For publicly-held companies, the SEC requires an introductory paragraph showing the proposed transactions, the company, the period covered, and what the pro forma information describes. The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail. The pro forma financial information should be presented in columns and show the condensed historical amounts, the pro forma adjustments, and the pro forma amounts.
In other words, you get an idea of what your financial results would have been if the event had already occurred. These are factually supported by the data from the original financial statements. Using pro forma templates can save you valuable time when creating your own pro forma income statements. These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan.
Line items like income tax expense, on the other hand, typically don’t change directly with sales. Stable businesses can generally estimate income tax expense as a percentage of income before taxes. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Use this Word template to create your own compilation report, as per the AICPA’s guidance.
To create a pro forma balance sheet:
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. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted. Finally, if substantial changes to the firm’s capitalization (the sum of their stock, debt, and retained earnings) are assumed to change substantially after the offering’s close date, pro forma documents must reflect that. Statements of cash flow, or cash flow statements, measure the sources of a company’s cash and how it uses that cash over the stated period.
Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment. Arguably, the statement of cash flow is the most important of the pro forma documents.
For example, if a company is considering an acquisition or a merger, it may publish a pro format statement of the expected impact of the move on its future earnings and expenses. Do you want to learn more about what’s behind the numbers on financial statements? Explore Financial Accounting, one of three courses comprising our Credential of Readiness (CORe) program, to discover how you can develop an intuitive knowledge of financial principles and statements to unlock critical insights into performance and potential. Taking an online course like Financial Accounting can help you understand how to create and interpret different kinds of financial statements so you can find meaning in them. Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions. You can address this fact simply with a final paragraph in the compilation reports, and the author may elect to include the reason for the lack of independence.
How to Create a Pro Forma Statement
There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense. The COGS figure does directly vary with sales; if it does not, something is wrong with your numbers. The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. External links to other Internet sites should not be construed as an endorsement of the views or privacy policies contained therein. If you don’t know how each of the companies defines its pro forma figures, you may be comparing apples to oranges.
- 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.
- The pro forma financial information should be presented in columns and show the condensed historical amounts, the pro forma adjustments, and the pro forma amounts.
- You can use them to study how changes in the price of labor, materials, overhead, and the cost of goods affect the bottom line.
- The auditor is not responsible for whether the statements are accurate and honestly prepared, but rather to ensure that there are no material errors, such as mathematical errors, oversights, inadequate disclosures, and clerical mistakes.
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Managers and individual contributors can also benefit from creating pro forma statements, enabling them to understand different factors impacting business units. A pro forma financial statement can help business owners evaluate a corporation or company’s potential, so they can make informed decisions. Likewise, in real estate settings, pro forma helps investors assess a property’s future value.
Pro Forma: What It Means and How to Create Pro Forma Financial Statements
However, for all regular income statements presented in a filing, there must also be a pro forma statement. Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Not all these things should be left off, but the decisions of what is left off should be well thought out and explained to potential investors, so they have a clear indication of what they are viewing. Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements. Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors.
Finally, in each page of the pro forma information, there must be a reference to the compilation report. Simply, a “pro forma invoice” is a “confirmed purchase order” where buyer and supplier agree on detail and cost of the product to be shipped to the buyer. A pro forma invoice is generally raised when the seller is ready for dispatching the material but they want to ensure that the payment is being sent before dispatch. And similarly, the customer also wants to know which components are included in the pro forma invoice to avoid disagreements later. A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods.
Companies’ definitions of pro forma vary along with their internal methods for forecasting and making assumptions. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly. The applications vary slightly from program to program, but all ask for some personal background information. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice. Other individual line items can also be easily forecasted, such as the cost of goods sold, since it can be assumed it will proportionally grow with sales.
Pro Forma Statements of Cash Flow
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. If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. 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.
In some respects, this type of analysis is a more accurate depiction of the company’s financial health and outlook. Further, organizations may want to develop their pro forma financial statements while they are doing an annual review of their business plan. Generally, pro forma financial statements tend to portray a business as being more successful than it really is, and having more financial resources available than may actually be the case.
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. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices. Companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel reflects the company’s true performance or future performance. Basic templates for creating pro forma statements can be found online, or they can be created using a Microsoft Excel spreadsheet to automatically populate and calculate the correct entries based on your inputs. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements. Pro forma financial statements do not need to follow the strictest accounting standards and should only be considered as estimates.
Therefore, it’s important to be cautious when evaluating these sorts of financial statements and use them alongside other financial documents to get a clearer picture of the business’s actual finances. 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.
Historical with Acquisition Pro Forma Template
For this reason, these reports can be leveraged in several ways, including analyzing risk, projecting investments, and showing expected results before the end of a reporting period. In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions.
Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. 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.
Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC. However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party. The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims. Whether in an assurance that the company is financially sound, also known as a comfort letter, or through a compilation letter, the auditor is only responsible for ensuring the financial statements are prepared correctly. The auditor is not responsible for whether the statements are accurate and honestly prepared, but rather to ensure that there are no material errors, such as mathematical errors, oversights, inadequate disclosures, and clerical mistakes.
