Alcoa 2012 Annual Report Download - page 89

In 2012, a net charge of $769 ($529 after-tax) was recorded in other comprehensive loss, primarily due to a 75 basis
point decrease in the discount rate, which was slightly offset by the favorable performance of the plan assets and the
recognition of actuarial losses and prior service costs. In 2011, a net charge of $991 ($593 after-tax) was recorded in
other comprehensive loss, primarily due to an 85 basis point decrease in the discount rate, which was slightly offset by
the favorable performance of the plan assets and the recognition of actuarial losses and prior service costs. In 2010, a
net charge of $216 ($138 after-tax) was recorded in other comprehensive income, primarily due to a 40 basis point
decrease in the discount rate, which was somewhat offset by the favorable performance of the plan assets and the
recognition of actuarial losses and prior service costs. Additionally, in 2010, a charge of $2 was recorded in
accumulated other comprehensive loss due to the reclassification of deferred taxes related to the Medicare Part D
prescription drug subsidy.
Stock-based Compensation. Alcoa recognizes compensation expense for employee equity grants using the non-
substantive vesting period approach, in which the expense (net of estimated forfeitures) is recognized ratably over the
requisite service period based on the grant date fair value. The fair value of new stock options is estimated on the date
of grant using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment,
including estimates for the average risk-free interest rate, dividend yield, volatility, annual forfeiture rate, and exercise
behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of
these inputs that occur over time.
Equity grants are issued in January each year. As part of Alcoa’s stock-based compensation plan design, individuals
who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion
of expense will be recognized in the first half of each year for these retirement-eligible employees. Compensation
expense recorded in 2012, 2011, and 2010 was $67 ($46 after-tax), $83 ($56 after-tax), and $84 ($57 after-tax),
respectively. Of this amount, $13, $18, and $19 in 2012, 2011, and 2010, respectively, pertains to the acceleration of
expense related to retirement-eligible employees.
Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a
combination of both. This choice is made before the grant is issued and is irrevocable.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for
income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received
or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future
tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result
from differences between the financial and tax bases of Alcoa’s assets and liabilities and are adjusted for changes in tax
rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will
not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable
income, including income available in carryback periods, future reversals of taxable temporary differences, projections
of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence.
Positive evidence includes factors such as a history of profitable operations, projections of future profitability within
the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations.
Existing favorable contracts and the ability to sell products into established markets are additional positive evidence.
Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that
are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred
tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances,
resulting in a future charge to establish a valuation allowance.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such
benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been
effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has
completed their examination even though the statute of limitations remains open. Interest and penalties related to
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