Alcoa 2012 Annual Report Download - page 85

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, 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. If Alcoa was required to demolish all such
structures immediately, the estimated CARO as of December 31, 2012 ranges from less than $1 to $52 per structure
(132 structures) in today’s dollars.
Goodwill. Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more
frequently if indicators of impairment exist or if a decision is made to sell a business. A significant amount of judgment
is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in
general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in
which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of
negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual
transaction may differ from that used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating
segment or one level below an operating segment. Alcoa has nine reporting units, of which five are included in the
Engineered Products and Solutions segment. The remaining four reporting units are the Alumina segment, the Primary
Metals segment, the Global Rolled Products segment, and the soft alloy extrusions business in Brazil, which is
included in Corporate. Almost 90% of Alcoa’s total goodwill is allocated to three reporting units as follows: Alcoa
Fastening Systems (AFS) ($1,160) and Alcoa Power and Propulsion (APP) ($1,628) businesses, both of which are
included in the Engineered Products and Solutions segment, and Primary Metals ($1,748). These amounts include an
allocation of Corporate’s goodwill.
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