Hydro Annual Report 2011b

F18
FINANCIAL STATEMENTS
Note 4 - Critical accounting judgment and key sources of estimation uncertainty
obligations require interpretation of scientific and legal data, in addition to assumptions about probability and future costs. A
description of Hydro's major contingencies is included in note 38 Contingent liabilities and contingent assets.
Insurance and other compensation
Hydro has insurance contracts and certain other arrangements giving right to compensation for damage and/or losses.
Compensation claims are recognized when it is deemed to be virtually certain that Hydro will receive a compensation under
the contract. Such determination requires detailed analysis of the legal basis for the claim; any contingencies that are or may be
raised by the liable party; evaluation of assessment from technical, legal or other third party experts; and other relevant
information. To recognize such claims Hydro normally expect to have received either a confirmation from the liable party that
the claim is valid and will be honored, or a confirmation from an external expert that Hydro has a valid claim with no or
remote risk of not being honored. The claim is measured at Hydro's best estimate of the amount to be received.
Income tax
Hydro calculates income tax expense based on reported income in the different legal entities. Deferred income tax expense is
calculated based on the differences between the carrying value of assets and liabilities for financial reporting purposes and their
respective tax basis that are considered temporary in nature. Valuation of deferred tax assets is dependent on management's
assessment of future recoverability of the deferred benefit. Expected recoverability may result from expected taxable income in
the future, planned transactions or planned tax optimizing measures. Economic conditions may change and lead to a different
conclusion regarding recoverability. Tax authorities in different jurisdictions may challenge Hydro's calculation of taxes payable
from prior periods. Such processes may lead to changes to prior periods' taxable income, resulting in changes to income tax
expense in the period of change.
Note 5 - Acquisitions
On February 28, 2011 Hydro acquired the majority of Vale S.A.'s aluminium business. Vale Aluminium included the
following equity interests all of which are located in the state of Pará:
57 percent of the shares in the alumina refinery Alunorte - Alumina do Norte do Brasil S.A. (Alunorte), increasing
Hydro's ownership interest from 34 percent to 91 percent
60 percent ownership interest in the bauxite mine Paragominas with the right and obligation to acquire the remaining 40
percent ownership within a period of five years from completion of the acquisition. The put and call arrangements are at a
fixed price and effectively transfer the majority of the economic exposure to Hydro, and is thus accounted for as a
purchase of the remaining shares with deferred payment.
51 percent ownership in the aluminium smelter Albras - Aluminio Brasileiro S.A. (Albras)
61 percent ownership in Companhia de Alumina do Pará S.A. (CAP), an alumina refinery under evaluation for
development, increasing Hydro ownership interest from 20 percent to 81 percent.
In addition, Hydro acquired certain commercial contracts related to sale of alumina and aluminium. The acquired business was
consolidated as of the acquisition date and has improved Hydro's access to bauxite and alumina, the main raw materials for
production of aluminium.
The fair value of consideration for the ownership interests as of the acquisition date was as follows:
Amounts in NOK million
Consideration shares (22%) 19 987
Cash consideration 6 193
Deferred cash payment 1 541
Cost of acquired shares 27 721
Fair value of previously held shares in Alunorte and CAP 9 162
Fair value of Hydro's interests as of the business combination 36 883
Consideration paid on closing consisted of approximately USD 1.1 billion in cash later reduced by approximately NOK 95
million following agreed procedures in establishing closing accounts. The consideration also included 447,834,465 shares
corresponding to 22 percent of Hydro's outstanding shares, valued at the price at Oslo Børs (Oslo Stock Exchange) as of the
end of trading Friday February 25, the latest market observation prior to completion of the transaction. In addition, the
consideration includes the deferred payment for the remaining 40 percent in Paragominas described above and certain
contingent compensation arrangements. Vale has given certain representations and warranties primarily related to tax issues