| Summary of Significant Accounting Policies | A. Summary
of Significant Accounting Policies
Basis of
Presentation.
The
separation of Alcoa Inc. into two standalone, publicly-traded
companies, Arconic Inc. (the new name for Alcoa Inc.) and Alcoa
Corporation, became effective on November 1, 2016 (the
“Separation Transaction”). The financial results of
Alcoa Corporation for all periods prior to the Separation
Transaction have been retrospectively reflected in the Statement of
Consolidated Operations as discontinued operations and, as such,
have been excluded from continuing operations and segment results
for all periods presented. Additionally, the related assets and
liabilities associated with Alcoa Corporation in the December 2015
Consolidated Balance Sheet are classified as assets and liabilities
of discontinued operations. The cash flows and comprehensive income
related to Alcoa Corporation have not been segregated and are
included in the Statement of Consolidated Cash Flows and Statement
of Consolidated Comprehensive Loss, respectively, for all periods
presented. See Note C for additional information related to the
Separation Transaction and discontinued operations.
Pursuant to
the authorization provided at a special meeting of Arconic common
shareholders held on October 5, 2016, shareholders approved a
1-for-3 reverse stock split of Arconic’s outstanding and
authorized shares of common stock (the “Reverse Stock
Split”). As a result of the Reverse Stock Split, every 3
shares of issued and outstanding common stock were combined into
one issued and outstanding share of common stock, without any
change in the par value per share. The Reverse Stock Split reduced
the number of shares of common stock outstanding from approximately
1.3 billion shares to approximately 0.4 billion shares. The
Company’s common stock began trading on a reverse stock
split-adjusted basis on the NYSE on October 6,
2016.
Principles
of Consolidation.
Management
also evaluates whether an Arconic entity or interest is a variable
interest entity and whether Arconic is the primary beneficiary.
Consolidation is required if both of these criteria are met.
Arconic does not have any variable interest entities requiring
consolidation.
Related
Party Transactions.
Cash
Equivalents.
Inventory
Valuation.
Properties, Plants, and Equipment.
Segment
Structures
Machinery and equipment
Global Rolled
Products 31 21
Engineered Products and
Solutions 29 17
Transportation and
Construction Solutions
27
19
Gains or
losses from the sale of assets are generally recorded in Other
income, net (see policy below for assets classified as held for
sale and discontinued operations). 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.
Properties,
plants, and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
such assets (asset group) may not be recoverable. Recoverability of
assets is determined by comparing the estimated undiscounted net
cash flows of the operations related to the assets (asset group) to
their carrying amount. An impairment loss would be recognized when
the carrying amount of the assets (asset group) exceeds the
estimated undiscounted net cash flows. The amount of the impairment
loss to be recorded is calculated as the excess of the carrying
value of the assets (asset group) over their fair value, with fair
value determined using the best information available, which
generally is a discounted cash flow (DCF) model. The determination
of what constitutes an asset group, the associated estimated
undiscounted net cash flows, and the estimated useful lives of
assets also require significant judgments.
Goodwill
and Other Intangible Assets.
Goodwill is
allocated among and evaluated for impairment at the reporting unit
level, which is defined as an operating segment or one level below
an operating segment. Arconic has eight reporting units, of which
four are included in the Engineered Products and Solutions segment,
three are included in the Transportation and Construction Solutions
segment, and the remaining reporting unit is the Global Rolled
Products segment. More than 70% of Arconic’s total goodwill
is allocated to two reporting units as follows: Arconic Fastening
Systems and Rings (AFSR) ($2,200) and Arconic Power and Propulsion
(APP) ($1,647) businesses, both of which are included in the
Engineered Products and Solutions segment. These amounts include an
allocation of Corporate’s goodwill.
In November
2014, Arconic acquired Firth Rixson (see Note F), and, as a result
recognized $1,801 in goodwill. This amount was allocated between
the AFSR and Arconic Forgings and Extrusions (AFE) reporting units,
which is part of the Engineered Products and Solutions segment. In
March and July 2015, Arconic acquired TITAL and RTI, respectively,
(see Note F) and recognized $117 and $298, respectively, in
goodwill. The goodwill amount related to TITAL was allocated to the
APP reporting unit and the amount related to RTI was allocated to
Arconic Titanium and Engineered Products (ATEP), a new Arconic
reporting unit that consists solely of the acquired RTI business
and is part of the Engineered Products and Solutions
segment.
In reviewing
goodwill for impairment, an entity has the option to first assess
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than
not (greater than 50%) that the estimated fair value of a reporting
unit is less than its carrying amount. If an entity elects to
perform a qualitative assessment and determines that an impairment
is more likely than not, the entity is then required to perform the
existing two-step quantitative impairment test (described below),
otherwise no further analysis is required. An entity also may elect
not to perform the qualitative assessment and, instead, proceed
directly to the two-step quantitative impairment test. The ultimate
outcome of the goodwill impairment review for a reporting unit
should be the same whether an entity chooses to perform the
qualitative assessment or proceeds directly to the two-step
quantitative impairment test.
Arconic’s policy for its annual review of goodwill is to
perform the qualitative assessment for all reporting units not
subjected directly to the two-step quantitative impairment test.
Generally, management will proceed directly to the two-step
quantitative impairment test for up to four reporting units (based
on facts and circumstances) during each annual review of goodwill.
This policy will result in each of the seven reporting units with
goodwill being subjected to the two-step quantitative impairment
test at least once during every three-year period.
Under the
qualitative assessment, various events and circumstances (or
factors) that would affect the estimated fair value of a reporting
unit are identified (similar to impairment indicators above). These
factors are then classified by the type of impact they would have
on the estimated fair value using positive, neutral, and adverse
categories based on current business conditions. Additionally, an
assessment of the level of impact that a particular factor would
have on the estimated fair value is determined using high, medium,
and low weighting. Furthermore, management considers the results of
the most recent two-step quantitative impairment test completed for
a reporting unit and compares the weighted average cost of capital
(WACC) between the current and prior years for each reporting
unit.
During the
2016 annual review of goodwill, management performed the
qualitative assessment for three reporting units, the Global Rolled
Products segment, ATEP, and Building and Construction Systems
(within the Transportation and Construction Solutions segment).
Management concluded that it was not more likely than not that the
estimated fair values of the three reporting units were less than
their carrying values. As such, no further analysis was
required.
Under the
two-step quantitative impairment test, the evaluation of impairment
involves comparing the current fair value of each reporting unit to
its carrying value, including goodwill. Arconic uses a discounted
cash flow model to estimate the current fair value of its reporting
units when testing for impairment, as management believes
forecasted cash flows are the best indicator of such fair value. 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,
production costs, tax rates, capital spending, discount rate, and
working capital changes. Most of these assumptions vary
significantly among the reporting units. Cash flow forecasts are
generally based on approved business unit operating plans for the
early years and historical relationships in later years. The betas
used in calculating the individual reporting units’ WACC rate
are estimated for each business with the assistance of valuation
experts.
In the event
the estimated fair value of a reporting unit per the DCF model is
less than the carrying value, additional analysis would be
required. The additional analysis would compare the carrying amount
of the reporting unit’s goodwill with the implied fair value
of that goodwill, which may involve the use of valuation experts.
The implied fair value of goodwill is the excess of the fair value
of the reporting unit over the fair value amounts assigned to all
of the assets and liabilities of that unit as if the reporting unit
was acquired in a business combination and the fair value of the
reporting unit represented the purchase price. If the carrying
value of goodwill exceeds its implied fair value, an impairment
loss equal to such excess would be recognized, which could
significantly and adversely impact reported results of operations
and shareholders’ equity.
During the
2016 annual review of goodwill, management proceeded directly to
the two-step quantitative impairment test for four reporting units
as follows: AFSR, APP, and AFE, which are all included in the
Engineered Products and Solutions segment, and Arconic Wheel and
Transportation Products which is included in the Transportation and
Construction Solutions segment. The estimated fair value of each of
the reporting units exceeded its respective carrying value,
resulting in no impairment.
Goodwill
impairment tests in prior years indicated that goodwill was not
impaired for any of the Company’s reporting units, except for
the soft alloy extrusion business in Brazil (SAE) which is included
in the Transportation and Construction Solutions segment, and there
were no triggering events since that time that necessitated an
impairment test.
In 2015, for
SAE, the estimated fair value as determined by the DCF model was
lower than the associated carrying value of the SAE reporting
unit’s goodwill. 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,
Arconic recorded a goodwill impairment of $25. The impairment of
the SAE goodwill resulted from headwinds from the 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.
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
Global Rolled
Products 8 9
Engineered Products and
Solutions 7 34
Transportation and
Construction Solutions
6
16
Revenue
Recognition.
In certain
circumstances, Arconic receives advanced payments from its
customers for product to be delivered in future periods. These
advanced payments are recorded as deferred revenue until the
product is delivered and title and risk of loss have passed to the
customer in accordance with the terms of the contract. Deferred
revenue is included in Other current liabilities and Other
noncurrent liabilities and deferred credits on the accompanying
Consolidated Balance Sheet.
Environmental Matters.
Litigation
Matters.
Income
Taxes.
Valuation
allowances are recorded to reduce deferred tax assets when it is
more likely than not 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 Arconic’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.
Tax benefits
related to uncertain tax positions taken or expected to be taken on
a tax return are recorded when such benefits meet a more likely
than not threshold. Otherwise, these tax benefits are recorded when
a tax position has been effectively settled, which means that the
statute of limitation has expired or the appropriate taxing
authority has completed their examination even though the statute
of limitations remains open. Interest and penalties related to
uncertain tax positions are recognized as part of the provision for
income taxes and are accrued beginning in the period that such
interest and penalties would be applicable under relevant tax law
until such time that the related tax benefits are
recognized.
Stock-Based Compensation.
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.
Foreign
Currency.
Acquisitions.
Discontinued Operations and Assets 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 discontinued
operations 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 Statement of Consolidated
Operations. The Statement of Consolidated Cash Flows is not
required to be reclassified for discontinued operations for any
period. Segment information does not include the assets or
operating results of businesses classified as discontinued
operations for all periods presented. These businesses are expected
to be disposed of within one year.
For
businesses classified as held for sale that do not qualify for
discontinued operations treatment, the balance sheet and cash flow
amounts are reclassified from their historical presentation to
assets and liabilities of operations held for sale for all periods
presented. The results of operations continue to be reported in
continuing operations. The gains or losses associated with these
divested businesses are recorded in restructuring and other charges
on the Statement of Consolidated Operations. The segment
information includes the assets and operating results of businesses
classified as held for sale for all periods presented.
Recently
Adopted Accounting Guidance.
On
January 1, 2016, Arconic adopted changes issued by the FASB to
the analysis an entity must perform to determine whether it should
consolidate certain types of legal entities. These changes
(i) modify the evaluation of whether limited partnerships and
similar legal entities are variable interest entities or voting
interest entities, (ii) eliminate the presumption that a
general partner should consolidate a limited partnership,
(iii) affect the consolidation analysis of reporting entities
that are involved with variable interest entities, particularly
those that have fee arrangements and related party relationships,
and (iv) provide a scope exception from consolidation guidance
for reporting entities with interests in legal entities that are
required to comply with or operate in accordance with requirements
that are similar to those in Rule 2a-7 of the Investment Company
Act of 1940 for registered money market funds. The adoption of
these changes had no impact on the Consolidated Financial
Statements.
On
January 1, 2016, Arconic adopted changes issued by the FASB to
the presentation of debt issuance costs. Previously, such costs
were required to be presented as a noncurrent asset in an
entity’s balance sheet and amortized into interest expense
over the term of the related debt instrument. The changes require
that debt issuance costs be presented in an entity’s balance
sheet as a direct deduction from the carrying value of the related
debt liability. The amortization of debt issuance costs remains
unchanged. The FASB issued an update to these changes based on an
announcement of the staff of the U.S. Securities and Exchange
Commission. This update provides an exception to the FASB changes
allowing debt issuance costs related to line-of-credit arrangements
to continue to be presented as an asset regardless of whether there
are any outstanding borrowings under such arrangement. This
additional change also was adopted by Arconic on January 1,
2016. This adoption is required on a retrospective basis;
therefore, the December 31, 2015 Consolidated Balance Sheet
has been updated to conform to the December 31, 2016
presentation. As a result, $51 of debt issuance costs (previously
reported in Other noncurrent assets) were reclassified to the
Long-term debt, less amount due within one year line item on the
December 31, 2015 Consolidated Balance Sheet.
For the 2016
annual period, Arconic adopted changes issued by the FASB related
to the evaluation of an entity’s ability to continue as a
going concern. Previously, under GAAP, continuation of a reporting
entity as a going concern was presumed as the basis for preparing
financial statements unless and until the entity’s
liquidation becomes imminent. Even if an entity’s liquidation
was not imminent, there may have been conditions or events that
raised substantial doubt about the entity’s ability to
continue as a going concern. Because there was no guidance in GAAP
about management’s responsibility to evaluate whether there
was substantial doubt about an entity’s ability to continue
as a going concern or to provide related note disclosures, there
was diversity in practice whether, when, and how an entity
discloses the relevant conditions and events in its financial
statements. As a result, these changes require an entity’s
management to evaluate whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about the
entity’s ability to continue as a going concern within one
year after the date that financial statements are issued.
Substantial doubt is defined as an indication that it is probable
that an entity will be unable to meet its obligations as they
become due within one year after the date that financial statements
are issued. If management has concluded that substantial doubt
exists, then the following disclosures should be made in the
financial statements: (i) principal conditions or events that
raised the substantial doubt, (ii) management’s
evaluation of the significance of those conditions or events in
relation to the entity’s ability to meet its obligations,
(iii) management’s plans that alleviated the initial
substantial doubt or, if substantial doubt was not alleviated,
management’s plans that are intended to at least mitigate the
conditions or events that raise substantial doubt, and (iv) if
the latter in (iii) is disclosed, an explicit statement that
there is substantial doubt about the entity’s ability to
continue as a going concern. The adoption of these changes had no
impact on the Consolidated Financial Statements. This guidance will
need to be applied by management at the end of each annual period
and interim period therein to determine what, if any, impact there
will be on the Consolidated Financial Statements in a given
reporting period.
Recently
Issued Accounting Guidance.
In February
2016, the FASB issued changes to the accounting and presentation of
leases. These changes require lessees to recognize a right of use
asset and lease liability on the balance sheet for all leases with
terms longer than 12 months. For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize a right of use asset
and lease liability. Additionally, when measuring assets and
liabilities arising from a lease, optional payments should be
included only if the lessee is reasonably certain to exercise an
option to extend the lease, exercise a purchase option, or not
exercise an option to terminate the lease. These changes become
effective for Arconic on January 1, 2019. Management is
currently evaluating the potential impact of these changes on the
Consolidated Financial Statements.
In March
2016, the FASB issued changes to employee share-based payment
accounting. Currently, an entity must determine for each
share-based payment award whether the difference between the
deduction for tax purposes and the compensation cost recognized for
financial reporting purposes results in either an excess tax
benefit or a tax deficiency. Excess tax benefits are recognized in
additional paid-in capital; tax deficiencies are recognized either
as an offset to accumulated excess tax benefits, if any, or in the
income statement. Excess tax benefits are not recognized until the
deduction reduces taxes payable. The changes require all excess tax
benefits and tax deficiencies related to share-based payment awards
to be recognized as income tax expense or benefit in the income
statement. The tax effects of exercised or vested awards should be
treated as discrete items in the reporting period in which they
occur. An entity also should recognize excess tax benefits
regardless of whether the benefit reduces taxes payable in the
current period. Additionally, the presentation of excess tax
benefits related to share-based payment awards in the statement of
cash flows is changed. Currently, excess tax benefits must be
separated from other income tax cash flows and classified as a
financing activity. The changes require excess tax benefits to be
classified along with other income tax cash flows as an operating
activity. Also, the changes require cash paid by an employer when
directly withholding shares for tax-withholding purposes to be
classified as a financing activity. Currently, there is no specific
guidance on the classification in the statement of cash flows of
cash paid by an employer to the tax authorities when directly
withholding shares for tax-withholding purposes. Additionally, for
a share-based award to qualify for equity classification it cannot
partially settle in cash in excess of the employer’s minimum
statutory withholding requirements. The changes permit equity
classification of share-based awards for withholdings up to the
maximum statutory tax rates in applicable jurisdictions. These
changes became effective for Arconic on January 1, 2017.
Management has determined that the adoption of this guidance will
not have a material effect on the Consolidated Financial
Statements.
In March
2016, the FASB issued changes eliminating the requirement for an
investor to adjust an equity method investment, results of
operations, and retained earnings retroactively on a step-by-step
basis as if the equity method had been in effect during all
previous periods that the investment had been held as a result of
an increase in the level of ownership interest or degree of
influence. Additionally, an entity that has an available-for-sale
equity security that becomes qualified for the equity method of
accounting must recognize through earnings the unrealized holding
gain or loss in accumulated other comprehensive income at the date
the investment becomes qualified for use of the equity method.
These changes became effective for Arconic on January 1, 2017.
Management has determined that the adoption of this guidance will
not have a material impact on the Consolidated Financial
Statements.
In March
2016, the FASB issued changes to derivative instruments designated
as hedging instruments. These changes clarify that a change in the
counterparty to a derivative instrument that has been designated as
a hedging instrument does not, in and of itself, require
dedesignation of that hedging relationship provided that all other
hedge accounting criteria continue to be met. These changes became
effective for Arconic on January 1, 2017. Management has
determined that the adoption of this guidance will not have a
material impact on the Consolidated Financial
Statements.
In June 2016,
the FASB added a new impairment model (known as the current
expected credit loss (CECL) model) that is based on expected losses
rather than incurred losses. Under the new guidance, an entity
recognizes as an allowance its estimate of expected credit losses.
The CECL model applies to most debt instruments, trade receivables,
lease receivables, financial guarantee contracts, and other loan
commitments. The CECL model does not have a minimum threshold for
recognition of impairment losses and entities will need to measure
expected credit losses on assets that have a low risk of loss.
These changes become effective for Arconic on January 1, 2020.
Management is currently evaluating the potential impact of these
changes on the Consolidated Financial Statements.
In August
2016, the FASB issued changes to the classification of certain cash
receipts and cash payments within the statement of cash flows. The
guidance identifies eight specific cash flow items and the sections
where they must be presented within the statement of cash flows.
These changes become effective for Arconic on January 1, 2018.
Management does not expect these changes to have a material impact
on the Consolidated Financial Statements.
In October
2016, the FASB issued changes to the accounting for Intra-Entity
transactions, other than inventory. Under current
US GAAP, no immediate tax impact is recognized in the
consolidated financial statements as a result of intra-entity
transfers of assets. The current standard precludes an entity from
reflecting a tax benefit or expense from an intra-entity asset
transfer between entities that file separate tax returns, whether
or not such entities are in different tax jurisdictions, until the
asset has been sold to a third party or otherwise recovered. The
current standard also prohibits recognition by the buyer of a
deferred tax asset for the temporary difference arising from the
excess of the buyer’s tax basis over the cost to the
seller. The changes require the current and deferred income
tax consequences of the intra-entity transfer to be recorded when
the transaction occurs. The exception to defer the tax consequences
of inventory transactions is maintained. These changes became
effective for Arconic on January 1, 2017. Management has
determined that the adoption of this guidance will not have a
material impact on the Consolidated Financial
Statements.
In November
2016, the FASB issued changes to the classification of cash and
cash equivalents within the cash flow statement. Restricted cash
and restricted cash equivalents will be included within the cash
and cash equivalents line on the cash flow statement and a
reconciliation must be prepared to the statement of financial
position. Transfers between restricted cash and restricted cash
equivalents and cash and cash equivalents will no longer be
presented as cash flow activities in the statement of cash flows
and material balances of restricted cash and restricted cash
equivalents must disclose information regarding the nature of the
restrictions. These changes become effective for Arconic on
January 1, 2018. Management has determined that the adoption
of these changes will not have a material impact on the
Consolidated Financial Statements.
In July 2015,
the FASB issued changes to the subsequent measurement of inventory.
Currently, an entity is required to measure its inventory at the
lower of cost or market, whereby market can be replacement cost,
net realizable value, or net realizable value less an approximately
normal profit margin. The changes require that inventory be
measured at the lower of cost and net realizable value, thereby
eliminating the use of the other two market methodologies. Net
realizable value is defined as the estimated selling prices in the
ordinary course of business less reasonably predictable costs of
completion, disposal, and transportation. These changes do not
apply to inventories measured using LIFO (last-in, first-out) or
the retail inventory method. Currently, Arconic applies the net
realizable value market option to measure non-LIFO inventories at
the lower of cost or market. These changes became effective for
Arconic on January 1, 2017. Management has determined that the
adoption of these changes will not have an impact on the
Consolidated Financial Statements.
In May 2014,
the FASB issued changes to the recognition of revenue from
contracts with customers. These changes created a comprehensive
framework for all entities in all industries to apply in the
determination of when to recognize revenue, and, therefore,
supersede virtually all existing revenue recognition requirements
and guidance. This framework is expected to result in less complex
guidance in application while providing a consistent and comparable
methodology for revenue recognition. The core principle of the
guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. To achieve this
principle, an entity should apply the following steps:
(i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract(s),
(iii) determine the transaction price, (iv) allocate the
transaction price to the performance obligations in the
contract(s), and (v) recognize revenue when, or as, the entity
satisfies a performance obligation. In August 2015, the FASB
deferred the effective date by one year, making these changes
effective for Arconic on January 1, 2018. The Company
has formed a project assessment and adoption team and is
currently reviewing contract terms and assessing the impact of
adopting the standard on the Consolidated Financial
Statements. |
