Solventum Corp

Information regarding significant accounting policies is included in Note 1 of the accompanying consolidated financial statements. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates.

The Company considers the items below to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company.

Legal Proceedings

Assessments of lawsuits and claims can involve a series of complex judgments about future events, the outcomes of which are inherently uncertain, and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and reasonably estimable in accordance with Accounting Standard Codification (ASC) 450, Contingencies. Please refer to the section entitled "Process for Disclosure and Recording of Liabilities Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 12 to the accompanying consolidated financial statements) for additional information about such estimates.

Goodwill and Intangible Assets

The Company makes certain estimates and judgments in impairment assessments of goodwill. Goodwill is tested for impairment annually in the fourth quarter of each year, as further discussed below, and is tested between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company may assess qualitative factors for its reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Alternatively, the Company may bypass this qualitative assessment and perform a quantitative goodwill impairment test.

Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. An impairment loss 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 based on a market approach using comparable company information such as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. The Company also performs a discounted cash flow analysis for certain reporting units where the market approach indicates additional review is warranted. A discounted cash flow analysis involves key assumptions including projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in reporting unit earnings, comparable company information, and expected future cash flows, as well as underlying market and overall economic conditions, among other factors, make these estimates subject to uncertainty. The Company did not perform a discounted cash flow analysis for any reporting unit for any period presented, as the market approach analysis resulted in sufficient headroom between the fair value and the carrying value for each of the Company's reporting units.

As of December 31, 2025, goodwill totaled approximately $5.7 billion. The Company has four reporting units that are assigned goodwill, with the MedSurg reporting unit accounting for approximately 74 percent of the goodwill balance. In connection with our annual testing in the fourth quarter of 2025, no qualitative indicators of impairment were identified for any of the Company's reporting units. For reporting units where quantitative testing was completed, the fair value exceeded the carrying value of the reporting unit by at least 65 percent. On December 23, 2025, subsequent to our annual impairment test, the Company completed the acquisition of Acera. Preliminary goodwill related to the acquisition was recognized and is included in the balance of our MedSurg reporting unit at December 31, 2025. The Company will continue to monitor its reporting units for any triggering events or other indicators of impairment.

The Company acquires intangible assets in connection with business combinations, primarily developed technology, trade names, and customer relationships. These acquired intangible assets are recorded at their estimated fair value as of the acquisition date. The fair values of acquired intangible assets are determined using information available on the acquisition date and are based on estimates and assumptions that management believes are reasonable. These estimates may include the amount and timing of projected future cash flows attributable to each class of intangible asset, the discount rates used to present value those cash flows, and the assessment of the asset’s expected life cycle. Significant assumptions vary by the class of intangible asset and the valuation technique applied.