What Is Pro Forma?

 Pro forma in Latin means “for the sake of form” or “as a matter of form."
- meaning made or done as a formality.
 In financial statements, it indicates that a method of calculating financial results using certain
projections or presumptions
- “Projection” is used within finance to predict financial results further out into the future
- “Presumption” an assumption that a factual conclusion can be made if specified conditions are
met
 Pro forma financials are not computed using generally accepted accounting principles (GAAP) and
but can be issued to the public to highlight certain items for potential investors.
- GAAP refer to a common set of accounting rules, standards, and procedures issued by the
Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow
GAAP when their accountants compile their financial statements.
 They can also be used internally by management for aiding in business decisions.
 a pro forma financial statement can exclude anything a company believes obscures the accuracy of
its financial outlook and can be a useful piece of information to help assess a company's future
prospects.
 It's illegal for publicly traded companies to mislead investors with pro forma financial results that do
not use the most conservative possible estimates of revenue and expense
 A pro forma financial statement allows a company to exclude special nonrecurring gains or losses,
like a legal settlement, merger-related expenses,
 Pro forma statements also allow companies to project future earnings or anticipated income,
instead of just reporting results from the past.

History
 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. GAAP accounting methods.
 The U.S. Securities and Exchange Commission (SEC) responded by cautioning that publicly traded
companies report and make public U.S. GAAP-based financial results as well. The SEC also clarified
that it would deem using pro forma results to grossly misconstrue GAAP-based results and mislead
investors fraudulent and punishable by law

NOTE: Using pro forma results to grossly misconstrue GAAP-based results and mislead investors is
deemed by the U.S. Securities and Exchange Commission (SEC) to be fraudulent and punishable by law.

What Is a Pro Forma Financial Statement?

Pro forma financial statements incorporate hypothetical numbers or estimates. They are built into the
data to give a picture of a company's profits if certain nonrecurring items are excluded.

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. As pro forma forecasts are hypothetical in nature, they can deviate from actual results,
sometimes significantly.

What Is a Pro Forma Invoice?

A pro forma invoice is a preliminary bill of sale sent to a buyer in advance of a shipment or delivery of
goods. The invoice will typically describe the purchased items and other important information, such as
the shipping weight and transport charges.

A pro forma invoice requires only enough information to allow customs officials to determine the duties
needed from a general examination of the included goods.

What Are the Types of Pro Forma Financial Statements?

Pro forma financial statements are projections of future expenses and revenues, based on a company's
past experience and future plans.
Some standard pro format statements include the following:

Pro Forma Budget Documents

A budget anticipates the inflow of projected revenues and the outflow of funds for a defined future
period, usually a fiscal year.

Fiscal year – a one year period that companies and government use for financial reporting and
budgeting.

A budget is based on certain assumptions about future expenses and revenues. It takes into account
past expenses and revenues and factors in the costs of the company's plans for the fiscal year.

Pro Forma Company Income Statements

A pro forma income statement uses the pro forma calculation method, mainly to draw the attention of
potential investors to specific numbers when a company issues its quarterly earnings announcement.

For example, a company will report its actual sales and expenses for the quarter that just passed and, in
the same chart, will list its projections of these numbers for the current quarter.

In this case, the company is projecting the future, based on its knowledge of past sales and expenses
and factoring in expected changes.

Pro Forma Earnings Projections

A company may present a pro forma statement to inform investors about their internal assessment of
the financial outcome of a proposed change in the business.

For example, if a company is considering an acquisition or a merger, it may publish a pro format
statement of the expected impact of the move on its future earnings and expenses.

Pro Forma Financial Accounting

In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions.

These excluded expenses could include declining investment values, restructuring costs, and
adjustments made on the company’s balance sheet that fix accounting errors from prior years.

Pro Forma Managerial Accounting

Accountants prepare financial statements in the pro forma method ahead of a proposed transaction
such as an acquisition, merger, a change in a company's capital structure, or new capital investment.

These are models that forecast the expected result of the proposed transaction. They focus on
estimated net revenues, cash flows, and taxes.

The statements are presented to the company's management to help it make a decision on a proposed
action based on its potential benefits and costs.

Limitations of Pro Forma Statements

Investors should be aware that a company’s pro forma financial statements can hold figures or
calculations that do not comply with generally accepted accounting principles (GAAP), the set of
standards followed by public companies for their financial statements.

In fact, they can differ vastly. Pro forma results may contain adjustments to GAAP numbers in order to
highlight important aspects of the company's operating performance.

What's the Difference Between Pro Forma and GAAP Financials?

There are no universal rules that companies must follow when reporting pro forma earnings. This is why
it is important for investors to distinguish between pro forma earnings and those reported using
generally accepted accounting principles (GAAP).

GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better
thought of as hypothetical earnings.

For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and
never mistake one for the other.
While GAAP figures indicate how much money your company made overall during a quarter or year, pro
forma earnings tell you how much your company made from its usual, or ordinary business activities in
that same period—they strip out extraordinary or one-time events, good or bad

How to Create a Pro Forma Statement

Basic templates for creating pro forma statements can be found online, or they can be created using a
Microsoft Excel spreadsheet to automatically populate and calculate the correct entries based on your
inputs.

You can also create a pro format financial statement by hand. The steps are:
1. Calculate the estimated revenue projections for your business. This process is called pro forma
forecasting. Use realistic market assumptions. Do your research and speak with experts and
accountants to determine what a normal annual revenue stream is, as well as asset accumulation
assumptions. Your estimates should be on the conservative side.
2. Estimate your total liabilities and costs. Liabilities include loans and lines of credit. Costs include
lease payments, utilities, employee pay, insurance, licenses, permits, materials, and taxes. Keep your
estimates realistic.
3. Use the revenue projections from Step 1 and the total costs found in Step 2 to create the first part of
your pro format, This part will project your future net income (NI).
4. Estimate cash flows. This part of the pro forma statement will identify the net effect on cash if the
proposed business change is implemented. Cash flow differs from NI because, under accrual
accounting, certain revenues and expenses are recognized prior to or after cash changes hands.

Here’s a historical example of a pro forma income statement, courtesy of Tesla Inc.'s (TSLA) unaudited
pro forma condensed and consolidated income statement for the year ended Dec. 31, 2016.