Freeport-McMoRan 2008 Annual Report Download - page 73

Notes to Consolidated Financial Statements
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 71
January 1, 2006, FCX recorded a cumulative effect adjustment
($149 million) to reduce beginning retained earnings for its deferred
mining costs asset ($285 million) as of December 31, 2005, net of
taxes, minority interest share and inventory effects ($136 million).
Environmental Expenditures. Environmental expenditures are
expensed or capitalized, depending upon their future economic
benefits. Liabilities for such expenditures are recorded when it is
probable that obligations have been incurred and the costs can
be reasonably estimated. For closed facilities and closed portions
of operating facilities with environmental obligations, an
environmental obligation is accrued when a decision to close a
facility, or a portion of a facility, is made by management and the
environmental obligation is considered to be probable.
Environmental obligations attributed to the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA) or analogous state programs are considered probable
when a claim is asserted, or is probable of assertion, and FCX, or
any of its subsidiaries, have been associated with the site. Other
environmental remediation obligations are considered probable
based on specific facts and circumstances. FCX’s estimates of
these costs are based on an evaluation of various factors,
including currently available facts, existing technology, presently
enacted laws and regulations, remediation experience, whether
or not FCX is a potentially responsible party (PRP) and the ability
of other PRPs to pay their allocated portions. With the exception
of those obligations assumed in the acquisition of Phelps Dodge
that were recorded at estimated fair values (see Note 15),
environmental obligations are recorded on an undiscounted
basis. Where the available information is sufficient to estimate
the amount of liability, that estimate has been used. Where the
information is only sufficient to establish a range of probable
liability and no point within the range is more likely than any
other, the lower end of the range has been used. Possible recoveries
of some of these costs from other parties are not recognized in
the consolidated financial statements until they become probable.
Legal costs associated with environmental remediation, as
defined in American Institute of Certified Public Accountants
Statement of Position (SOP) 96-1, “Environmental Remediation
Liabilities,” are included as part of the estimated liability.
Asset Retirement Obligations. In accordance with SFAS No.
143, “Accounting for Asset Retirement Obligations,” FCX records
the fair value of estimated asset retirement obligations (AROs)
associated with tangible long-lived assets in the period incurred.
Retirement obligations associated with long-lived assets included
within the scope of SFAS No. 143 are those for which there is a
legal obligation to settle under existing or enacted law, statute,
written or oral contract or by legal construction. These liabilities,
which are initially estimated based on discounted cash flow
estimates, are accreted to full value over time through charges to
income. In addition, asset retirement costs (ARCs) are capitalized
as part of the related asset’s carrying value and are depreciated
(primarily on a unit-of-production basis) over the asset’s
respective useful life. Reclamation costs for future disturbances
are recognized as an ARO and as a related ARC in the period of
the disturbance. FCX’s AROs consist primarily of costs associated
with mine reclamation and closure activities. These activities,
which are site specific, generally include costs for earthwork,
revegetation, water treatment and demolition (see Note 15).
Income Taxes. FCX accounts for income taxes pursuant to SFAS
No. 109, “Accounting for Income Taxes.” Deferred income taxes
are provided to reflect the future tax consequences of differences
between the tax basis of assets and liabilities and their reported
amounts in the financial statements (see Note 14). A valuation
allowance is provided for those deferred tax assets for which it is
more likely than not that the related benefits will not be realized.
The effect on deferred income tax assets and liabilities of a
change in tax rates and laws is recognized in income in the
period in which such changes are enacted.
On January 1, 2007, FCX adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109” (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Upon
adoption of FIN 48, FCX recorded a cumulative effect adjustment
of $4 million to increase beginning retained earnings. Following
adoption of FIN 48, for amounts accrued for unrecognized tax
benefits, FCX includes accrued interest in interest expense and
accrued penalties in other income and expenses rather than in its
provision for income taxes. FCX had previously included interest
and penalties in its provision for income taxes.
Derivative Instruments. FCX and its subsidiaries have entered
into derivative contracts to manage certain risks resulting from
fluctuations in commodity prices (primarily copper and gold),
foreign currency exchange rates and interest rates by creating
offsetting market exposures. FCX accounts for derivatives
pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS No. 133, as
subsequently amended, established accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The accounting for changes in the fair
value of a derivative instrument depends on the intended use of
the derivative and the resulting designation. See Note 17 for a
summary of FCX’s outstanding derivative instruments at
December 31, 2008, and a discussion of FCX’s risk management
strategies for those designated as hedges.