Pro Forma

Pro forma has a meaning of “for the sake of formality” or “in a formal matter." When it’s mentioned in financial reports, it refers to a method of estimating financial results using certain predictions or assumptions.

Pro forma financial statements are not calculated using generally accepted accounting principles (GAAP) and normally do not take into account one-off costs that are not included in usual company operations, such as  post-merger restructuring expenses.

In fact, pro forma financials can eliminate anything that, in the opinion of the company, complicates the accuracy of its financial presumptions, and may be useful information to help estimate the company's future prospects.

Types of Pro Forma financial statements

Pro forma financial statements mean predictions of future costs and incomes, determined on a company’s previous events and results as well as plans for future.

Some basic pro forma reports contain the following:

Budget documents. A budget assumes the infusion of predicted incomes and the drain of cash for a certain period of time in future, typically a financial year (in other words - a fiscal one).

A budget is grounded on some presumptions about future costs and earnings. It considers previous expenses and incomes and also takes into account the costs associated with the company's plans for the fiscal year.

Company Income statements. A pro forma income statement implies the pro forma method of calculation, primarily to attract the attention of prospective shareholders to certain numbers when a business publishes its quarterly incomes notification.

For instance, a company issues its current sellings and expenses for the quarter that just ended and also arranges its predictions of these rates for the actual quarter on the same chart.

In this situation, the business is predicting the future, relying on its knowledge of previous sellings and costs and considering anticipated changes.

Earnings Projections. An enterprise may release a pro forma statement to let investors know about their internal evaluation of the financial result due to proposed amendments in the business.

For example, if a company is about to make a merger or purchase, it may post a pro forma statement about the anticipated effect of the taken step on its proceeds and costs in the foreseeable future.

Financial accounting. In financial accounting, pro forma income statements eliminate offbeat or one-off operations. Eliminated costs could imply depreciating investment values, restructuring expenses, and corrections taken on the enterprise’s accounting balance that adjust accounting mistakes from past years.

Managerial accounting. Accountants make financial reports in the pro forma way long before a proposed deal such as a merger or a purchase, any adjustments in an enterprise's income structure, or new investment.

These are patterns that presume the expected outcome of the proposed deal. They are concentrated on estimated taxes,cash flows and net incomes.

The statements are posted to the enterprise's management to aid it choose a strategy on a proposed variant grounded on its potential profits and costs.

Limitations of Pro Forma statements

Investors should keep in mind the fact that a company's pro forma financial reports can hold numbers or computations that do not correspond to  conventional GAAP, the standards sticked by public enterprises for posting their financial statements.

Essentially, they can be very different. Preliminary results may contain corrections in GAAP indicators to highlight significant aspects of the enterprise's operating activities.

Pro forma financials in the United States prospered in the late 90s when dot-com companies used the method to make deficits look like profits or, at least, to post higher profits numbers than it was really defined through U.S. GAAP accounting policy.

U.S. The Securities and Exchange Commission (SEC) stated in reply by warning that trading public companies also publish reports and financial results in a base of the U.S. GAAP. The SEC also commented that it would consider the usage of pro forma results to flagrantly distorted GAAP-based results and defraud investors roguish and punishable by law.

How to make a Pro Forma statement

Simple cliche forms for making pro forma financial reports are available all over the Internet, or it’s also possible to build them using a spreadsheet on Microsoft Excel to automatically complete and compute the correct scores based on your inputs.

You can also form a pro forma financials manually. You adhere to the following order:

1. Calculate the possible revenue predictions for your enterprise. The process of determining projections is called a pro forma forecast. Adhere to the realistic market assumptions. Implement your investigation and appeal to accountants and specialists to define what a typical annual income flow is, as well as forming presumption of asset accumulations. Your evaluation should be kept in a conservative way.
2. Estimate your overall liabilities and expenses. Liabilities contain lines of credit and loans. Expenses grow from licenses, public utilities, rental payments,permits, employees salaries, insurance, permits, taxes and materials. Keep your assessing realistic.
3. Take the income predictions from the first step and the overall expenses found from the second step to build the first half of your pro format. This part will estimate your prospective net income (NI).
4. Measure earnings stream. This step of making the pro forma report will determine the net outcome on money if the proposed enterprise adjustment is implemented. Cash flow is different from NI as, under accrual-based accounting, some incomes and expenses are recognized before or after changes hands.

There is one fine example of a pro forma statement in history — due to Tesla Inc. 's (TSLA) unverified pro forma compressed and composite income statement for the year ended at the 31th of December, 2016.

Meaning of Pro Forma financial statement 

Pro forma financials include approximate numbers or estimates. They are embedded into the data to represent an overall look of a company's proceeds if certain once-off items are eliminated.

These are commonly conceived as illustrative or preliminary financial statements that do not adhere to normative accounting policies. Enterprises take their own choice in computing pro forma proceeds, excluding or including or excluding those items based on what they suppose represent the company's current or future performance.

Considering the fact that naturally the pro forma assumptions are written in a hypothetical sense, they can differ from real confirmed scores, and sometimes drastically.

Pro Forma vs. GAAP financials

There are no commonly suitable methods that businesses must follow in terms of reporting professional incomes and loss statements. For this reason it makes sense for traders to understand the difference between formal proceeds and proceeds represented with GAAP.

GAAP sets strict rules when businesses post their incomes, while pro forma results are better to be perceived as approximate revenues.

Thus, investors must consider pro forma incomes as well as GAAP incomes, and never confuse one with the other.

Pro Forma invoice

A pro forma consignment note is a draft sale bill given to a purchaser of a delivery or a shipment of products beforehand. The invoice usually describes important information about purchases, such as transport charges and the shipping weight.

A preliminary invoice requires only sufficient information so that customs officials can determine the necessary duties based on a general inspection of the included goods. 

The proforma invoice contains information about the price and value of the goods, but does not contain a requirement to pay the amount specified in it and therefore is not a settlement document. Due to this fact, it does not perform the main function of a regular invoice as a payment document. A proforma invoice can be issued for shipped but not yet sold goods. Also, this document can be drawn up only for the purposes of customs valuation when delivering goods for consignment, exhibitions, auctions, when supplying raw materials under processing 

Pro Forma statements in various enterprises 

It is possible to compare the statements from various companies, though it is not recommended. The examples of proforma in enterprises are quite different as well as their in-house methods of projecting and making presumptions.

If you have no clue how each of the businesses determines their pro forma shapes, perhaps you are comparing apples with oranges.