Pro forma earnings are a company’s earnings that exclude rare, extraordinary, or nonrecurring items. Companies may incur expenses that do not reflect typical operating expenses. These expenses, which must be disclosed in financial statements in accordance with GAAP standards, can impact a company’s financial performance in a given accounting period. Proforma earnings exclude these extraordinary expenses in order to provide a clearer picture of the company’s financial performance. You can also call proforma earnings core earnings, operating earnings, or ongoing earnings.
A company’s earnings are a key measure of its financial performance. Creditors and investors examine a company’s earnings to evaluate its financial performance when deciding whether or not to lend to or invest in the company. Compare current period earnings to prior period earnings of the same company to gauge progress over time. Or compare current period earnings to industry peers and competitors to assess the company’s competitive position in the marketplace.
The SEC requires publicly traded companies to report net income and operating income in financial statements prepared according to GAAP regulations and procedural standards. The investing public scrutinizes these measures of financial performance. However, some businesspeople often consider these income measures to be inaccurate to some degree.
GAAP standards require businesses to include rare, extraordinary, or nonrecurring items in their financial statements. But company executives believe that including these rare, extraordinary, and nonrecurring items in the financial statements obscures the true picture of the company’s financial performance. Therefore, some companies prefer to publish pro forma earnings in their financial statements along with their SEC-required GAAP-standardized earnings.
These pro forma earnings, or hypothetical earnings that exclude items deemed rare, extraordinary, or nonrecurring by the individuals preparing the pro forma financial statements, are considered to provide a clearer and more accurate picture of the company’s financial performance for the relevant accounting period. For example, when prepared in accordance with GAAP regulations, a company may show a loss for a given accounting period. However, during that same period, a company can show a profit in its pro forma earnings.
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