Alcoa 2012 Annual Report Download - page 104

Alcoa accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The
fair values of the derivatives are recorded in other current and noncurrent assets and liabilities in the Consolidated
Balance Sheet. The effective portions of the changes in the fair values of these derivatives are recorded in other
comprehensive income and are reclassified to sales, cost of goods sold, or other income or expense in the period in
which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow
hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years.
If no hedging relationship is designated, the derivative is marked to market through earnings.
Cash flows from derivatives are recognized in the Statement of Consolidated Cash Flows in a manner consistent with
the underlying transactions.
Foreign Currency. The local currency is the functional currency for Alcoa’s significant operations outside the U.S.,
except for certain operations in Canada, Russia and Iceland, where the U.S. dollar is used as the functional currency.
The determination of the functional currency for Alcoa’s operations is made based on the appropriate economic and
management indicators.
Effective January 1, 2010, the functional currency of a subsidiary located in Brazil (that is part of Alcoa World
Alumina and Chemicals, which is 60% owned by Alcoa and 40% owned by Alumina Limited) was changed from the
U.S. dollar to the Brazilian real (BRL). This change was made as a result of changes in the operations of the business
following the completion of the São Luís refinery expansion and Juruti bauxite mine development. In connection with
this change, on January 1, 2010, an adjustment of $309 was recorded as an increase to the net nonmonetary assets of
this subsidiary (primarily properties, plants, and equipment) with a corresponding adjustment to the foreign currency
translation component of Accumulated other comprehensive loss. The functional currency of all of Alcoa’s Brazilian
operations is now BRL.
Acquisitions. Alcoa’s business acquisitions are accounted for using the acquisition method. The purchase price is
allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price
over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included
in the Statement of Consolidated Operations since the dates of the acquisitions.
Discontinued Operations and Assets Held For Sale. For those businesses where management has committed to a
plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the
carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is
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 value that is ultimately realized upon the divestiture of a business
may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation, depletion,
and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale.
Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or
held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are
reclassified from their historical presentation to assets and liabilities of operations held for sale on the Consolidated
Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods
presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the
Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is also reclassified for assets and
liabilities of operations held for sale and discontinued operations for all periods presented. Additionally, segment
information does not include the assets or operating results of businesses classified as discontinued operations for all
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