Alcoa 2012 Annual Report Download - page 87

During the 2012 annual review of goodwill, management proceeded directly to the two-step quantitative impairment
test for three reporting units as follows: the Primary Metals segment, the Alumina segment, and the Global Rolled
Products segment. For Global Rolled Products, the estimated fair value exceeded carrying value by more than 150%,
resulting in no impairment. For Primary Metals and Alumina, the estimated fair values exceeded their carrying values
by 9.2% and 7.4%, respectively, resulting in no impairment. These two reporting units have goodwill of $1,748 and
$171, respectively. In developing the fair value of these reporting units, the Company estimates future cash flows using
LME forward curve pricing and operating cost assumptions management believes are reasonable based on expected
and historical performance. The following could have a negative impact on the estimated fair values of Primary Metals
and Alumina: a significant, protracted decrease in LME and alumina prices; decrease in long-term profitability;
decrease in the long-term demand for aluminum; substantial reductions in Alcoa’s end markets and volume
assumptions; and an increase in discount rates.
As part of the 2012 annual review of goodwill, management considered the market capitalization of Alcoa’s common
stock in relation to the Company’s total shareholders’ equity. At December 31, 2012, the market capitalization of
Alcoa’s common stock was $9,263. While this amount is less than the Company’s total shareholders’ equity at
December 31, 2012, the estimated aggregate fair value of Alcoa’s reporting units was substantially in excess of the
aforementioned market capitalization amount. In management’s judgment, the main reason for the difference between
Alcoa’s market capitalization and total shareholders’ equity at December 31, 2012 is significantly lower commodity
prices for aluminum. Management believes these commodity prices are being adversely impacted by turmoil in the
macroeconomic environment, which do not necessarily reflect aluminum industry fundamentals. For example, there
was, and continues to be, significant uncertainty of the sovereign debt of many European countries. This uncertainty
has affected the liquidity of many companies that either operate or are located in Europe, although, Alcoa has not been
impacted significantly. Additionally, during 2012, there was great concern over what was labeled the fiscal cliff in the
U.S. and a slowdown in the growth of China. The combination of this economic uncertainty and the continuing decline
in commodity prices caused the price of Alcoa’s common stock to remain depressed. As a result, management believes
the quoted market price of Alcoa’s common stock does not fully reflect the underlying value of the future aggregate
cash flows of the Company’s reporting units. Accordingly, management does not believe that the comparison of
Alcoa’s market capitalization and total shareholders’ equity as of December 31, 2012 is an indication that goodwill is
impaired.
Equity Investments. Alcoa invests in a number of privately-held companies, primarily through joint ventures and
consortia, which are accounted for on the equity method. The equity method is applied in situations where Alcoa has
the ability to exercise significant influence, but not control, over the investee. Management reviews equity investments
for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not
recoverable. This analysis requires a significant amount of judgment from management to identify events or
circumstances indicating that an equity investment is impaired. The following items are examples of impairment
indicators: significant, sustained declines in an investee’s revenue, earnings, and cash flow trends; adverse market
conditions of the investee’s industry or geographic area; the investee’s ability to continue operations measured by
several items, including liquidity; and other factors. Once an impairment indicator is identified, management uses
considerable judgment to determine if the impairment is other than temporary, in which case the equity investment is
written down to its estimated fair value. An impairment that is other than temporary could significantly and adversely
impact reported results of operations.
Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable.
Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations
related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying
amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment
loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with
fair value determined using the best information available, which generally is a DCF model. The determination of what
constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of
assets also require significant judgments.
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