Alcoa 2015 Annual Report Download - page 59

An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and
other factors could affect Alcoa’s results of operations or amount of pension funding contributions in future
periods.
Alcoa’s results of operations may be negatively affected by the amount of expense Alcoa records for its pension and
other postretirement benefit plans, reductions in the fair value of plan assets and other factors. U.S. generally accepted
accounting principles (GAAP) require that Alcoa calculate income or expense for the plans using actuarial valuations.
These valuations reflect assumptions about financial market and other economic conditions, which may change based
on changes in key economic indicators. The most significant year-end assumptions used by Alcoa to estimate pension
or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities
and the expected long-term rate of return on plan assets. In addition, Alcoa is required to make an annual measurement
of plan assets and liabilities, which may result in a significant charge to shareholders’ equity. For a discussion
regarding how Alcoa’s financial statements can be affected by pension and other postretirement benefits accounting
policies, see “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in Part II,
Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note W to the
Consolidated Financial Statements—Pension and Other Postretirement Benefits in Part II, Item 8. (Financial
Statements and Supplementary Data). Although GAAP expense and pension funding contributions are impacted by
different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the
amount of cash or securities Alcoa would contribute to the pension plans.
Potential pension contributions include both mandatory amounts required under federal law and discretionary
contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act (“MAP-
21”), enacted in 2012, provided temporary relief for employers like Alcoa who sponsor defined benefit pension plans
related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a
25-year average discount rate within an upper and lower range for purposes of determining minimum funding
obligations. In 2014, the Highway and Transportation Funding Act (HATFA) was signed into law. HATFA extended
the relief provided by MAP-21 and modified the interest rates that had been set by MAP-21. In 2015, the Bipartisan
Budget Act of 2015 (BBA 2015) was signed into law. BBA 2015 extends the relief period provided by HAFTA. Alcoa
believes that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the Company’s U.S.
pension plans’ funded status to potential declines in discount rates over the next several years. However, higher than
expected pension contributions due to a decline in the plans’ funded status as a result of declines in the discount rate or
lower-than-expected investment returns on plan assets could have a material negative effect on the Company’s cash
flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase the
Company’s liabilities related to such plans, adversely affecting Alcoa’s liquidity and results of operations.
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect Alcoa’s future
profitability.
Alcoa is subject to income taxes in both the United States and various non-U.S. jurisdictions. Its domestic and
international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes
in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the
possibility of retroactive effect, could affect the Company’s tax expense and profitability. Alcoa’s tax expense includes
estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The
assumptions include assessments of future earnings of the Company that could impact the valuation of its deferred tax
assets. The Company’s future results of operations could be adversely affected by changes in the effective tax rate as a
result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall
profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles,
changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously
filed tax returns or related litigation and continuing assessments of its tax exposures. Corporate tax reform and tax law
changes continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the U.S.
corporate tax system in particular could have a substantial impact, positive or negative, on Alcoa’s effective tax rate,
cash tax expenditures, and deferred tax assets and liabilities.
35