Alcoa 2009 Annual Report Download - page 76

unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy,
progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals
processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed
probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If
an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is
recorded. With respect to unasserted claims or assessments, management must first determine that the probability that
an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability
to reasonably estimate the potential loss is made. Legal matters are reviewed periodically or sooner if significant
changes in matters have occurred to determine if a change in the likelihood of an unfavorable outcome or the estimate
of a loss is necessary.
Asset Retirement Obligations. Alcoa recognizes asset retirement obligations (AROs) related to legal obligations
associated with the normal operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities.
These AROs consist primarily of costs associated with spent pot lining disposal, closure of bauxite residue areas, mine
reclamation, and landfill closure. Alcoa also recognizes AROs for any significant lease restoration obligation, if
required by a lease agreement, and for the disposal of regulated waste materials related to the demolition of certain
power facilities. The fair values of these AROs are recorded on a discounted basis, at the time the obligation is
incurred, and accreted over time for the change in present value. Additionally, Alcoa capitalizes asset retirement costs
by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining
useful life.
Certain conditional asset retirement obligations (CAROs) related to alumina refineries, aluminum smelters, and
fabrication facilities have not been recorded in the Consolidated Financial Statements due to uncertainties surrounding
the ultimate settlement date. A CARO is a legal obligation to perform an asset retirement activity in which the timing
and (or) method of settlement are conditional on a future event that may or may not be within Alcoa’s control. Such
uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other
factors. At the date a reasonable estimate of the ultimate settlement date can be made, Alcoa would record a retirement
obligation for the removal, treatment, transportation, storage and (or) disposal of various regulated assets and
hazardous materials such as asbestos, underground and aboveground storage tanks, polychlorinated biphenyls, various
process residuals, solid wastes, electronic equipment waste, and various other materials. Such amounts may be material
to the Consolidated Financial Statements in the period in which they are recorded. If Alcoa was required to demolish
all such structures immediately, the estimated CARO as of December 31, 2009 ranges from less than $1 to $52 per
structure (131 structures) in today’s dollars.
Goodwill. Goodwill is not amortized; instead, it is tested for impairment annually (in the fourth quarter) or more
frequently if indicators of impairment exist or if a decision is made to sell a business. A significant amount of judgment
is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in
expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition,
or slower growth rates, among others. It is important to note that fair values that could be realized in an actual
transaction may differ from those used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating
segment or one level below an operating segment. Alcoa has nine reporting units (previously there were ten reporting
units – the EES business was sold in 2009), of which five are included in the Engineered Products and Solutions
segment. The remaining four reporting units are the Alumina segment, the Primary Metals segment, the Flat-Rolled
Products segment, and the soft alloy extrusions business in Brazil, which is included in Corporate. Almost 90% of
Alcoa’s total goodwill is allocated to three reporting units as follows: Alcoa Fastening Systems (AFS) ($1,018) and
Alcoa Power and Propulsion (APP) ($1,622) businesses, both of which are included in the Engineered Products and
Solutions segment, and Primary Metals ($1,794). These amounts include an allocation of Corporate goodwill.
The evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value,
including goodwill. Alcoa uses a discounted cash flow model (DCF model) to estimate the current fair value of its
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