For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.

 

3M goodwill totaled approximately $7.3 billion as of December 31, 2013. 3M’s annual goodwill impairment testing is performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units generally correspond to a division. 3M did not combine any of its reporting units for impairment testing.

 

An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for start-up, loss position and declining businesses, but also uses discounted cash flow as an additional tool for businesses that may be growing at a slower rate than planned due to economic or other conditions.

 

As discussed in Notes 3 and 15 to the Consolidated Financial Statements, effective in the first quarter of 2013, 3M completed a realignment of its business segments. Concurrent with this business segment realignment, certain products were also moved between business segments. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2013, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion that follows relates to the separate fourth quarter 2013 annual impairment test and is in the context of the reporting unit structure that existed at that time.

 

As of September 30, 2013, 3M had 34 primary reporting units, with ten reporting units accounting for approximately 80 percent of the goodwill. These ten reporting units were comprised of the following divisions: 3M Purification Inc., Personal Safety, Optical Systems, Traffic Safety and Security Systems, Infection Prevention, 3M ESPE, Advanced Materials, Industrial Adhesives and Tapes, Communication Markets, and Health Information Systems. The fair values for all significant reporting units were in excess of carrying value by 50 percent or more, except for one reporting unit with approximately $300 million of goodwill, where the fair value exceeded the carrying value by approximately 30 percent.

 

In 2013, 3M primarily used an industry price-earnings ratio approach, but