Alcoa 2010 Annual Report Download - page 89

discount rate, and working capital changes. Most of these assumptions vary significantly among the reporting units.
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 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 10 -
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.
Revenue Recognition. Alcoa recognizes revenue when title, ownership, and risk of loss pass to the customer, all of
which occurs upon shipment or delivery of the product and is based on the applicable shipping terms. The shipping
terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck,
train, or vessel).
Alcoa periodically enters into long-term supply contracts with alumina and aluminum customers and receives advance
payments for product to be delivered in future periods. These advance payments are recorded as deferred revenue, and
revenue is recognized as shipments are made and title, ownership, and risk of loss pass to the customer during the term
of the contracts.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed.
Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may
include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring
expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are
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