Freeport-McMoRan 2010 Annual Report Download - page 30

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Reclamation and Closure Costs. Reclamation is an ongoing
activity that occurs throughout the life of a mine. We record the fair
value of our estimated asset retirement obligations (AROs)
associated with tangible long-lived assets in the period incurred.
Fair value is measured as the present value of cash flow estimates
after considering inflation and then applying a market risk
premium. Our cost estimates are reflected on a third-party cost
basis and comply with our legal obligation to retire tangible
long-lived assets in the period incurred. These cost estimates may
differ from financial assurance cost estimates for reclamation
activities because of a variety of factors, including obtaining
updated cost estimates for reclamation activities, the timing of
reclamation activities, changes in scope and the exclusion of
certain costs not considered reclamation and closure costs. Refer
to Note 1 for further discussion of our accounting policy for
reclamation and closure costs.
Generally, ARO activities are specified by regulations or in permits
issued by the relevant governing authority, and management
judgment is required to estimate the extent and timing of
expenditures based on life-of-mine planning. Accounting for
reclamation and closure costs represents a critical accounting
estimate because (i) we will not incur most of these costs for a
number of years, requiring us to make estimates over a long
period, (ii) reclamation and closure laws and regulations could
change in the future and/or circumstances affecting our operations
could change, either of which could result in significant changes
to our current plans, (iii) calculating the fair value of our AROs
requires management to estimate projected cash flows, make
long-term assumptions about inflation rates, determine our
credit-adjusted, risk-free interest rates and determine market risk
premiums that are appropriate for our operations and (iv) given
the magnitude of our estimated reclamation and closure costs,
changes in any or all of these estimates could have a significant
impact on our results of operations.
At least annually, we review our ARO estimates for changes in
the projected timing of certain reclamation costs, changes in cost
estimates and additional AROs incurred during the period.
Following is a summary of changes in our AROs for the years
ended December 31 (in millions):
2010 2009 2008
Balance at beginning of year
$ 731
$ 712 $ 728
Liabilities incurred
5
12 5
Revisions to cash flow estimates
105
a
(17) 21
Accretion expense
54
52 51
Spending
(38)
(28) (91)
Foreign currency translation adjustment
(1)
— (2)
Balance at end of year
$ 856
$ 731 $ 712
a. During 2010, the revisions to cash flow estimates were primarily related to the increased
cost and accelerated timing of closure activities at Chino.
Refer to Note 13 for further discussion of reclamation and
closure costs.
Deferred Taxes. In preparing our annual consolidated financial
statements, we estimate the actual amount of taxes currently payable
or receivable as well as deferred tax assets and liabilities attributable
to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which these temporary differences are expected to be recovered or
settled. The effect on deferred 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.
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. In determining the amount of the valuation allowance, we
consider estimated future taxable income as well as feasible tax
planning strategies in each jurisdiction. If we determine that we will
not realize all or a portion of our deferred tax assets, we will increase
our valuation allowance. Conversely, if we determine that we will
ultimately be able to realize all or a portion of the related benefits
for which a valuation allowance has been provided, all or a portion of
the related valuation allowance will be reduced.
At December 31, 2010, our valuation allowances totaled $2.2 billion
and covered all of our U.S. foreign tax credit carryforwards, and a
portion of our foreign net operating loss carryforwards, U.S. state net
operating loss carryforwards, and U.S. minimum tax credit
carryforwards. At December 31, 2009, our valuation allowances
totaled $2.2 billion and covered all of our U.S. foreign tax credit
FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
28