Pro Forma

Pro forma is Latin for as a matter of form, and in accounting it labels a presentation of financial information built on assumed, projected or hypothetical facts rather than only on transactions as they actually occurred. It is a modifier, not a document type of its own. A balance sheet, an invoice or a corporate vote can each be pro forma.

When the SEC Requires Pro Forma Financial Information

Under Regulation S-X Article 11, pro forma financial information must be filed when any of a listed set of conditions exists, among them a significant business acquisition or a combination of entities under common control that has occurred or is probable, a disposition of a significant portion of a business that has occurred or is probable and is not fully reflected in the historical statements (eCFR, section 210.11-01(a)).

The trigger is not confined to closed deals, because several of those conditions are met once a transaction is merely probable. Significance is defined, not judged: an acquisition is significant when it meets the definition of a significant subsidiary in section 210.1-02(w)(1), substituting 20 percent for 10 percent each place it appears, with a separate condition for a real estate operation (eCFR, section 210.11-01(b)).

What a Pro Forma Presentation Contains

The information must consist of a pro forma condensed balance sheet, pro forma condensed statements of comprehensive income and accompanying explanatory notes, though where a limited number of adjustments are required and those adjustments are easily understood, a narrative description of the pro forma effects of the transaction may be disclosed in lieu of those statements. The statements themselves are ordinarily presented in columnar form showing the condensed historical statements, the pro forma adjustments and the pro forma results, so the historical figures stay on the page unchanged next to what the transaction does to them (eCFR, section 210.11-02(a)).

Transaction Accounting Adjustments depict the accounting the transaction requires under US GAAP, or under International Financial Reporting Standards where those apply, and their effect on the income statement is run as though they had been made at the beginning of the fiscal year presented. Management’s Adjustments, which show the synergies and dis-synergies management expects, are presented at the discretion of the registrant, the company doing the filing, and only where stated conditions are met, and when synergies are shown the related dis-synergies must be shown too (eCFR, section 210.11-02(a)).

On illustrative figures, where the adjustment is the extra amortization on an intangible asset recognized in an acquisition:

                                    Historical   Adjustment   Pro forma
Amortization expense                     1,200          800       2,000
Income before income taxes               9,000         (800)      8,200

The table stops before tax. Tax effects of pro forma adjustments, if any, normally should be calculated at the statutory rate in effect during the periods for which pro forma condensed statements of comprehensive income are presented, and should be reflected as a separate pro forma adjustment rather than left to fall through to the after-tax result (eCFR, section 210.11-02(b)).

Pro Forma Inside the Financial Statements

A registrant must not present pro forma financial information on the face of its historical financial statements or in the accompanying notes, except where GAAP or IFRS requires that presentation (eCFR, section 210.11-02(a)). The SEC staff’s manual records that certain pro forma disclosures are required by GAAP, ASC 805 on business combinations among them, and that those presentations may differ in style and content from what Article 11 asks for (SEC Financial Reporting Manual, Topic 3). A reader can therefore meet two pro forma presentations of the same acquisition in one document, built under two different rule sets.

What Pro Forma Is Confused With

A pro forma invoice. A customs filing document, not a financial statement. A commercial invoice is not required for the categories of merchandise the rule lists, and for those the importer must still present any invoice, memorandum invoice or bill in his possession or available to him. If none is available, a pro forma or substitute invoice must be filed (eCFR, section 141.83(d)). The prescribed form is an importer’s own statement of value addressed to US Customs and Border Protection, the agency that takes the entry, closing with an undertaking to file any other invoice as soon as it is received, so it is the importer speaking to the government rather than a seller billing a buyer (eCFR, section 141.85).

The plain legal sense. Pro forma is a Latin term meaning made or done as a formality (Cornell Legal Information Institute, Wex), which is the sense in a pro forma session or a pro forma vote taken to satisfy a procedural requirement rather than to decide anything.

Prorated. Prorating divides one amount in proportion to a measured share, as set out in prorated, while a pro forma restates a whole presentation on assumed facts. The two get typed for each other because proforma is a common spelling of the phrase.

The tax software step. Inside some tax packages the word is a verb. Rolling client files from one year into the next is the proforma step, and the returns that will not carry forward in Lacerte are listed in Lacerte tax preparation outsourcing.

Adjusted results. Adjusted earnings labelled pro forma in a registrant’s release are a non-GAAP financial measure, with the reconciliation duties set out in EBITDA.

Common Questions

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade the work on its own files first through a trial task.