Freeport-McMoRan 2004 Annual Report Download - page 56

Notes To Consolidated Financial Statements
Note 1. Summary of Significant
Accounting Policies
Basis of Presentation.฀The฀consolidated฀financial฀state-
ments฀of฀Freeport-McMoRan฀Copper฀&฀Gold฀Inc.฀(FCX)฀include฀
the฀accounts฀of฀those฀subsidiaries฀where฀FCX฀directly฀or฀
indirectly฀has฀more฀than฀50฀percent฀of฀the฀voting฀rights฀and฀
has฀the฀right฀to฀control฀significant฀management฀decisions.฀
FCX฀consolidates฀its฀90.6฀percent-owned฀subsidiary฀PT฀Freeport฀
Indonesia฀and฀its฀85.7฀percent-owned฀subsidiary฀
PT฀Puncakjaya฀Power฀(Puncakjaya฀Power),฀as฀well฀as฀its฀
wholly฀owned฀subsidiaries,฀primarily฀Atlantic฀Copper,฀S.A.฀and฀
PT฀Irja฀Eastern฀Minerals.฀FCX’s฀unincorporated฀joint฀ventures฀
with฀Rio฀Tinto฀plc฀are฀reflected฀using฀the฀proportionate฀
consolidation฀method฀(Note฀2).฀PT฀Freeport฀Indonesia’s฀25฀
percent฀ownership฀interest฀and฀related฀investment฀in฀PT฀
Smelting฀is฀accounted฀for฀under฀the฀equity฀method฀(Note฀9).฀
All฀significant฀intercompany฀transactions฀have฀been฀elimi-
nated.฀Certain฀prior฀year฀amounts฀have฀been฀reclassified฀to฀
conform฀to฀the฀2004฀presentation.฀Changes฀in฀the฀accounting฀
principles฀applied฀during฀the฀years฀presented฀are฀discussed฀
below฀under฀the฀captions฀“Property,฀Plant,฀Equipment฀and฀
Development฀Costs,”฀“Reclamation฀and฀Closure฀Costs”฀and฀
“Derivative฀Instruments.”
Use of Estimates.฀The฀preparation฀of฀FCX’s฀financial฀
statements฀in฀conformity฀with฀accounting฀principles฀generally฀
accepted฀in฀the฀United฀States฀(U.S.)฀requires฀management฀
to฀make฀estimates฀and฀assumptions฀that฀affect฀the฀amounts฀
reported฀in฀these฀financial฀statements฀and฀accompanying฀
notes.฀The฀more฀significant฀areas฀requiring฀the฀use฀of฀
management฀estimates฀include฀mineral฀reserve฀estimation,฀
useful฀asset฀lives฀for฀depreciation฀and฀amortization,฀the฀
estimated฀average฀ratio฀of฀overburden฀removed฀to฀ore฀mined฀
over฀the฀life฀of฀the฀open-pit฀mine,฀allowances฀for฀obsolete฀
inventory,฀reclamation฀and฀closure฀costs,฀environmental฀
obligations,฀postretirement฀and฀other฀employee฀benefits,฀
deferred฀taxes฀and฀valuation฀allowances฀and฀future฀cash฀
flows฀associated฀with฀assets.฀Actual฀results฀could฀differ฀from฀
those฀estimates.
Cash Equivalents, Restricted Cash and Investments.
Highly฀liquid฀investments฀purchased฀with฀maturities฀of฀
three฀months฀or฀less฀are฀considered฀cash฀equivalents.฀At฀
December฀31,฀2003,฀restricted฀investments฀included฀U.S.฀
government฀securities,฀plus฀accrued฀interest฀thereon,฀totaling฀
$24.0฀million,฀pledged฀as฀security฀for฀scheduled฀interest฀
payments฀through฀July฀31,฀2004,฀on฀FCX’s฀8฀1 /4%฀Convertible฀
Senior฀Notes฀(see฀Note฀5).฀Restricted฀cash฀held฀in฀escrow฀as฀
security฀on฀Atlantic฀Copper’s฀working฀capital฀revolver฀totaled฀
$11.0฀million฀at฀December฀31,฀2003฀(see฀Note฀5).
Other Accounts Receivable.฀Other฀accounts฀receivable฀
include฀$30.5฀million฀at฀December฀31,฀2004,฀related฀to฀the฀
settlement฀of฀an฀insurance฀claim฀(see฀Note฀10);฀a฀receivable฀
from฀Rio฀Tinto฀totaling฀$11.5฀million฀at฀December฀31,฀
2004,฀and฀$10.5฀million฀at฀December฀31,฀2003,฀for฀its฀
current฀share฀of฀infrastructure฀financing฀arrangements฀
with฀Puncakjaya฀Power฀(see฀Note฀2);฀and฀value-added฀taxes฀
totaling฀$20.6฀million฀at฀December฀31,฀2004,฀and฀$12.4฀
million฀at฀December฀31,฀2003.
Inventories.฀In-process฀inventories฀represent฀materials฀
that฀are฀currently฀in฀the฀process฀of฀being฀converted฀to฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
a฀salable฀product.฀PT฀Freeport฀Indonesia฀does฀not฀have฀
material฀quantities฀of฀in-process฀inventories.฀For฀Atlantic฀
Copper,฀in-process฀inventories฀represent฀copper฀concentrates฀
at฀various฀stages฀of฀conversion฀into฀anodes฀and฀cathodes.฀
Atlantic฀Copper’s฀in-process฀inventories฀are฀valued฀at฀the฀
cost฀of฀the฀material฀fed฀to฀the฀smelting฀and฀refining฀process฀
plus฀in-process฀conversion฀cost.฀Inventories฀of฀materials฀and฀
supplies,฀as฀well฀as฀salable฀products,฀are฀stated฀at฀the฀lower฀
of฀cost฀or฀market.฀PT฀Freeport฀Indonesia฀uses฀the฀average฀
cost฀method฀for฀all฀inventories฀and฀Atlantic฀Copper฀uses฀the฀
first-in,฀first-out฀(FIFO)฀cost฀method฀for฀its฀sales฀of฀finished฀
copper฀products฀(see฀Note฀3).
Property, Plant, Equipment and Development
Costs. Property,฀plant,฀equipment฀and฀development฀costs฀
are฀carried฀at฀cost.฀Mineral฀exploration฀costs฀are฀expensed฀
as฀incurred,฀except฀in฀the฀year฀when฀proven฀and฀probable฀
reserves฀have฀been฀established฀for฀a฀given฀property,฀in฀which฀
case฀all฀exploration฀costs฀for฀that฀property฀incurred฀since฀
the฀beginning฀of฀that฀year฀are฀capitalized.฀Refer฀to฀Note฀13฀
for฀the฀definition฀of฀proven฀and฀probable฀reserves.฀No฀explo-
ration฀costs฀were฀capitalized฀during฀the฀years฀presented.฀
Development฀costs฀are฀capitalized฀beginning฀after฀proven฀and฀
probable฀reserves฀have฀been฀established.฀Development฀costs฀
include฀costs฀incurred฀resulting฀from฀mine฀pre-production฀
activities฀undertaken฀to฀gain฀access฀to฀proven฀and฀probable฀
reserves฀including฀adits,฀drifts,฀ramps,฀permanent฀excava-
tions,฀infrastructure฀and฀removal฀of฀overburden.฀Additionally,฀
interest฀expense฀allocable฀to฀the฀cost฀of฀developing฀mining฀
properties฀and฀to฀constructing฀new฀facilities฀is฀capitalized฀
until฀assets฀are฀ready฀for฀their฀intended฀use.฀Expenditures฀
for฀replacements฀and฀improvements฀are฀capitalized.฀Costs฀
related฀to฀periodic฀scheduled฀maintenance฀(turnarounds)฀are฀
expensed฀as฀incurred.฀Depreciation฀for฀mining฀and฀milling฀
life-of-mine฀assets฀is฀determined฀using฀the฀unit-of-production฀
method฀based฀on฀estimated฀recoverable฀proven฀and฀probable฀
copper฀reserves.฀Development฀costs฀that฀relate฀to฀a฀specific฀
ore฀body฀are฀depreciated฀using฀the฀unit-of-production฀
method฀based฀on฀estimated฀recoverable฀proven฀and฀probable฀
copper฀reserves฀for฀the฀ore฀body฀benefited.฀Recording฀of฀
depreciation฀and฀amortization฀using฀the฀unit-of-production฀
method฀occurs฀upon฀extraction฀of฀the฀recoverable฀copper฀
from฀the฀ore฀body,฀at฀which฀time฀it฀is฀allocated฀to฀inventory฀
cost฀and฀then฀included฀as฀a฀component฀of฀cost฀of฀goods฀sold.฀
Other฀assets฀are฀depreciated฀on฀a฀straight-line฀basis฀over฀
54฀| FREEPORT-McMoRan COPPER & GOLD INC.