Companies are allowed to use different rates if they are factually supportable and disclosed. 3240.3Pro forma adjustments should be referenced to footnotes which clearly explain the assumptions involved. Pro forma is Latin for “as a matter of” or “for the sake of form.” It is used primarily in reference to the presentation of information in a formal way, assuming or forecasting pieces of information that may be unavailable. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice.

They must also ensure they label all pro forma information as such, to avoid confusion with historical information, and list the specific assumptions and uncertainties about them they are making. Therefore, it prepares a projected balance sheet, income statement, and statement of cash flows for each of the three financing options. These projected financial statements are referred to as pro forma financial statements. Normally, tax effects should be calculated with reference to the statutory rate in effect during the periods for which the pro forma statements of comprehensive income are presented. If taxes are not calculated on that basis, or if unusual effects of loss carryforwards or other aspects of tax accounting are depicted, an explanation should be provided in a note to the pro forma financial statements. This Topic describes the circumstances in which pro forma financial statements should be presented in filings, the form of their presentation, and guidance to be considered in their preparation.

An example of pro forma

Certain limited circumstances may warrant the use of an interest rate other than the current or committed rate. In some instances, the staff believes that the registrant should use the interest rates that were prevailing during the period covered by the pro forma information. Other transactions appropriate for inclusion in a pro forma presentation should be accumulated in a separate column. Otherwise, if consummation of more than one transaction has occurred or is probable, pro forma information may be presented on either a combined or separate basis. If combined, footnote explanation should disaggregate the various transactions in a reasonable fashion. There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense.

A pro-forma forecast is a financial forecast based on pro-forma income statements, balance sheets, and cash flow statements. Pro-forma forecasts are usually created from pro-forma financial statements and are forecasted using basic forecasting procedures. When making these forecasts, revenues will usually provide the initial groundwork for the forecast, and expenses and other items are calculated as a percentage of future sales. Lenders and investors will require such statements to structure or confirm compliance with debt covenants such as debt service reserve coverage and debt to equity ratios. Similarly, when a new corporation is envisioned, its founders will prepare pro forma financial statements for the information of prospective investors. Also, banks will request pro forma statements in lieu of tax returns for a start up business in order to verify cash flow before issuing a loan or line of credit.

In addition to the risk factors identified from time to time in our reports filed with the U.S. Securities and Exchange Commission (SEC), factors that could cause our actual results to differ materially include the below. While it’s helpful to know what a company’s management has planned, it’s important to view these projections with skepticism. Nobody can predict the future, and managers might (even with the best intentions) use overly optimistic assumptions in their pro formas.

Pro forma

Our publication summarizes the requirements for pro forma financial information and illustrates how registrants may apply the guidance to different transactions and pro forma adjustments. Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant. Now the income statement, balance sheet, and other data can be used to create the statement of cash flows. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices. Companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel reflects the company’s true performance or future performance. For example, the company might merge with or purchase another business, and the outcome could affect both cash flow and profits.

Harvard Business School Online’s Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

Mastering Pro Forma Financial Statements: The Three You Need

Although the specific rules of S-X Article 11 do not apply to smaller reporting companies, those registrants can consult S-X Article 11 for guidance when preparing pro forma financial statements required by S-X 8-05 for business acquisitions. Smaller reporting companies should present pro forma information for other current or probable transactions if that presentation would be material to investors. In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk.

Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC. However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party. The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims.

TOPIC 3 – Pro Forma Financial Information

These are factually supported by the data from the original financial statements. Management may believe that the financial results it has reported under either the GAAP or IFRS accounting frameworks are inaccurate, or do not reveal a complete picture of the results of their business (usually because of the enforced reporting of a one-time event). If so, they may issue pro forma financial statements that include the corrections they believe are necessary to provide a better view of the business. The Securities and Exchange Commission takes a dim view of this kind of adjusted reporting, and has issued regulations about it in their Regulation G.

If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception.

Income statements would show how much it would cost a company to pursue the project and how much revenues might improve after completion. When deciding whether or not to invest in a company or a project, it’s reasonable to wonder how the future will unfold. There’s no way to predict the future with certainty, but you can analyze multiple “what if” scenarios to understand the potential outcomes.

Pro forma financial statements are projections of future expenses and revenues, based on a company’s past experience and future plans. A pro forma financial gl account number statement is supposed to include reasonably accurate information. However, companies that create these documents have some leeway in their assumptions.

3410.3Undistributed earnings or losses of a Sub-S registrant should be reclassified to paid-in capital in the pro forma statements. [SAB Topic 4B] Similarly, undistributed earnings or losses of partnerships should be reclassified to paid-in capital in the pro forma statements. That presentation assumes a constructive distribution to the owners followed by a contribution to the capital of the corporate entity. 3220.3Adjustments reflected in the pro forma adjustments column should give effect to events that are directly attributable to each specific transaction and factually supportable.

When should you use pro forma financial statements?

For example, if an energy company is planning to build a new power plant, investors may wonder how that project will affect the company’s profits. In some countries, customs may accept a pro forma invoice (generated by the importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs. The U.S. Customs and Border Protection, for example, uses pro forma invoices to assess duty and examine goods, but the importer on record is required to post a bond and produce a commercial invoice within 120 days from the date of entry. If the required commercial invoice is needed for statistical purposes, the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer.

• They have articles governing the preparation of pro forma financial statements for public companies.
• Companies’ definitions of pro forma vary along with their internal methods for forecasting and making assumptions.
• Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO).
• ABOUT BRIUMVI PATIENT SUPPORT in the U.S.BRIUMVI Patient Support is a flexible program designed by TG Therapeutics to support U.S. patients through their treatment journey in a way that works best for them.
• There was a boom in the reporting of pro forma results in the US starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the US GAAP accounting showed.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”). The limitation of these statements is that they show the business owner nothing more than a prediction. No matter how good or bad that portrayal may seem, it’s only a good guess as to what may happen. Pro forma financials in the United States boomed in the late 1990s when dot-com companies used the method to make losses appear like profits or, at a minimum, to reveal much greater gains than indicated through U.S.