Alcoa 2010 Annual Report Download - page 76

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, 2010 ranges from less than $1 to $52 per
structure (129 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, 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) ($1,009) and Alcoa Power and Propulsion (APP) ($1,623) businesses, both of which are included in the
Engineered Products and Solutions segment, and Primary Metals ($1,851). These amounts include an allocation of
Corporate goodwill. In 2010, the estimated fair values of all nine reporting units were substantially in excess of their
carrying values, resulting in no impairment.
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
reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of
such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to
forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, tax
rates, capital spending, discount rate, and working capital changes. Most of these assumptions vary significantly among
the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early
years and historical relationships in later years. The betas used in calculating the individual reporting units’ weighted
average cost of capital (WACC) rate are estimated for each business with the assistance of valuation experts.
In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional
analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s
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