## Notes to the Consolidated Financial Statements 

(dollars in millions, except per-share amounts) 

## A. Summary of Significant Accounting Policies 

Basis of Presentation. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America and require manage- ment to make certain estimates and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters. 

Principles of Consolidation. The Consolidated Financial Statements include the accounts of Alcoa and companies more than fifty percent owned. Intercompany transactions have been eliminated. Investments in affiliates and other joint ventures in which Alcoa has a noncontrolling ownership interest between twenty and fifty percent are accounted for on the equity method. Investments in affiliates in which Alcoa has an ownership interest less than twenty percent are accounted for on the cost method. 

Alcoa also evaluates consolidation of entities under Financial Accounting Standards Board Interpretation No. 46, ‘‘Consoli- dation of Variable Interest Entities’’ ( FIN 46). FIN 46 requires management to evaluate whether an entity is a variable interest entity and whether Alcoa is the primary beneficiary. Consolida- tion is required if both of these criteria are met. Alcoa does not have any variable interest entities requiring consolidation. 

Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. 

Inventory Valuation. Inventories are carried at the lower of cost or market, with cost for a substantial portion of U.S. and Canadian inventories determined under the last-in, first- out (LIFO) method. The cost of other inventories is principally determined under the average-cost method. See Note G for additional information. 

Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets, averaging 33 years for struc- tures and approximately 16 years for machinery and equipment, as useful lives range between 5 and 25 years. Gains or losses from the sale of assets are included in other income. Repairs and maintenance are charged to expense as incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs. Depletion is taken over the periods during which the estimated mineral reserves are extracted. See Notes H and V for additional information. 

Goodwill and Other Intangible Assets. Alcoa adopted Statement of Financial Accounting Standards (SFAS) No. 142, ‘‘Goodwill and Other Intangible Assets,’’ effective January 1, 2002. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. Intangible assets 

with finite useful lives are amortized generally on a straight- line basis over the periods benefited, with a weighted average useful life of 13 years. 

The carrying values of goodwill and other intangible assets with indefinite useful lives are tested at least annually for impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized. The evaluation of impairment involves comparing the current fair value of the business to the recorded value (including goodwill). The company uses a discounted cash flow model ( DCF model) to determine the current fair value of the business. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, and working capital changes. Manage- ment considers historical experience and all available informa- tion at the time the fair values of its businesses are estimated. However, actual fair values that could be realized in an actual transaction may differ from those used to evaluate the impair- ment of goodwill. See Note E for additional information. 

Accounts Payable Arrangements. Alcoa participates in computerized payable settlement arrangements with certain vendors and third-party intermediaries. The arrange- ments provide that, at the vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an appropriate discount, before the sched- uled payment date. Alcoa makes payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. The amounts outstanding under these arrangements that will be paid through the third-party intermediaries have been classified as short-term borrowings in the Consolidated Balance Sheet at December 31, 2004 and as cash provided from financing activities in the Statement of Consolidated Cash Flows at December 31, 2004. See Note K for additional information. 

Revenue Recognition. Alcoa recognizes revenue when title, ownership, and risk of loss pass to the customer, in accordance with the provisions of Staff Accounting Bulletin 104, ‘‘Revenue Recognition in Financial Statements.’’ 

Alcoa periodically enters into long-term supply contracts with alumina and aluminum customers and receives advance payments for product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as shipments are made and title, ownership, and risk of loss pass to the customer during the term of the contracts. 

Environmental Expenditures. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, and which do not contribute to future revenues, are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractor, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties. The estimates also 

