##### 



Exhibit 99.2Responsibility for the Annual Report Novelis management is responsible for the preparation, integrity and fair presentation of the
financial statements and other information in the Annual Report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of
America and include, where appropriate, estimates based on the best judgment of management.
Financial and operating data elsewhere in the Annual Report are consistent with that contained in
the accompanying financial statements. Novelis policy is to maintain systems of internal accounting, administrative and disclosure
controls of high quality. Such systems are designed to provide
reasonable assurance that the financial information is accurate and reliable and that Group assets
are adequately accounted for and safeguarded. The Board of Directors oversees the Groups systems
of internal accounting, administrative and disclosure controls through its Audit Committee, which
is comprised of directors who are not employees. The Audit Committee meets regularly with
representatives of the Groups independent auditors and management, including internal audit staff,
to satisfy themselves that Novelis policy is being followed. The Audit Committee has appointed
PricewaterhouseCoopers LLP as the independent auditors. The financial statements have been reviewed by the Audit Committee and, together with the other
required information in this Annual Report, approved by the Board of Directors. In addition, the
financial statements have been audited by PricewaterhouseCoopers LLP, whose report is provided
below. /s/ Brian W. SturgellBRIAN W. STURGELL
President and Chief Executive OfficerMarch 30, 2005
    
    /s/ Geoffrey P. BattGEOFFREY P. BATT
Senior Vice-President and Chief Financial Officer
  Report of Independent Registered Public Accounting Firm To the Board of Directors of Novelis Inc.: In our opinion, the accompanying combined balance sheets and related combined statements of income,
invested equity and cash flows present fairly, in all material respects, the financial position of
the Novelis Group as described in Note 1, at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Novelis Groups management. Our responsibility
is to express an opinion on these financial statements based on our audits. We conducted our audits
of these statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLPPRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Montreal, Quebec, Canada
March 24, 2005 1




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##### 



The Novelis Group COMBINED
STATEMENT OF INCOME
Year ended December 31
(in millions of US$, except per share amounts) 2004
    
    
    2003
    
    
    2002Sales and operating revenues third parties
    
    
    7,305
    
    
    
    5,749
    
    
    
    5,456 related parties (NOTE 11)
    
    
    450
    
    
    
    472
    
    
    
    4377,755
    
    
    
    6,221
    
    
    
    5,893Costs and expensesCost of sales and operating expenses, excluding depreciation and
amortization noted below third parties
    
    
    6,453
    
    
    
    5,046
    
    
    
    4,797 related parties (NOTE 11)
    
    
    403
    
    
    
    436
    
    
    
    411Depreciation and amortization (NOTE 7)
    
    
    246
    
    
    
    222
    
    
    
    211Selling, general and administrative expenses
    
    
    268
    
    
    
    211
    
    
    
    183Research and development expenses third parties
    
    
    20
    
    
    
    18
    
    
    
    18 related parties (NOTE 11)
    
    
    38
    
    
    
    44
    
    
    
    49Interest third parties
    
    
    41
    
    
    
    21
    
    
    
    20 related parties (NOTE 11)
    
    
    33
    
    
    
    19
    
    
    
    22Other expenses (income)  net (NOTE 14) third parties
    
    
    84
    
    
    
    84
    
    
    
    24 related parties (NOTE 11)
    
    
    (56
    )
    
    
    (84
    )
    
    
    227,530
    
    
    
    6,017
    
    
    
    5,757Income before income taxes and other items
    
    
    225
    
    
    
    204
    
    
    
    136Income taxes (NOTE 9)
    
    
    166
    
    
    
    50
    
    
    
    77Income before other items
    
    
    59
    
    
    
    154
    
    
    
    59Equity income (NOTE 10)
    
    
    6
    
    
    
    6
    
    
    
    8Minority interests
    
    
    (10
    )
    
    
    (3
    )
    
    
    8Income before cumulative effect of accounting change
    
    
    55
    
    
    
    157
    
    
    
    75Cumulative effect of accounting change, net of income taxes of
nil (NOTES 4 AND 7)
    
    
    
    
    
    
    
    
    
    
    (84
    )Net income (Loss)
    
    
    55
    
    
    
    157
    
    
    
    (9
    )Earnings (Loss) per share(NOTE 5)BasicIncome before cumulative effect of accounting change
    
    
    0.74
    
    
    
    2.12
    
    
    
    1.01Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (1.13
    )Net income (Loss) per share  basic
    
    
    0.74
    
    
    
    2.12
    
    
    
    (0.12
    )DilutedIncome before cumulative effect of accounting change
    
    
    0.74
    
    
    
    2.11
    
    
    
    1.00Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (1.13
    )Net income (Loss) per share  diluted
    
    
    0.74
    
    
    
    2.11
    
    
    
    (0.13
    )
 The accompanying notes are an integral part of the financial statements. 2




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##### 





The Novelis Group COMBINED
BALANCE SHEET
As at December 31
(in millions of US$)

2004
    
    
    2003ASSETSCurrent assetsCash and time deposits
    
    
    31
    
    
    
    27Trade receivables (net of allowances of $33 in 2004 and $30 in 2003) third parties (NOTE 12)
    
    
    710
    
    
    
    558 related parties (NOTE 11)
    
    
    87
    
    
    
    163Other receivables third parties
    
    
    118
    
    
    
    97 related parties (NOTES 11 AND 13)
    
    
    846
    
    
    
    1,167InventoriesAluminum
    
    
    1,081
    
    
    
    867Raw materials
    
    
    20
    
    
    
    14Other supplies
    
    
    125
    
    
    
    991,226
    
    
    
    980Total current assets
    
    
    3,018
    
    
    
    2,992Deferred charges and other assets (NOTE 15)
    
    
    193
    
    
    
    196Long-term receivables from related parties (NOTE 11)
    
    
    104
    
    
    
    614Property, plant and equipment (NOTE 16)Cost (excluding construction work in progress)
    
    
    5,506
    
    
    
    5,218Construction work in progress
    
    
    112
    
    
    
    129Accumulated depreciation
    
    
    (3,270
    )
    
    
    (2,928
    )2,348
    
    
    
    2,419Intangible assets (net of accumulated amortization of $9 in 2004
and $6 in 2003) (NOTE 7)
    
    
    35
    
    
    
    26Goodwill (NOTE 7)
    
    
    256
    
    
    
    69Total assets
    
    
    5,954
    
    
    
    6,316LIABILITIES AND INVESTED EQUITYCurrent liabilitiesPayables and accrued liabilities third parties
    
    
    859
    
    
    
    802 related parties (NOTE 11)
    
    
    401
    
    
    
    286Short-term borrowings third parties
    
    
    229
    
    
    
    900 related parties (NOTE 11)
    
    
    312
    
    
    
    64Debt maturing within one year (NOTE 18) third parties
    
    
    1
    
    
    
    132 related parties (NOTE 11)
    
    
    290
    
    
    
    10Total current liabilities
    
    
    2,092
    
    
    
    2,194Debt not maturing within one year (NOTES 18 AND 22) third parties
    
    
    139
    
    
    
    506 related parties (NOTE 11)
    
    
    2,307
    
    
    
    1,011Deferred credits and other liabilities (NOTE 17)
    
    
    472
    
    
    
    362Deferred income taxes (NOTE 9)
    
    
    249
    
    
    
    152Minority interests
    
    
    140
    
    
    
    117Invested equityOwners net investment
    
    
    467
    
    
    
    1,890Accumulated other comprehensive income
    
    
    88
    
    
    
    84555
    
    
    
    1,974Commitments and contingencies (NOTE 20)Total liabilities and invested equity
    
    
    5,954
    
    
    
    6,316


The accompanying notes are an integral part of the financial statements.

Approved by the Board



/s/ Brian W.
SturgellBRIAN W. STURGELL
Director
    
/s/ Suzanne LabargeSUZANNE LABARGE
Director


3



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##### 



The Novelis Group COMBINED
STATEMENT OF CASH FLOWS
Year ended December 31
(in millions of US$) 2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet income (Loss)
    
    
    55
    
    
    
    157
    
    
    
    (9
    )Adjustments to determine cash from operating activities:Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    84Depreciation and amortization
    
    
    246
    
    
    
    222
    
    
    
    211Deferred income taxes
    
    
    97
    
    
    
    (20
    )
    
    
    (1
    )Equity income
    
    
    (6
    )
    
    
    (6
    )
    
    
    (8
    )Asset impairment provisions
    
    
    75
    
    
    
    4
    
    
    
    19Stock option compensation
    
    
    2
    
    
    
    2
    
    
    
    2Loss (Gain) on sales of businesses and investment  net
    
    
    
    
    
    
    (25
    )
    
    
    4Change in operating working capitalChange in receivables third parties
    
    
    (112
    )
    
    
    6
    
    
    
    40 related parties
    
    
    28
    
    
    
    101
    
    
    
    (11
    )Change in inventories
    
    
    (145
    )
    
    
    (18
    )
    
    
    63Change in payables and accrued liabilities third parties
    
    
    (42
    )
    
    
    18
    
    
    
    142 related parties
    
    
    64
    
    
    
    (24
    )
    
    
    (92
    )Change in deferred charges and other assets
    
    
    (9
    )
    
    
    (28
    )
    
    
    (59
    )Change in deferred credits and other liabilities
    
    
    (14
    )
    
    
    48
    
    
    
    37Other  net
    
    
    (15
    )
    
    
    7
    
    
    
    (12
    )Cash from operating activities
    
    
    224
    
    
    
    444
    
    
    
    410FINANCING ACTIVITIESProceeds from issuance of new debt third parties
    
    
    575
    
    
    
    500
    
    
    
    105 related parties
    
    
    1,561
    
    
    
    471
    
    
    
    Debt repayments third parties
    
    
    (993
    )
    
    
    
    
    
    
     related parties
    
    
    (5
    )
    
    
    
    
    
    
    (50
    )Short-term borrowings  net third parties
    
    
    (774
    )
    
    
    577
    
    
    
    (75
    ) related parties
    
    
    221
    
    
    
    (29
    )
    
    
    (66
    )Dividends  minority interest
    
    
    (4
    )
    
    
    
    
    
    
    (2
    )Net payments to Alcan
    
    
    (1,512
    )
    
    
    (592
    )
    
    
    (153
    )Cash from (used for) financing activities
    
    
    (931
    )
    
    
    927
    
    
    
    (241
    )INVESTMENT ACTIVITIESPurchase of property, plant and equipment
    
    
    (165
    )
    
    
    (189
    )
    
    
    (179
    )Business acquisitions, net of cash and time deposits acquired
    
    
    
    
    
    
    (11
    )
    
    
    Proceeds from disposal of businesses, investments and other assets,
net of cash
    
    
    1
    
    
    
    33
    
    
    
    24Change in loans receivable  related parties
    
    
    874
    
    
    
    (1,210
    )
    
    
    (2
    )Cash from (used for) investment activities
    
    
    710
    
    
    
    (1,377
    )
    
    
    (157
    )Effect of exchange rate changes on cash and time deposits
    
    
    1
    
    
    
    2
    
    
    
    2Increase (Decrease) in cash and time deposits
    
    
    4
    
    
    
    (4
    )
    
    
    14Cash and time deposits  beginning of year
    
    
    27
    
    
    
    31
    
    
    
    17Cash and time deposits  end of year
    
    
    31
    
    
    
    27
    
    
    
    31
 The accompanying notes are an integral part of the financial statements. 4




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##### 



The Novelis Group COMBINED STATEMENT OF INVESTED EQUITY
Year ended December 31
(in millions of US$) Accumulated OtherComprehensive
    
    
    Owners Net
    
    Comprehensive
    
    Total InvestedIncome (Loss)
    
    
    Investment
    
    Income (Loss)
    
    EquityBalance at end of 2001
    
    
    
    
    
    
    
    2,376
    
    
    
    (142
    )
    
    
    2,234Net Loss  2002
    
    
    (9
    )
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Other comprehensive income:Net change in deferred translation adjustments
    
    
    129Net change
in minimum pension liability  net of taxes of $4
    
    
    (6
    )
    
    
    
    
    
    
    
    123
    
    
    
    123Comprehensive income
    
    
    114Transfers (to)/from Alcan  net*
    
    
    
    
    
    
    
    (167
    )
    
    
    
    
    
    
    (167
    )Balance at end of 2002
    
    
    
    
    
    
    
    2,200
    
    
    
    (19
    ) a
    
    
    2,181Net income  2003
    
    
    157
    
    
    
    
    157
    
    
    
    
    
    
    
    157Other comprehensive income:Net change in deferred translation adjustments
    
    
    102Net change
in minimum pension liability 
net of taxes of ($3)
    
    
    1
    
    
    
    
    
    
    
    
    103
    
    
    
    103Comprehensive income
    
    
    260Transfers (to)/from Alcan  net*
    
    
    
    
    
    
    
    (467
    )
    
    
    
    
    
    
    (467
    )Balance at end of 2003
    
    
    
    
    
    
    
    1,890
    
    
    
    84
    b
    
    
    1,974Net income  2004
    
    
    55
    
    
    
    
    55
    
    
    
    
    
    
    
    55Other comprehensive income:Net change in deferred translation adjustments
    
    
    30Net change
in minimum pension liability 
net of taxes of $15
    
    
    (26
    )
    
    
    
    
    
    
    
    4
    
    
    
    4Comprehensive income
    
    
    59Transfers (to)/from Alcan  net*
    
    
    
    
    
    
    
    (1,478
    )
    
    
    
    
    
    
    (1,478
    )Balance at end of 2004
    
    
    
    
    
    
    
    467
    
    
    
    88
    c
    
    
    555
 *
    
    Refer to note 2  Basis of Presentation  Cash Management for discussion of these amounts.  a.
    
    Comprised of deferred translation adjustments of ($12) and minimum pension liability of
($7).b.
    
    Comprised of deferred translation adjustments of $90 and minimum pension liability of ($6).c.
    
    Comprised of deferred translation adjustments of $120 and minimum pension liability of ($32). The accompanying notes are an integral part of the financial statements.   5




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  1.

NATURE OF OPERATIONS On May 18, 2004, Alcan Inc. (Alcan) announced its intention to separate its rolled products
business into a separate company and to pursue a spin-off of that business to its shareholders. The
rolled products businesses were managed under two separate operating segments within Alcan, Rolled
Products Americas and Asia and Rolled Products Europe. Alcan and its subsidiaries contributed and
on January 6, 2005, transferred to a new public company, Novelis Inc. (the Company or Novelis),
substantially all of the aluminum rolled products businesses operated by Alcan prior to its 2003
acquisition of Pechiney, together with some of Alcans alumina and primary metal-related businesses
in Brazil, which are fully integrated with the rolled products operations there, as well as four
former Pechiney rolling facilities in Europe, as their end-use markets and customers are more
similar to those of Novelis. Included within the Group are the assets, liabilities and operations
relating to the portions of the Sierre and Neuhausen facilities transferred to the Group, and
comprising certain assets and liabilities of the automotive and other aluminum rolled products
businesses relating to the sales and marketing output of the Sierre North Building as well as
various laboratory and testing equipment used in the aluminum rolling sheet business in Neuhausen.
These businesses formed the Novelis Group (the Group) prior to the spin-off on January 6, 2005.
Novelis, which was formed on September 21, 2004, acquired the Novelis Group businesses on January
6, 2005, through the reorganization transactions described above. On January 6, 2005, the spin-off occurred following the approval by Alcans Board of Directors and
shareholders, and the receipt of other required legal and regulatory approvals. Alcan shareholders
received one Novelis common share for every five Alcan common shares held. Common shares of
Novelis began trading on a when issued basis on the Toronto (TSX) and New York (NYSE) stock
exchanges on January 6, 2005, with a distribution record date of January 11, 2005. Regular Way
trading began on the TSX on January 7, 2005, and on the NYSE on January 19, 2005. The Novelis Group excludes the aluminum rolled products businesses that were retained by Alcan that
consist primarily of: (1) facilities in Singen, Germany and a portion of the plant located in
Sierre, Switzerland discussed below; (2) the Neuf-Brisach and Ravenswood facilities acquired in
connection with the Pechiney acquisition; and (3) facilities acquired in connection with the
Pechiney acquisition that produce plate and aerospace products and which have been attributed to
Alcans Engineered Products operating segments. The Singen plant in Germany supplies three
operating segments within Alcan, Rolled Products Europe, Engineered Products and Packaging. The
products sold by the Singen rolled products operations are used primarily as raw materials for the
Engineered Products and Packaging segments and therefore, the entire facility remains with Alcan.
Also, the Sierre plant in Switzerland forms part of two operating segments, Engineered Products in
addition to Rolled Products Europe. A portion of the Sierre plant that manufactures plate products
remains with Alcan as Novelis has entered into a non-competition agreement with Alcan with respect
to these products. The Neuf-Brisach rolling facility in France remained with Alcan in order to meet
the European regulatory requirement for the separation of Neuf-Brisach and the
AluNorf/Göttingen/Nachterstedt rolling facilities in Germany, which were transferred to the
Company. Alcan also retained the Ravenswood, West Virginia, rolling mill, consistent with the
requirements of the U.S. Department of Justices (DOJ) divestiture order relating to an overlap in
a non-aerospace related product line with the Oswego, New York, rolling mill, which was transferred
to the Company. The Group produces aluminum sheet and light gauge products where the end-use destination of the
products includes the construction and industrial, beverage and food cans, foil products and
transportation markets. The Group operates in four continents, North America, South America, Asia
and Europe through 37 operating plants and three research facilities in 12 countries. In addition
to aluminum rolled products plants, the Groups South American businesses include bauxite mining,
aluminum refining and smelting facilities that are integrated with the rolling plants in Brazil. Agreements between Novelis and Alcan Novelis has entered into various agreements with Alcan for the use of transitional and technical
services, the supply of Alcans metal and alumina, the licensing of certain of Alcans
patents, trademarks and other intellectual property rights, and the use of certain buildings,
machinery and equipment, technology and employees at certain facilities retained by Alcan, but
required in Novelis business.  2.

BASIS OF PRESENTATION The combined financial statements are presented using accounting principles generally accepted in
the United States of America (U.S. GAAP) and have been derived from the accounting records of Alcan
using the historical results of operations and historical basis of assets and liabilities of the
businesses comprising the Group. The Group has elected to use the U.S. dollar as its reporting
currency. Management believes the assumptions underlying the combined financial statements,
including the allocations described below, are reasonable. However, the combined financial
statements included herein may not necessarily reflect the Groups results of operations, financial
position and cash flows in the future or what its results of operations, financial position and
cash flows would have been had the Group been a stand-alone company during the periods 6




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  2.

BASIS OF PRESENTATION(contd) presented. As these financial statements represent a portion of the businesses of Alcan which do
not constitute a separate legal entity, the net assets of the Group have been presented as Owners
net investment in the Group. Alcans investment in the Group includes the accumulated earnings of
the Group as well as cash transfers related to cash management functions performed by Alcan. The combined financial statements include allocations of certain Alcan expenses, assets and
liabilities, including the items described below. General Corporate Expenses Alcan has allocated general corporate expenses to the Group based on average head count and capital
employed. Capital employed represents total assets less Payables and accrued liabilities and
Deferred credits and other liabilities. These allocations are reflected in Selling, general and
administrative expenses in the combined statement of income. The general corporate expenses
allocations are primarily for human resources, legal, treasury, insurance, finance, internal audit,
strategy and public affairs and amounted to $34, $24 and $28 for the years ended December 31, 2004,
2003 and 2002, respectively. Total head office costs, including the amounts allocated, amounted to
$54, $42 and $47 for the years ended December 31, 2004, 2003 and 2002, respectively. The costs
allocated are not necessarily indicative of the costs that would have been incurred if the Group
had performed these functions as a stand-alone company, nor are they indicative of costs that will
be charged or incurred in the future. Subsequent to the completion of the spin-off, the Group will
perform these functions using its own resources or purchased services; however, for an interim
period, these services will continue to be provided by Alcan, as described in note 1  Nature of
Operations  Agreements Between Novelis and Alcan. It is not practicable to estimate the amount of
expenses the Group would have incurred for the years ended December 31, 2004, 2003 and 2002 had it
been an unaffiliated entity of Alcan in each of those periods. Pensions and Post-Retirement Benefits Certain businesses included in the Group have pension obligations mostly comprised of defined
benefit plans in the U.S. and the U.K., unfunded pension benefits in Germany and lump sum
indemnities payable upon retirement to employees of businesses in France, Korea and Malaysia.
These pension benefits are managed separately and the related assets, liabilities and costs are
included in the combined financial statements. Alcan manages defined benefit plans in Canada, the U.S., the U.K. and Switzerland that include some
of the entities of the Group. The Groups share of these plans assets and liabilities is not
included in the combined balance sheet. The combined statement of income, however, includes an
allocation of the costs of the plans that varies depending on whether the entity is a subsidiary or
a division of Alcan. Pension costs of divisions of Alcan included in the Group are allocated based
on the following methods: service costs were allocated based on a percentage of payroll costs;
interest costs, the expected return on assets, and amortization of actuarial gains and losses were
allocated based on a percentage of the projected benefit obligation (PBO); and prior service costs
were allocated based on headcount. The total allocation of such pension costs amounted to $13, $15
and $14 for the years ended December 31, 2004, 2003 and 2002, respectively. Pension costs of
subsidiaries of Alcan included in the Group are accounted for on the same basis as a multi-employer
pension plan whereby the subsidiaries contributions for the period are recognized as net periodic
pension cost. The total contributions of the subsidiaries amounted to $1, $3 and $2 for the years
ended December 31, 2004, 2003 and 2002, respectively. Alcan provides post-retirement benefits in the form of unfunded healthcare and life insurance
benefits to retired employees in Canada and United States that include retired employees of some of
the Groups businesses. The Groups share of these plans liabilities is included in the combined
balance sheets and the Groups share of these plans costs is included in the combined statement of
income. Income Taxes Income taxes are calculated as if all of the Groups operations had been separate tax paying legal
entities, each filing a separate tax return in its local tax jurisdiction. For jurisdictions where
there is no tax sharing agreement, amounts currently payable have been included in the Owners net
investment. Cash Management Cash and cash equivalents in the combined balance sheets are comprised of the cash and cash
equivalents of the Groups businesses, primarily in South America, Asia and parts of Europe, that
perform their own cash management functions. 7




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  2.
    
    BASIS OF PRESENTATION(contd) Historically, Alcan has performed cash management functions on behalf of certain of the Groups
businesses primarily in North America, the United Kingdom, and parts of Europe. Cash deposits from
these businesses are transferred to Alcan on a
regular basis. As a result, none of Alcans cash and cash equivalents has been allocated to the
Group in the combined financial statements. Transfers to and from Alcan are netted against the
Owners net investment. Subsequent to the spin-off, the Group has become responsible for its own
cash management functions. Interest Expense The Group obtains short and long-term financing from third parties as well as related parties.
Interest is charged on all short and long-term debt and is included in Interest in the combined
statement of income. Historically, Alcan provided certain financing to the Group and incurred third party debt at the
parent level. This financing is reflected in the combined balance sheet within the amounts due to
Alcan and is interest bearing as described in note 11  Related Party Transactions. As a result of
this arrangement, the combined financial statements do not include an allocation of additional
interest expense. The Groups interest expense as a stand-alone company may be higher than
reflected in the combined statement of income. Derivatives The Group primarily enters into derivative contracts with Alcan to manage its foreign currency and
commodity price risk. These contracts are reported at their fair value on the combined balance
sheets. Changes in the fair value of these contracts are recorded in the combined statement of
income. Stock Options Stock-options expense and other stock-based compensation expense in the combined statement of
income include the Alcan expenses related to the fair value of awards held by certain employees of
Alcans Rolled Products businesses during the periods presented as well as an allocation,
calculated based on the average of headcount and capital employed, for Alcans corporate office
employees. These expenses are not necessarily indicative of what the expenses would have been had
the Group been a separate stand-alone company during the periods presented. Earnings Per Share Prior to the spin-off, the Group was not a separate legal entity with common shares outstanding.
Therefore, historical earnings per share have not been presented in the combined financial
statements. Earnings per share have been presented using the Novelis common shares outstanding
immediately after completion of the spin-off on January 6, 2005.  3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management 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 may also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Business Combinations All business combinations are accounted for under the purchase method. Under the purchase method,
assets and liabilities of the acquired entity are recorded at fair value. The excess of the
purchase price over the fair value of the assets and liabilities acquired is recorded as goodwill. 8




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(contd) Principles of Combination The combined financial statements include the assets and liabilities of the Group as well as a
variable interest entity, in which the Group is the primary beneficiary. Investments in entities
over which the Group has significant influence are accounted for using the equity method. Under
the equity method, the Groups investment is increased or decreased by the Groups share of the
undistributed net income or loss and deferred translation adjustments since acquisition.
Investments in joint ventures are accounted for using the equity method. Other investments are
accounted for using the cost method. Under the cost method, dividends received are recorded as
income. All inter-group balances and transactions, including profits in inventories, between and among the
Groups businesses have been eliminated. Foreign Currency The assets and liabilities of foreign operations, whose functional currency is other than the U.S.
dollar (located principally in Europe and Asia), are translated into U.S. dollars at the year-end
exchange rates. Revenues and expenses are translated at average exchange rates for the year.
Differences arising from exchange rate changes are included in the Deferred translation adjustments
(DTA) component of Accumulated other comprehensive income. If there is a reduction in the Groups
ownership in a foreign operation, the relevant portion of DTA is recognized in Other expenses
(income)  net. All other operations, including most of those in Canada and Brazil, have the U.S.
dollar as the functional currency. For these operations, monetary items denominated in currencies
other than the U.S. dollar are translated at year-end exchange rates and translation gains and
losses are included in income. Non-monetary items are translated at historical rates. The Group has entered into foreign currency contracts to hedge certain future, identifiable foreign
currency revenue and operating cost exposures. All such contracts are reported at fair value on
the combined balance sheet. For contracts qualifying as cash flow hedges, the effective portion of
the changes in fair value is recorded in Other comprehensive income and reclassified to Sales and
operating revenues, Cost of sales and operating expenses, or Depreciation and amortization, as
applicable, concurrently with the recognition of the underlying item being hedged. The portion of
the change in the contracts fair value that is not effective at offsetting the hedged exposure is
recorded in Other expenses (income)  net. For contracts qualifying as fair value hedges, changes
in fair value are recorded in the statement of income together with the changes in the fair value
of the hedged item. For contracts not qualifying as hedges, changes in fair value are recorded in
Other expenses (income)  net. Revenue Recognition Revenue from product sales, net of trade discounts and allowances, is recognized once delivery has
occurred provided that persuasive evidence of an arrangement exists, the price is fixed or
determinable, and collectibility is reasonably assured. Delivery is considered to have occurred
when title and risk of loss have transferred to the customer. Revenue from services is recognized
as services are rendered and accepted by the customer. Shipping and Handling Costs Amounts charged to customers related to shipping and handling are included in Sales and operating
revenues, and related shipping and handling costs are recorded in Cost of sales and operating
expenses. Commodity Contracts Generally, all of the forward metal contracts serve to hedge certain future identifiable aluminum
price exposures. For these contracts, the fair values of the derivatives are recorded on the
combined balance sheet. For contracts qualifying as cash flow hedges, the effective portions of
the changes in fair value are recorded in Other comprehensive income and are reclassified, together
with related hedging costs, to Sales and operating revenues or Cost of sales and operating
expenses, concurrently with the recognition of the item being hedged or in the period that the
derivatives no longer qualify as cash flow hedges. For contracts not qualifying as hedges, changes
in their fair value are recorded in Other expenses (income)  net. All natural gas and electricity futures contracts, swaps and options are recorded at fair value on
the balance sheet. For contracts qualifying as cash flow hedges, the effective portions of the
changes in the fair value are recorded in Other comprehensive income and are reclassified to the
statement of income concurrently with the recognition of the underlying item being hedged or in the
period that the derivatives no longer qualify as cash flow hedges. For contracts not qualifying
for hedge accounting, changes in fair value are recorded in Other expenses (income)  net. 9




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(contd) Physical metal purchase and sales contracts are generally not recorded at fair value because either
they are not derivative instruments or they are normal purchases or normal sales, as they involve
quantities that are expected to be used or sold in the normal course of business over a reasonable
period of time. Interest Rate Swaps The Group enters into interest rate swap agreements to manage its exposure to fluctuations in
interest rates on certain long-term debt. These swaps are marked-to-market in the financial
statements and all changes in fair value are recorded in Other expenses (income)  net. Inventories Aluminum, raw materials and other supplies inventories are stated at cost (determined for the most
part on the monthly average cost method) or net realizable value, whichever is lower. Cost includes
material, labour and manufacturing overhead costs. Capitalization of Interest Costs The Group capitalizes interest costs associated with the financing of major capital expenditures up
to the time the asset is ready for its intended use. Sale of Receivables When the Group sells certain receivables, it retains servicing rights, which constitute retained
interests in the sold receivables. No servicing asset or liability is recognized in the financial
statements as the fees received by the Group reflect the fair value of the cost of servicing these
receivables. The related purchase discount is included in Other expenses (income)  net. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Additions, improvements and major renewals are
capitalized; normal maintenance and repair costs are expensed. Depreciation is calculated on the
straight-line method using rates based on the estimated useful lives of the respective assets. The
principal rates range from 2% to 10% for buildings and structures, 1% to 4% for power assets and 3%
to 20% for chemical, smelter and fabricating assets. Gains or losses from the sale of assets are
included in Other expenses (income)  net. Impairment or Disposal of Long-Lived Assets The Group reviews its long-lived assets including amortizable intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset
may not be recoverable. An impairment loss is recognized when the carrying amount of the assets
exceeds the future undiscounted cash flows expected from the asset. Any impairment loss is
measured as the amount by which the carrying amount exceeds the fair value. Such evaluations for
impairment are significantly impacted by estimates of future prices for the Groups product,
capital needs, economic trends in the market and other factors. Quoted market values are used
whenever available to estimate fair value. When quoted market values are unavailable, the fair
value of the long-lived asset is generally based on estimates of discounted expected net cash
flows. Assets to be disposed of by sale are reflected at the lower of their carrying amount or
fair value less cost to sell and are not depreciated while classified as held for sale. Goodwill Goodwill is tested for impairment on an annual basis at the reporting unit level and is also tested
for impairment when events occur or circumstances change that would more likely than not reduce the
fair value of a reporting unit below the carrying value. Fair value is determined using discounted
cash flows. Intangible Assets Intangible assets are primarily trademarks and patented and non-patented technology, all of which
have finite lives. Intangible assets are recorded at cost less accumulated amortization and are
amortized over their useful life, which is generally 15 years, using the straight-line method of
amortization. 10




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(contd) Legal Claims Accruals for legal claims are made when it is probable that liabilities will be incurred and where
such liabilities can be reasonably estimated. Environmental Costs and Liabilities Environmental costs that are not legal asset retirement obligations are expensed or capitalized, as
appropriate. Environmental expenditures of a capital nature that extend the life, increase the
capacity or improve the safety of an asset or that mitigate or prevent environmental contamination
that has yet to occur are included in Property, plant and equipment and are depreciated generally
over the remaining useful life of the underlying asset. Expenditures relating to existing
conditions caused by past operations, and which do not contribute to future revenues, are expensed
when probable and estimable and are normally included in Cost of sales and operating expenses
except for large, unusual amounts, which are included in Other expenses (income)  net. Recoveries
relating to environmental liabilities are recorded when received. Pensions and Post-Retirement Benefits As described in note 2  Basis of Presentation, certain entities within the Group manage their
defined benefit pension plans separately from those of Alcan. Using appropriate actuarial methods
and assumptions, these defined benefit pension plans are accounted for in accordance with the
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
87, Employers Accounting for Pensions. Pension and post-retirement benefit obligations for these
plans are actuarially calculated using managements best estimates and based on expected service
period, salary increases and retirement ages of employees. Pension and post-retirement benefit
expense includes the actuarially computed cost of benefits earned during the current service
period, the interest cost on accrued obligations, the expected return on plan assets based on fair
market value and the straight-line amortization of net actuarial gains and losses and adjustments
due to plan amendments. Pension expense also includes the contributions of subsidiaries and the
pension expense allocation of divisions that participate in Alcan plans, as described in note 2 
Basis of Presentation. All net actuarial gains and losses are amortized over the expected average
remaining service life of the employees. Stock Options and Other Stock-Based Compensation The Group accounts for stock options granted to certain employees of Alcans Rolled Products
businesses under Alcans share option plan using the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under the fair value method, stock-based compensation
expense is recognized in the statement of income over the applicable vesting period. Other
stock-based compensation arrangements granted to certain employees of Alcans Rolled Products
businesses, that can be settled in cash and are based on the change in the Alcan common share price
during the period, are recognized in income over the vesting period of awards. Stock-based
compensation expense is recorded in Selling, general and administrative expenses in the statement
of income. Income Taxes Income taxes are accounted for under the liability method (also refer to note 2  Basis of
Presentation). Under the liability method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Cash and Time Deposits All time deposits have original maturities of 90 days or less and qualify as cash equivalents. Allowance For Doubtful Accounts The allowance for doubtful accounts reflects managements best estimate of probable losses inherent
in the trade receivables balance. Management determines the allowance based on known doubtful
accounts, historical experience, and other currently available evidence. 11




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(contd) Recently Issued Accounting Standards Share-Based Payment In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No.
123(R)), which is a revision to SFAS 123, Accounting for Stock-Based Compensation. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. SFAS No. 123(R) is effective
July 1, 2005. Alcan adopted the fair-value based method of accounting for share-based payments
effective January 1, 2004 using the retroactive restatement method described in SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure (see note 4  Accounting
Changes  Stock Options and Other Stock-Based Compensation). Currently, Alcan uses the
Black-Scholes formula to estimate the value of stock options granted to employees. The Group does
not anticipate that the adoption of SFAS No. 123(R) will have a material impact on its results of
operations or its financial position. Inventory Costs In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment to ARB 43, Chapter
4. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). ARB 43 previously stated that these
expenses may be so abnormal as to require treatment as current period charges. SFAS No. 151
requires that those items be recognized as current-period charges regardless of whether they meet
the criterion of so abnormal. In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. Prospective application of this statement is required beginning January 1, 2006. The
Group does not expect its financial statements to be significantly impacted by this statement. Exchanges of Nonmonetary Assets In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  an amendment of
APB Opinion No. 29. This statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. Prospective application of this statement is required beginning January 1, 2006.
The Group does not expect its financial statements to be significantly impacted by this statement.  4.
    
    ACCOUNTING CHANGES Stock Options and Other Stock-Based Compensation Effective January 1, 2004, Alcan retroactively adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation for stock options granted to employees.
These combined financial statements include the compensation cost for options granted to certain
employees of the Group. Beginning January 1, 1999, all periods have been restated to reflect
compensation cost as if the fair value method had been applied for awards issued to these employees
after January 1, 1995. Consolidation of Variable Interest Entities Effective January 1, 2004, the Group adopted FASB Interpretation No. 46 (revised December 2003)
(FIN 46(R)), Consolidation of Variable Interest Entities. In 2004, the Group became the primary
beneficiary of Logan Aluminum Inc. (Logan), a variable interest entity. As a result, the combined
balance sheet includes the assets and liabilities of Logan. Logan is a joint venture that manages
a tolling arrangement for the Group and an unrelated party. At the date of adoption of FIN 46(R), assets of $38 and liabilities of $38 related to Logan that
were previously not recorded on the combined balance sheet were recorded by the Group. Prior
periods were not restated. The Groups investment, plus any unfunded pension liability related to
Logan totalled approximately $37 and represented the Groups maximum exposure to loss. Creditors of
Logan do not have recourse to the general credit of the Group as a result of including it in the
Groups financial statements. 12




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  4.
    
    ACCOUNTING CHANGES(contd) Goodwill and Other Intangible Assets On January 1, 2002, the Group adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under
this standard, goodwill and other intangible assets with an indefinite life are no longer amortized
but are carried at the lower of carrying value and fair value. Goodwill and other intangible assets
with an indefinite life are tested for impairment on an annual basis. Goodwill is tested for impairment using a two-step test. Under the first step, the fair value of a
reporting unit, based upon discounted cash flows, is compared to its net carrying amount. If the
fair value is greater than the carrying amount, no impairment is deemed to exist. However, if the
fair value is less than the carrying amount, a second test must be performed whereby the fair value
of the reporting units goodwill must be estimated to determine if it is less than its carrying
amount. Fair value of goodwill is estimated in the same way as goodwill is determined at the date
of acquisition in a business combination, that is, the excess of the fair value of the reporting
unit over the fair value of the identifiable net assets of the reporting unit. An impairment of $84 was identified in the goodwill balance as at January 1, 2002, and was charged
to income as a cumulative effect of accounting change in 2002 upon adoption of the new accounting
standard. Any further impairment arising subsequent to January 1, 2002, is taken as a charge
against income. As a result of the new standard, the Group no longer amortizes goodwill. Impairment or Disposal of Long-Lived Assets In 2002, the Group adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Under this standard, an impairment loss is recognized when the carrying amount of a
long-lived asset held for use is not recoverable and exceeds its fair value. No impairment charges
were recorded upon adoption of this new standard. Impairment charges recorded are described in
note 8  Restructuring Programs and note 14  Other Expenses (Income)  Net. Under this standard, a long-lived asset to be disposed of by sale is measured at the lower of its
carrying amount or fair value less cost to sell, and is not depreciated while classified as held
for sale. Assets and liabilities classified as held for sale are reported as assets held for sale
and liabilities of operations held for sale on the balance sheet. A long-lived asset to be
disposed of other than by sale, such as by abandonment, before the end of its previously estimated
useful life, is classified as held for use until it is disposed of and depreciation estimates
revised to reflect the use of the asset over its shortened useful life. Also, the standard
requires that the results of operations of a component of an enterprise, that has been disposed of
either by sale or abandonment or is classified as held for sale, be reported as discontinued
operations if the operations and cash flows of the component have been, or will be, eliminated from
the ongoing operations as a result of the disposal transaction and the Group will not have any
significant continuing involvement in the operations of the component after the disposal
transaction. A component of an enterprise comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the enterprise. Derivatives On July 1, 2003, the Group adopted SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This standard amends and clarifies financial accounting and
reporting for derivatives and for hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard has no impact on the Groups financial
statements. Costs Associated with Exit or Disposal Activities On January 1, 2003, the Group prospectively adopted SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This standard requires that a liability associated with an exit
or disposal activity be recognized when the liability is incurred rather than at the date of the
Groups commitment to an exit plan. Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity On July 1, 2003, the Group adopted SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This standard requires that certain financial
instruments embodying an obligation to transfer assets or to issue equity securities be classified
as liabilities. This standard has no impact on the Groups financial statements. 13




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  5.
    
    EARNINGS PER SHARE The number of Novelis shares used to compute basic and diluted earnings per share was based on the
number of Novelis common shares outstanding on January 6, 2005, which was 73,988,932, as required
by Article 11 of Regulation S-X, Pro Forma Financial Information. The treasury stock method for
calculating the dilutive impact of stock options is used. The following table outlines the
calculation of basic and diluted earnings per share on income before cumulative effect of
accounting change. 2004
    
    
    2003
    
    
    2002Numerator:Income before cumulative effect of accounting change
    
    
    55
    
    
    
    157
    
    
    
    75Denominator (number of common shares in millions):Outstanding shares on January 6, 2005
    
    
    73.99
    
    
    
    73.99
    
    
    
    73.99Effect of dilutive stock options
    
    
    0.44
    
    
    
    0.44
    
    
    
    0.44Adjusted number of outstanding shares
    
    
    74.43
    
    
    
    74.43
    
    
    
    74.43Earnings per share  basic (in US$)
    
    
    0.74
    
    
    
    2.12
    
    
    
    1.01Earnings per share  diluted (in US$)
    
    
    0.74
    
    
    
    2.11
    
    
    
    1.00
 Options to purchase an aggregate of 1,356,735 Alcan common shares were held by the Groups
employees as at December 31, 2004. Of these, 685,285 options to purchase Alcan common shares at an
average exercise price of CAN$38.86 ($29.96) per share are dilutive for the periods presented.
These dilutive stock options are equivalent to 443,351 Novelis common shares. The number of
antidilutive Alcan options held by the Groups employees as at December 31, 2004 is 671,450.  6.
    
    SALES, ACQUISITIONS AND TRANSFER OF BUSINESSES 2003 Canada, United States, and Other Europe
In December 2003, Alcan completed the acquisition of Pechiney in a public offer for a cost of
$5,458, net of cash and time deposits acquired. A portion of the acquisition cost, relating to
four Pechiney plants in three countries that are included in the Group, was allocated to the Group
and accounted for as additional invested equity. As this transaction represented a transfer of
these plants to the Group rather than an acquisition by the Group, there were no cash outflows
incurred by the Group. The four plants comprise rolled products operations in foil, painted sheet
and circles. The business combination was accounted for using the purchase method. The net assets
of the Pechiney plants are included in the combined financial statements commencing on December 31,
2003 and the results of operations and cash flows have been included in the combined financial
statements beginning January 1, 2004. Allocation of the purchase price involves estimates and information gathering during months
following the date of the combination. Given the magnitude of the acquisition of Pechiney and due
to the fact that the transaction was completed at the end of 2003, a tentative purchase price
allocation was performed at December 31, 2003 and the final valuation was completed in 2004. The
revisions resulted in an increase in goodwill of $183 as indicated below. Fair value of net assets acquired at date of acquisition Final
    
    TentativePurchase Price
    
    Purchase PriceAllocation
    
    AllocationTrade receivables
    
    
    82
    
    
    
    82Inventories
    
    
    101
    
    
    
    101Property, plant and equipment(2)
    
    
    84
    
    
    
    70Goodwill(1)
    
    
    228
    
    
    
    45Total assets
    
    
    495
    
    
    
    298Payables and accrued liabilities(2)
    
    
    158
    
    
    
    139Debt not maturing within one year
    
    
    4
    
    
    
    4Deferred credits and other liabilities
    
    
    18
    
    
    
    14Deferred income taxes  non-current
    
    
    18
    
    
    
    13Fair value of net assets acquired at date of acquisition (net of cash and time
deposits acquired of $5)
    
    
    297
    
    
    
    128
 (1)
    
    See note 7  Goodwill and Intangible Assets.(2)
    
    Include $19 of asset impairment charges and $19 of restructuring costs as described in note 8  Restructuring Programs. 14




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##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  6.
    
    SALES, ACQUISITIONS AND TRANSFER OF BUSINESSES(contd) The goodwill is generally not deductible for tax purposes. The differences between the tentative and final purchase price allocations are principally due to
the completion of the final valuation of property, plant and equipment; the recording of
liabilities for costs to exit certain operations of Pechiney; and the finalization of the goodwill
to the reporting units. Asia and Other Pacific
In the first quarter of 2003, the Group increased its ownership in Alcan Taihan Aluminium Limited
by 6.81% at a cost of $5. In the third quarter of 2003, the Group increased its ownership position in Aluminium Company of
Malaysia, a manufacturer of light gauge aluminum products, from 36% to 59% by acquiring additional
shares, with a value of $30, from Nippon Light Metal Company, Ltd (NLM) in exchange for its
ownership in Alcan Nikkei Siam Limited in Rangsit, Thailand, with a value of $24, and a cash
payment of $6. In December 2003, the Group sold the extrusions operations of Aluminium Company of Malaysia, for
net proceeds of $2. A pre-tax amount of $6, which is included in Other expenses (income)  net,
consists of a favourable adjustment to a previously recorded impairment provision. Other
In 2003, the Group sold its Borgofranco power facilities in Italy (Novelis Europe) and recorded a
gain of $19 in Other expenses (income)  net.  7.
    
    GOODWILL AND INTANGIBLE ASSETS Goodwill The changes in the carrying amount of goodwill for the year ended December 31, 2004, are as
follows: BALANCE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCEAS AT
    
    
    
    
    
    
    DEFERRED
    
    
    
    
    
    
    
    
    
    
    AS ATJANUARY 1,
    
    
    
    
    
    
    TRANSLATION
    
    
    
    
    
    
    IMPAIRMENT
    
    
    DECEMBER 31,2004
    
    
    ADDITIONS
    
    
    ADJUSTMENTS
    
    
    ADJUSTMENTS*
    
    
    LOSSES
    
    
    2004Novelis Europe
    
    
    69
    
    
    
    
    
    
    
    4
    
    
    
    183
    
    
    
    
    
    
    
    256
 *
    
    In 2004, adjustments are due to changes to the tentative purchase price allocation related to
the Pechiney acquisition. See note 6  Sales, Acquisitions and Transfer of Businesses. The changes in the carrying amount of goodwill for the year ended December 31, 2003, are as
follows: BALANCE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCEAS AT
    
    
    
    
    
    
    DEFERRED
    
    
    
    
    
    
    
    
    
    
    AS ATJANUARY 1,
    
    
    
    
    
    
    TRANSLATION
    
    
    
    
    
    
    IMPAIRMENT
    
    
    DECEMBER 31,2003
    
    
    ADDITIONS
    
    
    ADJUSTMENTS
    
    
    ADJUSTMENTS
    
    
    LOSSES
    
    
    2003Novelis Europe
    
    
    21
    
    
    
    45
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    69
 The changes in the carrying amount of goodwill for the year ended December 31, 2002, are as
follows: BALANCE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCEAS AT
    
    
    
    
    
    
    DEFERRED
    
    
    
    
    
    
    
    
    
    
    AS ATJANUARY 1,
    
    
    
    
    
    
    TRANSLATION
    
    
    
    
    
    
    IMPAIRMENT
    
    
    DECEMBER 31,2002
    
    
    ADDITIONS
    
    
    ADJUSTMENTS
    
    
    ADJUSTMENTS
    
    
    LOSSES
    
    
    2002Novelis Europe
    
    
    98
    
    
    
    
    
    
    
    2
    
    
    
    5
    
    
    
    (84)
    
    
    
    21
 In accordance with SFAS No. 142, the Group completed an initial review to determine whether, at
January 1, 2002, there was an impairment in the goodwill balance. As a result of this review, an
impairment loss of $84 was recognized in income in 2002 as a cumulative effect of accounting
change. The impairment reflected the decline in end-market conditions in the period from the
algroup merger in October 2000 to January 1, 2002. The fair value of all reporting units was
determined using discounted future cash flows. Annual tests were also completed in 2002, 2003 and
2004 and no further impairment was identified. 15




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  7.
    
    GOODWILL AND INTANGIBLE ASSETS(contd) Intangible Assets with Finite Lives GROSS CARRYING
    
    
    ACCUMULATEDAMOUNT
    
    
    AMORTIZATION
    
    
    NET BOOK VALUEDECEMBER 31, 2004Trademarks
    
    
    14
    
    
    
    4
    
    
    
    10Patented and non-patented technology
    
    
    21
    
    
    
    5
    
    
    
    16Prior pension service costs (NOTE 24)
    
    
    9
    
    
    
    
    
    
    
    944
    
    
    
    9
    
    
    
    35DECEMBER 31, 2003Trademarks
    
    
    11
    
    
    
    2
    
    
    
    9Patented and non-patented technology
    
    
    17
    
    
    
    4
    
    
    
    13Prior pension service costs (NOTE 24)
    
    
    4
    
    
    
    
    
    
    
    432
    
    
    
    6
    
    
    
    26DECEMBER 31, 2002Trademarks
    
    
    10
    
    
    
    2
    
    
    
    8Patented and non-patented technology
    
    
    16
    
    
    
    2
    
    
    
    14Prior pension service costs (NOTE 24)
    
    
    1
    
    
    
    
    
    
    
    127
    
    
    
    4
    
    
    
    23
 The aggregate amortization expense for the year ended December 31, 2004 was $2 (2003: $2; 2002:
$2). The estimated amortization expense for the five succeeding fiscal years is approximately $2
per year.  8.
    
    RESTRUCTURING PROGRAMS 2004 Restructuring Activities In line with its objective of value maximization, the Group undertook various restructuring
initiatives in 2004. Pechiney In 2004, the Group recorded liabilities of $19 for restructuring costs in connection with the exit
of certain operations of Pechiney and these costs were recorded in the allocation of the purchase
price. See note 6  Sales, Acquisitions and Transfer of Businesses. These costs relate to a plant
closure in Flemalle, Belgium (Novelis Europe) and comprise $17 of severance costs and $2 of other
charges. No further charges are expected to be incurred in relation to this plant closure. Other 2004 Restructuring Activities The Group incurred restructuring charges of $19 in 2004 relating to the consolidation of its U.K.
aluminum sheet rolling activities in Rogerstone, Wales (Novelis Europe) in order to improve
competitiveness through better capacity utilization and economies of scale. Production ceased at
the rolling mill in Falkirk, Scotland (Novelis Europe) in December 2004 and the facility is
expected to close during the first quarter of 2005. The charges include $6 of severance costs, $8
of asset impairment charges, $2 of pension costs, $2 of decommissioning and environmental costs and
$1 of other charges, which were recorded in Other expenses (income)  net in the statement of
income. The Group incurred restructuring charges of $3 in 2004, relating to the closure of a corporate
office in Germany (Other), comprised of $2 for severance costs and $1 related to costs to
consolidate facilities, which were recorded in Other expenses (income)  net in the statement of
income. No further charges are expected to be incurred in relation to this restructuring activity. 16




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  8.
    
    RESTRUCTURING PROGRAMS(contd) 2001 Restructuring Program In 2001, Alcan implemented a restructuring program, resulting in a series of plant sales, closures
and divestments throughout the organization. A detailed business portfolio review was undertaken
in 2001 to identify high cost operations, excess capacity and non-core products. Impairment
charges arose as a result of negative projected cash flows and recurring losses. These charges
related principally to buildings, machinery and equipment. This program was essentially completed
in 2003. In 2004, the Group recorded recoveries related to the 2001 restructuring program comprised of $7
gain on the sale of assets related to the closure of facilities in Glasgow, U.K. (Novelis Europe)
and a write-back of $1 relating to a provision in the U.S. (Novelis North America). In 2003, the Group recorded restructuring recoveries of $24 in Other expenses (income)  net. The
$24 recovery consists of $3 for the reversal of an excess redundancy provision in the U.K. (Novelis
Europe), a gain of $19 principally for the sale of the Borgofranco power facilities in Italy
(Novelis Europe), income of $6 on the sale of extrusions operations in Malaysia (Novelis Asia), a
gain of $4 on the sale of assets in the U.K., and partially offset by other costs of $8 mainly in
the U.K. In 2003, the Group completed the closure of facilities at Glasgow, U.K., sold its
extrusions operations in Malaysia for net proceeds of $2 and decided to retain the recycling
operations at the Borgofranco plant in Italy and both cold mills at the light gauge operations in
Fairmont, West Virginia (Novelis North America). In 2002, the Group recorded restructuring costs of $25 in Other expenses (income)  net. The $25
charge consisted of severance costs of $9 related to workforce reductions of approximately 250
employees, impairment of long-lived assets of $13 and other costs of $3. Severance charges of $9
related primarily to the extrusions operations in Malaysia (Novelis Asia) and light gauge
operations in Fairmont, West Virginia (Novelis North America). Asset impairment charges of $13
related primarily to the Borgofranco plant in Italy (Novelis Europe) and the operations in Korea
(Novelis Asia). Other exit costs consisted principally of a loss of $4 on the sale of the rolled
products circles production unit at Pieve, Italy (Novelis Europe), for which the Group received
proceeds of $14. The remaining provision balance of $43 as at December 31, 2004, related principally to employee
severance and environmental remediation costs for which payments will be made over an extended
period. The environmental remediation costs of $9 included in the provision balance, which are
payable within one year, are not included in the estimated environmental clean-up costs discussed
in note 20  Commitments and Contingencies. The majority of the environmental remediation costs
relate to a facility in Borgofranco, Italy. Management has calculated the provision based on
current third-party costs for similar remediation activities. Management does not believe that the
amount will vary materially from what is recorded as a liability. The schedule provided below shows details of the provision balances and related cash payments for
the significant restructuring activities: ASSETSEVERANCE
    
    
    IMPAIRMENTCOSTS
    
    
    PROVISIONS
    
    
    OTHER
    
    
    TOTALProvision balance as at December 31, 2003
    
    
    19
    
    
    
    
    
    
    
    12
    
    
    
    312004:Charges recorded in the statement of income
    
    
    7
    
    
    
    8
    
    
    
    (1)
    
    
    
    14Liabilities recorded in the allocation of the
Pechiney purchase price
    
    
    17
    
    
    
    
    
    
    
    2
    
    
    
    19Cash payments  net
    
    
    (14)
    
    
    
    
    
    
    
    (5)
    
    
    
    (19)Non-cash charges (recoveries)
    
    
    
    
    
    
    (8)
    
    
    
    6
    
    
    
    (2)Provision balance as at December 31, 2004
    
    
    29
    
    
    
    
    
    
    
    14
    
    
    
    43
 17




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  9.
    
    INCOME TAXES 2004
    
    
    2003
    
    
    2002Income (Loss) before income taxes and other itemsCanada
    
    
    (25
    )
    
    
    (24
    )
    
    
    (22
    )Other countries
    
    
    250
    
    
    
    228
    
    
    
    158225
    
    
    
    204
    
    
    
    136Current income taxesCanada
    
    
    (11
    )
    
    
    (11
    )
    
    
    (10
    )Other countries
    
    
    80
    
    
    
    81
    
    
    
    8869
    
    
    
    70
    
    
    
    78Deferred income taxesCanada
    
    
    2
    
    
    
    4
    
    
    
    2Other countries
    
    
    95
    
    
    
    (24
    )
    
    
    (3
    )97
    
    
    
    (20
    )
    
    
    (1
    )Income tax provision
    
    
    166
    
    
    
    50
    
    
    
    77
 The composite of the applicable statutory corporate income tax rates in Canada in 2004 is 33%
(2003: 32%; 2002: 32%). The following is a reconciliation of income taxes calculated at the above composite statutory rates
with the income tax provision: 2004
    
    
    2003
    
    
    2002Income taxes at the composite statutory rate
    
    
    74
    
    
    
    66
    
    
    
    44Differences attributable to:Withholding tax in connection with the spin-off transaction
    
    
    21
    
    
    
    
    
    
    
    Exchange translation items
    
    
    13
    
    
    
    1
    
    
    
    (18
    )Exchange revaluation of deferred income taxes
    
    
    2
    
    
    
    4
    
    
    
    Unrecorded tax benefits  net
    
    
    42
    
    
    
    (14
    )
    
    
    24Investment and other allowances
    
    
    (3
    )
    
    
    (3
    )
    
    
    (2
    )Reduced rate or tax exempt items
    
    
    (2
    )
    
    
    (4
    )
    
    
    5Foreign tax rate differences
    
    
    10
    
    
    
    9
    
    
    
    18Prior years tax adjustments
    
    
    5
    
    
    
    (13
    )
    
    
    5Other  net
    
    
    4
    
    
    
    4
    
    
    
    1Income tax provision
    
    
    166
    
    
    
    50
    
    
    
    77
 At December 31, the principal items included in Deferred income taxes are: 2004
    
    
    2003LiabilitiesProperty, plant, equipment and intangibles
    
    
    255
    
    
    
    259Inventory valuation
    
    
    42
    
    
    
    11Other  net
    
    
    51
    
    
    
    38348
    
    
    
    308AssetsTax benefit carryovers
    
    
    174
    
    
    
    123Accounting provisions not currently deductible for tax
    
    
    100
    
    
    
    122274
    
    
    
    245Valuation allowance (amounts not likely to be recovered)
    
    
    163
    
    
    
    89111
    
    
    
    156Net deferred income tax liability
    
    
    237
    
    
    
    152Amounts recognized in the combined balance sheet consist of:Deferred charges and other assets
    
    
    (12
    )
    
    
    Deferred income tax liability
    
    
    249
    
    
    
    152237
    
    
    
    152
 18




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  9.
    
    INCOME TAXES(contd) The valuation allowance relates principally to loss carryforward benefits and tax credits where
realization is not likely. The majority of the allowance relates to loss carryforwards of
companies in Korea, the U.K., Italy and Luxembourg. The increase in the valuation allowance is
primarily due to tax benefits on current year losses and accounting provisions for which
realization is not likely and fluctuations in exchange rates. Based on rates of exchange at December 31, 2004, tax benefits of approximately $127 relating to
prior and current years operating losses and $11 of benefits related to tax credits carried
forward will be recognized when it is more likely than not that such benefits will be realized.
These amounts are included in the valuation allowance above. Approximately $8 of these potential
tax benefits expire in 2005. The determination of the unrecorded deferred income tax liability for temporary differences related
to investments in foreign subsidiaries and foreign corporate joint ventures that are considered to
be permanently reinvested is not considered practicable.  10.
    
    INVESTMENT IN NON-CONTROLLED AFFILIATES At December 31, 2004, investments accounted for using the equity method and the ownership held by
the Group include principally: Aluminium Norf GmbH (50%) and Petrocoque S.A.  Indústria E Comércio
(25%). The activities of the Groups major equity-accounted investments include the aluminum
rolling operations in Germany. As described in note 4  Accounting Changes  Consolidation of Variable Interest Entities,
beginning in 2004, the Group consolidated, under the provisions of
FIN 46(R), the financial
statements of Logan, in which it holds a 40% interest. Prior to 2004, the Groups investment in
Logan was accounted for using the equity method and the results of Logans operations for the years
ended December 31, 2003 and 2002 have been included in the combined financial information below. A summary of the combined financial information for these equity-accounted companies is set forth
below. Summary of Combined Financial Position 2004
    
    
    2003Current assets
    
    
    253
    
    
    
    216Non-current assets
    
    
    609
    
    
    
    662Total assets
    
    
    862
    
    
    
    878Current liabilities
    
    
    457
    
    
    
    492Non-current liabilities
    
    
    153
    
    
    
    160Total liabilities
    
    
    610
    
    
    
    652Net assets
    
    
    252
    
    
    
    226The Groups equity in net assets
    
    
    122
    
    
    
    110
 Summary of Combined Operations 2004
    
    
    2003
    
    
    2002Revenues
    
    
    451
    
    
    
    411
    
    
    
    359Costs and expenses
    
    
    423
    
    
    
    385
    
    
    
    332Income taxes
    
    
    11
    
    
    
    11
    
    
    
    12Net income
    
    
    17
    
    
    
    15
    
    
    
    15The Groups share of net income as reported in equity income
    
    
    6
    
    
    
    6
    
    
    
    8
 19




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  11.
    
    RELATED PARTY TRANSACTIONS The table below describes the nature and amount of transactions the Group has with related parties.
All of the transactions are part of the ordinary course of business and were agreed to by the
Group and the related parties. Alcan refers to Alcan Inc. and its subsidiaries. Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Sales and operating revenues(A)Alcan
    
    
    450
    
    
    
    472
    
    
    
    437Cost of sales and operating expenses(A)Alcan
    
    
    403
    
    
    
    436
    
    
    
    411Research and development expenses(B)Alcan
    
    
    38
    
    
    
    44
    
    
    
    49Interest expense(C)Alcan
    
    
    33
    
    
    
    19
    
    
    
    22Other expense (income) netService fee income(D)
    
    
    (42
    )
    
    
    (39
    )
    
    
    (37
    )Service fee expense(E)
    
    
    25
    
    
    
    26
    
    
    
    28Interest income
    
    
    (22
    )
    
    
    (4
    )
    
    
    (1
    )Derivatives(F)
    
    
    (23
    )
    
    
    (68
    )
    
    
    (9
    )Transfer pricing adjustment
    
    
    
    
    
    
    
    
    
    
    44Other
    
    
    8
    
    
    
    2
    
    
    
    2Total transactions with Alcan
    
    
    (54
    )
    
    
    (83
    )
    
    
    27Interest income from Aluminium Norf GmbH
    
    
    (2
    )
    
    
    (1
    )
    
    
    (5
    )(56
    )
    
    
    (84
    )
    
    
    22Purchase of inventory/tolling servicesAluminium Norf GmbH
    
    
    203
    
    
    
    187
    
    
    
    162Alcan(G)
    
    
    1,739
    
    
    
    1,732
    
    
    
    1,704
 (A)

The Group sells inventory to Alcan and certain investees accounted for under the equity
method in the ordinary course of business.(B)

These expenses are comprised of an allocation of research and development expenses incurred
by Alcan on behalf of the Group.(C)

As discussed further below as well as in note 18  Debt Not Maturing Within One Year, the
Group has various short-term and long-term debt payable to Alcan where interest is charged on
both a fixed and a floating rate basis.(D)

Service fee income relates to revenues generated through sales of research and development
and other corporate services to Alcan.(E)

Service fee expense relates to the purchase of corporate services from Alcan.(F)

Alcan is the counterparty to all of the Groups metal derivatives and most of the currency
derivatives. Refer to note 22  Financial Instruments and Commodity Contracts.(G)

Alcan is the primary supplier of prime and sheet ingot to the Group. 20




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  11.
    
    RELATED PARTY TRANSACTIONS(contd) The table below describes the nature and amount of balances the Group has with related parties. As at December 31
    
    2004
    
    
    2003Trade receivables(A)Alcan
    
    
    87
    
    
    
    163Other receivablesAlcan(B)(C)(E)
    
    
    801
    
    
    
    1,154Aluminium Norf GmbH
    
    
    45
    
    
    
    13846
    
    
    
    1,167Long-term receivablesAlcan(C)
    
    
    2
    
    
    
    500Aluminium Norf GmbH(D)
    
    
    102
    
    
    
    114104
    
    
    
    614Payables and accrued liabilities(A)Aluminium Norf GmbH
    
    
    45
    
    
    
    4Alcan
    
    
    356
    
    
    
    282401
    
    
    
    286Short-term borrowings(F)Alcan
    
    
    312
    
    
    
    64Debt maturing within one year(G)Alcan
    
    
    290
    
    
    
    10Debt not maturing within one year(G)Alcan
    
    
    2,307
    
    
    
    1,011
 (A)

The Group purchases from and sells inventory to Alcan and purchases services from an investee
accounted for under the equity method, in the ordinary course of business.(B)

Includes Trade receivables sold to Alcan in the amount of $242 (2003: $218) as described in
note 13  Sales and Forfaiting of Receivables.(C)

Alcan Aluminum Corporation Inc. (AAC), which is part of the Group, issued two $500 Floating
Rate Notes (FRNs) on December 8, 2003, maturing in December 2004 and 2005, respectively, and
advanced the funds including an additional $125 to Alcan as part of Alcans financing of its
acquisition of Pechiney. As at December 31, 2003, the amounts due from Alcan to AAC are
included in Other receivables, for the $500 FRN due in 2004 and the $125 loan (recorded by the
Group in Short-term borrowings), and in Long-term receivables for the $500 FRN due in 2005.
The $125 loan, the $500 FRN due in 2005, and the $500 FRN due in 2004 were repaid to AAC in
March, August and December 2004, respectively, and AAC applied the funds to repay the
corresponding third-party debt.(D)

Loan to an investee accounted for under the equity method.(E)

Includes various floating rate notes totalling  266 million (2003:  159 million) and $55
(2003: nil) maturing within one year.(F)

Loans due to Alcan in various currencies including  193 million (2003: nil) and GBP 20
million (2003: GBP 36 million).(G)

The Group has various loans payable to Alcan as described in note 18  Debt Not Maturing
Within One Year. 21




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  12.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts reflects managements best estimate of probable losses inherent
in the trade receivables balance. Management determines the allowance based on known uncollectable
accounts, historical experience, and other currently available evidence. Activity in the allowance
for doubtful accounts is as follows: ADDITIONSBALANCE AT
    
    
    CHARGED TOBEGINNING
    
    
    COSTS &
    
    
    
    
    
    
    
    
    
    
    BALANCE ATDESCRIPTION
    
    OF YEAR
    
    
    EXPENSES
    
    
    ACQUISITIONS
    
    
    WRITE-OFFS
    
    
    END OF YEAR2004
    
    
    30
    
    
    
    6
    
    
    
    
    
    
    
    (3)
    
    
    
    332003
    
    
    25
    
    
    
    5
    
    
    
    1
    
    
    
    (1)
    
    
    
    302002
    
    
    23
    
    
    
    8
    
    
    
    
    
    
    
    (6)
    
    
    
    25
  13.
    
    SALES AND FORFAITING OF RECEIVABLES Alcan performs cash management functions on behalf of certain of the Groups businesses primarily
in North America, the United Kingdom, and parts of Europe. On an ongoing basis, the Groups
businesses in North America sell to Alcan an undivided interest in certain third party trade
receivables, with no recourse. The third party receivables are exchanged for receivables from
Alcan, which are included in Other receivables  related parties (refer to note 11  Related Party
Transactions). The consideration received by the Group for the receivables reflects the good faith
determination of the Group and Alcan of the fair market value of the receivables and is equal to
the consideration that the parties believe would be received in sales of the receivables between
non-affiliated entities. Alcan charges the Group a servicing fee on a monthly basis which the Group
charges back to Alcan as it manages the receivables. The Group acts as a service agent and
administers the collection of the receivables sold. No servicing asset or liability is recognized
by the Group as the fees received reflect the fair value of the cost of servicing the receivables. An undivided interest in the trade receivables sold by the Group to Alcan is sold to a third party
bank, with limited recourse, on an ongoing basis under the terms of an agreement effective December
18, 2001. The assets are isolated from Alcan and the Group and are put presumptively beyond the
reach of Alcan, the Group and their respective creditors. The bank, as transferee, has the center to
pledge or exchange the assets it has received, and no condition both constrains such transferee
from taking advantage of its center to pledge or exchange and provides more than a trivial benefit
to Alcan or the Group. Alcan does not maintain effective control over the receivables so
transferred through either (a) an agreement that both entitles and obligates Alcan to repurchase
the receivables before their maturity or (b) the ability to unilaterally cause the bank to return
specific assets. Accordingly, the transfer of receivables by the Group to Alcan, and by Alcan to
the transferee bank, have been recognized as sales pursuant to SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets & Extinguishments of Liabilities. As at December 31, 2004, the Group sold third party trade receivables of $242 (2003: $218). In
January 2005, as a result of the spin-off, this program was discontinued. In 2004, Alcan Taihan Aluminum Limited forfaited third party receivables of $50 (2003: $34) to a
financial institution. Forfaiting is a customary, ordinary-course cash management practice in the
Korean marketplace where receivables typically run 60, 90, 120 days or longer.  14.
    
    OTHER EXPENSES (INCOME)  NET Other expenses (income)  net comprise the following elements: 2004
    
    
    2003
    
    
    2002Restructuring costs
    
    
    20
    
    
    
    8
    
    
    
    6Asset impairment provisions
    
    
    75
    
    
    
    4
    
    
    
    19Loss (Gain) on disposal of fixed assets
    
    
    (5)
    
    
    
    (28)
    
    
    
    1Environmental provisions
    
    
    6
    
    
    
    25
    
    
    
    Interest revenue
    
    
    (26)
    
    
    
    (7)
    
    
    
    (16)Exchange (gains) losses
    
    
    2
    
    
    
    17
    
    
    
    3Derivatives (gains) losses
    
    
    (69)
    
    
    
    (20)
    
    
    
    (9)Service fee expense (income)  net
    
    
    (17)
    
    
    
    (13)
    
    
    
    (9)Transfer pricing adjustment
    
    
    
    
    
    
    
    
    
    
    44Other
    
    
    42
    
    
    
    14
    
    
    
    728
    
    
    
    
    
    
    
    46
 22




---



##### 



The Novelis Group NOTES
TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)  14.
    
    OTHER EXPENSES (INCOME)  net(contd) The 2004 restructuring costs of $20 consist principally of $14 of charges included in note 8 
Restructuring Programs. The balance relates principally to severance costs. The 2004 asset impairment provisions consist principally of $8 of charges included in note 8 
Restructuring Programs and $65 related to the impairment of certain rolling assets in Italy
(Novelis Europe) and arose as a result of negative projected cash flows. Fair values were
determined based on either discounted cash flows or selling price. The 2003 restructuring costs of $8 consist principally of $5 related to the 2001 restructuring
program. These charges relate to the U.K. (Novelis Europe) and comprise $8 of employee severance
and other exit costs partially offset by $3 for the reversal of an excess redundancy provision. The 2002 restructuring costs of $6 consist principally of $9 of severance costs in Malaysia
(Novelis Asia) related to the 2001 restructuring program included in note 8  Restructuring
Programs.  15.
    
    DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets comprise the following elements: 2004
    
    
    2003Prepaid pension costs (NOTE 24)
    
    
    8
    
    
    
    2Deferred income taxes (NOTE 9)
    
    
    12
    
    
    
    Investments accounted for under the equity method (NOTE 10)
    
    
    122
    
    
    
    110Long-term notes and other receivables
    
    
    43
    
    
    
    74Other
    
    
    8
    
    
    
    10193
    
    
    
    196
  16.
    
    PROPERTY, PLANT AND EQUIPMENT 2004
    
    
    2003Cost (excluding Construction work in progress)Land and property rights
    
    
    93
    
    
    
    93Buildings
    
    
    935
    
    
    
    848Machinery and equipment
    
    
    4,478
    
    
    
    4,2775,506
    
    
    
    5,218
 Accumulated depreciation relates primarily to Buildings and Machinery and equipment.  17.
    
    DEFERRED CREDITS AND OTHER LIABILITIES Deferred credits and other liabilities comprise the following elements: 2004
    
    
    2003Post-retirement and post-employment benefits (NOTE 24)
    
    
    284
    
    
    
    211Environmental liabilities (NOTE 20)
    
    
    39
    
    
    
    52Restructuring liabilities
    
    
    1
    
    
    
    2Claims
    
    
    83
    
    
    
    40Other
    
    
    65
    
    
    
    57472
    
    
    
    362
 23




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 18. DEBT NOT MATURING WITHIN ONE YEAR 2004
    
    
    2003DUE TO RELATED PARTIESAlcan Deutschland Holdings GmbH & Co. KG3.62%, loan,
due 2008 (375 million)
    
    
    508
    
    
    
    472Floating rate loan, due 2006 (51 million)(A)
    
    
    69
    
    
    
    64Alcan Deutschland GmbHFloating rate loans, due 2005 (214 million)(A)
    
    
    290
    
    
    
    268Alcan Aluminio do Brasil LtdaFloating rate notes, due 2006/2007(A)
    
    
    125
    
    
    
    195Alcan Aluminio S.p.A.Floating rate loan (A)
    
    
    
    
    
    
    22Alcan Aluminum Corporation5.05% Promissory Note, due 2009
    
    
    400
    
    
    
    Alcan Packaging Bridgnorth Ltd7.8% Promissory Note, due 2014 (£61 million)(B)
    
    
    117
    
    
    
    7.8% Promissory Note, due 2014 ( £775,000) (B)
    
    
    1
    
    
    
    ARCUSTARGET INC.6.45% Promissory Note, due 2014 (10 million) (B)
    
    
    14
    
    
    
    5.15% Promissory Note, due 2014 (CHF 245 million) (B)
    
    
    215
    
    
    
    6.45% Promissory Note, due 2014 (7 million) (B)
    
    
    9
    
    
    
    7.80% Promissory Note, due 2014 (£23 million) (B)
    
    
    45
    
    
    
    7.50% Promissory Note, due 2014 (B)
    
    
    33
    
    
    
    6.45% Promissory Note, due 2014 (15 million) (B)
    
    
    20
    
    
    
    6.45% Promissory Note, due 2014 (83 million) (B)
    
    
    112
    
    
    
    7.50% Promissory Note, due 2014 (B)
    
    
    287
    
    
    
    7.50% Promissory Note, due 2014 (B)
    
    
    200
    
    
    
    6.45% Promissory Note, due 2014 (77 million)(B)
    
    
    105
    
    
    
    Novelis Valais SA5.15% Promissory Note, due 2014 (CHF 35 million) (B)
    
    
    31
    
    
    
    Novelis Specialités France6.45% Promissory Note, due 2014 (6 million) (B)
    
    
    8
    
    
    
    Novelis PAE6.45% Promissory Note, due 2014 (6 million)(B)
    
    
    8
    
    
    
    2,597
    
    
    
    1,021Debt maturing within one year included in current liabilities
    
    
    (290
    )
    
    
    (10
    )Debt not maturing within one year due to related parties
    
    
    2,307
    
    
    
    1,011DUE TO THIRD PARTIESAlcan Aluminum CorporationFloating Rate Notes, due 2005 (A) (C)
    
    
    
    
    
    
    500Alcan Taihan Aluminium Limited(D)4.55% Bank loan, due 2007
    
    
    70
    
    
    
    4.80% Bank loan, due 2007 (KRW 40 billion)
    
    
    39
    
    
    
    304.45% Bank loan, due 2007 (KRW 25 billion)
    
    
    24
    
    
    
    20Bank loans, due 2005/2011 (KRW 2 billion)
    
    
    2
    
    
    
    2OtherBank loans, due 2005/2009
    
    
    3
    
    
    
    85Other debt, due 2005/2010
    
    
    2
    
    
    
    1140
    
    
    
    638Debt maturing within one year included in current liabilities
    
    
    (1
    )
    
    
    (132
    )Debt not maturing within one year due to third parties
    
    
    139
    
    
    
    506
 24




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 18. DEBT NOT MATURING WITHIN ONE YEAR(contd)  (A)

Interest rates fluctuate principally with the lenders prime commercial rate, the commercial
bank bill rate, or are tied to LIBOR/EURIBOR rates.(B)

These promissory notes totalling $1,205 comprise a major portion of the $1,375 bridge
financing (Alcan Notes) provided by Alcan to the Group as a result of the reorganization
transactions described in note 1  Nature of Operations. The remaining balance of the Alcan
Notes of $170 was obtained in January 2005. The equivalent USD interest rate of the Alcan
Notes is fixed at 7.50%, subject to quarterly increases of 0.50%, not to exceed 11.50%. The
Group obtained the Alcan Notes with the intention of refinancing them with third party
long-term debt. The Notes were duly refinanced with the proceeds of the $1,400 10-year Senior
Notes issued in February 2005 (refer to note 27  Subsequent Events  Financing).
Accordingly, the Alcan Notes have been classified as Debt not maturing within one year as at
December 31, 2004.(C)

Alcan Aluminum Corporation (AAC) had the right to redeem the FRNs due December 8, 2005, at
any time on or after June 8, 2004. It opted to repay the FRNs on August 6, 2004 (refer to note
11  Related Party Transactions). The FRNs ranked equally with AACs senior unsecured debt
and were guaranteed by Alcan.(D)

In December 2004, Alcan Taihan Aluminium Limited (ATA) entered into a $70 floating rate
long-term loan which was subsequently swapped for a 4.55% fixed rate KRW 73 billion loan. In
2004, ATA also entered into two new long-term floating rate loans of KRW 40 billion and KRW 25
billion that were swapped for fixed rates of 4.80% and 4.45%, respectively. These loans
replace the KRW 30 billion and KRW 20 billion floating rate loans, that were outstanding in
2003 and that matured in 2004, of which $25 was swapped to fixed interest rates. Refer to
note 22  Financial Instruments and Commodity Contracts. In 2004, interest on the KRW 2
billion loans ranges from 3.00% to 5.50% (2003: 2.75% to 5.83%). Based on rates of exchange at year-end, third party debt repayment requirements over the next five
years amount to $1 in 2005, $1 in 2006, $134 in 2007, nil in 2008 and $2 in 2009. Related party
debt repayments over the next five years amount to $290 in 2005, $174 in 2006, $20 in 2007, $508 in
2008 and $400 in 2009. The third party and related party debt repayments are based on the Groups
debt as at December 31, 2004 and do not reflect the refinancing and/or reorganization transactions,
as described in Note 27  Subsequent Events  Financing. In 2005, all related party debt with
Alcan and its subsidiaries was refinanced with third party debt. 19. STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION Alcan Executive Share Option Plan
Under the executive share option plan, certain key employees may purchase common shares at an
exercise price that is based on the market value of the shares on the date of the grant of each
option. The vesting period for options granted beginning in 1998 is linked to Alcans share price
performance, but does not exceed nine years. Options granted before 1998 vest generally over a
fixed period of four years from the grant date and expire at various dates during the next ten
years. The number of options granted to certain employees of Alcans Rolled Products businesses is 604,650
in 2004 (2003: 300,000; 2002: 387,900). The option activity is not necessarily indicative of what
the activity would have been had the Group been a separate stand-alone company during the periods
presented or what the activity may be in the future. To compute compensation expense under SFAS No. 123, Accounting for Stock Compensation, the
Black-Scholes valuation model was used to determine the fair value of the Alcan options granted
that are held by the Groups employees. The weighted average fair value of stock options granted to certain employees of Alcans Rolled
Products businesses in 2004 is $12.87 (2003: $9.95; 2002: $7.72). Stock-based compensation expense for stock options granted to certain employees of Alcans Rolled
Products businesses was $2 in 2004 (2003: $2; 2002: $2). 25




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 19. STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION(contd) The fair value of each option grant is estimated on the date of grant with the following weighted
average assumptions used for the option grants: 2004
    
    
    2003
    
    
    2002Dividend yield (%)
    
    
    1.85
    
    
    
    1.88
    
    
    
    1.65Expected volatility (%)
    
    
    27.87
    
    
    
    29.16
    
    
    
    35.73Risk-free interest rate (%)
    
    
    4.56
    
    
    
    3.39
    
    
    
    3.50Expected life (years)
    
    
    6
    
    
    
    6
    
    
    
    6
 Refer to note 27  Subsequent Events  Stock Option Plans for revisions to the existing stock
option plans upon the Groups separation from Alcan. Compensation To Be Settled in Cash Presented below is a summary of Alcans other stock-based compensation plans to be settled in cash
that are held by certain employees of Alcans Rolled Products businesses. Stock Price Appreciation Unit Plan
A small number of employees of Alcans Rolled Products businesses are entitled to receive Stock
Price Appreciation Units (SPAU) whereby they are entitled to receive cash in an amount equal to the
excess of the market value of an Alcan common share on the date of exercise of a SPAU over the
market value of an Alcan common share as of the date of grant of such SPAUs. The vesting period is
linked to Alcans share price performance, but does not exceed nine years. Total Shareholder Return Performance Plan
Certain employees of Alcans Rolled Products businesses are entitled to receive cash awards under
the Total Shareholder Return Performance Plan, a cash incentive plan which provides performance
awards to eligible employees based on the relative performance of Alcans common share price and
cumulative dividend yield performance compared to other corporations included in the Standard &
Poors Industrials Index measured over three-year periods commencing on October 1, 2003 and 2002.
If the performance results for Alcans common shares is below the 30th percentile compared to all
companies in the Standard & Poors Industrials Index, the employee will not receive an award. At
the 50th percentile rank, the employee will earn an award equal to 100% of the target set for the
period. At or above the 75th percentile rank, the employee will earn the maximum award, which is
equal to 300% of the target set for the period. The actual amount of the award (if any) will be
prorated between the percentile rankings. Compensation Cost
Stock based compensation expense for Alcans employee compensation awards held by certain employees
of Alcans Rolled Products businesses that are to be settled in cash was $4 in 2004 (2003: $3;
2002: nil). 20. COMMITMENTS AND CONTINGENCIES Commitments with third parties for supplies of goods and services are estimated at $41 in 2005, $16
in 2006, $15 in 2007, $11 in 2008 and $11 in 2009 and $11 thereafter. Total payments to these
entities were $13 in 2004, $3 in 2003 and $5 in 2002, excluding capital expenditures. Minimum rental obligations are estimated at $10 in 2005, $7 in 2006, $4 in 2007, $3 in 2008, $2 in
2009 and $1 thereafter. Total rental expenses amounted to $17 in 2004, $15 in 2003 and $15 in 2002. The Group, in the course of its operations, is subject to environmental and other claims, lawsuits
and contingencies. The Group is named as a defendant in relation to environmental contingencies at
approximately 12 existing and former Group sites and third-party sites. Accruals have been made in
specific instances where it is probable that liabilities will be incurred and where such
liabilities can be reasonably estimated. The Group is subject to various laws relating to the protection of the environment. The Group has
established procedures for the ongoing evaluation of its operations, to identify potential
environmental exposures and to comply with regulatory policies and procedures. 26




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 20. COMMITMENTS AND CONTINGENCIES(contd) The Group is involved in proceedings, as described below, under the U.S. Superfund or analogous
state provisions regarding the usage, storage, treatment or disposal of hazardous substances at a
number of sites in the United States, as well as similar proceedings under the laws and regulations
of the other jurisdictions in which it has operations, including Brazil and certain countries in
the European Union. PAS Site.Alcan Aluminum Corporation (AAC) (renamed Novelis Corporation after the spin-off
from Alcan) and third parties were defendants in a lawsuit instituted in July 1987 by the U.S.
Environmental Protection Agency, or EPA, relating to the Pollution Abatement Services, or PAS,
site, a third-party disposal site, in Oswego, New York. In January 1991, the U.S. District Court
for the Northern District of New York found AAC liable for a share of the clean-up costs for the
site, and in December 1991 determined the amount of such share to be $3.2 plus interest and costs.
AAC appealed this decision to the United States Court of Appeals, Second Circuit. In April 1993,
the Second Circuit reversed the District Court and remanded the case for a hearing on what
liability, if any, might be assigned to AAC depending on whether AAC could prove that its waste did
not contribute to the costs of remediation at the site. This matter was consolidated with another
case, instituted in October 1991 by the EPA against AAC in the U.S. District Court for the Northern
District of New York seeking clean-up costs in regard to the Fulton Terminals Superfund site in
Oswego County, New York, which was also owned by PAS. The remand hearing was held in October of
1999. The trial court re-instituted its judgment holding AAC liable. The amount of the judgment
plus interest was $13.5 as at December 2000. The case was appealed. In the first quarter 2003, the
Second Circuit affirmed the decision of the trial court. In 2004, AAC paid $13.9 in respect of the
EPA claim, representing the full amount of the judgment plus interest, and $1.6 to the State of New
York, and is currently responsible for future oversight costs, which are currently estimated at
approximately $0.6. PAS Oswego Site Performing Group.AAC has also been sued by ten other potentially responsible
parties, or PRPs, at the PAS site seeking contribution from AAC for costs they collectively
incurred in cleaning up the PAS site from 1990 to the present. The costs incurred by the PRPs to
date total approximately $6.4 plus accrued interest. Based upon currently available record
evidence, AAC is contesting responsibility for costs incurred by the PRPs. Oswego North Ponds.In the late 1960s and early 1970s, AAC in Oswego used an oil containing
polychlorinated biphenyls, or PCBs, in its re-melt operations. At the time, AAC utilized a
once-through cooling water system that discharged through a series of constructed ponds and
wetlands, collectively referred to as the North Ponds. In the early 1980s, low levels of PCBs were
detected in the cooling water system discharge and AAC performed several subsequent investigations.
The PCB-containing hydraulic oil, Pydraul, which was eliminated from use by AAC in the early 1970s,
was identified as the source of contamination. In the mid-1980s, the Oswego North Ponds site was
classified as an inactive hazardous waste disposal site and added to the New York State Registry.
AAC ceased discharge through the North Ponds in mid-2002. In cooperation with the New York State Department of Environmental Conservation, or NYSDEC, and the
New York State Department of Health, AAC entered into a consent decree in August 2000 to develop
and implement a remedial program to address the PCB contamination at the Oswego North Ponds site. A
remedial investigation report was submitted in January 2004 and we anticipate that the NYSDEC will
issue a proposed remedial action plan and record of decision during the second half of 2005. The
Group expects that the remedial plan will be implemented in 2006. The estimated cost associated
with this remediation is approximately $25. Butler Tunnel Site.AAC was a party in a 1989 EPA lawsuit before the U.S. District Court for
the Middle District of Pennsylvania involving the Butler Tunnel Superfund site, a third-party
disposal site. In May 1991, the Court granted summary judgment against AAC for alleged disposal of
hazardous waste. After unsuccessful appeals, AAC paid the entire judgment plus interest. The United States government filed a second cost recovery action against Alcan seeking recovery of
expenses associated with the installation of an early warning system for potential future releases
from the Butler site. The complaint does not disclose the amount of costs sought by the government.
The case has been held in abeyance since shortly after it was filed and therefore there has been no
opportunity for discovery to fully determine the type of remedial action sought, the total cost,
the existence of other settlements or the existence of other non-settling PRPs that may exist for
potential contribution. In December 2004, a motion for partial summary judgment was heard and is
under advisement. 27




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 20. COMMITMENTS AND CONTINGENCIES(contd) Tri-Cities Site.In 1994, AAC and other companies responded to an EPA inquiry concerning the
shipment of old drums to Tri-Cities Inc., a third party barrel reprocessing facility in upstate New
York. In 1996 the EPA issued an administrative order directing the defendants to clean up the
site. AAC refused to participate, claiming that the drums sent to Tri-Cities were empty at the time
of delivery. In September 2002, AAC received notice from the EPA contending that AAC was
responsible for past and future response costs with accrued interest as well as penalties for its
violation of the administrative order. AAC responded by outlining its objections to the EPAs
determination. The EPA subsequently referred the matter to the Department of Justice, or DOJ, for
enforcement. In December 2004, a consent decree was negotiated with the DOJ and EPA. Under this
consent agreement, AAC will pay $0.4 as a civil penalty as well as $0.6 in past costs. Future
costs have been capped at a maximum payment of $0.8 payable over an extended period of time. Quanta Resources Site.In June 2003, the DOJ filed a Superfund costs recovery action in the
U.S. District Court for the Northern District of New York against AAC and Russell Mahler, the site
owner, seeking unreimbursed response costs stemming from the disposal of rolling oil emulsion at
the Quanta Resources facility in Syracuse, New York. The parties are in the process of discovery.
In 2003, AAC met with the DOJ and the EPA who quantified potential liability for unreimbursed costs
and penalties in the amount of $1.4. Sealand Site.New York State and EPA claim that AACs waste that was sent to the Sealand, New
York Restoration site is a hazardous substance that contributed to the occurrence of response
costs. There are several PRPs at this site. In 1993, AAC declined a request to participate in a
program to provide drinking water to area residents, contending that AACs waste did not cause or
contribute to the harm at the site. In 2003, Alcan met with the DOJ and the EPA who quantified
potential liability for unreimbursed costs at $2.6. Toyo Coal Tar Remediation. Prior property owners contaminated the soil at the Joiliet,
Illinois facility with coal tar. Following litigation, AAC received a 90% cost allocation from two
defendants. In 1998, a remediation plan was developed to clean-up soils and groundwater. The
remedial program was implemented in 1999. AAC continues to monitor the remediation. AACs
estimated costs are approximately $0.3. Diamond Alkali Superfund Site-Lower Passaic River Initiative. In 2003, AAC received a letter
from the EPA regarding an investigation being launched into possible contamination of the Lower
Passaic River in 1965. AAC has been identified as a PRP arising from one of its former plants in
Newark, New Jersey that may have generated hazardous waste. A remedial investigation feasibility
study is scheduled to be carried out over several years. AAC has entered into a consent decree with
other PRPs and will participate in a remedial feasibility study. AACs estimated environmental
costs have been set at approximately $0.2. Jarl Extrusions (Rochester, NY).The affected property in Rochester, New York was acquired in
1988. Operations at the property were subsequently discontinued and the property was sold in
December 1996. AAC retained liability under the terms of sale. AAC entered into a consent decree
with NYSDEC under which evaluation of the site was performed in 1990 and 1991. Most of the
contamination was determined to have come from an adjoining site. In its response to AACs
investigation report, the NYSDEC asked AAC to admit to liability for off-site pollution (a
Superfund site is located next door) and that hazardous sludge was dumped in the ponds behind the
building. AAC denied these allegations. In light of the States failure to cooperate with AAC in
the remediation of this site under the consent decree, AAC filed a notice of protest with the
State. AACs appeal was denied, but the State later approved a new remedial investigation report
negotiated between NYSDEC and AAC. A feasibility study for site remediation was then approved by
NYSDEC. Negotiations on a consent order for remedial design construction were completed and the
restrictive deed covenants have been filed for the property. The clean-up has been completed and
NYSDEC approved a long-term operation and monitoring plan (O&M). AAC continues to conduct O&M and
has sought permission to decommission two monitoring wells. Estimated costs associated with this
matter are approximately $0.2. Terre Haute TCE Issue. Trichloroethylene (TCE) soil and groundwater contamination was
discovered on the Terre Haute site in 1990. A site investigation was performed in between 1991 and
1994 whereby the extent of TCE groundwater and soil contamination was delineated. The subsurface
contamination was located on site with groundwater plume migrating off site, with impacts to
private homeowner drinking water wells. Terre Haute entered into the Indiana Voluntary Remediation
Program in 1995. A remediation plan was developed which consisted of Soil Venting/Air Sparging for
subsurface soil remediation. The point source carbon treatment systems were installed on impacted
homeowners wells. The active subsurface soil remediation was completed in 2003. Now that the
remediation phase has been completed, AAC is required to support a post remedial groundwater and
drinking water well monitoring program. Periodic monitoring will be required until groundwater
clean up goals are met. Based on historical trends in TCE contamination, it is anticipated that
clean up objectives will be met within 10 years. Once the clean up objectives are met, the project
will be considered closed. Estimated costs associated with funding the required monitoring program
for a period of 10 years is approximately $0.6. 28




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 20. COMMITMENTS AND CONTINGENCIES(contd) It is the Groups policy to accrue estimated environmental clean-up costs (investigation and
remediation) when such amounts can reasonably be estimated and it is probable that the Group will
be required to incur such costs. The Group has estimated its undiscounted remaining clean-up costs
related to 12 sites will be in the range of $36 to $40. An estimated liability of $39 has been
recorded on the combined balance sheet at December 31, 2004 in Deferred credits and other
liabilities. Other than these 12 sites, the Group is currently not aware of any material exposure
to environmental liabilities. However, adverse changes in environmental regulations, new
information or other factors could impact the Group. The Group has agreed to indemnify Alcan and its subsidiaries and each of their respective
directors, officers and employees, against liabilities relating to, among other things (see
reference to agreements between Novelis and Alcan in note 1):  

the contributed businesses, liabilities or contracts;

liabilities or obligations associated with the contributed businesses, as defined in the
separation agreement between Novelis and Alcan, or otherwise assumed by the Group pursuant
to the separation agreement; and

any breach by the Group of the separation agreement or any of the ancillary agreements
entered into with Alcan in connection with the separation. Although there is a possibility that liabilities may arise in other instances for which no accruals
have been made, the Group does not believe that it is reasonably possible that any losses in excess
of accrued amounts would be sufficient to significantly impair its operations, have a material
adverse effect on its financial position or liquidity, or materially and adversely affect its
results of operations for any particular reporting period, absent unusual circumstances. In addition, see reference to income taxes in note 9, debt repayments in note 18 and financial
instruments and commodity contracts in note 22. 21. CURRENCY GAINS AND LOSSES The following are the amounts recognized in the financial statements: 2004
    
    
    2003
    
    
    2002Currency gains (losses) recorded in incomeLosses realized and unrealized on currency derivatives
    
    
    (23
    )
    
    
    (37
    )
    
    
    (21
    )Realized deferred translation adjustments
    
    
    
    
    
    
    1
    
    
    
    Gains (Losses) on translation of monetary assets and liabilities
    
    
    (4
    )
    
    
    (7
    )
    
    
    9(27
    )
    
    
    (43
    )
    
    
    (12
    )Deferred translation adjustments*  beginning of year
    
    
    90
    
    
    
    (12
    )
    
    
    (141
    )Effect of exchange rate changes
    
    
    30
    
    
    
    103
    
    
    
    129Gains realized
    
    
    
    
    
    
    (1
    )
    
    
    Deferred translation adjustments  end of year
    
    
    120
    
    
    
    90
    
    
    
    (12
    )
 *Deferred translation adjustments are included in Accumulated other comprehensive income (loss). 29




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 22. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS In conducting its business, the Group uses various derivative and non-derivative instruments,
including forward contracts to manage the risks arising from fluctuations in exchange rates,
interest rates, aluminum prices and other commodity prices. Generally, such instruments are used
for risk management purposes only. The principal counterparty to these contracts is Alcan. Derivatives  Currency The Group enters into forward currency contracts that are designated as hedges of certain
identifiable foreign currency revenue and operating cost exposures. Foreign currency forward
contracts are also used to hedge certain foreign currency denominated debt. OUTSTANDING AT DECEMBER 31
    
    
    
    2004
    
    2003FINANCIAL INSTRUMENT
    
    HEDGE
    

FAIR
VALUE
    

FAIR
VALUEForward exchange contracts
    
    Future firm net operating cash flows third parties
    
    
    
    
    (1
    )
    
    
    (4
    ) related parties
    
    
    
    
    (52
    )
    
    
    (26
    )Cross currency interest swap (third parties)
    
    To swap floating rate US$ third
party borrowings to fixed rate KRW
    
    
    (8
    )
    
    
    2
 Derivatives  Interest Rate The Group sometimes enters into interest rate swaps to manage funding costs as well as the
volatility of interest rates. OUTSTANDING AT DECEMBER 31
    
    2004
    
    
    2003FAIR
    
    
    FAIRVALUE
    
    
    VALUEFinancial InstrumentRate swap  floating to fixed (third parties) KRW floating to KRW fixed
    
    
    (1)
    
    
    
    
 Derivatives  Aluminum Depending on supply and market conditions, as well as for logistical reasons, the Group may
purchase primary and secondary aluminum on the open market to meet its fabricated products
requirements. In addition, the Group may hedge certain commitments arising from pricing
arrangements with some of its customers and the effects of price fluctuations on inventories. OUTSTANDING AT DECEMBER 31
    
    2004
    
    
    2003Financial InstrumentForward contracts (related parties)Maturing principally in years
    2005 to 2006
    
    
    
    2004 to 2005Fair Value
    
    
    97
    
    
    
    86Call options purchased (related parties)Maturing principally in years
    
    
    2005
    
    
    
    Fair value
    
    
    26
    
    
    
    Embedded derivativesMaturing principally in years
    
    
    2005
    
    
    
    2005Fair value
    
    
    (10
    )
    
    
    (49
    )
 Derivatives  Natural Gas As a hedge of future natural gas purchases, the Group has outstanding as at December 31: 2004
    
    
    2003Financial InstrumentSwaps and options (third parties)Maturing at various times through
    
    
    2005
    
    
    
    2004Fair value
    
    
    (1)
    
    
    
    1
 30




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 22. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS(contd) Derivatives  Electricity As a hedge of future electricity purchases, the Group has outstanding as at December 31: 2004
    
    
    2003Financial InstrumentFixed price contractsMaturing at various times in years
    
    
    2016
    
    
    
    2016Fair value
    
    
    18
    
    
    
    1
 Counterparty risk The Group may be exposed to losses in the future if the counterparties to the above contracts fail
to perform. The principal counterparty is Alcan (refer to note 11  Related Party Transactions).
The Group is satisfied that the risk of such non-performance is remote, due to its monitoring of
credit exposures. Financial Instruments  Fair Value On December 31, 2004, the fair value of the Groups long-term debt due to related parties and third
parties totaling $2,737 (2003: $1,659) approximates its book value. The fair values of all other financial assets and liabilities are approximately equal to their
carrying values. 23. SUPPLEMENTARY INFORMATION 2004
    
    
    2003
    
    
    2002Statement of incomeInterest on long-term debt
    
    
    45
    
    
    
    27
    
    
    
    26Capitalized interest
    
    
    (1
    )
    
    
    (1
    )
    
    
    Statement of cash flowsInterest paid
    
    
    76
    
    
    
    41
    
    
    
    42Income taxes paid
    
    
    70
    
    
    
    19
    
    
    
    34
 2004
    
    
    2003Balance sheetPayables and accrued liabilities include the following:Trade payables
    
    
    899
    
    
    
    708Other accrued liabilities
    
    
    279
    
    
    
    286Income and other taxes
    
    
    8
    
    
    
    28Accrued employment costs
    
    
    74
    
    
    
    66At December 31, 2004, the weighted average interest rate on short-term borrowings was 2.5% (2003: 1.8%; 2002: 3.3%).
 24. POST-RETIREMENT BENEFITS Most of the Groups pension obligation relates to funded defined benefit pension plans it has
established in the United States and the United Kingdom, unfunded pension benefits in Germany, and
lump sum indemnities payable upon retirement to employees of businesses in France, Korea and
Malaysia. Pension benefits are generally based on the employees service and either on a flat
dollar rate or on the highest average eligible compensation before retirement. In addition, some of
the entities of the Group participate in defined benefit plans managed by Alcan in Canada, the
U.S., the U.K. and Switzerland. The Groups share of these plans assets and liabilities is not
included in the combined balance sheets, as discussed in note 2  Basis of Presentation. 31




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 24. POST-RETIREMENT BENEFITS(contd) Investments are generally limited to publicly traded stocks and high-rated debt securities, and
include only small amounts in other categories. Target allocation for 2004 is as indicated below. CATEGORY OF ASSET
    
    TARGETALLOCATION
    
    
    ALLOCATION IN AGGREGATE AT DECEMBER 312004
    
    
    2003Equity
    
    40% to 65%
    
    
    55
    %
    
    
    46
    %Debt securities
    
    30% to 55%
    
    
    39
    %
    
    
    51
    %Real estate
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    6
    %
    
    
    3
    %
 PENSION BENEFITS
    
    
    
    OTHER BENEFITS2004
    
    
    2003
    
    
    
    2004
    
    
    2003Change in benefit obligationBenefit obligation at January 1
    
    
    256
    
    
    
    115
    
    
    
    
    79
    
    
    
    69Service cost
    
    
    15
    
    
    
    6
    
    
    
    
    4
    
    
    
    2Interest cost
    
    
    29
    
    
    
    12
    
    
    
    
    6
    
    
    
    4Members contributions
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (23
    )
    
    
    (11
    )
    
    
    
    (8
    )
    
    
    (6
    )Amendments
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    Acquisitions/reorganization
    
    
    251
    
    
    
    88
    
    
    
    
    22
    
    
    
    Curtailments/divestitures
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    
    Actuarial (gains) losses
    
    
    32
    
    
    
    28
    
    
    
    
    12
    
    
    
    10Currency losses
    
    
    32
    
    
    
    17
    
    
    
    
    
    
    
    
    Benefit obligation measured at December 31
    
    
    550
    
    
    
    256
    
    
    
    
    115
    
    
    
    79Benefit obligation of funded pension plans
    
    
    398
    
    
    
    124
    
    
    
    
    N/A
    
    
    
    N/ABenefit obligation of unfunded pension plans
    
    
    152
    
    
    
    132
    
    
    
    
    N/A
    
    
    
    N/ABenefit obligation measured at December 31
    
    
    550
    
    
    
    256
    
    
    
    
    115
    
    
    
    79Change in market value of plan assetsAssets at January 1
    
    
    114
    
    
    
    25
    
    
    
    
    
    
    
    
    Actual return on assets
    
    
    17
    
    
    
    24
    
    
    
    
    
    
    
    
    Members contributions
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid from funded plans
    
    
    (14
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    Company contributions
    
    
    23
    
    
    
    4
    
    
    
    
    
    
    
    
    Acquisitions/reorganization
    
    
    177
    
    
    
    68
    
    
    
    
    
    
    
    
    Curtailments/divestitures
    
    
    (39
    )
    
    
    
    
    
    
    
    
    
    
    
    Currency gains
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    Assets at December 31
    
    
    290
    
    
    
    114
    
    
    
    
    
    
    
    
    Assets less than benefit obligation of funded pension plans
    
    
    (108
    )
    
    
    (10
    )
    
    
    
    N/A
    
    
    
    N/ABenefit obligation of unfunded pension plans
    
    
    (152
    )
    
    
    (132
    )
    
    
    
    N/A
    
    
    
    N/AAssets less than benefit obligation
    
    
    (260
    )
    
    
    (142
    )
    
    
    
    (115
    )
    
    
    (79
    )Unamortized actuarial (gains) / losses
    
    
    84
    
    
    
    (8
    )
    
    
    
    26
    
    
    
    10 prior service cost
    
    
    15
    
    
    
    16
    
    
    
    
    (1
    )
    
    
    (1
    )Minimum pension liability
    
    
    (54
    )
    
    
    (12
    )
    
    
    
    
    
    
    
    Intangible assets
    
    
    9
    
    
    
    4
    
    
    
    
    
    
    
    
    Net liability in balance sheet
    
    
    (206
    )
    
    
    (142
    )
    
    
    
    (90
    )
    
    
    (70
    )Net liability in balance sheet for funded pension plans
    
    
    (89
    )
    
    
    (26
    )
    
    
    
    N/A
    
    
    
    N/ANet liability in balance sheet for unfunded pension plans
    
    
    (117
    )
    
    
    (116
    )
    
    
    
    N/A
    
    
    
    N/ANet liability in balance sheet
    
    
    (206
    )
    
    
    (142
    )
    
    
    
    (90
    )
    
    
    (70
    )Deferred charges and other assets
    
    
    8
    
    
    
    2
    
    
    
    
    
    
    
    
    Intangible assets
    
    
    9
    
    
    
    4
    
    
    
    
    
    
    
    
    Payables and accrued liabilities
    
    
    (29
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    Deferred credits and other liabilities
    
    
    (194
    )
    
    
    (141
    )
    
    
    
    (90
    )
    
    
    (70
    )Net liability in balance sheet
    
    
    (206
    )
    
    
    (142
    )
    
    
    
    (90
    )
    
    
    (70
    )
 32




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 24. POST-RETIREMENT BENEFITS(contd) For the first time in 2004,
in accordance with the provisions of FIN 46(R), the net liability in
the balance sheet includes 100% of the pension and post-retirement benefits of Logan (as discussed
in note 4  Accounting Changes). Consequently, a benefit obligation of $88 and market value of
plan assets of $50 for pension benefits and a benefit obligation of $22 for other post-retirement
benefits are included in the acquisitions/reorganization lines above. The net liability in the
balance sheet for Logan is $31 for pension benefits and $21 for other post-retirement benefits as
at December 31, 2004. A benefit obligation of $181 and market value of plan assets of $126 for Bridgnorth (U.K.) are
included in the acquisitions/reorganization lines in pension benefits above. The net liability
in the balance sheet for Bridgnorth is $54 for pension benefits as at December 31, 2004. For certain plans, the projected benefit obligation (PBO) exceeds the market value of the assets.
For these plans, including unfunded pensions and lump sum indemnities, the PBO is $523 (2003:
$222), the accumulated benefit obligation (ABO) is $461 (2003: $203), while the market value of the
assets is $260 (2003: $77). The total ABO is $488 (2003: $237). For certain plans, the ABO exceeds the market value of the
assets. For these plans, including unfunded pensions and lump sum indemnities, the PBO is $515
(2003: $222), the ABO is $453 (2003: $203), while the market value of the assets is $252 (2003:
$77). The Groups pension funding policy is to contribute the amount required to provide for contractual
benefits attributed to service to date, and to amortize unfunded actuarial liabilities for the most
part over periods of 15 years or less. The Group expects to contribute $10 in aggregate to its
funded pension plans in 2005, and to pay $7 of unfunded pension benefits and lump sum indemnities
from operating cash flows. Alcan provides unfunded health care and life insurance benefits to retired employees in Canada and
the United States, which include retired employees of some of the Groups businesses. The Groups
share of these plans liabilities and costs are included in the combined financial statements. The
Group expects to pay benefits of $8 in 2005 from operating cash flows. Expected benefit payments for the next 10 years are $21 in 2005, $22 in 2006, $23 in 2007, $24 in
2008, $26 in 2009 and $148 from 2010 to 2014 for pensions, and $8 in 2005, $9 in 2006, $9 in 2007,
$9 in 2008, $10 in 2009 and $58 from 2010 to 2014 for other benefits. PENSION BENEFITS
    
    
    
    OTHER BENEFITS2004
    
    
    2003
    
    
    2002
    
    
    
    2004
    
    
    2003
    
    
    2002Components of net periodic benefit costService cost
    
    
    27
    
    
    
    21
    
    
    
    25
    
    
    
    
    4
    
    
    
    2
    
    
    
    2Interest cost
    
    
    37
    
    
    
    33
    
    
    
    37
    
    
    
    
    6
    
    
    
    5
    
    
    
    4Expected return on assets
    
    
    (28
    )
    
    
    (28
    )
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    Amortization actuarial (gains) losses
    
    
    4
    
    
    
    3
    
    
    
    (3
    )
    
    
    
    1
    
    
    
    
    
    
    
     prior service cost
    
    
    4
    
    
    
    5
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    Curtailment/settlement losses
    
    
    (19
    )
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    25
    
    
    
    41
    
    
    
    25
    
    
    
    
    11
    
    
    
    7
    
    
    
    6Weighted average assumptions used to
determine benefit obligations at
December 31Discount rate
    
    
    5.4
    %
    
    
    5.8
    %
    
    
    5.6
    %
    
    
    
    5.8
    %
    
    
    6.2
    %
    
    
    6.5
    %Average compensation growth
    
    
    3.6
    %
    
    
    3.3
    %
    
    
    3.0
    %
    
    
    
    4.0
    %
    
    
    3.7
    %
    
    
    3.9
    %Weighted average assumptions used to
determine net periodic benefit costDiscount rate
    
    
    5.8
    %
    
    
    6.2
    %
    
    
    5.6
    %
    
    
    
    6.2
    %
    
    
    6.5
    %
    
    
    7.0
    %Average compensation growth
    
    
    3.3
    %
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    
    3.7
    %
    
    
    3.9
    %
    
    
    5.0
    %Expected return on plan assets
    
    
    8.3
    %
    
    
    8.0
    %
    
    
    5.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
 Included in net periodic benefit cost are contributions of subsidiaries and cost allocations of
divisions that participate in Alcan plans, as described in note 2  Basis of Presentation. In estimating the expected return on assets of a pension plan, consideration is given primarily to
its target allocation, the current yield on long-term bonds in the country where the plan is
established, and the historical risk premium in each relevant country of equity or real estate over
long-term bond yields. The approach is consistent with the principle that assets with higher risk
provide a greater return over the long term. 33




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 24. POST-RETIREMENT BENEFITS(contd) The assumed health care cost trend used for measurement purposes is 10.0% for 2005, decreasing
gradually to 4.5% in 2011 and remaining at that level thereafter. A one percentage point change in
assumed health care cost trend rates would have the following effects: OTHER BENEFITS1% INCREASE
    
    
    1% DECREASESensitivity AnalysisEffect on service and interest costs
    
    
    1
    
    
    
    (1)Effect on benefit obligation
    
    
    11
    
    
    
    (10)
 The Group participates in savings plans in Canada and the U.S. as well as defined contribution
pension plans in certain countries. The cost of the Groups contributions was $8 in 2004 (2003:
$7; 2002: $6). 25. INFORMATION BY GEOGRAPHIC AREAS LOCATION
    
    2004
    
    
    2003
    
    
    2002Sales and operating revenues  third
    
    Canada
    
    
    182
    
    
    
    212
    
    
    
    145and related parties (by origin)
    
    United States
    
    
    2,795
    
    
    
    2,174
    
    
    
    2,373Brazil
    
    
    515
    
    
    
    408
    
    
    
    373United Kingdom
    
    
    382
    
    
    
    302
    
    
    
    357Germany
    
    
    1,865
    
    
    
    1,705
    
    
    
    1,409Other Europe
    
    
    822
    
    
    
    503
    
    
    
    451Asia and Other Pacific
    
    
    1,194
    
    
    
    917
    
    
    
    785Total
    
    
    7,755
    
    
    
    6,221
    
    
    
    5,893
 LOCATION
    
    2004
    
    
    2003Property, plant and equipment,
    
    Canada
    
    
    112
    
    
    
    116Intangible assets and Goodwill at
    
    United States
    
    
    438
    
    
    
    454December 31 (*)
    
    Brazil
    
    
    544
    
    
    
    568United Kingdom
    
    
    167
    
    
    
    162Germany
    
    
    275
    
    
    
    267Other Europe
    
    
    481
    
    
    
    317Asia and Other Pacific
    
    
    622
    
    
    
    630Total
    
    
    2,639
    
    
    
    2,514
 (*) The allocation of the purchase price for Pechiney by geographic area was completed in 2004. 26. INFORMATION BY OPERATING SEGMENTS The following presents selected information by operating segment, viewed on a stand-alone basis.
The operating management structure is comprised of four operating segments. The four operating
segments are Novelis North America, Novelis Europe, Novelis Asia and Novelis South America.
Alcans measure of the profitability of its operating segments is referred to as business group
profit (BGP). BGP comprises earnings before interest, income taxes, minority interests,
depreciation and amortization and excludes certain items, such as corporate costs, restructuring
costs (relating to major corporate-wide acquisitions or initiatives), impairment and other special
charges, and pension actuarial gains, losses and other adjustments, that are not under the control
of the business groups or are not considered in the measurement of their profitability. These items
generally have been managed by Alcans corporate head office, which focuses on strategy development
and oversees governance, policy, legal, compliance, human resources and finance matters. The
change in fair market value of derivatives is removed from individual BGP and is shown on a
separate line. The Group believes that this presentation provides a more accurate portrayal of
underlying business group results and is in line with the Groups portfolio approach to risk
management. 34




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 26. INFORMATION BY OPERATING SEGMENTS(contd) Transactions between operating segments are conducted on an arms-length basis and reflect market
prices. The accounting principles used to prepare the information by operating segment are the same as
those used to prepare the combined financial statements of the Group, except for the following two
items:  (1)

The operating segments include the Groups proportionate share of joint ventures (including
joint ventures accounted for using the equity method) as they are managed within each
operating segment, with the adjustments for equity-accounted joint ventures shown on a
separate line in the reconciliation to net income; and(2)

Pension costs for the operating segments are based on the normal current service cost with
all actuarial gains, losses and other adjustments being included in Intersegment and other. The operating segments are described below. Novelis North America
Headquartered in Cleveland, U.S.A., this group encompasses aluminum sheet and light gauge products,
operating 12 plants, including two recycling facilities, in two countries. Novelis Europe
Headquartered in Zurich, Switzerland, this group comprises aluminum sheet, including automotive,
can and lithographic sheet as well as foil stock, operating 17 plants in seven countries including
two recycling facilities. The Group ceased operations in Falkirk, Scotland, in December 2004. Novelis Asia
Headquartered in Seoul, South Korea, this group encompasses aluminum sheet and light gauge
products, operating three plants in two countries. Novelis South America
Headquartered in Sao Paulo, Brazil, this group comprises bauxite mining, alumina refining, smelting
operations, power generation, carbon products, aluminum sheet and light gauge products, operating
five plants in Brazil. The Brazilian bauxite, alumina and smelting assets are included in the
Group because they are integrated with the Brazilian rolling operations. Intersegment and other
This classification includes the deferral or realization of profits on intersegment sales of
aluminum and alumina, corporate office costs as well as other non-operating items. Risk Concentration All four operating segments traded with Rexam Plc (Rexam) during 2004 and 2003 and all except for
Novelis Asia traded with Rexam in 2002. Revenues from Rexam of $861 amounted to approximately 11%
of total revenues for the year ended December 31, 2004 (2003: $628 and 10%; 2002: $666 and 11%). SALES AND OPERATING REVENUES
    
    INTERSEGMENT
    
    
    THIRD AND RELATED PARTIES2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Novelis North America
    
    
    8
    
    
    
    40
    
    
    
    9
    
    
    
    2,964
    
    
    
    2,385
    
    
    
    2,517Novelis Europe
    
    
    30
    
    
    
    23
    
    
    
    40
    
    
    
    3,081
    
    
    
    2,510
    
    
    
    2,218Novelis Asia
    
    
    9
    
    
    
    13
    
    
    
    11
    
    
    
    1,194
    
    
    
    918
    
    
    
    785Novelis South America
    
    
    57
    
    
    
    23
    
    
    
    13
    
    
    
    525
    
    
    
    414
    
    
    
    379Adjustments for equity-accounted joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (7
    )
    
    
    (7
    )Other
    
    
    (104
    )
    
    
    (99
    )
    
    
    (73
    )
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    7,755
    
    
    
    6,221
    
    
    
    5,893
 35




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 26. INFORMATION BY OPERATING SEGMENTS(contd) BUSINESS GROUP PROFIT
    
    2004
    
    
    2003
    
    
    2002Novelis North America
    
    
    237
    
    
    
    206
    
    
    
    277Novelis Europe
    
    
    188
    
    
    
    173
    
    
    
    130Novelis Asia
    
    
    79
    
    
    
    68
    
    
    
    35Novelis South America
    
    
    143
    
    
    
    112
    
    
    
    90Adjustments for equity-accounted joint ventures
    
    
    (50
    )
    
    
    (45
    )
    
    
    (42
    )Adjustments for mark-to-market of derivatives
    
    
    77
    
    
    
    20
    
    
    
    9Depreciation and amortization
    
    
    (246
    )
    
    
    (222
    )
    
    
    (211
    )Intersegment, corporate offices and other
    
    
    (129
    )
    
    
    (68
    )
    
    
    (110
    )Equity income
    
    
    6
    
    
    
    6
    
    
    
    8Interest
    
    
    (74
    )
    
    
    (40
    )
    
    
    (42
    )Income taxes
    
    
    (166
    )
    
    
    (50
    )
    
    
    (77
    )Minority interests
    
    
    (10
    )
    
    
    (3
    )
    
    
    8Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (84
    )Net Income (Loss)
    
    
    55
    
    
    
    157
    
    
    
    (9
    )
 TOTAL ASSETS AT DECEMBER 31
    
    2004
    
    
    2003Novelis North America
    
    
    1,301
    
    
    
    1,131Novelis Europe
    
    
    2,504
    
    
    
    2,167Novelis Asia
    
    
    954
    
    
    
    837Novelis South America
    
    
    773
    
    
    
    733Adjustments for equity-accounted joint ventures
    
    
    (60
    )
    
    
    (135
    )Other
    
    
    482
    
    
    
    1,5835,954
    
    
    
    6,316
 CASH PAID FOR CAPITALEXPENDITURES AND BUSINESSDEPRECIATION AND AMORTIZATION
    
    
    ACQUISITIONS2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Novelis North America
    
    
    69
    
    
    
    68
    
    
    
    67
    
    
    
    41
    
    
    
    38
    
    
    
    32Novelis Europe
    
    
    115
    
    
    
    87
    
    
    
    75
    
    
    
    84
    
    
    
    97
    
    
    
    81Novelis Asia
    
    
    46
    
    
    
    45
    
    
    
    42
    
    
    
    31
    
    
    
    36
    *
    
    
    32Novelis South America
    
    
    47
    
    
    
    49
    
    
    
    49
    
    
    
    23
    
    
    
    41
    
    
    
    46Adjustments for equity-accounted joint ventures
    
    
    (37
    )
    
    
    (32
    )
    
    
    (26
    )
    
    
    (16
    )
    
    
    (14
    )
    
    
    (14
    )Other
    
    
    6
    
    
    
    5
    
    
    
    4
    
    
    
    2
    
    
    
    2
    
    
    
    2246
    
    
    
    222
    
    
    
    211
    
    
    
    165
    
    
    
    200
    
    
    
    179
 * Includes $11 of cash paid for business acquisitions. 27. SUBSEQUENT EVENTS Financing In connection with the reorganization transactions described in note 1  Nature of Operations, the
Group entered into senior secured credit facilities providing for aggregate borrowings of up to
$1.8 billion. These facilities consist of a $1.3 billion seven-year senior secured Term Loan B
facility, bearing interest at LIBOR plus 1.75%, all of which was borrowed on January 10, 2005, and
a $500 five-year multi-currency revolving credit facility. The Term Loan B facility consists of an
$825 Term Loan B in the U.S. and a $475 Term Loan B in Canada. The proceeds of the Term Loan B
facility were used in connection with the reorganization transactions, the Groups separation from
Alcan and to pay related fees and expenses. On January 31, 2005, Novelis announced that it had agreed to sell $1.4 billion aggregate principal
amount of senior unsecured debt securities (Senior Notes). The Senior Notes, which were priced at
par, bear interest at 7.25% and will mature on February 15, 2015. The net proceeds of the
placement, received on February 3, 2005, were used to repay the Alcan Notes (refer to note 18 
Debt Not Maturing within One Year). 36




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##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated) 27. SUBSEQUENT EVENTS(contd) Stock Option Plans Executive Share Option Plan
On January 6, 2005, all of the options granted under the Alcan Executive Share Option Plan held by
the Groups employees who were Alcan employees immediately prior to the spin-off were replaced with
options to purchase Novelis common shares. The new Novelis options cover 2,701,028 common shares
at a weighted average exercise price per share of $21.60. All converted options that were vested
on the separation date continued to be vested. Any that were unvested will vest in four equal
installments on the anniversary of the separation date on each of the next four years. Stock Price Appreciation Units
On January 6, 2005, all of the Alcan stock price appreciation units (SPAUs) held by the Groups
employees who were Alcan employees immediately prior to the spin-off were replaced with Novelis
SPAUs, consisting of 418,777 SPAUs at a weighted average exercise price per SPAU of $22.04. Total Shareholder Return Performance Plan
As at January 6, 2005, the Groups employees who were Alcan employees immediately prior to the
spin-off and who were eligible to participate in the Alcan Total Shareholder Return Performance
Plan (TSR Plan) ceased to actively participate in, and accrue benefits under, the TSR Plan. The
current three-year performance periods, namely 2002 to 2005 and 2003 to 2006, were truncated as of
the date of the separation. The accrued award amounts for each participant in the TSR Plan were
converted into restricted share units in Novelis, which will vest at the end of each performance
period, 2005 or 2006, as applicable. At the end of each performance period, each holder of
restricted share units will receive the net proceeds based on Novelis common share price at that
time, including declared dividends. Shareholder Rights Plan
The Groups initial board of directors approved in 2004 a plan whereby each of Novelis common
shares carries one right to purchase additional common shares. The rights expire in 2014, subject
to re-confirmation at the annual meetings of shareholders in 2008 and 2011. The rights under the
plan are not currently exercisable. The rights may become exercisable upon the acquisition by a
person or group of affiliated or associated persons (Acquiring Person) of beneficial ownership of
20% or more of Novelis outstanding voting shares or upon the commencement of a takeover bid.
Holders of rights, with the exception of an Acquiring Person or bidding party, in such
circumstances will be entitled to purchase from Novelis, upon payment of the exercise price
(currently $200.00), such number of common shares as can be purchased for twice the exercise price,
based on the market value of Novelis common shares at the time the rights become exercisable. The plan has a permitted bid feature which allows a takeover bid to proceed without the rights
becoming exercisable, provided that the bid meets specified minimum standards of fairness and
disclosure, even if the Groups board of directors does not support the bid. The rights may be
redeemed by the Groups board of directors prior to the expiration or re-authorization of the
rights agreement, with the prior consent of the holders of rights or common shares, for $0.01 per
right. In addition, under specified conditions, the Groups board of directors may waive the
application of the rights. Pension Benefits In 2005, the following transactions transpired related to existing Alcan pension plans covering
Novelis employees:  a)

In the U.S., for Novelis employees previously participating in the Alcancorp Pension
Plan and the Alcan Supplemental Executive Retirement Plan, Alcan agreed to recognize up to one year of additional service in its plan as long as
such employee worked for Novelis and Novelis paid to Alcan the normal
cost (in the case of the Alcancorp Pension Plan) and the current
service cost (in the case of the Alcan Supplemental Executive
Retirement Plan).b)

In the U.K., the sponsorship of the Alusuisse Holdings U.K. Ltd Pension Plan was
transferred from Alcan to Novelis. No new plan was established. 37




---



##### 



The Novelis GroupNOTES TO COMBINED FINANCIAL STATEMENTS
(in millions of US$, except where indicated)   27. SUBSEQUENT EVENTS(contd) The following plans were newly established in 2005 to replace the Alcan pension plans that
previously covered Novelis employees (other Alcan pension plans covering Novelis employees were
assumed by Novelis): Canada Pension Plan The Canada Plan provides for pensions calculated on service (no cap) and
eligible earnings which consist of the average annual salary and the short term incentive award up
to its target during the 36 consecutive months when they were the greatest. The normal form of
payment of pensions is a lifetime annuity with either a guaranteed minimum of 60 monthly payments
or a 50% lifetime pension to the surviving spouse. Pension Plan for Officers The Pension Plan for Officers (PPO) provides for pensions
calculated on service up to 20 years as an officer of Novelis or of Alcan, and eligible earnings
which consist of the excess of the average annual salary and target short term incentive award
during the 60 consecutive months when they were the greatest over eligible earnings in the U.S.
Plan or the U.K. Plan, as applicable. The normal form of payment of pensions is a lifetime
annuity. Pensions will not be subject to any deduction for social security or other offset
amounts. 38




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##### 



The Novelis GroupQUARTERLY FINANCIAL DATA
(in millions of US$, except per share data)
(unaudited) 2004
    
    FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTH
    
    
    YEARSales and operating revenues
    
    
    1,810
    
    
    
    1,929
    
    
    
    2,000
    
    
    
    2,016
    
    
    
    7,755Cost of sales and operating expenses
    
    
    1,585
    
    
    
    1,690
    
    
    
    1,757
    
    
    
    1,824
    
    
    
    6,856Depreciation and amortization
    
    
    61
    
    
    
    57
    
    
    
    60
    
    
    
    68
    
    
    
    246Income taxes
    
    
    43
    
    
    
    23
    
    
    
    45
    
    
    
    55
    
    
    
    166Other items:SFAS No. 133 impact
    
    
    (41
    )
    
    
    26
    
    
    
    (22
    )
    
    
    (32
    )
    
    
    (69
    )Other
    
    
    93
    
    
    
    88
    
    
    
    126
    
    
    
    194
    
    
    
    501Net income (Loss)
    
    
    69
    
    
    
    45
    
    
    
    34
    
    
    
    (93
    )
    
    
    55Earnings (loss) per share:Basic
    
    
    0.93
    
    
    
    0.61
    
    
    
    0.47
    
    
    
    (1.26
    )
    
    
    0.74Diluted
    
    
    0.92
    
    
    
    0.61
    
    
    
    0.46
    
    
    
    (1.26
    )
    
    
    0.74
 2003
    
    FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTH
    
    
    YEARSales and operating revenues
    
    
    1,519
    
    
    
    1,634
    
    
    
    1,532
    
    
    
    1,536
    
    
    
    6,221Cost of sales and operating expenses
    
    
    1,339
    
    
    
    1,433
    
    
    
    1,348
    
    
    
    1,362
    
    
    
    5,482Depreciation and amortization
    
    
    54
    
    
    
    56
    
    
    
    56
    
    
    
    56
    
    
    
    222Income taxes
    
    
    28
    
    
    
    16
    
    
    
    28
    
    
    
    (22
    )
    
    
    50Other items:SFAS No. 133 impact
    
    
    9
    
    
    
    (10
    )
    
    
    (16
    )
    
    
    (3
    )
    
    
    (20
    )Other
    
    
    84
    
    
    
    69
    
    
    
    88
    
    
    
    89
    
    
    
    330Net income
    
    
    5
    
    
    
    70
    
    
    
    28
    
    
    
    54
    
    
    
    157Earnings per share:Basic
    
    
    0.07
    
    
    
    0.94
    
    
    
    0.38
    
    
    
    0.73
    
    
    
    2.12Diluted
    
    
    0.07
    
    
    
    0.93
    
    
    
    0.38
    
    
    
    0.72
    
    
    
    2.11
 40




---



##### 



The Novelis Group
SELECTED FINANCIAL DATA
(in millions of US$, except per share data) Unaudited2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Sales and operating revenues
    
    
    7,755
    
    
    
    6,221
    
    
    
    5,893
    
    
    
    5,777
    
    
    
    5,668Net income (Loss)
    
    
    55
    
    
    
    157
    
    
    
    (9
    )
    
    
    (137
    )
    
    
    82Total assets
    
    
    5,954
    
    
    
    6,316
    
    
    
    4,558
    
    
    
    4,390
    
    
    
    4,943Long-term debt (including current portion)
    
    
    2,737
    
    
    
    1,659
    
    
    
    623
    
    
    
    514
    
    
    
    584Other debt
    
    
    541
    
    
    
    964
    
    
    
    366
    
    
    
    445
    
    
    
    498Cash and time deposits
    
    
    31
    
    
    
    27
    
    
    
    31
    
    
    
    17
    
    
    
    35Invested equity
    
    
    555
    
    
    
    1,974
    
    
    
    2,181
    
    
    
    2,234
    
    
    
    2,562Earnings per share:BasicIncome (Loss) before cumulative effect of
accounting change
    
    
    0.74
    
    
    
    2.12
    
    
    
    1.01
    
    
    
    (1.85
    )
    
    
    1.11Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (1.13
    )
    
    
    
    
    
    
    Net income (Loss) per share  basic
    
    
    0.74
    
    
    
    2.12
    
    
    
    (0.12
    )
    
    
    (1.85
    )
    
    
    1.11DilutedIncome (Loss) before cumulative effect of
accounting change
    
    
    0.74
    
    
    
    2.11
    
    
    
    1.00
    
    
    
    (1.85
    )
    
    
    1.10Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (1.13
    )
    
    
    
    
    
    
    Net income (Loss) per share  diluted
    
    
    0.74
    
    
    
    2.11
    
    
    
    (0.13
    )
    
    
    (1.85
    )
    
    
    1.10
 41