Alcoa 2007 Annual Report Download - page 42

Income Taxes. The provision for income taxes is determined
using the asset and liability approach of accounting for income
taxes. Under this approach, the provision for income taxes repre-
sents income taxes paid or payable for the current year plus the
change in deferred taxes during the year. Deferred taxes represent
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid, and result
from differences between the financial and tax bases of Alcoa’s
assets and liabilities and are adjusted for changes in tax rates and
tax laws when enacted. Valuation allowances are recorded to
reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized. Deferred tax assets for which no valu-
ation allowance is recorded may not be realized upon changes in
facts and circumstances. Tax benefits related to uncertain tax
positions taken or expected to be taken on a tax return are
recorded when such benefits meet a more likely than not thresh-
old. Otherwise, these tax benefits are recorded when a tax position
has been effectively settled, which means that the appropriate
taxing authority has completed their examination even though the
statute of limitations remains open, or the statute of limitation
expires. Interest and penalties related to uncertain tax positions
are recognized as part of the provision for income taxes and are
accrued beginning in the period that such interest and penalties
would be applicable under relevant tax law until such time that the
related tax benefits are recognized. Alcoa also has unamortized
tax-deductible goodwill of $311 resulting from intercompany stock
sales and reorganizations (generally at a 30% to 34% rate). Alcoa
recognizes the tax benefits associated with this tax-deductible
goodwill as it is being amortized for local income tax purposes
rather than in the period in which the transaction is consummated.
Related Party Transactions
Alcoa buys products from and sells products to various related
companies, consisting of entities in which Alcoa retains a 50% or
less equity interest, at negotiated arms-length prices between the
two parties. These transactions were not material to the financial
position or results of operations of Alcoa for all periods presented.
Recently Adopted Accounting Standards
On January 1, 2007, Alcoa adopted FASB Interpretation (FIN)
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 state-
ments, uncertain tax positions that it has taken or expects to take
on a tax return. This Interpretation requires that a company recog-
nize in its financial statements the impact of tax positions that
meet a "more likely than not" threshold, based on the technical
merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement.
Effective January 1, 2007, Alcoa adopted FASB Staff Position
(FSP) No. FIN 48-1, “Definition of Settlement in FASB Inter-
pretation No. 48,” (FSP FIN 48-1), which was issued on May 2,
2007. FSP FIN 48-1 amends FIN 48 to provide guidance on how
an entity should determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax
benefits. The term “effectively settled” replaces the term
“ultimately settled” when used to describe recognition, and the
terms “settlement” or “settled” replace the terms “ultimate
settlement” or “ultimately settled” when used to describe
measurement of a tax position under FIN 48. FSP FIN 48-1 clari-
fies that a tax position can be effectively settled upon the com-
pletion of an examination by a taxing authority without being
legally extinguished. For tax positions considered effectively set-
tled, an entity would recognize the full amount of tax benefit, even
if the tax position is not considered more likely than not to be
sustained based solely on the basis of its technical merits and the
statute of limitations remains open.
The adoption of FIN 48 and FSP FIN 48-1 did not have an
impact on the Consolidated Financial Statements. See Note T to
the Consolidated Financial Statements for the required disclosures
in accordance with the provisions of FIN 48.
Alcoa adopted SFAS 158 effective December 31, 2006. SFAS
158 requires an employer to recognize the funded status of each of
its defined pension and postretirement benefit plans as a net asset
or liability in its statement of financial position with an offsetting
amount in accumulated other comprehensive income, and to
recognize changes in that funded status in the year in which
changes occur through comprehensive income. Following the
adoption of SFAS 158, additional minimum pension liabilities and
related intangible assets are no longer recognized. The adoption of
SFAS 158 resulted in the following impacts: a reduction of $119 in
existing prepaid pension costs and intangible assets, the recog-
nition of $1,234 in accrued pension and postretirement liabilities,
and a charge of $1,353 ($877 after-tax) to accumulated other
comprehensive loss. See Note W to the Consolidated Financial
Statements for additional information.
Additionally, SFAS 158 requires an employer to measure the
funded status of each of its plans as of the date of its year-end
statement of financial position. This provision becomes effective
for Alcoa for its December 31, 2008 year-end. The funded status
of the majority of Alcoa’s pension and other postretirement benefit
plans are currently measured as of December 31.
In September 2006, the Securities and Exchange Commission
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 provi-
sions of SAB 108 were 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 supersedes Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. Alcoa elected the modified prospective
application method for adoption, and prior period financial state-
ments have not been restated. As a result of the implementation of
SFAS 123(R), Alcoa recognized additional 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 to the Consolidated Financial Statements
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 pro-
duction 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
40