Alcoa 2012 Annual Report Download - page 166

Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss
on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative
representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings.
Derivatives in Cash
Flow Hedging
Relationships
Amount of Gain or
(Loss) Recognized in
OCI on Derivatives
(Effective Portion)
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)*
Location of Gain
or (Loss)
Recognized in
Earnings on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
Amount of Gain or
(Loss) Recognized
in Earnings on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)**
2012 2011 2010 2012 2011 2010 2012 2011 2010
Aluminum contracts $(10) $72 $ (6) Sales $36 $(114) $(106) Other (income)
expenses, net
$(1) $2 $-
Energy contracts - (3) (10) Cost of goods sold - (8) (25) Other (income)
expenses, net
---
Foreign exchange
contracts
- 1 (3) Sales - 4 (6) Other (income)
expenses, net
---
Interest rate contracts - (2) (1) Interest expense (2) - (1) Other (income)
expenses, net
---
Interest rate contracts (2) (5) (1) Other (income)
expenses, net
- (3) - Other (income)
expenses, net
---
Total $(12) $63 $(21) $34 $(121) $(138) $(1) $2 $-
* Assuming market rates remain constant with the rates at December 31, 2012, a loss of $23 is expected to be
recognized in earnings over the next 12 months.
**In 2012 and 2011, the amount of gain or (loss) recognized in earnings represents $(1) and $3, respectively, related to
the amount excluded from the assessment of hedge effectiveness. There was also $(1) and less than $1 recognized in
earnings related to the ineffective portion of the hedging relationships in 2011 and 2010, respectively.
Aluminum and Energy. Alcoa anticipates the continued requirement to purchase aluminum and other commodities, such as
electricity and natural gas, for its operations. Alcoa enters into forwards, futures, and options contracts to reduce volatility in
the price of these commodities. Alcoa has also entered into power supply and other contracts that contain pricing provisions
related to the LME aluminum price. The LME-linked pricing features are considered embedded derivatives. A majority of
these embedded derivatives have been designated as cash flow hedges of future sales of aluminum.
In 2010, Alcoa entered into contracts to hedge the anticipated power requirements at two smelters in Australia. These
derivatives hedge forecasted power purchases through December 2036.
Interest Rates. Alcoa had no outstanding cash flow hedges of interest rate exposures as of December 31, 2012, 2011
or 2010. An investment accounted for on the equity method by Alcoa has entered into interest rate contracts, which are
designated as cash flow hedges. Alcoa’s share of the activity of these cash flow hedges is reflected in the table above.
Foreign Exchange. Alcoa is subject to exposure from fluctuations in foreign currency exchange rates. Contracts may
be used from time to time to hedge the variability in cash flows from the forecasted payment or receipt of currencies
other than the functional currency. These contracts cover periods consistent with known or expected exposures through
2013.
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