Pro forma financial statements are statements built on assumed or hypothetical facts rather than on recorded results alone. In the attestation standards the term is narrow and anchored to history: pro forma financial information is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction, or event, occurred at an earlier date (AICPA, AT-C section 310). In ordinary business speech the same phrase is also used for a forward-looking model of a period that has not happened yet, which the standards treat separately as prospective financial information.
Two different documents travel under that name, and which one you are holding decides what a CPA can be engaged to do with it. The SEC filing rules that govern the transaction kind, including the Regulation S-X Article 11 triggers and the columnar presentation those filings use, sit in pro forma.
Planning Statements Versus Transaction Statements
The planning kind looks forward. It is the model prepared ahead of a decision, for a budget, a lending package, a business plan or a valuation, and every figure in it is a claim about a period that has not happened yet. The attestation standards call this prospective financial information and split it into a financial forecast and a financial projection, a distinction worked through in a rolling weekly cash forecast.
The transaction kind is anchored to history. It starts from real historical statements and shows what a closed or proposed deal would have done to them had it happened at an earlier date.
What Is the Difference Between Pro Forma and Prospective Financial Statements?
The vocabulary is settled in the standards rather than left to taste. AT-C section 305 defines prospective financial statements as either financial forecasts or financial projections, including the summaries of significant assumptions and accounting policies, and then states that pro forma financial statements and partial presentations are not considered to be prospective financial statements (AICPA, AT-C section 305).
Pro forma financial information and prospective financial information each have their own engagement section, so the label decides which rulebook a practitioner opens.
What Standard the Work Falls Under
Which standard applies turns on the service. Neither kind is a historical financial statement on which an audit opinion is issued.
Compilations run under the accounting and review services standards, and the scope of AR-C section 80 reaches pro forma financial information alongside financial statements and prospective financial information. AR-C section 120 then carries the added requirements for compiling pro forma financial information (AICPA, AR-C sections). What a compilation does and does not commit a firm to is worked through in audit vs review vs compilation.
Reviews are the exception, and the carve-out is explicit. AR-C section 90 applies to reviews of financial statements and of other historical financial information, excluding pro forma financial information, and states that reviews of pro forma financial information are to be performed in accordance with the attestation standards (AICPA, AR-C sections).
That carve-out only moves the work. It does not remove it. The forward-looking kind cannot be reviewed at any address, because AT-C section 305 records that section 210 states a practitioner should not perform a review of prospective financial information (AICPA, AT-C section 305).
On the attestation side there is a ceiling worth knowing before a firm quotes the work. The level of service provided on pro forma financial information should not exceed the level provided on the related historical financial statements: an examination can be performed only if those statements were audited, and a review only if they were audited or reviewed (AICPA, AT-C section 310).
Two situations sit outside AT-C section 310 altogether. A request for a comfort letter, or for procedures on pro forma financial information in connection with an offering, is an AU-C section 920 engagement, handled under the auditing standards rather than the attestation standards. Where pro forma financial information is presented outside the basic financial statements but within the same document and the practitioner is not engaged to report on it, AU-C sections 720 and 925 may be applicable (AICPA, AT-C section 310).
Common Questions
No. A pro forma income statement is one of the statements that can be presented on a pro forma basis, and it uses the same captions as any other, set out in income statement.
A transaction presentation filed with the SEC is not a full statement at all. It is condensed, and it need only include the major captions prescribed by the applicable sections of Regulation S-X (eCFR, section 210.11-02(a)).
Pro forma is not automatically outside GAAP. The attestation section does not apply where the applicable financial reporting framework itself requires the presentation, and it names generally accepted accounting principles requiring pro forma financial information in FASB Accounting Standards Codification 805 on business combinations and 250 on accounting changes and error corrections (AICPA, AT-C section 310). The separate case, adjusted earnings labelled pro forma in a company’s release, is a non-GAAP measure and is covered in EBITDA.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade that work on its own files first through a trial task.
