Freeport-McMoRan 2013 Annual Report Download - page 90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
88 | FREEPORT-McMoRan
therefore, the actual amount of any loss could differ from the
litigation contingencies reflected in FCX’s consolidated financial
statements. Refer to Note 12 for further discussion of FCX’s
litigation contingencies.
Income and Other 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 effects of
temporary differences between the financial statements and the
tax basis of assets and liabilities, as measured by current enacted
tax rates (refer to Note 11 for further discussion). When appropriate,
FCX evaluates the need for a valuation allowance to reduce
deferred tax assets to amounts that are more likely than not
realizable. The effect 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 criteria for the financial 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 11 for
further discussion).
With the exception of Tenke Fungurume Mining S.A.R.L. (TFM or
Tenke) 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 TFM are
reinvested indefinitely or have been allocated toward specifically
identifiable needs of the local operations, including, but not limited
to, certain contractual obligations and future plans for potential
expansions of production capacity. Changes in contractual
obligations or future plans for potential expansion could result in
accrual of additional deferred income taxes related to undistributed
earnings of TFM. FCX has not provided deferred income taxes
for other differences between the book and tax carrying amounts
of its investments in material foreign subsidiaries as FCX
considers its ownership positions to be permanent in duration, and
quantification of the related deferred tax liability is not practicable.
FCX’s operations are in multiple jurisdictions where
uncertainties arise in the application of complex tax regulations.
Some of these tax regimes are defined by contractual agreements
with the local government, while others are defined by general tax
laws and regulations. FCX and its subsidiaries are subject to
reviews of its income tax filings and other tax payments, and
disputes can arise with the taxing authorities over the
interpretation of its contracts or laws. The final taxes paid may be
dependent upon many factors, including negotiations with taxing
authorities. In certain jurisdictions, FCX must pay a portion of the
disputed amount to the local government in order to formally
appeal the assessment. Such payment is recorded as a receivable
if FCX believes the amount is collectible.
there is a legal obligation to settle under existing or enacted law,
statute, written or oral contract or by legal construction. These
obligations, which are initially estimated based on discounted
cash flow 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 over the asset’s respective useful life.
For mining operations, reclamation costs for disturbances are
recognized as an ARO and as a related ARC (included in property,
plant, equipment and mining development costs) in the period of
the disturbance and depreciated primarily on a UOP basis. FCX’s
AROs for mining operations 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 (refer to Note 12 for
further discussion).
For oil and gas properties, the fair value of the legal obligation
is recognized as an ARO and as a related ARC (included in oil
and gas properties) in the period in which the well is drilled or
acquired and is amortized on a UOP basis together with other
capitalized costs. Substantially all of FCX’s oil and gas leases
require that, upon termination of economic production, the
working interest owners plug and abandon non-producing
wellbores, remove platforms, tanks, production equipment
and flow lines, and restore the wellsite (refer to Note 12 for
further discussion).
At least annually, FCX reviews its ARO estimates for changes in
the projected timing of certain reclamation and closure/restoration
costs, changes in cost estimates and additional AROs incurred
during the period.
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
after 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 amount of such loss can be reasonably
estimated. Where the available information is sufficient to
estimate the amount of the obligation, 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. 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 charged to expense as incurred.
Litigation is inherently unpredictable, and it is difficult to
project the outcome of particular matters with reasonable certainty;