Freeport-McMoRan 2012 Annual Report Download - page 79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
distributed. FCX has determined that undistributed earnings
related to TFM are reinvested indefinitely or have been allocated
toward specifically identifiable needs of the local operations. FCX
has not provided for other differences between the book and tax
carrying amounts of its TFM investment as FCX considers its
ownership position to be permanent in duration, and quantification
of the related deferred tax liability is not practicable.
Derivative Instruments. FCX and its subsidiaries may enter 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. Derivative instruments (including
certain derivative instruments embedded in other contracts)
are 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. Refer to Note 15
for a summary of FCX’s outstanding derivative instruments at
December 31, 2012, and a discussion of FCX’s risk management
strategies for those designated as hedges.
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 are based on terms of the
sales contract, generally upon shipment or delivery of product.
Revenues from FCX’s concentrate and cathode sales are
recorded based on 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. Moreover, because a portion of the metals contained in
copper concentrates is unrecoverable as a result of the smelting
process, FCX’s 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
FCX’s contracts and vary by customer. Treatment and refining
charges represent payments or price adjustments to smelters and
refiners and are either fixed or, in certain cases, vary with the
price of copper (referred to as price participation).
Under the long-established structure of sales agreements
prevalent in the industry, copper contained in concentrate and
cathode is generally provisionally priced at the time of shipment.
The provisional prices are finalized in a specified future month
(generally one to four months from the shipment date) based on
quoted monthly average spot copper prices on the London Metal
Exchange (LME) or the New York Mercantile Exchange (COMEX).
FCX receives market prices based on prices in the specified future
month, which results in price fluctuations recorded to revenues
until the date of settlement. FCX records revenues and invoices
customers at the time of shipment based on then-current LME or
COMEX prices, which results in an embedded derivative (i.e., a
pricing mechanism that is finalized after the time of delivery) that
is required to be bifurcated from the host contract. The host
contract is the sale of the metals contained in the concentrates or
cathodes at the then-current LME or COMEX price. FCX applies
the normal purchases and normal sales scope exception in
accordance with derivatives and hedge accounting guidance to
the host contract in its concentrate or cathode sales agreements
since these contracts do not allow for net settlement and always
result in physical delivery. The embedded derivative does not
qualify for hedge accounting and is adjusted to fair value through
earnings each period, using the period-end forward prices, until
the date of final pricing.
Gold sales are priced according to individual contract terms,
generally the average London Bullion Market Association (London
PM) price for a specified month near the month of shipment.
Substantially all of FCX’s 2012 molybdenum sales were priced
based on prices published in Metals Week, Ryan’s Notes or
Metal Bulletin, plus conversion premiums for products that
undergo additional processing, such as ferromolybdenum
and molybdenum chemical products. The majority of these sales
use the average price of the previous month quoted by the
applicable publication. FCX’s remaining molybdenum sales
generally have pricing that is either based on the current month
published prices or a fixed price.
PT Freeport Indonesia concentrate sales and TFM metal sales
are subject to certain royalties, which are recorded as a reduction
to revenues (refer to Note 14 for further discussion).
Stock-Based Compensation. Compensation costs for share-
based payments to employees, including stock options, are
measured at fair value and charged to expense over the requisite
service period for awards that are expected to vest. The fair
value of stock options is determined using the Black-Scholes-
Merton option valuation model. The fair value for restricted
stock units is based on FCX’s stock price on the date of grant or
an appropriate valuation model. The fair value for cash-settled
stock appreciation rights (SARs) is the intrinsic value on the
reporting or exercise date. FCX estimates forfeitures at the time
of grant and revises those estimates in subsequent periods
through the final vesting date of the awards if actual forfeitures
differ from those estimates. FCX has elected to recognize
compensation costs for stock option awards that vest over
several years on a straight-line basis over the vesting period.
Refer to Note 11 for further discussion.
Earnings Per Share. FCX’s basic net income per share of common
stock was calculated by dividing net income attributable to
FCX common stockholders by the weighted-average shares of
common stock outstanding during the year. A reconciliation of net
income and weighted-average shares of common stock
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