | % | % | % | % | % |
| | Domestic Manufacturer’s deduction | % | % | % | % | % |
| | Employee share-based payments | % | % | % | % | % |
| | All other, net | % | % | % | % | % |
| | Effective worldwide tax rate | % | % | % | % | % |
Source: Based on data from 3M Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Effective worldwide tax rate | A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations. | 3M Co.'s effective worldwide tax rate declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Components of Deferred Tax Assets and Liabilities
3M Co., components of deferred tax assets and liabilities
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Employee benefit costs | |||||
| | Product and other claims | |||||
| | Miscellaneous accruals | |||||
| | Accruals not currently deductible | |||||
| | Pension costs | |||||
| | Stock-based compensation | |||||
| | Net operating/capital loss carryforwards | |||||
| | Foreign tax credits | |||||
| | Currency translation | |||||
| | Inventory | |||||
| | Gross deferred tax assets | |||||
| | Valuation allowance | |||||
| | Deferred tax assets | |||||
| | Product and other insurance receivables | |||||
| | Accelerated depreciation | |||||
| | Intangible amortization | |||||
| | Currency translation | |||||
| | Other | |||||
| | Deferred tax liabilities | |||||
| | Net deferred tax assets (liabilities) |
Source: Based on data from 3M Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Gross deferred tax assets | The sum of the tax effects as of the balance sheet date of the amounts of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws (before the valuation allowance, if any, to reduce such sum amount to net realizable value). Includes any tax benefit realized in deferred tax assets for significant impacts of tax planning strategies. | 3M Co.'s gross deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
| Deferred tax assets | The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. | 3M Co.'s deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
| Net deferred tax assets (liabilities) | For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods. | 3M Co.'s net deferred tax assets (liabilities) increased from 2015 to 2016 but then slightly declined from 2016 to 2017. |
Deferred Tax Assets and Liabilities, Classification
3M Co., deferred tax assets and liabilities, classification
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Current deferred tax assets (included in Other current assets) | |||||
| | Noncurrent deferred tax assets (included in Other assets) | |||||
| | Current deferred tax liabilities (included in Other current liabilities) | |||||
| | Noncurrent deferred tax liabilities (included in Other liabilities) |
Source: Based on data from 3M Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Current deferred tax assets (included in Other current assets) | The current portion of the aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset. | |
| Noncurrent deferred tax assets (included in Other assets) | The noncurrent portion as of the balance sheet date of the aggregate carrying amount of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. | 3M Co.'s noncurrent deferred tax assets (included in Other assets) declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| Current deferred tax liabilities (included in Other current liabilities) | Represents the current portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A current taxable temporary difference is a difference between the tax basis and the carrying amount of a current asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. | |
| Noncurrent deferred tax liabilities (included in Other liabilities) | Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. | 3M Co.'s noncurrent deferred tax liabilities (included in Other liabilities) declined from 2015 to 2016 but then slightly increased from 2016 to 2017. |
Analyst Adjustments: Removal of Deferred Taxes
3M Co., adjustments to financial data
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Adjustment to Current Assets | ||||||
| | Current assets (as reported) | |||||
| | Less: Current deferred tax assets, net | |||||
| | Current assets (adjusted) | |||||
| Adjustment to Total Assets | ||||||
| | Total assets (as reported) | |||||
| | Less: Current deferred tax assets, net | |||||
| | Less: Noncurrent deferred tax assets, net | |||||
| | Total assets (adjusted) | |||||
| Adjustment to Current Liabilities | ||||||
| | Current liabilities (as reported) | |||||
| | Less: Current deferred tax liabilities, net | |||||
| | Current liabilities (adjusted) | |||||
| Adjustment to Total Liabilities | ||||||
| | Total liabilities (as reported) | |||||
| | Less: Current deferred tax liabilities, net | |||||
| | Less: Noncurrent deferred tax liabilities, net | |||||
| | Total liabilities (adjusted) | |||||
| Adjustment to Total 3M Company Shareholders' Equity | ||||||
| | Total 3M Company shareholders' equity (as reported) | |||||
| | Less: Net deferred tax assets (liabilities) | |||||
| | Total 3M Company shareholders' equity (adjusted) | |||||
| Adjustment to Net Income Attributable To 3M | ||||||
| | Net income attributable to 3M (as reported) | |||||
| | Add: Deferred income tax expense (benefit) | |||||
| | Net income attributable to 3M (adjusted) | |||||
Adjusted Ratios: Removal of Deferred Taxes (Summary)
3M Co., adjusted ratios
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Current Ratio | ||||||
| | Reported current ratio | |||||
| | Adjusted current ratio | |||||
| Net Profit Margin | ||||||
| | Reported net profit margin | % | % | % | % | % |
| | Adjusted net profit margin | % | % | % | % | % |
| Total Asset Turnover | ||||||
| | Reported total asset turnover | |||||
| | Adjusted total asset turnover | |||||
| Financial Leverage | ||||||
| | Reported financial leverage | |||||
| | Adjusted financial leverage | |||||
| Return on Equity (ROE) | ||||||
| | Reported ROE | % | % | % | % | % |
| | Adjusted ROE | % | % | % | % | % |
| Return on Assets (ROA) | ||||||
| | Reported ROA | % | % | % | % | % |
| | Adjusted ROA | % | % | % | % | % |
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. | 3M Co.'s adjusted current ratio improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017. |
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by total revenue. | 3M Co.'s adjusted net profit margin improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | 3M Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017. |
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
3M Co.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | 3M Co.'s adjusted ROE improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | 3M Co.'s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017. |
Adjusted Current Ratio
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Current assets (USD $ in millions) | |||||
| | Current liabilities (USD $ in millions) | |||||
| | Current ratio1 | |||||
| Adjusted for Deferred Taxes | ||||||
| | Adjusted current assets (USD $ in millions) | |||||
| | Adjusted current liabilities (USD $ in millions) | |||||
| | Adjusted current ratio2 | |||||
2017 Calculations
1 Current ratio = Current assets ÷ Current liabilities
= ÷ =
2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. | 3M Co.'s adjusted current ratio improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017. |
Adjusted Net Profit Margin
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net income attributable to 3M (USD $ in millions) | |||||
| | Net sales (USD $ in millions) | |||||
| | Net profit margin1 | % | % | % | % | % |
| Adjusted for Deferred Taxes | ||||||
| | Adjusted net income attributable to 3M (USD $ in millions) | |||||
| | Adjusted net profit margin2 | % | % | % | % | % |
2017 Calculations
1 Net profit margin = 100 × Net income attributable to 3M ÷ Net sales
= 100 × ÷ = %
2 Adjusted net profit margin = 100 × Adjusted net income attributable to 3M ÷ Net sales
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by total revenue. | 3M Co.'s adjusted net profit margin improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
Adjusted Total Asset Turnover
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net sales (USD $ in millions) | |||||
| | Total assets (USD $ in millions) | |||||
| | Total asset turnover1 | |||||
| Adjusted for Deferred Taxes | ||||||
| | Adjusted total assets (USD $ in millions) | |||||
| | Adjusted total asset turnover2 | |||||
2017 Calculations
1 Total asset turnover = Net sales ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | 3M Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017. |
Adjusted Financial Leverage
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Total assets (USD $ in millions) | |||||
| | Total 3M Company shareholders' equity (USD $ in millions) | |||||
| | Financial leverage1 | |||||
| Adjusted for Deferred Taxes | ||||||
| | Adjusted total assets (USD $ in millions) | |||||
| | Adjusted total 3M Company shareholders' equity (USD $ in millions) | |||||
| | Adjusted financial leverage2 | |||||
2017 Calculations
1 Financial leverage = Total assets ÷ Total 3M Company shareholders' equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total 3M Company shareholders' equity
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
3M Co.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017. |
Adjusted Return on Equity (ROE)
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net income attributable to 3M (USD $ in millions) | |||||
| | Total 3M Company shareholders' equity (USD $ in millions) | |||||
| | ROE1 | % | % | % | % | % |
| Adjusted for Deferred Taxes | ||||||
| | Adjusted net income attributable to 3M (USD $ in millions) | |||||
| | Adjusted total 3M Company shareholders' equity (USD $ in millions) | |||||
| | Adjusted ROE2 | % | % | % | % | % |
2017 Calculations
1 ROE = 100 × Net income attributable to 3M ÷ Total 3M Company shareholders' equity
= 100 × ÷ = %
2 Adjusted ROE = 100 × Adjusted net income attributable to 3M ÷ Adjusted total 3M Company shareholders' equity
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | 3M Co.'s adjusted ROE improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
Adjusted Return on Assets (ROA)
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net income attributable to 3M (USD $ in millions) | |||||
| | Total assets (USD $ in millions) | |||||
| | ROA1 | % | % | % | % | % |
| Adjusted for Deferred Taxes | ||||||
| | Adjusted net income attributable to 3M (USD $ in millions) | |||||
| | Adjusted total assets (USD $ in millions) | |||||
| | Adjusted ROA2 | % | % | % | % | % |
2017 Calculations
1 ROA = 100 × Net income attributable to 3M ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Adjusted net income attributable to 3M ÷ Adjusted total assets
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | 3M Co.'s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017. |
