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Concept
Pro forma
Summary
The term pro forma (Latin for "as a matter of form" or "for the sake of form") is most often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a norm or doctrine, tends to be performed perfunctorily or is considered a formality. The term is used in legal and business fields to refer to various types of documents that are generated as a matter of course.
The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" when stating how much money the company actually made. Examples of expenses often excluded from pro forma results are company restructuring costs, a decline in the value of the company's investments, or other accounting charges, such as adjusting the current balance sheet to fix faulty accounting practices in previous years.
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. The U.S. Securities and Exchange Commission requires publicly traded companies in the United States to report US GAAP-based financial results, and has cautioned companies that using pro forma results to obscure US GAAP results would be considered fraud if used to mislead investors.
In business, pro forma financial statements are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of stock.
The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes.
Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements. Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained.
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