restated. One of the objectives of the FRS is to track new investment activities.

For FRS reporting purposes, acquisitions accounted for as pooling for annual report purposes must be reflected in the FRS filing under a modified purchase method. All purchase accounting rules are followed, except that the assets of the acquired company are not revalued, but are recorded at their book values as stated on the acquired company's books.

Full Cost and Successful Efforts Accounting Methods

FRS reporting companies are permitted to choose between two accounting methods, "full cost" and "successful efforts," to account for their exploration and production activities. Twenty-three of the twenty-five FRS companies use the successful efforts method. The main difference between the two methods is the treatment of dry exploratory well cost.

Under full cost, the cost of a dry exploratory well is capitalized and then amortized to the income statement over the production life of successful wells. Thus, the costs of both dry and successful wells are capitalized and reflected in the balance sheet as part of producing properties.

Under successful efforts, the cost of a dry exploratory well is written off to expense in the year drilling is determined to be unsuccessful. There is no capitalized cost of such dry exploratory wells carried on the balance sheet.

In comparison to the successful efforts method, the full cost method will: (1) show less volatility of earnings, since the cost of unsuccessful wells is amortized over many years; (2) show a higher balance in accumulated

property, plant, and equipment (PP&E), since the account contains the costs of all wells drilled, including dry exploratory wells; (3) usually show higher earnings during years of intense exploratory activity when a number of dry wells are encountered; and (4) show the same cumulative earnings over a long period of years, since eventually all costs will be amortized to the income statement. These effects are minimized if the firm is large, since the exploratory activities of a large firm are usually smaller relative to total production operations than they are in a small production firm.

Usually, the precise effect of using one method over the other cannot be determined. However, one large firm switched from full cost to successful efforts in 1975 and restated 1973 and 1974 data to the successful efforts method. Thus, we have available the impact of this conversion on their comparative net income, net PP&E, and return on net PP&E for 1973 and 1974 (see text table).

Since twenty-three of the FRS companies presently use successful efforts accounting, comparability problems are inconsequential.

Inventory Accounting - LIFO Versus FIFO

The Last In-First Out (LIFO) and the First In-First Out (FIFO) inventory methods are most often used in the preparation of the financial statements of industrial enterprises.

Under FIFO, the balance sheet valuation of inventory is based upon the most recent prices paid for the physical units on hand at year's end, and the income statement reflects the cost of units sold at the oldest unit cost. In periods of rapidly rising prices, the income statement reflects higher profits than would be reflected if the units sold were priced at current replacement cost or under the LIFO method.

Under LIFO, the balance sheet valuation of inventory is based on the prices paid for the first units of each major type of inventory ever purchased. For example, crude oil could be carried at $10 per barrel, which of course vastly understates the value of the inventory in terms of its replacement cost. The income statement reflects the cost of units sold at the most recent prices paid for the number of units sold. Thus, cost of goods sold reflects nearly a replacement cost amount, and profits are lower than under the FIFO method.

Since either method is permitted under the Federal tax laws, most companies use LIFO for operations subject to U.S. taxation because earnings and hence taxes are lower under this method. By 1979, most FRS reporting companies were primarily using the LIFO inventory method. Most analysts probably would agree that LIFO is the preferable method, since the income statement is more realistic than with FIFO. However, its disadvantage is that the balance sheet's inventory figure is understated, and hence the stockholders' equity amount is correspondingly understated.

In 1992 and 1993, five FRS companies reported liquidation profits or losses, compared with four in 1991. The 1993 aggregate liquidation profits increased the reporting companies' operating income by $96 million, which represented 0.4 percent of their aggregate operating income. This compares to a $7 million increase in 1992 and a $10 million increase in 1991, which represented -0.1 and 0.5 percent, respectively, of aggregate operating income for those years.

Foreign Currency Translations

In December 1981, the Financial Accounting Standards Board (FASB) issued Statement No. 52, "Foreign Currency Translations," which superseded FASB-8, "Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements." FASB-52 covers the translation of the foreign currency financial statements for the purposes of the consolidation, combination, or reporting by the equity method, and the translation of foreign currency transactions. The new statement required that assets, liabilities, and operations of an entity be stated in the currency of the primary economic environment in which the entity operates (termed, the "functional currency"). If a foreign entity has not kept its financial records in the functional currency, remeasurement is

required prior to translation. Any gain or loss on remeasurement is recognized in current net income. The assets and liabilities of the foreign entity are translated from its functional currency to the reporting currency at the current rate of exchange.

Under FASB-52, gain or loss on the translation of foreign currency financial statements is shown as a separate component of stockholders' equity, whereas, under FASB-8, all non-monetary balance sheet items were translated at the historical rate of exchange. Thus, the change to FASB-52, which uses the current rate of exchange, had the most significant impact on inventories and fixed assets. With respect to the income statement, FASB-52 requires that only gains or losses from foreign currency transactions be included.

As the text table on the following page indicates, foreign currency translation losses decreased stockholders' equity by 0.4 percent, while foreign currency transaction gains increased pretax income by 0.7 percent in 1993.

FRS Database History

The Form EIA-28, Financial Reporting System (FRS), database has existed in three formats during its 20-year history. (In addition, there have been minor, periodic adjustments since 1987. The most noteworthy was the change from a Statement of Sources and Uses of Funds to a Statement of Cash Flows, effective in the 1986 reporting year. The first version of the Form EIA-28 and its database covered years 1974-1980. The second version covered years 1981-1986. The third covered years 1987-1992. The fourth version begins with the 1993 reporting year and is approved through the 1995 reporting year. The current version was changed by adding the Former Soviet Union and Eastern Europe as a new geographical reporting areas.

The first full reporting year for the first version of the form was 1977. It consisted of 47 separate schedules containing 8,775 data elements, and was 136 pages long.295 This version of the database contained a significant amount of detail at the consolidated level, at each line of business, and in the breadth of operating statistics. However, not all of the collected data were loaded into the database. About 1,000 elements were not unique to individual companies-such as joint venture information-and were maintained only in their hard copy format.

In 1982 (for the 1981 reporting year) the form was shortened by 72 percent, to 2,468 elements. The format was still the same, with data collected at the consolidated level, four energy lines of business (petroleum, coal, nuclear, and other energy), and nonenergy. The 1981-1986 form consisted of 19 schedules, and was 35 pages long. Although data were still collected by each line-of-business, most of the decline was at the line-of-business level, where more than 81 percent of the form was eliminated, compared with a 58-percent decline at the consolidated level.

In 1988 (for the 1987 reporting year) the form was shortened by another 33 percent, to 1,650 elements. The consolidated level was shortened by 32 percent, primarily by combining other energy with nuclear energy. Petroleum data declined by 10 percent, coal by 74 percent, and separate income statement schedules for the remaining lines of business (coal, nuclear and other energy, and nonenergy) were eliminated altogether (although income statements for each of these lines of business were incorporated into Schedule 5110, Consolidating Statement of Income). The form currently has 14 schedules, and is 27 pages long.