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Part: four More Tools > Pro Forma Accounting vs. GAAP

Pro Forma Accounting vs. GAAP

During the 1990s, many firms, especially techs, emphasized pro forma results in their earnings reports over the numbers resulting from generally accepted accounting practices (GAAP). Originally pro forma meant as if and was mainly employed to present the results of recently merged companies as if they had always been a single company. Lately company managements gloomed onto pro forma as a way of inflating their reported earnings by designating a variety of loss items as nonoperating or nonrecurring, and simply not counting them when computing earnings. Unfortunately, the analyst community decided that was a good idea and based their published earnings forecasts on pro forma instead of GAAP results.

However the SEC requires companies to report their results in GAAP format. So at least one of the detailed financial statements included in quarterly report press releases, and all financial statements filed with the SEC and compiled on financial Websites do follow GAAP standards. Since the analysts' earnings forecasts don't match GAAP earnings, you can't compare forecast EPS to historical values found on the company's financial statements.


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