Notes To Consolidated Financial Statements Pro Forma Net Income.  Presented below (in thousands,  except per share amounts) are FCX’s reported results and  pro forma amounts that would have been reported in FCX’s  Consolidated Statements of Income had those statements  been adjusted for the retroactive application of the 2003  changes in accounting principles (SFAS No. 143 and SFAS No.  150) and the 2002 change in depreciation methodology. Derivative Instruments.  At times FCX and its subsid- iaries 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, estab- lished 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 11 for  a summary of FCX’s outstanding derivative instruments at  December 31, 2004, and a discussion of FCX’s risk manage- ment strategies for those designated as hedges. ($0.16 per share) cumulative effect adjustment for the amor- tization of the original issuance costs through July 1, 2003.  Effective July 1, 2003, dividend payments on FCX’s manda- torily redeemable preferred stock are classified as interest  expense. SFAS No. 150 does not permit prior period financial  statements to be restated to reflect the changes in clas- sification. In addition to the cumulative effect adjustment,  adopting SFAS No. 150 decreased net income applicable to  common stock by approximately $0.4 million, less than $0.01  per share, in 2003 for amortization after July 1 of original  issuance costs. Revenue Recognition.  PT Freeport Indonesia’s sales of  copper concentrates, which also contain significant quanti- ties of gold and silver, are recognized in revenues when the  title to the concentrates is transferred to the buyer (which  coincides with the transfer of the risk of loss) at the  point the concentrates are moved over the vessel’s rail at PT Freeport Indonesia’s port facility. FCX elected to continue its historical accounting for its  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. Redeemable preferred stock indexed to commodities  is treated as a hedge of future production and is carried  at its original issue value. As redemption payments occur,  differences between the carrying value and the payment are  recorded as an adjustment to revenues (see Note 5). Effective July 1, 2003, FCX adopted SFAS No. 150, “Account– ing for Certain Financial Instruments with Characteristics of  both Liabilities and Equity.” On July 1, 2003, FCX reclassified  its mandatorily redeemable preferred stock totaling $450.0  million as debt and reclassified the $26.6 million of original  issuance costs from capital in excess of par value of common  stock to other assets. FCX also recorded a $24.7 million  Revenues from PT Freeport Indonesia’s concentrate 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  royalties, treatment and all refining charges (including price  participation, if applicable) and the impact of commodity  contracts, including the impact of redemptions of FCX’s  mandatorily redeemable preferred stock indexed to commodi- ties (see Notes 5 and 11). Moreover, because a portion of  the metals contained in copper concentrates is unrecover- able as a result of the smelting process, our 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 our contracts and  vary by customer. Treatment and refining charges represent  payments to smelters and refiners and are either fixed or in  certain cases vary with the price of copper. 2004 ANNUAL REPORT  | 57 2003  2002 Actual reported results: Net income applicable to common stock  $154,219  $127,050 Basic net income per share of common stock  0.99  0.88 Diluted net income per share of common stock  0.97  0.87 Pro forma amounts assuming retroactive application: Net income applicable to common stock  $169,307  $129,635 Basic net income per share of common stock  1.09  0.90 Diluted net income per share of common stock  1.06  0.89