Alcoa 2009 Annual Report Download - page 88

During 2008, Alcoa completed a review of the estimated useful lives of its alumina refining and aluminum smelting
facilities. Such a review was performed because considerable engineering data and other information (readily available
due to the construction of the Iceland smelter as well as various expansions and other growth projects in-process or
completed over the two years prior to 2009) indicated that the useful lives of many of the assets in these businesses
were no longer appropriate. As a result of this review, for the majority of its refining and smelting locations, Alcoa
extended the useful lives of structures to an average of 26 and 32 years (previously 23 and 29 years), respectively, and
machinery and equipment to an average of 27 and 20 years (previously 17 and 19 years), respectively.
Also during 2008, Alcoa completed a review of the estimated useful lives of its flat-rolled products and engineered
products and solutions facilities. As a result of this review, for a portion of its flat-rolled products locations, Alcoa
extended the useful lives of structures to an average of 33 years (previously 29 years) and machinery and equipment to
an average of 18 years (previously 16 years). No change was made to the useful lives related to the engineered products
and solutions locations as the study determined that the average useful lives of structures (26 years) and machinery and
equipment (17 years) were appropriate.
The extension of depreciable lives qualifies as a change in accounting estimate and was made on a prospective basis
effective January 1, 2008 for the alumina refining and aluminum smelting facilities and July 1, 2008 for the flat-rolled
products facilities. In 2008, Depreciation, depletion, and amortization expense was $35 (after-tax and noncontrolling
interests) less than it would have been had the depreciable lives not been extended. The effect of this change on both
basic and diluted earnings per share was $0.04.
Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by
comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their
carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group)
exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as
the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the
best information available, which generally is a discounted cash flow model (DCF model). The determination of what
constitutes an asset group and the associated estimated undiscounted net cash flows also require significant judgments.
Goodwill and Other Intangible Assets. Goodwill is not amortized; instead, it is tested for impairment annually (in the
fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell a business. A
significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators
may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate,
unanticipated competition, or slower growth rates, among others. It is important to note that fair values that could be
realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating
segment or one level below an operating segment. Alcoa has nine reporting units (previously there were ten reporting
units – the Electrical and Electronic Solutions business was sold in 2009 – see Notes B and F), of which five are
included in the Engineered Products and Solutions segment. The remaining four reporting units are the Alumina
segment, the Primary Metals segment, the Flat-Rolled Products segment, and the soft alloy extrusions business in
Brazil, which is included in Corporate. Almost 90% of Alcoa’s total goodwill is allocated to three reporting units as
follows: Alcoa Fastening Systems (AFS) ($1,018) and Alcoa Power and Propulsion (APP) ($1,622) businesses, both of
which are included in the Engineered Products and Solutions segment, and Primary Metals ($1,794). These amounts
include an allocation of Corporate goodwill.
The evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value,
including goodwill. Alcoa uses a DCF model to estimate the current fair value of its reporting units when testing for
impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of
significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash
flows, including markets and market share, sales volumes and prices, costs to produce, tax rates, capital spending,
discount rate, and working capital changes. Most of these assumptions vary significantly among the reporting units.
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