Alcoa 2010 Annual Report Download - page 90

recognized as agreements are reached with third parties. The estimates also include costs related to other potentially
responsible parties to the extent that Alcoa has reason to believe such parties will not fully pay their proportionate
share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates
of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a
matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an
unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy,
progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals
processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed
probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If
an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is
recorded. With respect to unasserted claims or assessments, management must first determine that the probability that
an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability
to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis or sooner if
significant changes in matters have occurred to determine if a change in the likelihood of an unfavorable outcome or
the estimate of a loss is necessary.
Asset Retirement Obligations. Alcoa recognizes asset retirement obligations (AROs) related to legal obligations
associated with the normal operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities.
These AROs consist primarily of costs associated with spent pot lining disposal, closure of bauxite residue areas, mine
reclamation, and landfill closure. Alcoa also recognizes AROs for any significant lease restoration obligation, if
required by a lease agreement, and for the disposal of regulated waste materials related to the demolition of certain
power facilities. The fair values of these AROs are recorded on a discounted basis, at the time the obligation is
incurred, and accreted over time for the change in present value. Additionally, Alcoa capitalizes asset retirement costs
by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining
useful life.
Certain conditional asset retirement obligations (CAROs) related to alumina refineries, aluminum smelters, and
fabrication facilities have not been recorded in the Consolidated Financial Statements due to uncertainties surrounding
the ultimate settlement date. A CARO is a legal obligation to perform an asset retirement activity in which the timing
and (or) method of settlement are conditional on a future event that may or may not be within Alcoa’s control. Such
uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other
factors. At the date a reasonable estimate of the ultimate settlement date can be made, Alcoa would record a retirement
obligation for the removal, treatment, transportation, storage, and (or) disposal of various regulated assets and
hazardous materials such as asbestos, underground and aboveground storage tanks, polychlorinated biphenyls (PCBs),
various process residuals, solid wastes, electronic equipment waste, and various other materials. Such amounts may be
material to the Consolidated Financial Statements in the period in which they are recorded.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for
income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received
or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future
tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result
from differences between the financial and tax bases of Alcoa’s assets and liabilities and are adjusted for changes in tax
rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers
all potential sources of taxable income, including income available in carryback periods, future reversals of taxable
temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available
positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections
of future profitability within the carryforward period, including from tax planning strategies, and the Company’s
experience with similar operations. Existing favorable contracts and the ability to sell products into established markets
are additional positive evidence.
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