Alcoa 2013 Annual Report Download - page 95

AFS and APP. The estimated fair values of the four Engineered Products and Solutions businesses, and the soft alloy
extrusions business were substantially in excess of their respective carrying value, resulting in no impairment.
During the 2012 annual testing of goodwill, the estimated fair value of the Alumina segment exceeded the carrying
value by 7%. In connection with the 2013 testing, the estimated fair value of the Alumina segment exceeded the
carrying value by 18%. This increase is attributable to several factors: improved pricing due to the continued
implementation of the Alumina Price Index; operating and productivity improvements in the business; and a stronger
U.S. dollar, all of which increased management’s estimates of operating results and cash flows used in assessing
Alumina’s goodwill for impairment. These improvements were partially offset by an increase in the discount rate used
in the DCF models. Unfavorable movements in one or more of these trends in the future could have a negative impact
on the estimated fair value of the Alumina segment.
For Primary Metals, the estimated fair value as determined by the DCF model was lower than the associated carrying
value. As a result, management performed the second step of the impairment analysis in order to determine the implied
fair value of Primary Metals’ goodwill. The results of the second-step analysis showed that the implied fair value of
goodwill was zero. Therefore, in the fourth quarter of 2013, Alcoa recorded a goodwill impairment of $1,731
($1,719 after noncontrolling interest). As a result of the goodwill impairment, there is no goodwill remaining for the
Primary Metals reporting unit.
The impairment of Primary Metals’ goodwill results from several causes: the prolonged economic downturn; a
disconnect between industry fundamentals and pricing that has resulted in lower metal prices; and the increased cost of
alumina, a key raw material, resulting from expansion of the Alumina Price Index throughout the industry. All of these
factors, exacerbated by increases in discount rates, continue to place significant downward pressure on metal prices and
operating margins, and the resulting estimated fair value, of the Primary Metals business. As a result, management
decreased the near-term and long-term estimates of the operating results and cash flows utilized in assessing Primary
Metals’ goodwill for impairment. The valuation of goodwill for the second step of the goodwill impairment analysis is
considered a level 3 fair value measurement, which means that the valuation of the assets and liabilities reflect
management’s own judgments regarding the assumptions market participants would use in determining the fair value
of the assets and liabilities.
Goodwill impairment tests in prior years indicated that goodwill was not impaired for any of the Company’s reporting
units and there were no triggering events since that time that necessitated an impairment test.
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
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