What does 'Pro Forma' mean
Pro forma, a Latin term, literally means “for the sake of form” or “as a matter of form.” In the world of investing, pro forma refers to a method by which financial results are calculated. This method of calculation places emphasis on present or projected figures.
Financial statements that utilize the pro forma method of calculation are often designed to draw focus to specific figures when an earnings announcement is issued by a company and made available to the public, particularly potential investors. These pro forma statements may also be designed to indicate a change proposed by a company, such as an acquisition or a merger. Investors should be aware a company’s pro forma financial statements may hold figures or calculations that are not in compliance with generally accepted accounting principles (GAAP). In some instances, pro forma figures are vastly different than those generated with GAAP.
BREAKING DOWN 'Pro Forma'
The term pro forma is regularly used, in a descriptive sense, to identify a document or a practice that conforms to a doctrine or a norm, is generally considered a formality or performed perfunctorily, is provided as a courtesy and/or satisfies some minimum requirement.
Pro Forma in Accounting
In accounting, pro forma refers to a statement of a company’s financial doings, that excludes unusual or nonrecurring transactions, when reporting the company’s earnings. Excluded expenses typically include declining investment values, restructuring costs and adjustments made on the company’s balance sheet that fix faulty accounting practices from other years.
Pro Forma in Business
In a business sense, financial statements prepared with the pro forma method are made ready ahead of a planned transaction such as an acquisition, merger, change in capital structure or a new capital investment. These models forecast the anticipated result of the transaction, with emphasis placed most specifically on estimated net revenues, cash flows and taxes. Pro forma statements, therefore, in summary, indicate the projected status of a company in the future based on current financial statements.
The Popularity of Pro Forma
Pro forma results in the United States boomed in the late 1990s surrounding dot-com companies that used the method to make losses appear like profits or, at minimum, to reveal much greater losses than obviously indicated through U.S. GAAP accounting methods. The U.S. Securities and Exchange Commission (SEC) responded by firmly requiring publicly traded companies in the country to report and make public U.S. GAAP-based financial results. The SEC also made it clear that utilizing pro forma results to lie about or grossly misconstrue GAAP-based results would be deemed fraud and punishable by law if investors were misled.