Alcoa 2000 Annual Report Download - page 52

Name /alcoa/4500 06/01/2001 02:19PM Plate # 0 com g 50 # 1
Alcoa also enters into futures and options contracts that cover
long-term, fixed-price commitments to supply customers with metal
from internal sources. These contracts are marked to market, and
the gains and losses from changes in market value of the contracts
are recorded in other income in the current period. This resulted
in after-tax gains of $6 in 2000 and $12 in 1999 and losses of $45
in 1998.
From time to time, Alcoa may elect to sell forward a portion of
its production. Gains and losses related to transactions that qualify
for hedge accounting are deferred and reflected in revenues when
the underlying physical transaction takes place. The deferred gains
or losses are reflected on the balance sheet in other current and non-
current liabilities or assets. If the above contracts no longer qualify
for deferral, the contracts are marked to market to other income in
the current period.
Alcoa attempts to maintain a reasonable balance between fixed-
and floating-rate debt, using interest rate swaps and caps, to keep
financing costs as low as possible. If the requirements for hedge
accounting are met, amounts paid or received under these agree-
ments are recognized over the life of the agreements as adjustments
to interest expense. Otherwise, the instruments are marked to
market, and the gains and losses from changes in the market value
of the contracts are recorded in other income in the current period.
Upon early termination of an interest rate swap or cap, gains
or losses are deferred and amortized as adjustments to interest
expense of the related debt over the remaining period covered by
the terminated swap or cap.
Alcoa is subject to exposure from fluctuations in foreign
currencies. To manage this exposure, Alcoa uses foreign exchange
forward and option contracts. Gains and losses on contracts that
meet the requirements for hedge accounting are deferred and
included in the basis of the underlying transactions. Contracts that
do not meet these requirements are marked to market in other
income each period.
Cash flows from financial instruments are recognized in the
statement of cash flows in a manner consistent with the underlying
transactions. See Note S for additional detail.
Foreign Currency. The local currency is the functional currency
for Alcoa’s significant operations outside the U.S., except in Canada,
where the U.S. dollar is used as the functional currency. The deter-
mination of the functional currency for Alcoa’s Canadian operations
is made based on the appropriate economic and management
indicators.
Effective July 1, 1999, the Brazilian real became the functional
currency for translating the financial statements of Alcoa’s 59%-
owned Brazilian subsidiary, Alcoa Aluminio S.A. (Aluminio).
Economic factors and circumstances related to Aluminio’s operations
had changed significantly due to the devaluation of the real in the
1999 first quarter. Under
SFAS No. 52, ‘‘Foreign Currency Translation,’’
the change in these facts and circumstances required a change in
Aluminio’s functional currency.
As a result of the change, at July 1, 1999, Alcoa’s shareholders’
equity (cumulative translation adjustment) and minority interests’
accounts were reduced by $156 and $108, respectively. These amounts
were driven principally by a reduction in fixed assets. This reduction
resulted in a $15 decrease in Aluminio’s depreciation expense for 1999
and $30 in 2000.
One of the factors affecting the change in Aluminio’s functional
currency was Alcoa’s purchase of approximately $185 of Aluminio’s
7.5% secured export notes. The repurchase of these notes was consis-
tent with Alcoa’s policy change regarding the manner in which large
subsidiaries are capitalized and resulted in lower overall financing costs
to the company.
Recently Adopted Accounting Standards. In 2000, Alcoa
changed its method of accounting for revenue recognition in accor-
dance with Staff Accounting Bulletin
(SAB) 101, ‘‘Revenue Recognition
in Financial Statements.’’ Under the new accounting method,
adopted retroactive to January 1, 2000, Alcoa recognizes revenue
upon the passage of title, ownership and risk of loss to the customer.
The cumulative effect of the change on prior years resulted in a
charge to income of $5 (net of income taxes and minority interests
of $3), which has been included in net income for the year ended
December 31, 2000. The change did not have a significant effect on
revenues or results of operations for the year ended December 31,
2000. The pro forma amounts, assuming that the new revenue
recognition method were applied retroactively to prior periods, were
not materially different from the amounts shown in the Statement
of Consolidated Income for the years ended December 31, 1999 and
1998. Therefore, these amounts have not been presented.
For the three months ended March 31, 2000, Alcoa recognized
$43 in revenue that resulted from the cumulative effect adjustment as
of January 1, 2000. The effect of the revenue in the first quarter was
to increase income by $5 (net of income taxes and minority interests
of $3) during that period.
Effective January 1, 2001, Alcoa adopted
SFAS No. 133, ‘‘Account-
ing for Derivative Instruments and Hedging Activities,’’ as amended
by SFAS Nos. 137 and 138. The new accounting standard requires
that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income,
depending on whether a derivative is designated as a fair value or
cash flow hedge. The ineffective portion of all hedges is recognized
in current-period earnings.
For transactions that are designated as fair value hedges, changes
in the fair value of the hedged asset, liability or firm commitment
are also recorded on the balance sheet. Thus, changes in the fair
value of the derivative instrument are generally offset in the income
statement by changes in the fair value of the hedged item.
For transactions that are designated as cash flow hedges related
to a variable-rate liability or a forecasted transaction, the offsetting
effects of changes in the fair value of the derivative instrument are
reported in other comprehensive income. These gains and losses
will be reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item.
On January 1, 2001, Alcoa recorded the fair value of all out-
standing derivative instruments as assets or liabilities on the balance
sheet. The transition adjustment was not material to earnings or
accumulated other comprehensive income.
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