Alcoa 2015 Annual Report Download - page 126

hedged item and the derivative hedging instrument. For derivatives designated as cash flow hedges, Alcoa measures
hedge effectiveness by formally assessing, at inception and at least quarterly, the probable high correlation of the
expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portions of both
types of hedges are recorded in sales or other income or expense in the current period. If the hedging relationship
ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or
losses on the derivative instrument are recorded in other income or expense.
Alcoa accounts for interest rate swaps related to its existing long-term debt and hedges of firm customer commitments
for aluminum as fair value hedges. As a result, the fair values of the derivatives and changes in the fair values of the
underlying hedged items are reported in other current and noncurrent assets and liabilities in the Consolidated Balance
Sheet. Changes in the fair values of these derivatives and underlying hedged items generally offset and are recorded
each period in sales or interest expense, consistent with the underlying hedged item.
Alcoa accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The
fair values of the derivatives are recorded in other current and noncurrent assets and liabilities in the Consolidated
Balance Sheet. The effective portions of the changes in the fair values of these derivatives are recorded in other
comprehensive income and are reclassified to sales, cost of goods sold, or other income or expense in the period in
which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow
hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years.
If no hedging relationship is designated, the derivative is marked to market through earnings.
Cash flows from derivatives are recognized in the Statement of Consolidated Cash Flows in a manner consistent with
the underlying transactions.
Foreign Currency. The local currency is the functional currency for Alcoa’s significant operations outside the United
States, except for certain operations in Canada, Russia, and Iceland, where the U.S. dollar is used as the functional
currency. The determination of the functional currency for Alcoa’s operations is made based on the appropriate
economic and management indicators.
Acquisitions. Alcoa’s business acquisitions are accounted for using the acquisition method. The purchase price is
allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price
over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included
in the Statement of Consolidated Operations from the date of the acquisition.
Discontinued Operations and Assets Held For Sale. For those businesses where management has committed to a
plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the
carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is
estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings
multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the
application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs
and expenses, and multiple other factors. Management considers historical experience and all available information at
the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business
may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation, depletion,
and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale.
Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or
held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are
reclassified from their historical presentation to assets and liabilities of operations held for sale on the Consolidated
Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods
presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the
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