Freeport-McMoRan 2011 Annual Report Download - page 77

2011 ANNUAL REPORT | 75
is only sucient 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
nancial statements until they become probable. Legal costs
associated with environmental remediation (such as fees to
outside law rms for work relating to determining the extent and
type of remedial actions and the allocation of costs among PRPs)
are included as part of the estimated obligation. Environmental
obligations assumed in the acquisition of FMC, which were
initially estimated on a discounted basis, are accreted to full value
over time through charges to interest expense. Adjustments
arising from changes in amounts and timing of estimated costs
and settlements may result in increases and decreases in these
obligations and are calculated on a discounted basis if they were
initially estimated on a discounted basis. Unless these adjustments
qualify for capitalization, changes in environmental obligations
are charged to operating income when they occur.
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 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. ese
obligations, which are initially estimated based on discounted cash
ow estimates, are accreted to full value over time through charges
to cost of sales. 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. ese
activities, which are site specic, generally include costs for
earthwork, revegetation, water treatment and demolition (refer to
Note 13 for further discussion).
Litigation Contingencies. At least quarterly, FCX assesses the
likelihood of any adverse judgments or outcomes related to legal
matters (including pending or threatened litigation matters), as
well as ranges of potential losses. A determination of the amount of
the reserve required, if any, for litigation contingencies is made
aer analysis of known issues. FCX records reserves related to legal
matters for which it believes it is probable that a loss has been
incurred and the range of such loss can be reasonably estimated. If
an amount within a range of loss appears to be a better estimate
than any other amount within the range, that amount is accrued,
otherwise, the minimum amount in the range is accrued. With
respect to other matters, for which management has concluded that
a loss is only reasonably possible or remote, or not reasonably
estimable, no liability has been recorded. For losses assessed as
reasonably possible, FCX discloses the nature of the contingency
and an estimate of the possible loss or range of loss or states that
such an estimate cannot be made. Costs incurred to defend claims
are expensed as incurred.
Litigation is inherently unpredictable and it is dicult to project
the outcome of particular matters with reasonable certainty;
therefore, the actual amount of any loss could dier from the
litigation contingencies reected in FCX’s consolidated nancial
statements. Refer to Note 13 for further discussion of FCX’s
litigation contingencies.
Income Taxes. FCX accounts for deferred income taxes utilizing
an asset and liability method, whereby deferred tax assets and
liabilities are recognized based on the tax eects of temporary
dierences between the nancial statements and the tax basis of
assets and liabilities, as measured by current enacted tax rates
(refer to Note 12 for further discussion). When appropriate, FCX
evaluates the need for a valuation allowance to reduce deferred
tax assets to estimated recoverable amounts. e eect on
deferred income tax assets and liabilities of a change in tax rates or
laws is recognized in income in the period in which such changes
are enacted.
FCX accounts for uncertain income tax positions using a threshold
and measurement attribute for the nancial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FCX’s policy associated with uncertain tax positions
is to record accrued interest in interest expense and accrued
penalties in other income and expenses rather than in the provision
for income taxes (refer to Note 12 for further discussion).
With the exception of FCX’s operations in the Democratic
Republic of Congo (DRC), income taxes are provided on the earnings
of FCX’s material foreign subsidiaries under the assumption that
these earnings will be distributed. FCX has determined that
undistributed earnings related to its DRC operations are reinvested
indenitely or have been allocated toward specically identiable
needs of the local operations. FCX has not provided for other
dierences between the book and tax carrying amounts of these
investments as FCX considers its ownership position to be
permanent in duration and quantication of the related deferred
tax liability is not practicable.
Derivative Instruments. FCX and its subsidiaries have entered
into derivative contracts to manage certain risks resulting from
uctuations in commodity prices (primarily copper and gold),
foreign currency exchange rates and interest rates by creating
osetting market exposures. Every derivative instrument
(including certain derivative instruments embedded in other
contracts) is recorded in the balance sheet as either an asset or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS