Freeport-McMoRan 2004 Annual Report Download - page 63

Notes To Consolidated Financial Statements
New Accounting Standards.฀In฀November฀2004,฀the฀FASB฀
issued฀SFAS฀No.฀151,฀“Inventory฀Costs,฀an฀amendment฀of฀
ARB฀No.฀43,฀Chapter฀4.”฀SFAS฀No.฀151฀clarifies฀that฀abnormal฀
amounts฀of฀idle฀facility฀expense,฀freight฀handling฀costs฀and฀
wasted฀materials฀(spoilage)฀should฀be฀recognized฀as฀current-
period฀charges฀and฀requires฀the฀allocation฀of฀fixed฀produc-
tion฀overheads฀to฀inventory฀based฀on฀the฀normal฀capacity฀
of฀the฀production฀facilities.฀FCX฀must฀adopt฀SFAS฀No.฀151฀no฀
later฀than฀January฀1,฀2006.฀FCX฀has฀not฀yet฀determined฀when฀
it฀will฀adopt฀SFAS฀No.฀151;฀however,฀FCX฀currently฀does฀not฀
expect฀adoption฀to฀have฀a฀material฀impact฀on฀its฀accounting฀
for฀inventory฀costs.
In฀December฀2004,฀the฀FASB฀issued฀SFAS฀No.฀123฀(revised฀
2004),฀“Share-Based฀Payment.”฀SFAS฀No.฀123฀(revised฀2004)฀
requires฀all฀share-based฀payments฀to฀employees,฀including฀
grants฀of฀employee฀stock฀options,฀to฀be฀recognized฀in฀the฀
income฀statement฀based฀on฀their฀fair฀values.
Through฀December฀31,฀2004,฀FCX฀accounted฀for฀grants฀
of฀employee฀stock฀options฀under฀the฀recognition฀prin-
ciples฀of฀APB฀Opinion฀No.฀25,฀“Accounting฀for฀Stock฀Issued฀
to฀Employees,”฀and฀related฀interpretations,฀which฀require฀
compensation฀costs฀for฀stock-based฀employee฀compensa-
tion฀plans฀to฀be฀recognized฀based฀on฀the฀difference฀on฀the฀
date฀of฀grant,฀if฀any,฀between฀the฀quoted฀market฀price฀of฀
the฀stock฀and฀the฀amount฀an฀employee฀must฀pay฀to฀acquire฀
the฀stock.฀If฀FCX฀had฀applied฀the฀fair฀value฀recognition฀
provisions฀of฀SFAS฀No.฀123,฀“Accounting฀for฀Stock-Based฀
Compensation,”฀which฀requires฀compensation฀cost฀for฀all฀
stock-based฀employee฀compensation฀plans฀to฀be฀recognized฀
based฀on฀the฀use฀of฀a฀fair฀value฀method,฀FCX’s฀net฀income฀
would฀have฀been฀reduced฀by฀$5.2฀million,฀$0.05฀per฀diluted฀
share,฀for฀2004,฀$4.7฀million,฀$0.05฀per฀diluted฀share,฀for฀
2003฀and฀$6.5฀million,฀$0.07฀per฀diluted฀share,฀for฀2002฀(see฀
”Stock-Based฀Compensation”).฀FCX฀must฀adopt฀SFAS฀No.฀123฀
(revised฀2004)฀no฀later฀than฀July฀1,฀2005;฀however,฀FCX฀can฀
elect฀to฀adopt฀SFAS฀No.฀123฀(revised฀2004)฀as฀early฀as฀January฀
1,฀2005.฀FCX฀is฀still฀reviewing฀the฀provisions฀of฀SFAS฀No.฀123฀
(revised฀2004)฀and฀has฀not฀yet฀determined฀if฀it฀will฀adopt฀
SFAS฀No.฀123฀(revised฀2004)฀before฀July฀1,฀2005.฀Also,฀stock฀
options฀were฀granted฀to฀employees฀in฀February฀2005,฀including฀
multi-year฀grants฀to฀senior฀executive฀officers.฀As฀a฀result,฀the฀
annual฀charges฀for฀share-based฀payments฀will฀be฀higher฀than฀
the฀pro฀forma฀annual฀amounts฀presented฀under฀“Stock-Based฀
Compensation.”฀Based฀on฀currently฀outstanding฀employee฀
stock฀options,฀including฀those฀granted฀in฀February฀2005,฀if฀
FCX฀adopts฀SFAS฀No.฀123฀(revised฀2004)฀on฀July฀1,฀2005,฀FCX฀
estimates฀the฀charge฀to฀earnings฀before฀taxes฀and฀minority฀
interest฀sharing฀in฀the฀second฀half฀of฀2005฀would฀total฀approxi-
mately฀$11฀million,฀and฀the฀reduction฀in฀net฀income฀would฀
be฀approximately฀$6.5฀million,฀$0.04฀per฀basic฀share฀using฀
common฀shares฀outstanding฀at฀December฀31,฀2004.
Note 2. Ownership in Subsidiaries and Joint
Ventures With Rio Tinto
Ownership in Subsidiaries.฀FCX’s฀direct฀ownership฀in฀
PT฀Freeport฀Indonesia฀totaled฀81.3฀percent฀at฀December฀31,฀
2004฀and฀2003.฀PT฀Indocopper฀Investama,฀an฀Indonesian฀
company,฀owns฀9.4฀percent฀of฀PT฀Freeport฀Indonesia฀and฀FCX฀
owns฀100฀percent฀of฀PT฀Indocopper฀Investama.฀In฀July฀2004,฀
FCX฀received฀a฀request฀from฀the฀Indonesian฀Department฀
of฀Energy฀and฀Mineral฀Resources฀that฀it฀offer฀to฀sell฀to฀
Indonesian฀nationals฀shares฀in฀PT฀Indocopper฀Investama฀at฀
fair฀market฀value.฀In฀response฀to฀this฀request฀and฀in฀view฀
of฀the฀potential฀benefits฀of฀having฀additional฀Indonesian฀
ownership฀in฀the฀project,฀FCX฀has฀agreed฀to฀consider฀a฀
potential฀sale฀of฀an฀interest฀in฀PT฀Indocopper฀Investama฀
at฀fair฀market฀value.฀Neither฀its฀Contract฀of฀Work฀with฀the฀
Indonesian฀government฀nor฀Indonesian฀law฀requires฀FCX฀to฀
divest฀any฀portion฀of฀its฀ownership฀in฀PT฀Freeport฀Indonesia฀
or฀PT฀Indocopper฀Investama.฀At฀December฀31,฀2004,฀PT฀
Freeport฀Indonesia’s฀net฀assets฀totaled฀$2.3฀billion฀and฀its฀
retained฀earnings฀totaled฀$2.1฀billion.฀As฀of฀December฀31,฀2004,฀
FCX฀has฀two฀outstanding฀loans฀to฀PT฀Freeport฀Indonesia฀
totaling฀$192.4฀million.
Substantially฀all฀of฀PT฀Freeport฀Indonesia’s฀assets฀are฀
located฀in฀Indonesia.฀Events฀in฀Indonesia฀during฀2004฀mainly฀
centered฀on฀the฀national฀elections.฀The฀presidential฀election฀
was฀conducted฀peacefully฀and฀after฀a฀runoff,฀Susilo฀Bambang฀
Yudhoyono฀was฀declared฀the฀new฀president฀in฀October.฀
Indonesia฀continues฀to฀face฀political,฀economic฀and฀social฀
uncertainties,฀including฀separatist฀movements฀and฀civil฀and฀
religious฀strife฀in฀a฀number฀of฀provinces.฀
FCX฀owns฀100฀percent฀of฀the฀outstanding฀Atlantic฀Copper฀
common฀stock.฀At฀December฀31,฀2004,฀FCX’s฀net฀investment฀in฀
Atlantic฀Copper฀totaled฀$97.4฀million,฀FCX฀had฀$189.5฀million฀
of฀loans฀outstanding฀to฀Atlantic฀Copper฀and฀Atlantic฀Copper’s฀
debt฀under฀financing฀arrangements฀that฀are฀nonrecourse฀to฀
FCX฀totaled฀$12.3฀million.฀Atlantic฀Copper฀is฀not฀expected฀
to฀pay฀dividends฀in฀the฀near฀future.฀Under฀the฀terms฀of฀its฀
concentrate฀sales฀agreements฀with฀Atlantic฀Copper,฀PT฀Freeport฀
Indonesia฀had฀outstanding฀trade฀receivables฀from฀Atlantic฀
Copper฀totaling฀$146.0฀million฀at฀December฀31,฀2004.฀FCX฀
made฀cash฀contributions฀to฀Atlantic฀Copper฀totaling฀$202.0฀
million฀in฀2004,฀$10.0฀million฀in฀2003฀and฀$25.0฀million฀in฀
2002.฀These฀transactions฀had฀no฀impact฀on฀FCX’s฀consoli-
dated฀financial฀statements.
FCX฀owns฀100฀percent฀of฀FM฀Services฀Company.฀FM฀Services฀
Company฀provides฀certain฀administrative,฀financial฀and฀other฀
services฀on฀a฀cost-reimbursement฀basis฀to฀FCX฀and฀provides฀
similar฀services฀to฀two฀other฀public฀companies฀under฀manage-
ment฀services฀agreements฀with฀fixed฀fee฀terms฀plus฀reim-
bursements฀for฀special฀projects฀and฀out-of-pocket฀expenses.฀
The฀costs฀billed฀to฀FCX฀and฀PT฀Freeport฀Indonesia,฀which฀
include฀related฀overhead,฀totaled฀$34.6฀million฀in฀2004,฀$33.4฀
2004 ANNUAL REPORT |฀61