Alcoa 2003 Annual Report Download - page 48

the carrying value of goodwill or an intangible asset exceeds its fair
value, an impairment loss is recognized. The evaluation of impair-
ment involves comparing the current fair value of the business to the
recorded value(including goodwill). The company uses a discounted
cash flow model (
DCF model) to determine the current fair value of
the business. A number of significantassumptions and estimates are
involved in the application of the
DCF model to forecast operating
cash flows, including markets andmarket share, sales volumes and
prices, costs to produce, and working capital changes. Management
considers historical experience and all available information at the
time the fair values of its businesses are estimated. However, actual
fair values that could be realized in an actual transaction may differ
from those used to evaluate the impairment of goodwill. See Note E
for additional information.
Revenue Recognition. Alcoa recognizes revenue when title,
ownership, and risk of loss pass to the customer, in accordance
with the provisions of Staff Accounting Bulletin 101, ‘‘Revenue
Recognition inFinancial Statements.’’
Alcoa periodically enters into long-term supply contracts with
aluminaand aluminum customers and receives advance payments
for product to be delivered in future periods. These advance
payments are recorded as deferred revenue, and revenue is recognized
as shipments are made and title, ownership, and risk of loss pass
to the customer during the term of the contracts.
Environmental Expenditures. Expenditures for current
operations are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations, and which
do notcontribute to future revenues, are expensed. Liabilities are
recorded when remedial efforts are probable and the costs can be
reasonablyestimated. The liability may include costs such as site
investigations, consultant fees, feasibility studies, outside contractor,
andmonitoring expenses. Estimates are not discounted or reduced
by potential claims for recovery. Claims for recovery are recognized
as agreements are reached with third parties. 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
paytheir proportionate share. The liability is periodically reviewed
and adjusted to reflect current remediation progress,prospective
estimatesofrequired activity, and other factors that may be relevant,
including changes in technology or regulations. See Note X 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 relatedinterpretations using the intrinsic value
method, which resulted in no compensation cost for options granted.
Alcoa’s net income and earnings per share would have been
reduced to the proformaamounts shown below if compensation
cost had been determined based on the fair value at the grant
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Notes to the Consolidated
Financial Statements
(dollars in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Consolidated Financial Statements
are prepared in conformity with accounting principles generally
accepted in the UnitedStates of America and require management
to make certain estimates and assumptions. These may affect the
reportedamounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial state-
ments. They also may 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.
Principles of Consolidation. The Consolidated Financial
Statements include the accounts ofAlcoa and companies more
than 50%owned. Intercompany transactions have been eliminated.
Investments in other entities are accounted for principally on the
equity basis.
Cash Equivalents. Cash equivalents are highly liquid invest-
ments purchased with an original maturity of three months or less.
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-cost method. See Note G foradditional information.
Properties, Plants, and Equipment. Properties, plants, and
equipment 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
5and25yearsformachinery and equipment. Gains 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 H and U
for additional information.
Goodwill and Other Intangible Assets. Alcoa adopted
Statement of Financial Accounting Standards
(SFAS) No. 142,
‘‘Goodwill and Other Intangible Assets,’’ effective January 1, 2002.
Under this standard, goodwill and intangibles with indefinite useful
lives are no longer amortized. Priorto2002,goodwill and indefinite-
lived intangible assets were amortized over periods not exceeding
40 years. Intangible assets with finite useful lives are amortized
generally on a straight-line basis over the periods benefited, with
aweightedaverage useful life of tenyears.
The carrying values of goodwill and otherintangible assets with
indefinite useful lives are tested at least annually for impairment. If