Alcoa 2010 Annual Report Download - page 77

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.
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.
Properties, Plants, and Equipment. 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 DCF model. The determination of what
constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of
assets also require significant judgments.
Discontinued Operations and Assets Held For Sale. The fair values of all businesses to be divested are estimated
using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or
indicative bids, when available. A number of significant estimates and assumptions are involved in the application of
these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses,
and multiple other factors. Management considers historical experience and all available information at the time the
estimates are made; however, the fair values that are ultimately realized upon the sale of the businesses to be divested
may differ from the estimated fair values reflected in the Consolidated Financial Statements.
Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits
are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used
to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions
relating to the employee workforce (salary increases, medical costs, retirement age, and mortality). The interest rate
used to discount future estimated liabilities is determined using a Company-specific yield curve model (above-median)
developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are
discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad
diversification of issuers in various sectors, including finance and banking, manufacturing, transportation, insurance,
and pharmaceutical, among others. The yield curve model parallels the plans’ projected cash flows, which have an
average duration of 10 years, and the underlying cash flows of the bonds included in the model exceed the cash flows
needed to satisfy the Company’s plans’ obligations multiple times. The impact on the liabilities of a change in the
discount rate of 1/4 of 1% would be approximately $355 and either a charge or credit of $12 to after-tax earnings in the
following year.
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