Alcoa 2000 Annual Report Download - page 51

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of sales and profits related to such ventures on the percentage-of-
completion method. Adjustments in estimates, which can affect both
revenues and earnings, are made in the period in which the informa-
tion necessary to make the adjustment becomes available. Provisions
for estimated losses on contracts are recorded when identified.
Environmental Expenditures. Expenditures for current
operations are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations, and which
do not contribute to future revenues, are expensed. Liabilities are
recorded when remedial efforts are probable and the costs can be
reasonably estimated. The liability may include costs such as site
investigations, consultant fees, feasibility studies, outside contractor
and monitoring expenses. Estimates are not discounted or reduced
by potential claims for recovery. Claims for recovery are recognized
when received. The estimates also include costs related to other
potentially responsible parties to the extent that Alcoa has reason
to believe such parties will not fully pay their proportionate
share. The liability is periodically reviewed and adjusted to reflect
current remediation progress, prospective estimates of required
activity and other factors that may be relevant, including changes in
technology or regulations. See Note T for additional information.
Stock-Based Compensation. Alcoa accounts for stock-based
compensation in accordance with the provisions of Accounting
Principles Board
(APB) Opinion No. 25, ‘‘Accounting for Stock Issued
to Employees,’’ and related interpretations. Accordingly, compen-
sation cost is not required to be recognized on options granted.
Disclosures required with respect to alternative fair value measure-
ment and recognition methods prescribed by Statement of Financial
Accounting Standards (SFAS) No. 123, ‘‘Accounting for Stock-Based
Compensation,’’ are presented in Note M.
Financial Instruments and Commodity Contracts. Alcoa enters
into long-term contracts to supply fabricated aluminum products
to a number of its customers. To hedge the market risk of changing
prices for purchases or sales of metal, Alcoa uses aluminum
commodity futures and options contracts. Alcoa also purchases
certain other commodities such as fuel oil, natural gas, electricity
and copper for its operations and enters into futures and options
contracts to eliminate volatility in the prices of such products.
Gains and losses related to transactions that qualify for hedge
accounting, including closed futures contracts, are deferred and
reflected in cost of goods sold when the underlying physical trans-
action takes place. The deferred gains or losses are reflected on
the balance sheet in other current and noncurrent liabilities or assets.
If future purchases are revised lower than initially anticipated, the
futures contracts associated with the reduction no longer qualify for
deferral and are marked to market. Mark-to-market gains and losses
are recorded in other income in the current period.
The effectiveness of the hedge is measured by an historical and
probable future high correlation of changes in the fair value of the
hedging instruments with changes in value of the hedged item. If
correlation ceases to exist, hedge accounting will be terminated and
gains or losses recorded in other income. To date, high correlation
has always been achieved.
Notes to Consolidated Financial Statements
(dollars and shares in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements
include the accounts of Alcoa and companies more than 50% owned.
Investments in other entities are accounted for principally on an
equity basis.
The consolidated financial statements are prepared in conformity
with generally accepted accounting principles and require manage-
ment to make certain estimates and assumptions. These may affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial state-
ments. They may also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates upon subsequent resolution of identified matters.
Inventory Valuation. Inventories are carried at the lower of cost
or market, with cost for a substantial portion of U.S. and Canadian
inventories determined under the last-in, first-out
(LIFO) method.
The cost of other inventories is principally determined under the
average-costmethod.SeeNoteDforadditionaldetail.
Properties, Plants and Equipment. Properties, plants and equip-
ment are recorded at cost. Depreciation is recorded principally on
the straight-line method at rates based on the estimated useful lives
of the assets, averaging 33 years for structures and between 5 and
25 years for machinery and equipment. Profits or losses from the sale
of assets are included in other income. Repairs and maintenance are
charged to expense as incurred. Interest related to the construction
of qualifying assets is capitalized as part of the construction costs.
Depletion is taken over the periods during which the estimated
mineral reserves are extracted. See Notes E and R for additional detail.
Amortization of Intangibles. The excess purchase price over
the net tangible assets of businesses acquired is reported as goodwill
in the Consolidated Balance Sheet. Goodwill and other intangibles
are amortized on a straight-line basis over not more than 40 years.
The carrying value of goodwill and other intangibles is evaluated
periodically in relation to the operating performance and future
undiscounted cash flows of the underlying businesses. Adjustments
are made if the sum of expected future net cash flows is less than
book value. See Note G for additional information.
Revenue Recognition. Alcoa recognizes revenue when title,
ownership and risk of loss pass to the customer. See Recently
Adopted Accounting Standards for additional information.
Thiokol Propulsion’s (Thiokol) sales encompass products and
services performed principally under contracts and subcontracts
with various United States government (government) agencies and
aerospace prime contractors. Sales under cost-type contracts are
recognized as costs are incurred and include a portion of total
estimated earnings to be realized in the ratio that costs incurred
relate to estimated total costs. Sales under fixed-price-type contracts
are recognized when deliveries are made or upon completion of
specified tasks. Cost or performance incentives are incorporated into
certain contracts and are recognized when awards are earned or
when realization is reasonably assured and amounts can be estimated.
Alcoa participates in teaming arrangements and records its share
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