Alcoa 2015 Annual Report Download - page 123

During the 2015 annual review of goodwill, management proceeded directly to the two-step quantitative impairment
test for two reporting units as follows: Global Rolled Products segment and the soft alloys extrusion business in Brazil
(hereafter “SAE”), which is included in the Transportation and Construction Solutions segment. The estimated fair
value of the Global Rolled Products segment was substantially in excess of its respective carrying value, resulting in no
impairment. For SAE, the estimated fair value as determined by the DCF model was lower than the associated carrying
value. As a result, management performed the second step of the impairment analysis in order to determine the implied
fair value of the SAE reporting unit’s goodwill. The results of the second-step analysis showed that the implied fair
value of the goodwill was zero. Therefore, in the fourth quarter of 2015, Alcoa recorded a goodwill impairment of $25.
The impairment of the SAE goodwill resulted from headwinds from the recent downturn in the Brazilian economy and
the continued erosion of gross margin despite the execution of cost reduction strategies. As a result of the goodwill
impairment, there is no goodwill remaining for the SAE reporting unit.
Goodwill impairment tests in prior years indicated that goodwill was not impaired for any of the Company’s reporting
units, except for the Primary Metals segment in 2013 (see below), and there were no triggering events since that time
that necessitated an impairment test.
In 2013, for Primary Metals, the estimated fair value as determined by the DCF model was lower than the associated
carrying value. As a result, management performed the second step of the impairment analysis in order to determine
the implied fair value of Primary Metals’ goodwill. The results of the second-step analysis showed that the implied fair
value of goodwill was zero. Therefore, in the fourth quarter of 2013, Alcoa recorded a goodwill impairment of $1,731
($1,719 after noncontrolling interest). As a result of the goodwill impairment, there is no goodwill remaining for the
Primary Metals reporting unit.
The impairment of Primary Metals’ goodwill resulted from several causes: the prolonged economic downturn; a
disconnect between industry fundamentals and pricing that has resulted in lower metal prices; and the increased cost of
alumina, a key raw material, resulting from expansion of the Alumina Price Index throughout the industry. All of these
factors, exacerbated by increases in discount rates, continue to place significant downward pressure on metal prices and
operating margins, and the resulting estimated fair value, of the Primary Metals business. As a result, management
decreased the near-term and long-term estimates of the operating results and cash flows utilized in assessing Primary
Metals’ goodwill for impairment. The valuation of goodwill for the second step of the goodwill impairment analysis is
considered a level 3 fair value measurement, which means that the valuation of the assets and liabilities reflect
management’s own judgments regarding the assumptions market participants would use in determining the fair value
of the assets and liabilities.
Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are
amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-
average useful lives of software and other intangible assets by reporting segment (numbers in years):
Segment Software Other intangible assets
Alumina 7 15
Primary Metals 6 37
Global Rolled Products 9 14
Engineered Products and Solutions 7 32
Transportation and Construction Solutions 8 23
Equity Investments. Alcoa invests in a number of privately-held companies, primarily through joint ventures and
consortia, which are accounted for using the equity method. The equity method is applied in situations where
Alcoa has the ability to exercise significant influence, but not control, over the investee. Management reviews
equity investments for impairment whenever certain indicators are present suggesting that the carrying value of
an investment is not recoverable. This analysis requires a significant amount of judgment from management to
identify events or circumstances indicating that an equity investment is impaired. The following items are
examples of impairment indicators: significant, sustained declines in an investee’s revenue, earnings, and cash
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