Freeport-McMoRan 2007 Annual Report Download - page 79

Financial & Operating Information 77
Notes to Consolidated Financial Statements
considered probable based on specific facts and circumstances. FCX’s
estimates of these costs are based on an evaluation of various factors,
including currently available facts, existing technology, presently enacted
laws and regulations, remediation experience, whether or not FCX is a
potentially responsible party (PRP) and the ability of other PRPs to pay
their allocated portions. With the exception of those obligations assumed
in the acquisition of Phelps Dodge that were recorded at estimated
fair values (see Note 15), environmental obligations are recorded on an
undiscounted basis. Where the available information is sufficient to
estimate the amount of liability, 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. Possible recoveries of some of these costs from
other parties are not recognized in the consolidated financial statements
until they become probable. Legal costs associated with environmental
remediation, as defined in American Institute of Certified Public
Accountants Statement of Position (SOP) 96-1, “Environmental Remediation
Liabilities,” are included as part of the estimated liability.
Asset Retirement Obligations. In accordance with SFAS No. 143,
“Accounting for Asset Retirement Obligations,” FCX records the fair value
of estimated asset retirement obligations (AROs) associated with tangible
long-lived assets in the period incurred. Retirement obligations associated
with long-lived assets included within the scope of SFAS No. 143
are those for which there is a legal obligation to settle under existing or
enacted law, statute, written or oral contract or by legal construction.
These liabilities are accreted to full value over time through charges to
income. In addition, asset retirement costs (ARCs) are capitalized as part
of the related asset’s carrying value and are depreciated (primarily on a
unit-of-production basis) over the asset’s respective useful life.
Reclamation costs for future disturbances are recognized as an ARO and
as a related ARC in the period of the disturbance. FCX’s AROs 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 (see Note 15).
Income Taxes. FCX accounts for income taxes pursuant to SFAS No.
109, “Accounting for Income Taxes.” Deferred income taxes are provided
to reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements (see Note 14). A valuation allowance is provided for those
deferred tax assets for which it is more likely than not that the related
benefits will not be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates and laws is recognized in income in the
period in which such changes are enacted.
On January 1, 2007, FCX adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Upon adoption of FIN 48, FCX recorded
a cumulative effect adjustment of $4 million to increase its beginning
retained earnings. Following adoption of FIN 48 related to amounts
accrued for unrecognized tax benefits, FCX includes accrued interest in
interest expense and accrued penalties in other income and expenses
rather than in its provision for income taxes. FCX had previously included
interest and penalties in its provision for income taxes.
Derivative Instruments. At times, FCX and its subsidiaries 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 17 for a summary of FCX’s outstanding derivative
instruments at December 31, 2007, and a discussion of FCX’s risk
management strategies for those designated as hedges.
FCX elected to continue its historical accounting for its mandatorily
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. Mandatorily redeemable preferred stock
indexed to commodities was treated as a hedge of future production and
was carried at its original issue value. As redemption payments occurred,
differences between the carrying value and the payments were recorded
as adjustments to revenues. In 2006, FCX made the final redemptions
of its preferred stock indexed to commodities. Under SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,” FCX classified its mandatorily redeemable preferred
stock as debt. Dividend payments on FCX’s mandatorily redeemable
preferred stock were classified as interest expense (see Notes 11 and 17).
Revenue Recognition. FCX sells its products pursuant to sales
contracts entered into with its customers. Revenue for all FCX’s products
is recognized when title and risk of loss pass to the customer and when
collectibility is reasonably assured. The passing of title and risk of loss to
the customer is based on terms of the sales contract, generally upon
shipment or delivery of product.
Revenues from FCX’s concentrate and cathodes 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 treatment and all refining charges (including price participation, if
applicable, as discussed below) and the impact of derivative contracts,
including the impact of redemptions of FCX’s mandatorily redeemable