Alcoa 2009 Annual Report Download - page 89

Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical
relationships in later years. The betas used in calculating the individual reporting units’ weighted average cost of
capital (WACC) rate are estimated for each business with the assistance of valuation experts.
In 2009, the estimated fair values of all nine reporting units were in excess of their carrying values, resulting in no
impairment. The impairments tests yielded similar results between 2009 and 2008, including a smaller excess for
Primary Metals than had been the case historically. In 2008, the excess of the estimated fair value of Primary Metals
over its carrying value was substantially less than in prior years due to the unprecedented decline in the LME price that
occurred in the second half of the year. Historically, LME pricing levels and corresponding input costs (e.g., raw
materials, energy) have generally trended in the same manner, resulting in relatively consistent cash margins over time.
However, the decline in the LME price significantly outpaced any decreases in associated input costs, causing expected
cash margins in the early years in the DCF model to be lower than normal and lower than long-term expectations. In
2009, the LME price increased gradually throughout the year and exceeded $2,000 (in whole dollars) per metric ton by
the end of the year, resulting in higher undiscounted expected future cash flows for Primary Metals, as the historical
trend between LME pricing levels and input costs began to return. However, Primary Metals’ WACC, the measure
used by Alcoa to discount expected future cash flows, increased from 8.4% in 2008 to 10.4% in 2009, effectively
negating the positive impact the rising LME price had on expected future cash flows. As a result, Primary Metals’ fair
value continued to exceed its carrying value even though the excess has not yet returned to levels prior to 2008.
In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional
analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s
goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair
value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the
assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the
reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an
impairment loss equal to such excess would be recognized, which could significantly and adversely impact reported
results of operations and shareholders’ equity.
Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are
amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-
average useful lives of software and other intangible assets by reporting segment (numbers in years):
Segment Software Other intangible assets
Alumina 9 -
Primary Metals 10 40
Flat-Rolled Products 10 9
Engineered Products and Solutions 10 16
Equity investments. Alcoa invests in a number of privately-held companies, primarily through joint ventures and
consortiums, which are accounted for on the equity method. The equity method is applied in situations where Alcoa
has the ability to exercise significant influence, but not control, over the investee. Management reviews equity
investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment
is not recoverable. This analysis requires a significant amount of judgment from management to identify events or
circumstances indicating that an equity investment is impaired. The following items are examples of impairment
indicators: significant, sustained declines in an investee’s revenue, earnings, and cash flow trends; adverse market
conditions of the investee’s industry or geographic area; the investee’s ability to continue operations measured by
several items, including liquidity; and other factors. Once an impairment indicator is identified, management uses
considerable judgment to determine if the impairment is other than temporary, in which case the equity investment is
written down to its estimated fair value. An impairment that is other than temporary could significantly and adversely
impact reported results of operations.
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