## 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 

