Alcoa 1997 Annual Report Download - page 43

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Not es t o Co nso lid at e d Fina ncial St a tem e nt s
(dolla rs in m illion s, except sh are am ou n ts)
A. Su m m a r y of Sign ifica n t Accou n t in g Policie s
Principles of Consolidation. T h e con s olida te d fin a n cial statem ents
in clu de t h e accou n t s of Alcoa a n d com p a n ie s m o re t h a n 50% ow n e d .
Invest m en ts in oth er e nt it ies are accou nted for p r incipa lly on a n
equ it y ba sis.
Th e con s olida te d fin a ncia l st ate m e nt s ar e p rep ared in con for m it y
w it h gen e r ally a cce pt e d accou n t in g p r in c ip le s a n d r equ ir e m a n a ge -
m ent to m a ke ce r ta in est im ate s a nd a ssu m pt ion s. Th es e m ay affect
t h e rep o r te d a m ou n t s of a s set s a n d liab ilit ie s a n d t h e d is clo su r e of
con t in gen t a ssets a nd liabilit ies at t he date of t he financial state-
m e nt s. T he y m ay a ls o affect t h e rep o r te d a m ou n t s of r even u es a n d
exp en s es du r in g t h e r ep or t in g p e r iod . Act u al r esu lt s cou ld d iffer
from t h os e e st im at es up on su bse qu e nt resolu t ion of som e m at te rs.
Inventory Valuation. Inventor ies ar e car r ied at th e lower of cost or
m a r ket , w it h cos t fo r a su bst an t ia l p o r t ion of U.S. inven t or ies det er-
m in e d u n de r t h e la st-in , fir st-ou t
(LIFO) m et h od . Th e co st of ot h er
in ven tor ie s is p r in cip ally d ete r m in ed u n de r t h e ave ra ge -cos t m e th od .
Depreciation and Depletion. Dep reciat ion is recorded p r in cipally on
th e st ra ight-lin e m et hod at rates b as ed on t he est im ated u sefu l live s
of t h e a sset s. Profits or losses from th e sale of a s set s are inclu ded
in ot h e r in com e. Rep a ir s a n d m a in te n an ce a re ch a rge d t o ex p en s e
a s in cu r red .
Deplet ion is t a ken ove r th e per iod s du r ing wh ich t h e est im ated
m in er al r ese r ves ar e ext ract ed .
Amortization of Intangibles. T h e exce s s of p u rch a s e p r ice ove r n e t
tan gible asset s of bu sin esses acqu ired is in cluded in ot he r asset s
in t h e con s olid ate d ba lan ce sh eet . In ta n gible s ar e a m or t ized on
a st r a igh t-lin e b as is over n ot m o re t h an 40 yea rs . Th e car r yin g va lu e
of intangibles is evalu ated per iod ically in relat ion to t he operat in g
p er fo r m a n ce a n d fu t u re u n d is cou n t ed ca sh fl ow s o f t h e u n d e rly in g
bu s inesses. Adju st m en ts a re m a d e if t h e s u m o f e xp ected fu tu re
n et ca s h flows is less th a n b ook value.
Environmental Expenditures. Exp en dit u res for cu r ren t op erat ion s
a re e xp e n se d or cap it alize d , a s ap p rop r iat e. Exp en d it u r es r elat in g
to ex ist in g con dit ion s cau sed by past op erat ion s, an d wh ich do n ot
con t r ibu te to fu t u re revenu es, are exp en s ed. Liabilit ies are recorded
wh e n r em e dia l effor t s a r e p rob able a n d t h e co st s ca n b e r ea s on ably
e st im at ed . Th e liab ilit y m ay in clu de ele m e n t s of co st s su ch a s s ite
invest igat ion s, con su lta nt fees, feasibilit y st ud ies, ou tside con t ractor
exp en s es a n d m on itor in g exp e n se s. Est im a te s a re n ot d is cou n te d
or r ed u ce d b y p ot en t ia l cla im s for r ecove r y. Cla im s for r ecover y a re
r ecogn ize d w he n r ece ive d . T h e e st im at es a lso in clu de co st s r elat ed
to oth er p oten t ially respon sible par t ies to th e exten t th at Alcoa h as
reason to b elieve su ch p a r t ies w ill n ot fu lly pay t h eir p ropor t ionate
sh a r e. T h e liab ilit y is p e r iod ica lly r eviewe d a n d ad ju st ed to r efl ect
cu r rent r em e diat ion p rogres s, p rosp ect ive est im ates of requ ired
act ivit y a n d ot h er fact or s t h at m ay be releva nt , in clu d in g ch a nges
in t ech n olog y o r regu lat ion s. See Not e U for add it ion al in for m at ion .
Interest Costs. Int er es t r elat ed to con st r u ct ion of qu a lify in g a ss et s
is cap it a liz ed a s p ar t of con st r u ct ion co st s.
Financial Instrum ents and Commodity Contracts. Alcoa enter s into
lon g-t er m con t r act s to su p ply fab r icat ed p rodu ct s t o a n u m b e r of it s
cu stom ers. To hedge th e m arket r isk of chan gin g pr ices for pu rch ases
or sales of m et al, Alcoa u ses com m od it y fu tu res a nd opt ion s cont racts.
Gain s an d loss es r elated to t ra n sact ion s t hat qu alify for he dge
accou n t in g, in clu d in g clos e d fu t u re s con t r act s, a r e de fer r ed a n d
r efle cte d in cos t of goo d s sold wh en t h e u n de rly in g ph ys ica l t ra n s-
act ion t a ke s place. Th e d efe r re d ga in s or los se s a r e refl ec te d on t h e
ba lan ce sh eet in ot h er cu r r en t a nd n on cu r r en t lia bilit ies or a ss et s.
If fu t u re pu rch a se d m e ta l n e ed s a r e rev is ed lowe r t h an in it ia lly
an t icipated , t h e fu tu res cont racts a ss ociated w ith t he r educt ion n o
lon ge r qu a lify for d efe r ra l a n d a re m a rke d-to-m a rket . Ga in s a n d
los se s ar e recorde d in ot h er in com e in t h e cu r r en t p er iod .
Th e e ffe ct ive n es s of t h e h e dge is m e a su r ed by a h ist or ica l a n d
p rob able fu t u re h igh cor r elat ion of ch a nges in t h e fa ir va lu e of t h e
h edg in g in st r u m e nt s w it h ch a n ges in va lue of t h e h ed ge d ite m . If
cor relat ion cea se s to exist , h edge accou nt ing w ill be te rm inated a nd
ga in s or losses r ecorded in ot h er in com e. To date, h igh cor relat ion
ha s always bee n ach ieved .
Alcoa a lso en ters in to fu tu res a nd opt ion s cont ract s t hat cover
lon g-ter m , fixed-pr ice com m itm en t s to su p ply cu stom e rs w ith m et a l
from in ter na l sou rces. Th es e cont ract s a re m arked-to-m arket , an d
t h e ga in s a n d los s es fr om ch a n ges in m a rket va lue of t h e con t r act s
a re recorde d in ot h er in com e in t h e cu r r en t p e r iod . T h is resu lt ed in
aft er-ta x losses of $12.7 in 1997, $57.1 in 1996 an d $37.9 in 1995.
Alcoa a ls o at tem pt s to m a int a in a rea son able b ala nce bet we en
fixe d- a n d float in g-ra te d ebt , u s in g in t er est r at e swap s a n d ca ps,
to ke e p fin a n cin g cost s a s low a s p o ss ib le . Am o u n t s t o b e p a id o r
received u n de r swap an d cap agreem ent s ar e recogn ized over th e
life of s u ch a gr ee m e n ts a s ad ju st m e n ts t o in t er est exp e n se.
Upon e arly t er m in at ion of a n in t er est rate swap or cap, ga in s
or lo ss e s ar e de fer r ed a n d a m o r t iz ed a s a dju st m e nt s t o in te rest
expen se of th e relate d debt over t h e rem a in ing p er iod covered by
t h e t er m in ate d swap or ca p.
Alcoa is su bject to sign ifica nt exp osu re from flu ctu at ion s in
fo re ig n c u r r en cie s. To m it igat e t h e s e r isk s, fo re ign e xch a n ge
con t ract s a re u s ed to m a nage t r an sact ion al exp osu res t o ch an ges in
cu r r en cy exch a n ge ra te s. Ga in s a n d los se s on for w ard con t ract s t h a t
h e d ge fir m fo re ig n c u r r en c y com m it m e nt s, a n d op t ion s t h at h e dge
a n t icip ate d t r a n sa ct ion s, a r e defer r ed a n d in clu de d in t h e ba sis
of th e t ran sact ion s u n derlying th e com m it m ents. If t he u nde rlyin g
t r a n s act ion is n o t com p let e d , t h e fin a n cia l p os it ion is clos ed a n d
ga in s or los se s a re recogn iz ed in ot h e r in com e in t h e p er iod su ch
com m itm en t is ter m inated .
Ca s h flow s fr om fin an cia l in st ru m ents a re recogn ized in t he
st at em e nt of ca sh fl ow s in a m a n n er con s ist en t w it h t h e u n de rlyin g
t r a n s act io n s.
Stock-Based Com pensation. Alcoa accou n t s for st ock-b as ed com -
p en s at ion in a ccord an ce w it h t h e p r ov ision s of
APB Opin ion No. 25,
‘‘Acc ou n t in g fo r St o ck Is s u e d t o Em p lo ye e s,’’ a n d r elat ed in t er p r et a-
t ion s. Accord ingly, com p en sat ion cost is n ot requ ired to be recogn ized