Alcoa 2010 Annual Report Download - page 145

Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
and any other applicable laws and regulations. The use of derivative instruments is permitted where appropriate and
necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not
significant when compared to the overall investment portfolio.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension
and other postretirement benefit plan assets, including an indication of the level in the fair value hierarchy in which
each type of asset is generally classified (see Note X for the definition of fair value and a description of the fair value
hierarchy).
Equity Securities. These securities consist of direct investments in the stock of publicly traded companies and are
valued based on the closing price reported in an active market on which the individual securities are traded. As such,
the direct investments are generally classified in Level 1. Also, these securities consist of the plans’ share of
commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of
shares held at December 31st. As such, these securities are generally included in Level 2. Additionally, these securities
include direct investments of private equity and are valued by investment managers based on the most recent financial
information available, which typically represents significant unobservable data. As such, these investments are
generally classified as Level 3
Debt Securities. These securities consist of publicly traded U.S. and non-U.S. fixed interest obligations (principally
corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional
market using quoted prices and other observable market data. As such, a portion of these securities are included in both
Level 1 and 2. Additionally, these securities include cash and cash equivalents, which consist of government securities
with maturities less than one year and commingled funds, and are generally valued using quoted prices or observable
market data. As such, these funds are included in both Level 1 and 2.
Other Investments. These investments include, among others, exchange traded funds, hedge funds, real estate
investment trusts, and direct investments of private real estate. Exchange traded funds, such as gold, and real estate
investment trusts are valued based on the closing price reported in an active market on which the investments are
traded, and, therefore, are included in Level 1. Direct investments of hedge funds and private real estate are valued by
investment managers based on the most recent financial information available, which typically represents significant
unobservable data. As such, these investments are generally classified as Level 3. If fair value is able to be determined
through the use of quoted market prices of similar assets or other observable market data, then the investments are
classified in Level 2.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values.
Additionally, while Alcoa believes the valuation methods used by the plans’ trustees are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date.
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