Pro forma is a type of financial statement that reflects financial information under some conditional basis. For example, if company has discontinued some activity, it may provide normal income statement and pro forma income statement that will provide information on basis if that activity would be continued.
Normally companies do not provide any pro forma in their financial reports, but it is common among large companies that are highly involved in M&A activity. After merger or acquisition financial statements include the data of new subsidiaries only when those subsidiaries are legally included in the group structure. So it is especially hard for investors to compare new results and previous results if such inclusion was completed during the middle of fiscal reporting period. In such case, financial data of pro forma should help to understand real financial situation of a company.
However, pro forma also can be used to exclude some non-recurring costs or expenses, for example for restructuring or other. In any case pro forma can be prepared with some kind of creativity and if investor wants to be sure about company’s financial situation, he/she should look deeper in a pure numbers and do not trust only the data that are provided by pro forma, especially if that company is facing some solvency problems.
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