Alcoa 2010 Annual Report Download - page 87

Alcoa and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Consolidated Financial Statements of Alcoa Inc. and subsidiaries (“Alcoa” or the
“Company”) are prepared in conformity with accounting principles generally accepted in the United States of America
(GAAP) and require management to make certain judgments, estimates, and assumptions. These may affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in
previously issued financial statements were reclassified to conform to the 2010 presentation.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of Alcoa and companies in
which Alcoa has a controlling interest. Intercompany transactions have been eliminated. The equity method of
accounting is used for investments in affiliates and other joint ventures over which Alcoa has significant influence but
does not have effective control. Investments in affiliates in which Alcoa cannot exercise significant influence are
accounted for on the cost method.
Management also evaluates whether an Alcoa entity or interest is a variable interest entity and whether Alcoa is the
primary beneficiary. Consolidation is required if both of these criteria are met. Alcoa does not have any variable
interest entities requiring consolidation.
Related Party Transactions. Alcoa buys products from and sells products to various related companies, consisting of
entities in which Alcoa retains a 50% or less equity interest, at negotiated arms-length prices between the two parties.
These transactions were not material to the financial position or results of operations of Alcoa for all periods presented.
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months
or less.
Inventory Valuation. Inventories are carried at the lower of cost or market, with cost for a substantial portion of U.S.
and Canadian inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is
principally determined under the average-cost method.
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded
principally on the straight-line method at rates based on the estimated useful lives of the assets. For greenfield smelters
and mines, the units of production method is used to record depreciation. The following table details the weighted-
average useful lives of structures and machinery and equipment by reporting segment (numbers in years):
Segment Structures Machinery and equipment
Alumina 30 24
Primary Metals 34 22
Flat-Rolled Products 32 20
Engineered Products and Solutions 25 18
Gains or losses from the sale of assets are generally recorded in other income or expenses (see policy that follows for
assets classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as
incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs.
Depletion related to mineral reserves is recorded using the units of production method.
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