pro forma earnings

Pro forma Earnings

Often used in two ways. First, pro forma earnings refers to projections of earnings. This is often used internally or on a road show for an IPO. Second, it refers to a way of reporting earnings that excludes non-recurring items such as restructuring charges, extraordinary items.

Pro Forma Earnings

A company's earnings that are not calculated according to the Generally Accepted Accounting Principles. For example, a company may exclude non-cash expenses that the GAAP would ordinarily include. Companies often publish pro forma earnings to highlight positive aspects of their earnings. While this may indeed show positive earnings for a company that the GAAP can miss, pro forma earnings can also be manipulated more easily to make a company appear healthier than it is.

pro forma earnings

Income not necessarily calculated in accordance with generally accepted accounting principles. For example, a company might report pro forma earnings that exclude depreciation expense and nonrecurring expenses such as restructuring costs. In general, pro forma earnings are reported in an effort to put a more positive spin on a company's operations.
Case Study Unlike net income reported in audited financial statements according to generally accepted accounting principles, pro forma earnings are calculated in any number of ways because there is no generally accepted definition for this measure of earnings. Companies may inflate pro forma earnings by omitting certain expenses, such as stock compensation, interest payments, and amortization of intangible assets. The result is a hodgepodge of earnings calculations that are not consistent from company to company or, for the same company, from year to year. In early 2001 released quarterly pro forma results that omitted writedowns of impaired assets, interest expense, and losses on equity investments. The latter item had been a particularly important source of income for many Internet and technology-based companies when the stock market was booming rather than swooning. According to officials, the firm's quarterly U.S. pro forma operating loss narrowed to $16 million while its overall pro forma operating loss amounted to $60 million. At the same time the company reported that the net loss calculated according to generally accepted accounting principles was $545 million. Critics contended that companies were emphasizing whichever measure of earnings produced the most favorable result. The controversy over reported earnings caused a group of financial executives to begin work on developing a standard for pro forma earnings. The group was at work at the time the results were released. In late 2001 the Securities and Exchange Commission issued a warning that companies issuing misleading pro forma earnings could face civil fraud suits. On January 16, 2002, the SEC instituted its first enforcement action addressing the abuse of pro forma earnings when it initiated proceedings against Trump Hotels & Casino Resorts, Inc., for making misleading statements in the firm's third-quarter 1999 earnings release. The SEC found that the release cited pro forma figures to tout the firm's purportedly positive results of operations while failing to disclose that the results were primarily attributable to an unusual one-time gain rather than to operations. The SEC also found that the company, through its chief executive officer, chief financial officer, and treasurer, violated the antifraud provisions of the Securities Exchange Act by knowingly or recklessly issuing a materially misleading press release.
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50 per share, the manager may choose to disclose a pro forma earnings measure (earnings before write-offs and restructuring charges) of $0.
SYNOPSIS: This study provides descriptive evidence on the controversial trend adopted by many firms in recent years of reporting earnings figures on a pro forma basis, pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or nonrepresentative of ongoing operations.
For instance, GAAP mandates pro forma earnings disclosures for certain accounting changes.
CEI reacted quickly to the early December warning issued by the Securities and Exchange Commission (SEC) on the use of pro forma earnings per share measures used in earnings press releases.
Absent any generally accepted standards for defining nonrecurring items, and with an increase in the number of companies reporting pro forma earnings, abuse in reporting has become common practice.
The debate over pro forma earnings goes on, spurred in part by announcements such as the latest quarterly results from Computer Associates.
Pro forma earnings statements are unaudited, unregulated what-if reports that are not required to conform with GAAP.
Today, pro forma earnings have widely different communication objectives.
The use of pro forma earnings statements in press releases issued by publicly held companies has become a popular trend, but these statements are considerably different from what has traditionally been called pro forma.
The use of pro forma earnings has become commonplace as companies seek to redefine the benchmark against which they are to be evaluated.