Freeport-McMoRan 2008 Annual Report Download - page 74

Notes to Consolidated Financial Statements
72 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
FCX elected to continue its historical accounting for its
mandatorily redeemable preferred stock indexed to commodities
under the provisions of SFAS No. 133, which allow such
instruments issued before January 1, 1998, to be excluded from
those instruments required to be adjusted for changes in their
fair values. Mandatorily redeemable preferred stock indexed to
commodities was treated as a hedge of future production and
was carried at its original issue value. As redemption payments
occurred, differences between the carrying value and the
payments were recorded as adjustments to revenues. In 2006,
FCX made the final redemptions of its preferred stock indexed to
commodities. Under SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity,” FCX classified its mandatorily redeemable preferred
stock as debt. Dividend payments on FCX’s mandatorily
redeemable preferred stock were classified as interest expense
(see Notes 11 and 17).
Revenue Recognition. FCX sells its products pursuant to
sales contracts entered into with its customers. Revenue for all
FCX’s products is recognized when title and risk of loss pass to
the customer and when collectibility is reasonably assured.
The passing of title and risk of loss to the customer is based on
terms of the sales contract, generally upon shipment or delivery
of product.
Revenues from FCX’s concentrate and cathodes sales are
recorded based on either 100 percent of a provisional sales price
or a final sales price calculated in accordance with the terms
specified in the relevant sales contract. Revenues from
concentrate sales are recorded net of treatment and all refining
charges (including price participation, if applicable, as discussed
below) and the impact of derivative contracts, including the
impact of redemptions of FCX’s mandatorily redeemable
preferred stock indexed to commodities and the copper collars
acquired from Phelps Dodge (see Notes 11 and 17). Moreover,
because a portion of the metals contained in copper concentrates
is unrecoverable as a result of the smelting process, FCX’s
revenues from concentrate sales are also recorded net of
allowances based on the quantity and value of these
unrecoverable metals. These allowances are a negotiated term of
FCX’s contracts and vary by customer. Treatment and refining
charges represent payments or price adjustments to smelters and
refiners and are either fixed or, in certain cases, vary with the
price of copper (referred to as price participation).
Under the long-established structure of sales agreements
prevalent in the industry, copper contained in concentrates and
cathodes is generally provisionally priced at the time of shipment.
The provisional prices are finalized in a specified future period
(generally one to four months from the shipment date) based on
the quoted London Metal Exchange (LME) or the New York
Mercantile Exchange (COMEX) prices. FCX receives market
prices based on prices in the specified future period, and, under
SFAS No. 133, these sales result in changes recorded to revenues
until the specified future period. FCX records revenues and
invoices customers at the time of shipment based on then-current
LME or COMEX prices, which results in an embedded derivative
(i.e., a pricing mechanism that is finalized after the time of
delivery) that is required to be bifurcated from the host contract.
The host contract is the sale of the metals contained in the
concentrates or cathodes at the then-current LME or COMEX
price. FCX applies the normal purchase and sale exception
allowed by SFAS No. 133 to the host contract in its concentrate or
cathode sales agreements because the sales agreements do not
allow for net settlement and always result in physical delivery.
Under SFAS No. 133, as amended, the embedded derivative does
not qualify for hedge accounting. At December 31, 2008, revenues
based on provisional sales prices totaled $768 million. At
December 31, 2008, FCX had outstanding provisionally priced
sales of 508 million pounds of copper (net of minority interests),
priced at an average of $1.39 per pound, subject to final pricing.
Final prices on these sales will be established over the first
several months of 2009 pursuant to terms of sales contracts.
Gold sales are priced according to individual contract terms,
generally the average London Bullion Market Association price
for a specified month near the month of shipment.
Approximately 85 percent of FCX’s 2008 molybdenum sales
were priced based on prices published in Platts Metals Week,
Ryan’s Notes or Metal Bulletin, plus conversion premiums for
products that undergo additional processing, such as ferro-
molybdenum and molybdenum chemical products. The majority
of these sales use the average of the previous month. FCX’s
remaining molybdenum sales generally have pricing that is either
based on a fixed price or adjusts within certain price ranges.
PT Freeport Indonesia concentrate sales are subject to certain
royalties, which are recorded as a reduction to revenues (see
Note 16 for further discussion).
Stock-Based Compensation. As of December 31, 2008, FCX has
five stock-based employee compensation plans and one stock-
based director compensation plan. Prior to 2007, the market price
for stock options was defined as the average of the high and low
price of FCX common stock on the date of grant. Effective
January 2007, the plans were amended to define the market price
for future grants as the closing price of FCX common stock on the
date of grant.
Effective January 1, 2006, FCX adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004), “Share-
Based Payment” (SFAS No. 123R), using the modified prospective
transition method. Under that transition method, compensation
costs recognized in the consolidated statements of operations
include: (i) compensation costs for all stock option awards
granted to employees prior to but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, “Accounting for