Freeport-McMoRan 2013 Annual Report Download - page 88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
86 | FREEPORT-McMoRan
amortization and in the process of development. Proceeds from
the sale of oil and gas properties are accounted for as reductions
to capitalized costs unless the reduction causes a significant
change in proved reserves, which absent other factors, is generally
described as a 25 percent or greater change, and significantly
alters the relationship between capitalized costs and proved
reserves attributable to a cost center, in which case a gain or loss
is recognized.
Under the SEC full cost accounting rules, FCX reviews the
carrying value of its oil and gas properties each quarter on
a country-by-country basis. Under these rules, capitalized costs
of oil and gas properties (net of accumulated depreciation,
depletion and amortization, and related deferred income taxes)
for each cost center may not exceed a “ceiling” equal to:
• thepresentvalue,discountedat10percent,ofestimatedfuture
net cash flows from the related proved oil and natural
gas reserves, net of estimated future income taxes; plus
• thecostoftherelatedunprovedpropertiesnotbeing
amortized; plus
• thelowerofcostorestimatedfairvalueoftherelatedunproved
properties included in the costs being amortized (net of related
tax effects).
These rules require that FCX price its future oil and gas
production at the twelve-month average of the first-day-of-the-
month historical reference prices as adjusted for location and
quality differentials. FCX’s reference prices are West Texas
Intermediate (WTI) for oil and the Henry Hub spot price for natural
gas. Such prices are utilized except where different prices are
fixed and determinable from applicable contracts for the
remaining term of those contracts. The reserve estimates exclude
the effect of any crude oil and natural gas derivatives FCX has in
place. The estimated future net cash flows also exclude future
cash outflows associated with settling asset retirement
obligations included in the net book value of the oil and gas
properties. The rules require an impairment if the capitalized
costs exceed this “ceiling.” At December 31, 2013, the ceiling with
respect to FCX’s oil and gas properties exceeded the net
capitalized costs, and therefore, no impairment was recorded.
Goodwill. Goodwill has an indefinite useful life and is not
amortized, but rather is tested for impairment at least annually
during the fourth quarter, unless events occur or circumstances
change between annual tests that would more likely than not
reduce the fair value of a related reporting unit below its carrying
value. Impairment occurs when the carrying amount of goodwill
exceeds its implied fair value. FCX generally uses a discounted
cash flow model to determine if the carrying value of a reporting
unit, including goodwill, is less than the fair value of the
reporting unit. FCX’s approach to allocating goodwill includes the
identification of the reporting unit it believes has contributed
to the excess purchase price and includes consideration of the
reporting unit’s potential for future growth. Goodwill arose
in 2013 with FCX’s acquisitions of PXP and MMR, and has been
Carrying amounts assigned to VBPP are not charged to expense
until the VBPP becomes associated with additional proven and
probable mineral reserves and the reserves are produced or the
VBPP is determined to be impaired. Additions to proven and
probable mineral reserves for properties with VBPP will carry with
them the value assigned to VBPP at the date acquired, less any
impairment amounts.
Oil and Gas Properties. FCX follows the full cost method of
accounting specified by the U.S. Securities and Exchange
Commission’s (SEC) rules whereby all costs associated with oil
and gas property acquisition, exploration and development
activities are capitalized into a cost center on a country-by-country
basis. Such costs include internal general and administrative
costs, such as payroll and related benefits and costs directly
attributable to employees engaged in acquisition, exploration and
development activities. General and administrative costs
associated with production, operations, marketing and general
corporate activities are charged to expense as incurred.
Capitalized costs, along with estimated future costs to develop
proved reserves and asset retirement costs that are not already
included in oil and gas properties, net of related salvage value,
are amortized to expense under the UOP method using engineers’
estimates of the related, by-country proved oil and natural
gas reserves.
The costs of unproved oil and gas properties are excluded from
amortization until the properties are evaluated. Costs are
transferred into the amortization base on an ongoing basis as the
properties are evaluated and proved oil and natural gas reserves
are established or impairment is determined. Unproved oil and
gas properties are assessed periodically, at least annually, to
determine whether impairment has occurred. FCX assesses oil
and gas properties on an individual basis or as a group if
properties are individually insignificant. The assessment
considers the following factors, among others: intent to drill,
remaining lease term, geological and geophysical evaluations,
drilling results and activity, the assignment of proved reserves
and the economic viability of development if proved reserves are
assigned. During any period in which these factors indicate an
impairment, the cumulative drilling costs incurred to date for such
property and all or a portion of the associated leasehold costs are
transferred to the full cost pool and are then subject to
amortization. The transfer of costs into the amortization base
involves a significant amount of judgment and may be subject to
changes over time based on drilling plans and results, geological
and geophysical evaluations, the assignment of proved oil and
natural gas reserves, availability of capital and other factors.
Costs not subject to amortization consist primarily of capitalized
costs incurred for undeveloped acreage and wells in progress
pending determination, together with capitalized interest for these
projects. The ultimate evaluation of the properties will occur over
a period of several years. Interest costs totaling $69 million in
2013 were capitalized on oil and gas properties not subject to