Alcoa 2012 Annual Report Download - page 102

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. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred
credits on the accompanying Consolidated Balance Sheet.
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
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 to determine if there
has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a
potential loss.
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 an ARO 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
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