Pro forma financial statements are a great way to assess the financial impact of those assumptions. Accountants prepare financial statements in the pro forma method ahead of a proposed transaction such as an acquisition, merger, a change in a company’s capital structure, or new capital investment. A pro forma income statement uses the pro forma calculation method, mainly to draw the attention of potential investors to specific numbers when a company issues its quarterly earnings announcement. A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred. Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.
Pro forma means “for the sake of form” or “as a matter of form.” When it appears in financial statements, it indicates that a method of calculating financial results using certain projections or presumptions has been used. There was a boom in the reporting of pro forma results in the US starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the US GAAP accounting showed. Before delivering an actual invoice, send a client a pro forma invoice that lists the cost of the goods and services you’re planning to provide. A pro forma invoice isn’t binding; it’s a way to make sure you and the client are on the same page before agreeing to the transaction. 3260.2Although use of current or committed interest rates is appropriate in most cases, careful consideration should be given to the facts and circumstances specific to each presentation to determine whether the interest rate used is reasonable.
The effects of the unusual events ordinarily should not be eliminated from pro forma data. The registrant may wish to consider furnishing a forecast in lieu of pro forma data. 3110.1Pro forma financial information is required if a significant business combination has occurred in the latest fiscal year or subsequent interim period, or is probable (see Section 2005.4).
These are Regulation S-X Article 11, and Regulation S-X 8-05 for smaller companies from 17 CFR 210. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO). This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.
Pro forma templates
Information about the possible or expected impact of current actions taken by management in response to the pro forma transaction, as if management’s actions were carried out in previous reporting periods, is considered a projection and not an objective of S-X Article 11. Presentation of forward looking and projected information should be confined to supplemental information separately identified as such (information that is not required or contemplated by Article 11) and in MD&A. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements. Regular income statements, sometimes called statement of financial performance, are exacting, in that they reflect the exact income figures your company had in past years. The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things.
- Further, organizations may want to develop their pro forma financial statements while they are doing an annual review of their business plan.
- They’re a way for you to test out situations you think may happen in the future to help you make business decisions.
- If your company has a high debt-to-equity ratio, it will show on the balance sheet.
- For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
- For instance, what happens if your main vendor raises their prices like they did last year?
Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance. A budget anticipates the inflow of projected revenues and the outflow of funds for a defined future period, usually a fiscal year. We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.
Linking the Three Pro Forma Financial Statements
Similarly, the AICPA’s guide, Prospective Financial Information, requires these assumptions to be reasonable and suitably supported. An absence of adequate support may preclude a registrant’s ability to include prospective financial statements in the filing. Additionally, a company with a limited operating history may not have a reasonable basis to present a financial forecast beyond one year. According to the SEC, for public companies, a pro forma balance sheet should have the same dates, plus one year from the last submitted balance sheet.
Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet. 3220.1Pro forma presentation should be based on the latest balance sheet included in the filing. A pro forma balance sheet is not required if the acquisition or disposal is already reflected in a historical balance sheet. Pro forma statements are useful with regard to tracking future financial direction and occurrences, often including some historical numbers to help account for what the projected outcomes should look like. In the event that the projected numbers show that profits are likely to drop, the pro forma statement allows a company to see the need for changes in its operations to prevent decreased profitability.
In this case, the company is projecting the future, based on its knowledge of past sales and expenses and factoring in expected changes. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense. The best way to package a quote for your goods and services is by using a pro forma invoice, also called a draft invoice. Certain pro forma disclosures are required by GAAP (e.g., ASC 805) and should be provided where applicable. Those presentations may differ in style and content from the requirements of S-X Article 11.
Creating a pro forma cash flow statement
3290.2If a pro forma statement of comprehensive income is presented, management should limit it to information that is reliably determinable and not include forward-looking information within the pro forma statement of comprehensive income. Management also should disclose how the pro forma statement of comprehensive income is not indicative of operations going forward because it necessarily excludes various operating expenses. If factually supportable, certain adjustments may demonstrate the effects of the changes in operations that may have affected historical revenues or operating expenses had they been implemented at the beginning of the historical period. [Instruction 4 to S-X Article 11] See Section 2065 for guidance about form and content of carve out financial statements. Traditionally, financial statement analysis is used to better understand a company’s performance over a specified period. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future.
Often, the difference between a past balance sheet and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures. Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet. A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations. Pro-forma financial statements are also prepared and used by corporate managers and investment banks to assess the operating prospects for their own businesses in the future and to assist in the valuation of potential takeover targets. They are useful tools to help identify a company’s core value drivers and analyze changing trends within company operations.
With pro forma statements, businesses can better make assumptions on what decisions are best for the company, such as labor increases, production increases, or even expansion. All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet. The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line.
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The changes can include cutting costs or increasing the price of goods and services. You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future.
GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB). They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items. Pro forma income statements usually project a minimum of three years, whereas regular income statements may just be the year prior or based upon a lender’s request. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods. However, for all regular income statements presented in a filing, there must also be a pro forma statement.
Doing so can allow you to conduct a side-by-side comparison of possible outcomes to determine which is favorable and guide your planning process. Pro forma financial statements are financial reports issued by an entity, using assumptions or hypothetical conditions about events that may have occurred in the past or which may occur in the future. These statements are used to present a view of corporate results to outsiders, perhaps as part of an investment or lending proposal. A budget may also be considered a variation on pro forma financial statements, since it presents the projected results of an organization during a future period, based on certain assumptions.
Companies are generally prohibited from creating misleading or fraudulent pro forma financial statements. Still, there may be some gray areas, so use caution when relying on future projections. Russell creates a pro forma income statement for next year to inform his decision. Russell follows The Ascent’s guide to forecasted financial statements to generate the document. Before acquiring another business, investing in new equipment, or taking on new debt, businesses draft forward-looking pro forma financial statements to understand the effect. Unlike traditional financial statements that explain the past, pro forma documents usually look forward and rely on financial modeling and speculation.
3110.3Pro forma financial statements are not required for individually insignificant businesses unless they are significant in the aggregate at over the 50% level. If certain financial statements are included in the filing under S-X 3-05(b)(2)(i), registrants should consider whether the pro forma financial information would be misleading without giving effect to all individually insignificant acquisitions. Also, if a registrant presents the financial statements of an individually insignificant business, the staff encourages the registrant to also include S-X Article 11 pro forma financial information in the filing. For cases in which your company is specifically seeking funding, you want to show your potential investors how the company’s financial results will change with their investment. There may be several sets of these pro forma documents, each based on different potential investment amounts, or just one based on what you think you need.