Freeport-McMoRan 2008 Annual Report Download - page 77

Notes to Consolidated Financial Statements
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 75
The Hierarchy of Generally Accepted Accounting Principles. In
May 2008, FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles,” which identifies the
sources of accounting and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
U.S. GAAP. SFAS No. 162 was effective November 15, 2008, and
adoption did not result in a change in FCX’s accounting practices.
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion.
In May 2008, FASB issued FSP
No. APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement),” which will change the accounting treatment
for convertible debt securities that the issuer may settle fully
or partially in cash. FSP No. APB 14-1 requires bifurcation of
convertible debt instruments into a debt component that is
initially recorded at fair value and an equity component that
represents the difference between the initial proceeds from
issuance of the instrument and the fair value allocated to the debt
component. The debt component is subsequently accreted (as a
component of interest expense) to par value over its expected life.
FSP No. APB 14-1 is effective for fiscal years and interim periods
beginning after December 15, 2008, and must be retrospectively
applied to all prior periods presented, even if an instrument
has matured, converted, or otherwise been extinguished as of
the FSP’s effective date. FCX will adopt FSP No. APB 14-1 on
January 1, 2009, and will be required to retrospectively apply its
provisions to its 7% Convertible Senior Notes. FCX is currently
evaluating the impact that the adoption of FSP No. APB 14-1 will
have on its consolidated financial statements.
Determining the Fair Value of a Financial Asset when the Market
for That Asset is Not Active.
In October 2008, FASB issued FSP
No. FAS 157-3, “Determining the Fair Value of a Financial Asset
when the Market for That Asset is Not Active,” which clarifies
the application of SFAS No. 157 in a market that is not active and
provides key considerations in determining the fair value of the
financial asset. FSP FAS 157-3 is effective upon issuance, including
prior periods for which financial statements have not been issued.
Revisions resulting from a change in the valuation technique
or its application shall be accounted for as a change in accounting
estimate. The adoption of FSP No. FAS 157-3 did not have a
material impact on FCX’s financial reporting and disclosures.
Employers’ Disclosures about Postretirement Benefit Plan Assets.
In December 2008, FASB issued FSP No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets,” which
provides enhanced guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement
plan. FSP FAS 132(R)-1 revises disclosure requirements on
pension and postretirement plan assets from those required in
the original SFAS No. 132 after the FASB decided disclosures
about fair value measurements for postretirement plan assets
were not within the scope of SFAS No. 157. The disclosures about
plan assets required by FSP FAS 132(R)-1 are effective for fiscal
years ending after December 15, 2009, with early application
permitted. Upon initial application, disclosures are not required
for earlier periods that are presented for comparative purposes.
FCX is currently evaluating the impact that the adoption of FSP
No. FAS 132(R)-1 will have on its financial disclosures.
Reclassifications. For comparative purposes, primarily the
revision to FCX’s presentation of its business segments, certain
prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2. ASSET IMPAIRMENTS AND OTHER CHARGES
The following table summarizes long-lived asset impairments,
other than goodwill, and other charges recorded during the year
ended December 31, 2008 (see Note 19 for long-lived asset
impairments and other charges by FCX’s reportable segments):
Long-lived asset impairments $ 10,867
Pension and postretirement special benefits and curtailments 61
Restructuring costs 50
Total long-lived asset impairments and other charges $ 10,978
During the fourth quarter of 2008, there was a dramatic decline in
copper and molybdenum prices. After averaging $3.05 per
pound in 2006, $3.23 per pound in 2007 and $3.61 per pound for
the first nine months of 2008, LME spot copper prices declined to
a four-year low of $1.26 per pound in December 2008 and
averaged $1.78 per pound in the fourth quarter of 2008 and closed
at $1.32 per pound on December 31, 2008. Additionally, while
molybdenum markets have been strong in recent years with
prices averaging approximately $25 per pound in 2006, $30 per
pound in 2007 and $33 per pound for the first nine months of
2008, molybdenum prices declined significantly to a four-year
low of $8.75 per pound in November 2008 and averaged
approximately $16 per pound in the fourth quarter of 2008 and
closed at $9.50 per pound on December 31, 2008.
Although FCX’s long-term strategy of developing its resources
to their full potential remains in place, the decline in copper and
molybdenum prices and the deterioration of the economic and
credit environment during the fourth quarter of 2008 have limited
FCX’s ability to invest in growth projects and required FCX to
make adjustments to its near-term plans. FCX responded to the
sudden downturn and uncertain near-term outlook by revising its
near-term strategy to protect liquidity while preserving its
mineral resources and growth options for the longer term.
Accordingly, operating plans were revised to reflect:
(i) curtailment of copper production at high-cost North America
operations and of molybdenum production at the Henderson
molybdenum mine; (ii) capital cost reductions; (iii) aggressive
cost control, including workforce reductions, reduced equipment
purchases that were planned to support expansion projects, a
reduction in material and supplies inventory and reductions in