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What is 'Pro Forma'

Pro forma is a Latin term that describes a method of calculating and presenting financial results to emphasize either current or projected figures. Pro forma 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 firms calculate financial results. This method of calculation emphasizes present or projected figures.

BREAKING DOWN 'Pro Forma'

Financial statements that use the pro forma calculation method are often designed to draw focus to specific figures when a company issues an earnings announcement and makes it available to the public, particularly potential investors. Companies may also design these pro forma statements to indicate a proposed change, such as an acquisition or a merger.

Investors should be aware a company’s pro forma financial statements may hold figures or calculations not in compliance with Generally Accepted Accounting Principles. Sometimes, pro forma figures differ vastly from those generated within a GAAP framework as pro forma results will make adjustments to GAAP numbers to highlight important aspects of the company's operating performance.

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, companies make financial statements prepared with the pro forma method ready ahead of a planned transaction such as an acquisition, merger, change in capital structure or a new capital investment. These models forecast the expected result of the transaction, with emphasis placed on estimated net revenues, cash flows and taxes. Pro forma statements, therefore, in summary, show the projected status of a company 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 a minimum, to reveal much greater losses than indicated through U.S. GAAP accounting methods. The U.S. Securities and Exchange Commission responded by firmly requiring publicly traded companies in the country to report and make public U.S. GAAP-based financial results. The SEC also clarified that it would deem using pro forma results to lie about or grossly misconstrue GAAP-based results fraud and punishable by law if they misled investors.

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