Freeport-McMoRan 2003 Annual Report Download - page 56

Derivative Instruments. At times FCX and its sub-
sidiaries have entered into derivative contracts to
manage certain risks resulting from fluctuations in
commodity prices (primarily copper and gold), foreign
currency exchange rates and interest rates by creating
offsetting market exposures. FCX accounts for
derivatives pursuant to SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” SFAS
No. 133, as subsequently amended, established
accounting and reporting standards requiring that
every derivative instrument (including certain derivative
instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or
liability measured at its fair value. The accounting for
changes in the fair value of a derivative instrument
depends on the intended use of the derivative and the
resulting designation. See Note 11 for a summary of
FCX’s outstanding derivative instruments at December
31, 2003, and a discussion of FCX’s risk management
strategies for those designated as hedges.
Upon adoption of SFAS No. 133 on January 1,
2001, FCX recorded immaterial cumulative gain
adjustments totaling $0.8 million to other income
and net income to adjust the recorded values of PT
Freeport Indonesia’s and Atlantic Copper’s foreign
currency forward contracts to fair value and $0.8
million to revenues ($0.4 million to net income) to
adjust the embedded derivatives (see “Revenue
Recognition”) in PT Freeport Indonesia’s provisionally
priced copper sales to fair value, as calculated under
SFAS No. 133. In addition, FCX recorded a cumula-
tive effect net loss adjustment to other comprehen-
sive income totaling $1.0 million for the fair value of
Atlantic Copper’s interest rate swaps on January 1,
2001. FCX elected to continue its historical account-
ing for its 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. Redeemable preferred stock indexed to
commodities is treated as a hedge of future produc-
tion and is carried at its original issue value. As
redemption payments occur, differences between the
carrying value and the payment are recorded as an
adjustment to revenues (see Note 5).
Effective July 1, 2003, FCX adopted SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” On July
1, 2003, FCX reclassified its mandatorily
redeemable preferred stock totaling $450.0 mil-
lion as debt and reclassified the $26.6 million of
original issuance costs from capital in excess of par
value of common stock to other assets. FCX also
recorded a $24.7 million ($0.16 per share) cumula-
tive effect adjustment for the amortization of the
original issuance costs through July 1, 2003.
Effective July 1, 2003, dividend payments on FCX’s
mandatorily redeemable preferred stock are classified
as interest expense. SFAS No. 150 does not
permit prior period financial statements to be
restated to reflect the changes in classification. In
addition to the cumulative effect adjustment,
adopting SFAS No. 150 decreased net income appli-
cable to common stock by approximately $0.4 million,
less than $0.01 per share, in 2003 for amortization
after July 1 of original issuance costs.
Revenue Recognition. PT Freeport Indonesia’s
sales of copper concentrates, which also contain
significant quantities of gold and silver, are recognized
in revenues when the title to the concentrates is
transferred to the buyer (which coincides with the
transfer of the risk of loss) at the point the concen-
trates are moved over the vessel’s rail at PT Freeport
Indonesia’s port facility.
Revenues from PT Freeport Indonesia’s concentrate
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 royalties, treatment and
all refining charges (including price participation, if
applicable) and the impact of commodity contracts,
including the impact of redemptions of FCX’s manda-
torily redeemable preferred stock indexed to
commodities (see Notes 5 and 11). Moreover, because
a portion of the metals contained in copper
concentrates is unrecoverable as a result of the
smelting process, our 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
our contracts and vary by customer. Treatment
and refining charges represent payments to smelters
and refiners and are either fixed or in certain cases
vary with the price of copper.
PT Freeport Indonesia’s concentrate sales agree-
ments, including its sales to Atlantic Copper and
PT Smelting, provide for provisional billings based
on world metals prices when shipped, primarily
using then-current prices on the London Metal
Exchange (LME). Final settlement on the copper
portion is generally based on the average LME price
for a specified future period, generally three months
after the month of arrival at the customer’s facility.
Final delivery to customers in Asia generally takes
up to 25 days and to customers in Europe generally
takes up to 57 days.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
54 FREEPORT-McMoRan COPPER & GOLD INC. 2003 Annual Report