More than a year has elapsed since the adoption of the highly controversial Financial Accounting Standards Board’s Statement No. 8, “Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements.” The author examines its impact on the reported earnings for 1974 and 1975 of 70 U.S. multinational companies selected for their large foreign direct investments in Europe, Japan and Canada—countries that have allowed their currencies to fluctuate, sometimes wildly, against the U.S. dollar.

It turns out that, of the 70 companies studied, only 23 either announced that adoption of FASB No. 8 in 1976 would have material impact on their reported earnings or felt compelled to restate the previous year’s earnings to conform with FASB No. 8. In 10 of the 23 companies reporting a material impact on earnings, the impact represented less than five per cent of that year’s earnings. In these 10, more often than not, FASB No. 8 helped boost 1975 earnings. However, only three companies reported an increase in earnings of more than 10 per cent, while five reported a negative impact larger than 10 per cent; for one company, the negative impact was 38 per cent.

The single most important cause of changes in reported earnings under the switch to FASB No. 8 is the abolition of foreign exchange valuation reserve accounts. The second most important cause appears to be a change in the valuation of inventory. The impact of exchange rates on inventories, however, will be passed into the income statement in the next period in the form of cost of goods sold. In only one case did the change from historical to current rates to translate foreign debt have a depressing impact on a company’s earnings.

In summary, the adoption of FASB No. 8 does not appear to have significantly changed the earnings reports of most U.S. multinationals. It has taken away the smoothing effect that use of a reserve account permitted, and it has made reported earnings more vulnerable to short-term fluctuations in exchange rates. But the difference is small for most cases in the author’s sample.