Alcoa 2011 Annual Report Download - page 95

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 on a continuous basis to determine if there
has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a
potential loss.
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 an ARO 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 (PCBs), 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.
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 represents income taxes paid or payable (or received
or receivable) 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. In evaluating the need for a valuation allowance, management considers all potential sources of taxable
income, including income available in carryback periods, future reversals of taxable temporary differences, projections
of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence.
Positive evidence includes factors such as a history of profitable operations, projections of future profitability within
the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations.
Existing favorable contracts and the ability to sell products into established markets are additional positive evidence.
Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that
are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred
tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances,
resulting in a future charge to establish a valuation allowance.
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 threshold. Otherwise, these tax benefits are recorded when a tax position has been
effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has
completed their examination even though the statute of limitations remains open. 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.
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