meaning "according to form." The phrase describes the act of following a form
or as a matter
of form. A pro forma document
is one that is drawn up according to a pre-set
format or outline.
A pro forma is considered to be an informal document and used as an adverb can be expressed generally speaking action taken as perfunctory such as a formality in a set manner without serious attention, "they answered my letter pro forma" or "he kissed her cheek perfunctorily," as well as, "a one-candidate pro forma election"
Albert Herring explains that 'in traditional British business-speak, " a pro forma" used as a noun phrase would generally refer to a pro forma invoice commonly used for a quotation or tender. In the business world of Corporate America it’s typically a financial statement which attempts to foretell estimated income, expenses and cash flow for some specific upcoming period. In these statements operating profit can be identified as profit minus some would-be losses such as investments or employee stock options. It is not as strict a definition as that demanded by standard accountancy practices.
These hypothetical balance sheets and income statements based on a set of assumptions used in earnings reports are prepared when a corporation decides to issue a new security being planned for distribution. This illustrates to the shareholders how the corporation would have spent the money if they had it on the day the pro forma balance sheet was created. The purpose is to explain to the suppliers of the new capital how they plan on spending the money received from the sale of the securities. The corporation pro forma balance sheet combines the new pool of money into their existing operation. Here is one example:
“If company A buys company B mid-year, the year-end financials of Company A might show the current earnings results and the year ago results as Pro Forma - as if the two companies had been merged all along. This gives a more relevant earnings comparison year over year. “
The projected estimates are generally for one year and typically not more than five years. The "estimate" of income and expenses is usually based on the prior year or years income and costs.
Pro forma magic
Pro forma is intended to demonstrate "what if" circumstances. A one-time incident like the McDonald’s expenses due to its Monopoly Game scandal was a cause for pro forma reporting. In fact, a Pro Forma statement can be a sign of just about any situation—or omission—a company wants it to. Even though they have to be explained pro forma statements are meant to show the company in its best light.
As a subject of intense controversy more and more companies employ pro forma hocus-pocus to publicize and even lionize their net earnings. When it comes to looking into researching investments it’s always a good idea to look for "on a pro forma basis" in a company's financial report or press release. It is just part of a company's hard sell, use caution and don’t let it cloud your judgment.
Numbers that aspire to be greater than they are
In one recent hullabaloo over pro forma documents occurred in October 2002 The U. S Supreme Court was brought into the fracas and ruled in a 7-2 decision that pro-forma financial statements enjoy protection as original works of art. Chief Justice William Rehnquist writes:
"One plus one is two. That is math. That is science. But as we have seen, earnings and revenues are abstract and original concepts, ideas not bound by physical constraints or coarse realities, and must therefore be considered art."
A pair of Associate Justices, David Souter
and Clarence Thomas
, penned a cutting dissent, inducing recollections of Justice Potter Stewart's
famous line about pornography from the mid sixties, "I know it when I see it'.
The minority opposition was based upon the theory that "we may not be able to define it, but when we see fraud, we know it is fraud."
The force of the ruling was pervasive. Investigations into hundreds of companies were cancelled, while avid collectors seized these ‘artistic’ works in the form of original balance sheets, audits, and profit and loss statements from WorldCom, Enron, and Global Crossing. In the meantime since they were no longer an auditing firm, Arthur Andersen became Art by Andersen and reclassified as art critics. As a result their opinions no longer require the business to carry professional liability insurance.
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U S Supreme Court Condones Pro-Forma Financial Statements - Asserts They Enjoy Protection As Original Works of Art: