Alcoa 2012 Annual Report Download - page 88

Discontinued Operations and Assets Held For Sale. The fair values of all businesses to be divested are 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.
Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits
are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used
to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions
relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality).
The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model
(above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit
obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which
represent a broad diversification of issuers in various sectors, including finance and banking, manufacturing,
transportation, insurance, and pharmaceutical, among others. The yield curve model parallels the plans’ projected cash
flows, which have an average duration of 10 years, and the underlying cash flows of the bonds included in the model
exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In 2012, 2011, and 2010, the
discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was 4.15%,
4.90%, and 5.75%, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be
approximately $475 and either a charge or credit of $19 to after-tax earnings in the following year.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan
assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The
process used by management to develop this assumption has expanded from one that relied primarily on historical asset
return information to one that also incorporates forward-looking returns by asset class, as described below.
Prior to developing the expected long-term rate of return for calendar year 2009, management focused on historical actual
returns (annual, 10-year moving, and 20-year moving averages) when developing this assumption. Based on that process,
management utilized 9% for the expected long-term rate of return for several years through 2008. For calendar year 2009,
the expected long-term rate of return was reduced to 8.75% due to lower future expected market returns as a result of the
then global economic downturn. This was supported by the fact that, in 2008, the 10-year moving average of actual
performance fell below 9% for the first time in 20 years, although the 20-year moving average continued to exceed 9%.
For calendar year 2010, management expanded its process by incorporating expected future returns on current and
planned asset allocations using information from various external investment managers and management’s own
judgment. Management considered this forward-looking analysis as well as the historical return information, and
concluded the expected rate of return for calendar 2010 would remain at 8.75%, which was between the 20-year
moving average actual return performance and the estimated future return developed by asset class.
For calendar year 2012 and 2011, management again incorporated both actual historical return information and
expected future returns into its analysis. Based on strategic asset allocation changes and estimates of future returns by
asset class, management used 8.50% as its expected long-term rate of return for both years. This rate again falls within
the range of the 20-year moving average of actual performance and the expected future return developed by asset class.
For calendar year 2013, management used the same methodology as it did for 2012 and 2011 and determined that
8.50% will be the expected long-term rate of return.
A change in the assumption for the expected long-term rate of return on plan assets of 1/4 of 1% would impact after-tax
earnings by approximately $16 for 2013.
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