Pro Forma Reporting Vs Gaap Essay

671 Words2 Pages

Introduction In researching the topic of Non GAAP vs. GAAP Reporting, Group 6 was able to understand the effects that reporting has on the company and how it affects overall market conditions. We were able to find that the guidelines companies follow for reporting can be influenced and portrayed in a more appealing way if Pro Forma reporting is chosen. Pro Forma Earnings Pro Forma reporting is based on projected amounts that are intended to portray data in an appealing way to investors. This method of reporting allows the company to exclude certain items from financial statements, including non-recurring costs that are nonessential to the company. A Pro Forma financial statement allows for management to smooth their financial statements …show more content…

These reported earnings are based off of the audited financial statements as prepared from the 10-K and 10-Q report. However when a company issues financial projections with pro forma reporting, GAAP assurance cannot be given. The most that an audit commitee can give is compilation report based on management's pro forma assumptions. When conducting a formal examination the auditor's report that statements issued using pro forma reporting are in compliance with AICPA but not GAAP. Companies with a preference for Pro Forma Currently there is a certain segment of companies who prefer the use of pro forma reporting. Technology and Biotech companies generally prefer to disclose earning through pro forma reporting due to the ability to leave disclosures such as stock options and exclude one time startup costs. Pro forma reporting allows for the financial statements to be forecasted and present a better earnings picture for investors and lenders. While this may be favorable for management, shareholders are exposed to forecasting errors that can ultimately plague the actual value of the company. Why do companies prefer Pro …show more content…

This can provide a more accurate view of the operational costs without having to include large one time transactions that hurt the value of the company. The use of pro forma reporting is usually beneficial to companies with specific industry characteristics. One example of this is cable and telephone companies. These companies struggle to produce an operating net profit due to large depreciation costs that are recorded. Reporting income using pro forma statements allows for companies in this industry to display a better projected profit number. Pro Forma reporting controversies Since 2010 companies in the S&P 500 have began to use pro forma to report earnings. As much as 90% of companies on this index have now transitioned away from GAAP. Pro Forma reporting has allowed for companies to selectively disclose the earning report by censoring financial events that they may deem non-essential and non-recurring. In 2015 it was reported that the S&P 500 was valued $256 billion higher using pro forma reported statements than the GAAP counterparts. Some notable cases in which a significant reporting discrepancy exist include the following: Amazon

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