Alcoa 2006 Annual Report Download - page 53

In September 2006, the Securities and Exchange Commis-
sion issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” (SAB
108). SAB 108 was issued to provide interpretive guidance
on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current
year misstatement. The provisions of SAB 108 are effective
for Alcoa for its December 31, 2006 year-end. The adoption
of SAB 108 did not have a material impact on Alcoa’s
consolidated financial statements.
On January 1, 2006, Alcoa adopted SFAS No. 123
(revised 2004), “Share-Based Payment,” (SFAS 123(R)),
which requires the company to recognize compensation
expense for stock-based compensation based on the grant
date fair value. SFAS 123(R) revises SFAS No. 123,
“Accounting for Stock-Based Compensation,” and super-
sedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related
interpretations (APB 25). Alcoa elected the modified pro-
spective application method for adoption, and prior period
financial statements have not been restated. As a result of
the implementation of SFAS 123(R), Alcoa recognized addi-
tional compensation expense of $29 ($19 after-tax) in 2006
comprised of $11 ($7 after-tax) and $18 ($12 after-tax)
related to stock options and stock awards, respectively. See
Note R for additional information.
Effective January 1, 2006, Alcoa adopted Emerging
Issues Task Force (EITF) Issue No. 04-6, “Accounting for
Stripping Costs Incurred During Production in the Mining
Industry,” (EITF 04-6). EITF 04-6 requires that stripping
costs incurred during the production phase of a mine are to
be accounted for as variable production costs that should be
included in the costs of the inventory produced (that is,
extracted) during the period that the stripping costs are
incurred. Upon adoption, Alcoa recognized a cumulative
effect adjustment in the opening balance of retained earn-
ings of $3, representing the reduction in the net book value
of post-production stripping costs of $8, offset by a related
deferred tax liability of $3 and minority interests of $2.
Recently Issued Accounting Standards. In Sep-
tember 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements,” (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in gen-
erally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions
of this standard apply to other accounting pronouncements
that require or permit fair value measurements. SFAS 157
becomes effective for Alcoa on January 1, 2008. Upon
adoption, the provisions of SFAS 157 are to be applied
prospectively with limited exceptions. The adoption of SFAS
157 is not expected to have a material impact on Alcoa’s
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - an Inter-
pretation of FASB Statement No. 109,” (FIN 48). FIN 48
prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that it has taken or expects
to take on a tax return. On January 17, 2007, the FASB
affirmed its previous decision to make FIN 48 effective for
fiscal years beginning after December 15, 2006. Accordingly,
FIN 48 is effective for Alcoa on January 1, 2007. Management
has determined that the adoption of FIN 48 will not have a
material impact on Alcoa’s consolidated financial statements.
Reclassification. Certain amounts in previously issued
financial statements were reclassified to conform to 2006
presentations. See Note B for further information.
B. Discontinued Operations and Assets Held for
Sale
In the third quarter of 2006, Alcoa reclassified its home
exteriors business to discontinued operations upon the
signing of a definitive sale agreement with Ply Gem
Industries, Inc. The sale of the home exteriors business was
completed in the fourth quarter of 2006 (See Note F for
additional details). In the first quarter of 2006, Alcoa
reclassified the Hawesville, KY automotive casting facility to
discontinued operations upon closure of the facility. The
results of the Extruded and End Products segment and the
Engineered Solutions segment have been reclassified to
reflect the movement of the home exteriors business and the
automotive casting facility, respectively, into discontinued
operations. The consolidated financial statements for all
prior periods presented have been reclassified to reflect these
businesses in discontinued operations.
In the third quarter of 2005, Alcoa reclassified the
imaging and graphics communications business of Southern
Graphic Systems, Inc. (SGS) to discontinued operations
based on the decision to sell the business. The results of the
Packaging and Consumer segment were reclassified to
reflect the movement of this business into discontinued
operations. The sale was completed in the fourth quarter of
2005. The divestitures of the following businesses were
completed in 2005: the telecommunications business, the
protective packaging business, and the imaging and graphics
communications business. See Note F for additional details.
In 2006, businesses classified as discontinued operations
included the home exteriors business, the Hawesville, KY
automotive casting facility, the wireless component of the
telecommunications business and a small automotive casting
business in the U.K.
The following table details selected financial information
for the businesses included within discontinued operations
in the Statement of Consolidated Income:
2006 2005 2004
Sales $517 $1,033 $1,352
(Loss) income from
operations $ (26) $38 $37
Gain on sale of businesses 176 50 8
Loss from impairment (1) (55) (153)
Pretax income (loss) 149 33 (108)
(Provision)/benefit for taxes (62) (57) 6
Minority interests —243
Income (loss) from
discontinued operations $87 $ (22) $ (59)
The income of $87 in discontinued operations in 2006
was comprised of a $110 gain related to the sale of the
home exteriors business, offset by $20 of net operating
losses and a loss of $3 related to the 2005 sale of the
imaging and graphics communications business. The loss of
$22 in discontinued operations in 2005 was comprised of
$43 of net losses associated with businesses impaired or sold
in 2005, including a $28 loss for asset impairments asso-
ciated with the Hawesville, KY automotive casting facility,
partially offset by $21 in net operating income. The loss of
$59 in discontinued operations in 2004 was comprised of
impairment losses of $89 to reflect the estimated fair values
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