Pro-forma earnings are financial statements filed by companies that exclude certain nonrecurring items, often in order to present a more attractive financial report. That is, they exclude certain expenses that are not part of recurring company operations. A pro-forma financial statement can leave out any item at the company’s discretion to best reflect the accuracy of its financial outlook. 

Items excluded form Pro-forma earnings typically include:

• Employee stock options
• Interest payments
• Restructuring costs
• Amortization of goodwill
• Acquisition and merger costs

Pro-forma earnings do not follow the standard accounting principles or generally accepted accounting principles (GAAP) for a company’s quarterly and annual report filing. Pro-forma reports do not have any strict rules or norms. As a result of this, companies generate these reports for use in news releases and with stock analysts to give a brighter financial outlook.

Originally, pro-forma earnings were used to provide an accurate financial outlook after a major acquisition or merger. The one-time costs associated with acquisitions and mergers were removed from the financial statements. However, since there are no standards on how to file these statements, different companies began using diverse methods to arrive at their earnings figures. Some companies try to present earnings before one-time, unusual items while other companies present a form of cash-based earnings.

Pro-forma earnings measures could present a more accurate assessment of their sustainable operating performance than the standard GAAP and can be used to assess the performance of a particular business entity. In recent times, pro-forma earnings have been subjected to much criticism for not giving an accurate picture of a company’s financial health. The U.S. Securities & Exchange Commission investigates companies that release pro-forma earnings not consistent with their GAAP. It is in the investors’ interest to understand and analyze both GAAP and pro-forma earnings to get an accurate picture of the health of any company.