| Help for Survey Respondents to Financial Reporting System - Form EIA-28
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Reporting Format The FRS data system is designed to permit review of the functional performance of major energy-producing companies in total, as well as by specific functions and geographic areas of operation. The financial reporting schedules obtain data on revenues, costs, and profits, thereby indicating financial flows and performance characteristics. In addition, Form EIA-28 is used to collect balance sheet data (e.g., accumulated property, plant, and equipment), along with data on new investment in these accounts. To complement the financial data, statistical schedules are included to trace physical activity patterns and to evaluate several physical and financial relationships. In greater detail, the structure of the reporting package is as follows:
Petroleum Line of Business Overview The Petroleum line of business is further disaggregated into segments. [1] These segments are presented as though each were a separate entity, with certain limitations, entering into transactions with other segments and third parties. The following lists each segment within the Petroleum line of business, along with a brief description of that segment's principal revenue-generating product or service. (Further detail on the FRS Petroleum segments can be found in the section on FRS Petroleum Supply and Trading Function and FRS Income Taxes.)
Downstream Natural Gas Line of Business Overview Downstream Natural Gas line of business is further disaggregated into segments. These segments are presented as though each were a separate entity, with certain limitations, entering into transactions with other segments and third parties. The following lists each segment within the Downstream Natural Gas line of business, along with a brief description of that segment's principal revenue-generating product or service.
Electric Power Line of Business Overview The Electric Power line of business is further disaggregated into segments. These segments are presented as though each were a separate entity, with certain limitations, entering into transactions with other segments and third parties. The following lists each segment within the Electric Power line of business, along with a brief description of that segment's principal revenue-generating product or service.
Selection of FRS Reporting Companies From 1977 through 1997, companies were selected if they were U.S.-based publicly-owned companies or U.S.-based subsidiaries of publicly-owned foreign companies within the top 50 publicly-owned U.S. crude oil producers that had at least 1 percent of either production or reserves of oil, gas, coal, or uranium in the United States, or 1 percent of either refining capacity or petroleum product sales in the United States. After 1997, companies were selected if they were U.S.-based publicly-owned companies or U.S.-based subsidiaries of publicly-owned foreign companies that had at least 1 percent of either production or reserves of oil or gas in the United States, or 1 percent of either refining capacity or petroleum product sales in the United States. Mergers, acquisitions, and spin-offs, together with the applications of the selection criteria, resulted in the list of FRS reporting companies shown in Table A1. Data Quality Assurance Program The data quality assurance program encompasses EIA's efforts to ensure the quality and integrity of FRS data. These efforts are evidenced by the design of the form and by the procedures applied to verify the data, including computer programmed checks and desk review procedures. Forms Design The Securities and Exchange Commission (SEC) Form 10-K contains financial statements audited by independent certified public accountants. These financial statements and the entire text of the annual report and Form 10-K are reviewed by the SEC staff to provide the investing public with assurances that data filed on Form 10-K are accurate and are in accordance with generally accepted accounting principles and SEC Regulations. The FRS Form EIA-28 is designed in a multi-tier structure to take advantage of the SEC review and audit by independent certified public accountants. This structure presents both the Form 10-K figures and statistics and the more detailed data required by the FRS system. The top FRS tier corresponds to Form 10-K; the second tier is the first tier disaggregated into the different sources of energy (e.g., Petroleum, Downstream Natural Gas); and the third tier is the second tier disaggregated into the specific functional line-of-business segments within petroleum. (See the Petroleum Segment Overview section at the beginning of this appendix, which describes the FRS segments in detail.) The fourth tier provides further detail within the individual segments- for example, the details of petroleum raw materials purchased and sold. Therefore, the lower tiers can be aggregated to each successively higher tier until the consolidated Form 10-K figures are reached. In this way, the more detailed FRS data is tied to the aggregated figures already reported publicly to the SEC and to company shareholders. Review Procedures Detailed computer editing and desk review procedures have been established for the incoming FRS data. The result of each review is the issuance of a letter to the reporting company containing questions regarding data elements. The reporting companies respond to each question, either by explaining the item or by amending any incorrect schedule. Amended schedules are reprocessed like the original, with the full range of desk and computer checks. The result of this process is an internally consistent database that has been reconciled to the Form 10-K and from which the output reports can be compiled. The FRS review procedures include:
Computer Programmed Checks There are 1177 computer programmed checks for mathematical accuracy, which ensure that each horizontal and vertical total equals the sum of the amounts within each line or column. There are also 114 computer programmed cross-reference checks, which ascertain that the amounts within a certain section of a schedule equal the amounts of the same description within a different schedule. The cross-reference checks are performed to ensure accuracy and consistency between different schedules. For example, the amount reported on Schedule 5210 for the U.S. production segment charges for depreciation, depletion, and amortization is cross-referenced to ensure the same amount is reported on Schedule 5120. Since the number and type of errors noted during these checks is an indicator of respondent understanding of the form, existing and potential problems are identified. The FRS review staff can then focus most of their attention on specific companies and areas where data accuracy may be of a greater concern. Desk Review Procedures Desk review procedures encompass a detailed comparison of the data submitted to information contained in the Form 10-K and the annual report to company shareholders, as well as other publicly available information. As stated previously, the Form 10-K and the annual report contain financial information audited by independent certified public accountants. This financial information, along with textual and statistical information, has also been reviewed by the SEC staff, which includes not only accountants, lawyers, and financial analysts, but also petroleum and mineral resource engineers. Hence, the data contained in these documents is considered a valuable reference in connection with the quality of FRS data. The data contained in each respondent's submission is compared to the data on Form 10-K and the annual report material by use of a detailed review program. Each review program step is performed by trained auditors supervised by CPAs with experience in the oil and gas industry. These comparisons involve checking elements in both the financial and physical information areas (e.g., production, reserves, refinery statistics, etc.). Direct comparisons are made of specific data elements from the FRS form with corresponding items on Form 10-K or in the annual report. Indirect comparisons deal with information that is mentioned in Form 10-K and the annual report, but which is not quantified sufficiently for direct matching with FRS data. For example, if a respondent's annual report discussed an investment in coal, appropriate entries would be expected on the FRS schedule for coal. The FRS desk review procedures also include two other types of comparisons. The first type of comparison is made against prior year FRS data of the reporting company as well as the average data for all FRS reporting companies. These procedures ensure consistency and reasonableness across reporting years. The second procedure involves comparing data to other related data series. Information contained in the FRS system is compared to data available from other DOE systems and published data, such as state mining surveys. The FRS desk review procedures described above often lead to the formulation of a set of questions that are issued to the reporting companies each year. Response to these questions generates substantial interchange between the energy company staff and the FRS staff. From this interchange the company personnel acquire a better understanding of the unique aspects of the FRS system. The FRS staff learns more about each reporting company, the industry, and how each company's accounting and reporting practices might affect the published FRS aggregate data. Statistical Disclosure Avoidance Procedures Procedures to prevent the disclosure of "individually identifiable energy information" have been applied to each table in this report. These tables provide summary rather than company-specific information. In most cases, the level of summarization applies to all FRS companies. In certain cases, subcategories have been established that break the reports into size or other descriptive classes. Each table has been screened to ensure that no statistical disclosure will occur. A large number of summary computer reports, generated from a single selected database, provide the basis for these tables. In conjunction with the summary reports, a parallel set of cell count reports were produced that tabulate for each report cell the number of nonzero values that were aggregated to produce the summary value. The cell count reports were then reviewed to identify whether potential disclosure problems would result from having an insufficient number of reporters or from having values that represent primarily dominant companies in a particular energy sector or activity. If potential disclosure problems are identified, the tables are restructured to combine values or groups of individual cells in the tables so that the resulting tables are essentially disclosure free. Financial Analysis Guide Indicators of Financial Performance To depict the activities of the FRS companies classified by the various energy industries, several indicators have been selected to show the amounts and geographic distribution of production, profits, cash generated, accumulated investment, and annual new investment. These indicators are compared across segments, across functions within segments, and geographically. They are the same as, or similar, to indicators that have been in regular use by financial analysts and economists for many years. However, to avoid potential misunderstandings, the measures used, their significance, and their limitations are described below. All of these measures are based upon the existing framework of financial reporting now used by industry, which relies on Generally Accepted Accounting Principles (GAAP). GAAP is the set of accounting principles by which industry reflects the financial results of operations, cash flows, and financial positions of individual business enterprises. The two primary issues one must contend with in using present GAAP-based data are that not all companies use the same GAAP accounting methods (e.g., full cost versus successful efforts in petroleum), and GAAP is based upon historical cost accounting principles (inflationary distortions and market values are not reflected). Both of these can cause a degree of noncomparability of reported data across companies in the case of accounting methods and through time in the case of historical cost accounting. In spite of these problems, the data are regarded as meaningful, especially for trend analysis. (For a further discussion of these two problems, see the Accounting Practices section of this appendix.) The financial measure of the production and distribution of raw materials and refined products is operating revenues or sales. Under GAAP, this measure is based on arm's-length transactions with third parties. However, in the FRS system, the concept of sales has been extended to include sales from one segment to another. By use of such an approach, one segment's sales become another segment's costs, which must be eliminated in consolidation. The establishment of the FRS segments, the definition of sales (trading function), and the nontraceable and eliminations categories are discussed more fully in the Accounting Practices section of this appendix. Profits are the measure of financial return for company activities. In the FRS system, profits are expressed in terms of net income, operating income, and contribution to net income. The first term applies only to the consolidated company profits and represents income after the provision for income tax expense. Operating income applies both to the segments and to the consolidated company and is the net of operating revenues and operating expenses. Excluded from this figure are such items as income taxes, interest income, and interest expense, which are not allocated to the segments because they are "corporate-level" items for FRS system purposes. (This is explained more fully in the Accounting Practices section of this appendix.) Contribution to net income is meant to be the equivalent of net income for individual segments and excludes several corporate-level items which are not allocated to the segment level. "Cash flow from operations" is presented for the consolidated company. It generally follows the indirect or reconciliation method of reporting cash flow from operations allowed by Statement of Financial Accounting Standards No. 95. The indirect method adjusts net income to remove the effects of changes in receivables, payables, and inventory during the year. The indirect method also adjusts for the effects of depreciation, depletion, and amortization, gains or losses on disposition of property, plant, and equipment, and other items. "Cash flow from operations" represents the cash effects of producing and delivering the company's products and services. This presentation is useful in analyzing the ability to generate future positive cash flow, adequacy of cash flow in relation to current obligations, and the relationship of net income to cash flow. Accumulated investment is expressed by: (1) total assets; (2) net property, plant, and equipment (PP&E); (3) investments and advances to unconsolidated affiliates; and (4) net investment in place. Total assets are used in the context of the consolidated company figures and are the total of the left-hand, or asset side, of the balance sheet. Net PP&E is frequently used as a measure of resources committed by an enterprise to an industry or segment. In the energy industry, net PP&E accounts for the bulk of the consolidated assets. Investments and advances to unconsolidated affiliates are of interest because many energy companies extend the range of their activities through subsidiaries of which they own less than 50 percent. Finally, net investment in place is the total of: (1) net PP&E and (2) investments and advances to unconsolidated affiliates. Annual new investment is the measure of newly committed resources during any given year. In the FRS system, this is expressed in terms of: (1) additions to PP&E; (2) current capitalized exploration and development (E&D) expenditures; (3) current expenditures on E&D; (4) additions to investment in unconsolidated affiliates; and (5) additions to net investment in place. The key words are: current, which means simply a current commitment of resources; and capitalized, which refers to expenditures that are classified as an addition to the PP&E account in the balance sheet rather than as an expense of the current year in the income statement. Being capitalized indicates that the expenditure benefits future years and will be amortized to expense in the years benefited. Being expensed means the cost does not directly benefit a future period; therefore, the cost should be shown as an expense of the current year. The capitalization concept is at the heart of the difference between the successful efforts versus full cost accounting methods (discussed in the Accounting Practices section of this appendix). Therefore, in the FRS system, total expenditures that are both expensed and capitalized are used as a measure of activity to standardize the measurement of resources invested. Foreign Reserve Interests This category includes all three types of foreign reserves collected on Form EIA-28: (1) net ownership interest reserves; (2) proportionate interest in investee reserves; and (3) foreign access reserves. These three foreign categories are added together for purposes of comparison with U.S. net working interest reserves because of the different nature of company interests in foreign production as compared to U.S. production. Foreign petroleum reserve statistics are not strictly comparable to those of U.S. petroleum reserves because of the more complex and varying arrangements whereby U.S. companies obtain foreign crude oil. In addition, such arrangements have been known to be changed suddenly by those governments, thereby imposing a degree of uncertainty about what a reporting company can describe as its equity reserves. Foreign reserve statistics may be used as an indicator of the rate and magnitude of industry activity, but the fact that their character is distinct from those of U.S. reserves must be recognized. Accounting Practices Relation of FRS to Generally Accepted Accounting Principles In completing Form EIA-28, with one exception noted below, companies use the same generally accepted accounting principles that they use in their financial statements filed with the SEC and in their annual reports to shareholders. Therefore, the amount and timing of income recognized and the capitalization policies will be the same. Net income in the FRS system will agree in total with that reported in each company's financial statements. However, in the FRS system the presentation of the details of financial and statistical data will usually differ somewhat from that presented by most individual companies because current reporting standards do not require standardized business segments with standardized financial statement line items. In the FRS system, such standardization is necessary because of the need to aggregate a large number of companies (see Sec. 205(h), P.L. 95-91). FRS Petroleum Supply and Trading Function In establishing the FRS functional lines of business for reporting the activities of vertically integrated enterprises, it was necessary to define a set of trading rules. Each segment can engage in activities as defined by the rules. Otherwise, the segment data would be inconsistent between companies. FRS defines the following segments within petroleum; they are the main components of the 5200 series schedules:
A few of the more noteworthy rules, intended to make the trading activities of each FRS reporting company comparable to those of the other companies, are as follows: Nontraceables and Eliminations One of the objectives of the FRS system is to allow economic and financial analysis of the energy industry to be performed by individual functions. These functions, referred to in the FRS system as segments, are presented as separate entities with their own income statements. They reflect sales and purchases not only to and from unaffiliated parties, but also to and from other segments. Because the segments are not separate entities, but are part of an integrated firm, two special classifications are defined which allow reconciliation of consolidated company figures with those of the segments. The first is the nontraceable classification, which covers those items included in the consolidated financial statements but not allocated to the segments. The second is the eliminations classification, which prevents double counting of intersegment transactions when the segments are consolidated into total company figures. The nontraceable classification captures asset, liability, revenue, and expense items that cannot be attributed to the activities of a segment. In the FRS data, this classification reflects general overhead for the consolidated firm, as well as financial activities which represent corporate-level activities. While the financial transactions may play a key role in the firm's ability to do business, such transactions are not allocated to activities in an individual segment. Cash, corporate investments, interest income, and interest expense are examples of nontraceable items. The accompanying example illustrates a nontraceable item, interest expense of $20, and the $10 corresponding tax effect (see "FRS Segment Tax Allocation Rules" in this appendix for further explanation). The need for the eliminations classification arises when the product of one segment is sold to a second segment, which, in turn, sells the product again. In the example illustrated in Table A2, $80 of crude oil is sold by the U.S. Production segment to the Refining/Marketing segment. The Refining/Marketing segment records $80 of purchases of crude oil and, after processing, reflects sales of $160 of refined product. If the segment figures were simply added to arrive at the consolidated total, the consolidated sales figure of $240 ($80 + $160) would be too high because of double counting. Thus, the eliminations classification subtracts $80 of sales and $80 of costs, leaving consolidated sales of $160, the appropriate measure of the firm's consolidated transactions. The nontraceables and eliminations classifications are treated as if they are segments for purposes of aggregating segment data to the consolidated level. FRS Income Taxes FRS Segment Tax Allocation Rules. In the FRS system, the tax allocated to each segment reflects a pro-rata share of consolidated income taxes. Where the consolidated company reports income and pays a tax, but an individual segment incurs a loss, the segment with a loss reflects a tax benefit. This treatment is an FRS rule whose purpose is to reflect, at the segment level, the effect of the segment's operations on the consolidated income taxes. The tax benefit reflected at the segment level is limited to the extent it offsets taxes in other segments on a consolidated basis. In comparing an FRS company's segment to a specialized (nonintegrated) company in the same line of business, one must consider the effect of the above described rule. The current tax effect may be different, since a specialized company cannot report tax benefits for operating losses incurred in that year. It must carry the loss forward, or backward, against profits of other years, while a segment of an otherwise profitable consolidated firm can show a tax benefit by FRS conventions because a segment's loss can offset profits in other segments on a consolidated basis. FRS Reporting Companies, Segments, and Tax-Paying Entities. FRS reporting companies and their segments differ from the entities which actually pay income taxes. The FRS system reports energy activities on a consolidated company basis, disaggregated into various energy lines of business. Accordingly, income tax expense, current and deferred, is reflected on a line-of-business basis. However, under the tax laws, taxes are not necessarily based upon FRS reporting company consolidated earnings of the FRS line-of-business segments. The tax-paying entities of an FRS reporting company are its subsidiaries. Some are incorporated in the United States and some in foreign countries, and each may operate in the United States, foreign countries, or both. Income tax expense in the FRS system consists of both U.S. and foreign income taxes incurred by these subsidiaries. Taxes reflected by the consolidated company and each individual segment are allocated from taxes paid and deferred by the actual tax-paying entities. The United States taxes only income of foreign corporations earned in the United States or paid into the United States as dividends to a U.S. parent corporation (owner). All income subject to U.S. tax, whether the entity is a foreign or U.S. corporation, is given the benefit of the foreign income tax credit (up to the statutory rate) to avoid double taxation. Each U.S. incorporated subsidiary of a U.S. corporation elects either to be included in a consolidated U.S. tax return or to file a separate return, depending on which election is most likely to minimize the aggregate U.S. and foreign taxes. In the FRS system, corporate organization and relationships are not purely a function of line-of-business financial reporting. This fact requires that allocations be made of taxes incurred so that they can be classified according to the FRS segment format. These allocations are required when a subsidiary is involved in both U.S. and foreign operations and/or in more than one line of energy business. For example, the FRS system has separate segments for the foreign and U.S. petroleum production business, and for the foreign and U.S. Refining/Marketing business. Therefore, if an FRS reporting company has a foreign subsidiary involved in both petroleum Production and Refining/Marketing of petroleum, a disaggregation of that subsidiary's activities, including income taxes, must be made. The disaggregation is further complicated by the existence of nontraceable items, such as interest expense, interest income, minority interest, and foreign currency gains and losses. The nontraceable column must be treated as a separate segment when the tax allocation is made. Deferred Taxes The Financial Accounting Standards Board (FASB) began working on a project to reexamine the generally accepted accounting procedure for income taxes in September 1982. Accounting Principles Board Opinion 11 ("APB 11"), issued in 1967, faced criticism and concerns about the inconsistencies in its amendments and interpretations. In addition, problems created by new tax depreciation methods and changes in accounting for income taxes in other countries were making APB 11 outdated. In 1988, the FASB issued Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"), to address the increased complexity and significance of deferred taxes in the balance sheet. However, because of its complex scheduling process and conservative tax asset provisions, SFAS 96 soon became a source of controversy among businesses, CPA firms, professional organizations, and industry trade groups. In response to the criticism, the FASB deferred the required implementation date of SFAS 96 three times (SFAS 100, 103, and 108) and began developing a new standard which would address not only criticism of APB Opinion 11 but also the controversy surrounding SFAS 96. The new standard, SFAS 109, "Accounting for Income Taxes," became effective for periods beginning after December 15, 1992. The objective of accounting for income taxes is the recognition and presentation in the financial statements of the following:
Deferred taxes reflect the future tax consequences of events already recognized in either the financial statements or tax returns. SFAS 109 uses the balance sheet approach, also referred to as the liability method, to determine deferred taxes. This method, first introduced in SFAS 96, differs from APB 11, which used the income statement approach. SFAS 109 also requires a deferred tax asset to be recognized for deductible temporary differences and operating loss and tax credit carry forwards using the applicable tax rate. The income statement approach recognizes deferred taxes on the temporary timing differences between pretax accounting income and taxable income each year. Temporary differences are those differences between accounting and taxable income that will ultimately reverse. For example, intangible drilling costs for a successful well are expensed when paid for tax purposes but capitalized and depreciated for accounting purposes. If we assume the intangible drilling cost of $100,000 was the sole timing difference, and this cost was depreciated $20,000 per year for accounting purposes, there would be an $80,000 temporary timing difference in year one, as taxable income would be less than accounting income. This timing difference would reverse $20,000 each year as the intangible drilling cost is depreciated for accounting purposes with no deduction for tax purposes. At the end of the fifth year, the timing difference would be completely reversed. The liability approach recognizes deferred taxes on the temporary differences between the financial and tax bases of assets and liabilities. Both the deferred tax liability and the deferred tax asset must be measured by use of the applicable tax rate. The applicable tax rate is the enacted tax rate to be applied to the last dollar of taxable income for the year when the liability is expected to be settled or the assets recovered. A single flat tax rate may be used for companies for which graduated rates are not a significant factor. A deferred tax asset is recognized for existing alternative minimum tax credit carry forwards for tax purposes. When computing deferred tax assets and/or liabilities, if there is a change in the tax rate or tax law, the deferred tax assets and/or liabilities should be adjusted in the period that includes the enactment date. To the extent deferred tax balances are adjusted for the effects of such changes, income tax expense or benefit from continuing operations is charged or credited. Using the example from the preceding paragraph, the financial statement basis of the intangible drilling cost in year one would be $80,000 ($100,000 less $20,000 depreciation), while there would be no basis for tax purposes because the costs were totally deducted. Deferred taxes would be provided for the $80,000 difference by use of enacted tax rates. Deferred taxes would be adjusted each year until the difference between the financial accounting and tax bases was fully eliminated at the end of year five. Once deferred tax assets and liabilities relating to the future tax consequences of temporary differences and carry forwards have been measured, the deferred tax provision or benefit is based on the net change in a deferred tax balance during the year. The income tax expense or benefit for the period is derived from the total tax currently payable or refundable and the deferred tax expense or benefit. As stated earlier, SFAS 109 became effective for fiscal years beginning after December 15, 1992. There were two transition options available when adopting SFAS 109: prospective or retroactive application. A company could elect to restate the financial statements for any number of consecutive prior years (retroactive application) or report a cumulative effect adjustment below "income from continuing operations" (prospective application). For 1993 through 2009, all FRS companies have reported taxes in accordance with SFAS 109. For 1992, seventeen FRS reporting companies had adopted the provisions of SFAS 109, which resulted in a net $163 million benefit to their 1992 reported earnings. The remaining eight FRS reporting companies adopted SFAS 109 in the first quarter of 1993, resulting in a $671 million benefit to 1993 reported earnings. Of the eight companies which had not adopted SFAS 109 in 1992, five reported under APB 11 and three reported in accordance with SFAS 96. Corporate Acquisitions Under FRS reporting rules, no acquisitions were accounted for under the pooling of interests method. This was because, under the pooling method, the financial statements did not reflect such transactions as new investment, since the historical financial statements were restated. One of the objectives of the FRS is to track new investment activities. Effective after June 30, 2001, the pooling of interests method was no longer an acceptable method of accounting for business combinations under GAAP. For FRS reporting purposes, acquisitions prior to 2002 accounted for as poolings for annual report purposes were reflected in the FRS filing under a modified purchase method. All purchase accounting rules were followed, except that the assets of the acquired company were not revalued but were 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. All but fourteen of the 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 productive 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 in which 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 Table A3). Since only four of the FRS companies presently use full cost 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 used most often in the preparation of 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, an amount which 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 using primarily 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 2009, ten FRS companies reported liquidation profits or losses. The 2009 aggregate liquidation profits decreased the reporting companies' operating income by $(402) million, an amount which represented less than (.78) percent of their aggregate operating income. This compares to a $(195) million increase in 2008 and a $(2,243) million increase in 2007 that represented (0.12) percent and (1.29) percent, respectively, of aggregate operating income for each year. 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 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 Table A4 indicates, foreign currency translation losses incresed stockholders' equity by (1.95) percent, while foreign currency transaction losses decreased pretax income by (3.10) percent in 2008. FRS Database History The Form EIA-28, "Financial Reporting System (FRS)," database has existed in five formats during its 33-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 covered years 1993-2002. The form was changed by the addition of the former Soviet Union and Eastern Europe as a new geographical reporting area. The fifth version began with the 2003 reporting year and remains in use. 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. [2] This version of the database contained a significant amount of detail at the consolidated level, in 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). In 2004 (for the 2003 reporting year), two new lines of business were added to the survey form: downstream natural gas, and electric power. The form was increased to 3542 elements. Ten new schedules were added to incorporate the data requirements for the new lines of business. The current form is 48 pages long. In 2007 (for the 2006 reporting year), reductions were made in the reporting requirements for the Downstream Natural Gas and Electric Power lines of business. Reporting of segmental activities within the two lines of business was greatly reduced. Also, schedule 5341 (Operating Statistics for Coal Operations) was eliminated, due to minimal activity in the coal industry by the reporting companies. Endnotes 1 The other lines of business (Coal, Other Energy, and Nonenergy) were also disaggregated into segments, but only through 1986.
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