Literature Review on proforma

To begin the literature review you may want to read an article and make a sheet with the citation at the top and a bullet point list of important facts from the article.  Read everything you can about proforma financial statements.  Make a sheet for each article.  (I would like a copy of the sheets also.)  Then you can take the sheets and organize the important fact by topic.  You can decide what is important and should be put in the paper and what is not.Now my thought on the research question.   I was curious how a particular industry is utilizing proformas.  I think you need to pick an industry (for example clothing retailers, software companies, internet companies, department stores, manufactures, etc).  Then for say the 30 largest publicly traded company (I would stick with US publicly traded companies because I know we can get their financials), I want you to examine what types of items are they putting in the proforma.  I want you to find at least 30 companies in that industry who use proforma.  I want to see if there is a trend of what they are doing in the proforma.  But of course before we can start this the literature review needs to be done to see what is already discovered on the topic.  You may find a project like this done for one industry.  We can extend the literature by doing it for a different industry.

 

Watch Out for Pro Forma

Pro forma reporting, in which companies provide investors a choice in reported income numbers, is popular among companies in the S&P 500. For example, in 2008–2009, in addition to income measured according to generally accepted accounting principles (GAAP), nearly 50 percent of S&P 500 companies also reported an income measure that is adjusted for certain items. Companies make these adjustments because they believe the items are not representative of operating results. How do these pro forma numbers compare to GAAP? As shown in the chart below, ap-proximately 30 percent of the S&P 500 companies report pro forma income in excess of operating income in the third quarter of 2009. In general, pro forma profits were 18 percent higher than operating earnings.

Characteristic of pro forma reporting practices is Amazon.com. It has adjusted for items such as stock-based compensation, amortization of goodwill and intangibles, impairment charges, and equity in losses of investees. All of these adjustments make pro forma earnings higher than GAAP income. In its earnings announcement, Amazon defended its pro forma reporting, saying that it gives better insight into the fundamental operations of the business.

Some raise concerns that companies use pro forma reporting to deflect investor attention from bad news. Skeptics of these practices often note that these adjustments generally lead to higher adjusted net income and, as a result, often report earnings before bad stuff (EBS). In addition, they note that it is difficult to compare these adjusted or pro forma numbers because companies have different views as to what is fundamental to their business.

In many ways, the pro forma reporting practices by companies like Amazon represent implied criticisms of certain financial reporting standards, including how the information is presented on the income statement. In response, the SEC issued Regulation G, which requires companies to reconcile non-GAAP financial measures to GAAP. This regulation provides investors with a roadmap to analyze adjustments companies make to their GAAP numbers to arrive at pro forma results. Regulation G helps investors compare one company’s pro forma measures with results reported by another company.

The FASB (and IASB) are working on a joint project on financial statement presentation to address users’ concerns about these practices. Users believe too many alternatives exist for classifying and reporting income statement information. They note that information is often highly aggregated and inconsistently presented. As a result, it is difficult to assess the financial performance of the company and compare its results with other companies. This trend toward more transparent income reporting is encouraging, but managers still like pro forma reporting, as indicated by a recent survey in response to the FASB financial statement presentation project. Over 55 percent polled indicated they would continue to practice pro forma reporting, even with a revised income statement format.

Source: A. Stuart, “A New Vision for Accounting: Robert Herz and FASB Are Preparing a Radical New Format for Financial Statements,” CFO Magazine (February 2008), pp. 49–53. See also SEC Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” Release No. 33-8176 (March 28, 2003) and Compliance & Disclosure Interpretations: Non-GAAP Financial Measures (January 15, 2010), available at

www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

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