PRO FORMA ACTIVITY

1. What is pro forma reporting according to Regulation S-X of the SEC? How has pro
forma reporting been used by corporations over the years? Summarize the arguments for
and against this type of reporting.

Pro-forma earnings are those that are made public in press releases from companies that
describe their quarterly results. Certain items that ought to be included in determining the GAAP
earnings reported to the SEC are not included in the pro-forma earnings calculations. Over time,
managers have reported pro-forma results using pro-forma statements, which depict how
earnings would look if specific income statements weren't included in the
calculation.Restructuring charges, depreciation charges, amortization expenses, good will
impairment charges, impairment of other intangibles, asset write-downs, research and
development costs, and stock-related compensation costs are some of the factors that are not
included in pro-forma earnings.Pro-forma reporting can be utilized to improve the comparability
of earnings between the various reporting periods, just as the SEC originally intended.

The pro-forma statements might assist investors in evaluating potential outcomes. Pro
forma statements are useful with regard to tracking future financial direction and occurrences,
often including some historical numbers to help account for what the projected outcomes should
look like and the pro-forma financial information can give investors information about the
ongoing effects of those transactions.To summarize the arguments against this type of report the
pro-forma results are used improperly by the management to represent what the earnings would
be if specific income statement elements were not taken into account while determining earnings.
These expenses include, among others, restructuring costs, depreciation costs, and amortization
costs. The pro-forma earnings are forcing corporate managers to report earnings that differ from
generally accepted accounting rules more frequently.

2.Exhibits 1 and 2 provide sample earnings announcements and pro forma information
released by Proxim and Cisco Systems, respectively. Do you believe these disclosures are
consistent with the spirit of the SEC regulation, or are they corporate abuses of financial
disclosure? As a CFO of these companies, what would you have reported in your earnings
announcement for the respective period?

Due to corporate abuse in the disclosures, Proxim and Cisco Systems' pro forma
information does not follow the spirit of the SEC. This is due to the fact that some items have
been left out of the pro-forma statements, overstating the pro-forma earnings in violation of SEC
standards. Investors in Proxim and Cisco may have been seriously misled by the manner the pro-
forma data was presented alongside GAAP. This is a misuse of pro-forma earnings data that
could provide investors false information. To give the stakeholders a more optimistic
perspective, Proxim and Cisco should have contrasted the pro-forma earnings with previous
reporting periods in addition to the GAAP earnings. Due to this, stakeholders may believe that
the companies are functioning well when in reality they are not.As the CFO, we would have
included the GAAP earnings, which are a loss of 1014 for Cisco System and a loss of 92587 for
Proxim, in earnings statements.

3 .Do you believe the SEC should permit the type of disclosure shown in Exhibits 1 and 2?

SEC should not permit the type of disclosure that is shown in exhibit 1 and 2. This is
because its misleading and it can lead the investors to believing that the company is performing
well while in the real sense it’s not. Proxim and Cisco pro-forma seem to be comparing the
GAAP earnings with the pro-forma earnings to give the investors a positive outlook of the
earnings. The GAAP earnings shows that the companies are making losses and the companies
seem to be making use of the pro-forma statements to mislead the public regarding the
company’s performance.

4. Usefulness of the pro forma versus GAAP earnings disclosures found in Exhibits 1 and 2
with regards to evaluating:

a. Recent financial performance -The GAAP disclosures make it easier for current and
prospective investors to understand how much money the companies made throughout the
financial period. The pro-forma disclosures are beneficial because they make it easier to compare
earnings across reporting periods.

b. Expectations of future earnings-The pro-forma disclosures provide shareholders with details

about the effects of specific transactions by demonstrating the potential impact on previous
financial statements if the transactions had been completed sooner. Investors can examine future
prospects with the help of pro-forma statements because they show the potential scale of change.

By displaying the trend in a company's earnings, GAAP results reflect predicted future
earnings, and investors can use this to forecast future performance.

c. Credibility of management -Based on the company's earnings, the managers' management of

the business can be assessed using the GAAP earnings. High earnings demonstrate the business's
successful management and the managers' dedication to maximize shareholder value.The pro-
forma results demonstrate how well the managers ran the company during the current reporting
period in comparison to earlier reporting periods.

d. Quality of earnings

Once all items on the income statement are taken into account, GAAP results reflect the
quality of earnings.Pro-forma earnings, on the other hand, depict the quality of earnings when
such income statement items, such as asset write-downs, restructuring charges, depreciation
charges, amortization expenses, good will impairment charges, impairment of other intangibles,
research and development costs, and stock-related compensation costs, have been eliminated.
e. Equity valuation

Since GAAPS earnings are the real earnings that are distributed to shareholders, an increase in
GAAPS earnings will result in an increase in the equity valuation.On the other hand, pro-forma
earnings have no impact on equity valuation due to the fact that they not incorporate all of the
income statement elements.