Alcoa 2001 Annual Report Download - page 51

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Notes to Consolidated Financial Statements
(dollars 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 the
equity basis.
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United States
of America and require management 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 statements. 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.
Cash Equivalents. Cash equivalents are highly liquid investments
purchasedwithanoriginalmaturityofthreemonthsorless.
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
have been 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. Adjust-
ments are made if the sum of expected future net cash flows is less
than book value. See Note F for additional information. See Recently
Adopted Accounting Standards regarding the accounting for goodwill
and intangibles amortization effective January 1, 2002.
Revenue Recognition. Alcoa recognizes revenue when title,
ownership and risk of loss pass to the customer. In 2000, Alcoa
changed its method of accounting for revenue recognition in accor-
dance with the provisions of Staff Accounting Bulletin 101, ‘‘Revenue
Recognition in Financial Statements.’’ The application of this method
of accounting for revenue recognition resulted in a cumulative effect
charge to income of $5 (net of taxes and minority interests of $3)
in 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 was applied retroactively to prior periods, were not materially
different from the amounts shown in the Statement of Consolidated
Income for the year ended December 31, 1999.
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 Opinion No. 25, ‘‘Accounting for Stock Issued to
Employees,’’ and related interpretations. Accordingly, compensation
cost is not recognized on options granted. Disclosures required
with respect to alternative fair value measurement and recognition
methods prescribed by Statement of Financial Accounting Standards
(SFAS) No. 123, ‘‘Accounting for Stock-Based Compensation,’’ are
presentedinNoteM.
Derivatives and Hedging. Effective January 1, 2001, Alcoa
adopted SFAS No. 133 ‘‘Accounting for Derivative Instruments and
Hedging Activities,’’ as amended. The fair values of all outstanding
derivative instruments are recorded on the balance sheet in other
current and noncurrent assets and liabilities at December 31, 2001.
The transition adjustment on January 1, 2001 resulted in a net charge
of $4 (after tax and minority interests), which was recorded in other
comprehensive income.
Derivatives are held as part of a formally documented risk
management (hedging) program. Alcoa’s hedging activities are subject
to the management, direction and control of the Strategic Risk
Management Committee
(SRMC) . SRMC is composed of the chief
executive officer, the chief financial officer and other officers and
employees that the chief executive officer may select from time to
time. SRMC reports to the Board of Directors on the scope of its
derivative activities. All derivatives are straightforward and are held
for purposes other than trading. Alcoa measures hedge effectiveness
by formally assessing, at least quarterly, the historical and probable
future high correlation of changes in the fair value or expected future
cash flows of the hedged item. The ineffective portions are recorded
in other income or expense in the current period. To the extent that
Alcoa uses options contracts as hedging instruments, effectiveness
is assessed based on changes in the intrinsic value of the option.
If the hedging relationship ceases to be highly effective or it becomes
probable that an expected transaction will no longer occur, gains
or losses on the derivative are recorded in other income or expense.