According to MS KB entry, there is a quirk in CreateIconIndirect which recognizes HBITMAPs been created with BITMAPV5HEADER passed to CreateDIBSection (and BGRA channel layout). 
However,  TBitmap instances with (PixelFormat = pf32bit) and (AlphaFormat = afDefined) (behaving as alpha blended for the other purposes) when referred by its Handles are not being recognized as valid alpha blended bitmaps for creation of icons or cursors.
Currently, I have to create a full copy of TBitmap using described API calls (see) to make CreateIconIndirect accept a bitmap handle as alpha blended. How do I overcome this clumsiness?
Here is an example:
procedure TForm1.Button1Click(Sender: TObject);
const
  crAlpha = TCursor(-25);
var
  Bmp: TBitmap;
  Px: PRGBQuad;
  X, Y: Integer;
  BmpMask: TBitmap;
  II: TIconInfo;
  AlphaCursor: HCURSOR;
begin
  Bmp := TBitmap.Create;
  Bmp.PixelFormat := pf32bit;
  Bmp.Canvas.Brush.Color := clWhite;
  Bmp.SetSize(32, 32);
  Bmp.Canvas.Font.Style := [fsBold];
  Bmp.Canvas.Font.Color := clRed;
  Bmp.Canvas.TextOut(1, 10, 'alpha');
  for Y := 0 to (Bmp.Height - 1) do
  begin
    Px := Bmp.ScanLine[Y];
    for X := 0 to (Bmp.Width - 1) do begin
      if DWORD(Px^) = DWORD(clWhite) then
        Px.rgbReserved := $00
      else
        Px.rgbReserved := $FF;
      Inc(Px);
    end;
  end;
  BmpMask := TBitmap.Create;
  BmpMask.SetSize(Bmp.Width, Bmp.Height);
  II.fIcon := False;
  II.xHotspot := 32;
  II.yHotspot := 32;
  II.hbmMask := BmpMask.Handle;
  II.hbmColor := Bmp.Handle;
  AlphaCursor := CreateIconIndirect(II);
  Win32Check(AlphaCursor <> 0);
  BmpMask.Free;
  Bmp.AlphaFormat := afDefined;  // AlphaBlend below, premultiply channels
  Canvas.Draw(0, 0, Bmp);        // test draw
  Bmp.Free;
  Screen.Cursors[crAlpha] := AlphaCursor;
  Cursor := crAlpha;
end;
 (Top 'alpha' is test draw, the other is a cursor)
 (Top 'alpha' is test draw, the other is a cursor)
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