Alcoa 2013 Annual Report Download - page 97

decrease in the discount rate, which was slightly offset by the favorable performance of the plan assets and the
amortization of actuarial losses.
Stock-based Compensation. Alcoa recognizes compensation expense for employee equity grants using the non-
substantive vesting period approach, in which the expense (net of estimated forfeitures) is recognized ratably over the
requisite service period based on the grant date fair value. The fair value of new stock options is estimated on the date
of grant using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment,
including estimates for the average risk-free interest rate, dividend yield, volatility, annual forfeiture rate, and exercise
behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of
these inputs that occur over time.
Equity grants are issued in January each year. As part of Alcoa’s stock-based compensation plan design, individuals
who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion
of expense will be recognized in the first half of each year for these retirement-eligible employees. Compensation
expense recorded in 2013, 2012, and 2011 was $71 ($48 after-tax), $67 ($46 after-tax), and $83 ($56 after-tax),
respectively. Of this amount, $14, $13, and $18 in 2013, 2012, and 2011, respectively, pertains to the acceleration of
expense related to retirement-eligible employees.
Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a
combination of both. This choice is made before the grant is issued and is irrevocable.
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 (greater than 50%) 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 Alcoa’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. Existing valuation
allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is
more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any,
is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law
changes and the granting and lapse of tax holidays.
In 2013, Alcoa recognized a $372 discrete income tax charge for valuation allowances on certain deferred tax assets in
Spain and the U.S. Of this amount, a $237 valuation allowance was established on the full value of the deferred tax
assets related to a Spanish consolidated tax group. As of December 31, 2013, these deferred tax assets have an
expiration period ranging from 2014 to 2030. After weighing all available positive and negative evidence, as described
above, management determined that it was no longer more likely than not that Alcoa will realize the tax benefit of
these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business (2013
realized prices were the lowest since 2009) combined with prior year cumulative losses of the Spanish consolidated tax
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