Alcoa 2014 Annual Report Download - page 107

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 United States. 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. These deferred tax assets have an expiration period
ranging from 2016 (for certain credits) to an unlimited life (for operating losses). 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 group. During 2014, the underlying value of the deferred tax assets decreased due to a
remeasurement as a result of the enactment of new tax rates in Spain beginning in 2015 (see Income Taxes in Earnings
Summary under Results of Operations above), the sale of a member of the Spanish consolidated tax group, and a
change in foreign currency exchange rates. As a result, the valuation allowance decreased by the same amount. At
December 31, 2014, the amount of the valuation allowance was $163. This valuation allowance was reevaluated as of
December 31, 2014, and no change to the allowance was deemed necessary based on all available evidence. The need
for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of
the allowance may be reversed based on changes in facts and circumstances.
The remaining $135 relates to a valuation allowance established on a portion of available foreign tax credits in the
United States. These credits can be carried forward for 10 years, and have an expiration period ranging from 2016 to
2023 as of December 31, 2013 (2015 to 2019 as of December 31, 2014). 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 full tax benefit of these foreign tax credits. This was primarily due to lower foreign sourced taxable
income after consideration of tax planning strategies and after the inclusion of earnings from foreign subsidiaries
projected to be distributable as taxable foreign dividends. This valuation allowance was reevaluated as of
December 31, 2014, and no change to the allowance was deemed necessary based on all available evidence. The need
for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, an increase or
decrease to this allowance may result based on changes in facts and circumstances.
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