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  54 |  FREEPORT-McMoRan COPPER & GOLD INC.