What It Means and How To Create Pro Forma Financial Statements

From the Latin meaning “for the sake of form,” pro forma generally means something done for the sake of appearances, or formality. In finance, pro forma statements are projected, hypothetical views that reflect “what-if” scenarios.

For example, when VF Corporation (VFC), the company behind such brands as Vans and JanSport, sold its Supreme streetwear brand for $1.5 billion in 2024, it released two sets of numbers: standard accounting figures and “pro forma” results. It wanted to show investors two different pictures: what the company looked like before the sale and what it would look like after. These “before and after” snapshots help investors understand how major business changes affect a company’s bottom line. For VF Corp, this included details on how selling Supreme would affect everything from its cash holdings to its future earnings.

Companies use pro forma financial statements to factor out one-time costs, incorporate planned changes, or show the impact of major decisions. However, these statements rely on assumptions and estimates, and publicly traded companies are legally obligated to provide clarifying context and not mislead investors.

Types of Pro Forma Financial Statements

When companies prepare pro forma statements, they’re essentially creating financial forecasts based on different scenarios. Here are the main types you’ll see:

Budget Planning Documents

Just as you might create a household budget by looking at last year’s expenses and planning for changes, companies create pro forma budgets to map out their financial future. For example, a retail chain might use its previous year’s sales data plus projections for new store openings to create next year’s budget. These documents help management allocate resources and set financial goals.

Similarly, pro forma statements are used to help executives evaluate potential business decisions. For example, a manufacturer might create pro forma statements to compare the financial impact of building a new factory versus outsourcing production.

Projected Income Statements

These statements show what a company expects to earn in upcoming quarters. For instance, when Apple Inc. (AAPL) releases its quarterly earnings, it often includes pro forma projections for the next quarter, factoring in expected iPhone sales and potential supply chain costs.

Transaction Impact Analysis

When companies merge or acquire another, they create pro forma statements to show the financial impact. For example, when Microsoft Corporation (MSFT) acquired Activision Blizzard in 2023, it created pro forma statements showing how combining the two companies would affect revenues, costs, and profits.

Companies occasionally create pro forma versions of past financial statements that leave out unusual events to show what they think the picture would have looked like otherwise. For example, if a retailer had a one-time insurance payout from storm damage, it might present pro forma earnings without this payment to show its typical operating performance.

Taking Pro Forma Statements With a Grain of Salt

While pro forma statements can be clarifying, investors need to understand their significant limitations. Like weather forecasts, they’re helpful for planning, but not guarantees of what will happen—especially if those projections use rosy financial assumptions.

Lack of Standardized Rules

Unlike regular financial statements that follow generally applicable accounting principles (GAAP), companies have considerable flexibility in preparing these numbers. For example, one company might exclude restructuring costs when reporting pro forma earnings, while another includes them, making comparisons difficult.

The Potential for Fraud

Companies often use pro forma statements to present their finances in the most favorable light. During the late 1990s dot-com boom, many internet companies used pro forma results to transform losses into apparent profits by excluding significant costs. For instance, a tech company might have shown pro forma profits by leaving out stock-based compensation expenses, even though these represent real costs to shareholders.

Regulatory Oversight

After the dot-com bubble burst, the SEC tightened rules to prevent misleading pro forma reporting—its first case after doing so, though, wasn’t against a tech company but Trump Hotels & Casino Resorts Inc.

Companies must now provide standard GAAP results alongside any pro forma figures and explain all adjustments made. The SEC can impose hefty fines on companies that mislead investors with pro forma numbers, yet it often hasn’t—in the Trump Hotels case, as with many to follow, it let the company off with a warning.

Creating a Pro Forma Statement

Creating pro forma statements follows a logical process. Let’s look at how VF Corporation created its pro forma statements when selling its Supreme brand (see the table below):

Step 1: Establish the Base Numbers

Start with your current financial statements. VF Corporation began with its existing balance sheet, showing $11.5 billion in total assets. These baseline numbers provide the foundation for your projections.

Step 2: Identify Major Changes

List all significant changes that will affect the financials. In VF’s case, they needed to do the following:

• Add the $1.5 billion sale proceeds
• Remove Supreme’s assets and revenues
• Account for debt repayment plans
• Factor in transaction costs

Step 3: Calculate Financial Impact

Make detailed adjustments to show the effects of these changes. Thus, the pro forma filing does the following:

• Adds $1.47 billion in net cash proceeds
• Subtracts Supreme’s $138 million in quarterly revenue
• Reduces operating expenses by $255 million
• Adjusted the tax implications

Step 4: Prepare Multiple Scenarios

Create different versions based on various assumptions. VF’s full filings do the following:

• Show balance sheet changes as of the sale date
• Give income statements for several past periods without Supreme
• Offer projections for future periods

GAAP vs. Pro Forma

GAAP requires companies to include all costs of doing business, even one-time expenses that may not recur. In pro forma statements, meanwhile, companies typically leave out certain items they consider “nonrecurring” or “extraordinary.”

Here are key items that GAAP requires companies to include, which are often excluded in pro forma statements:

• Restructuring costs when closing facilities or laying off workers
• Stock-based compensation expenses for employee stock options
• Depreciation and amortization of assets
• One-time legal settlement costs
• Integration costs following mergers and acquisitions
• Write-downs of impaired assets
• Real estate losses from facility closures

For example, if a company spends $50 million restructuring its business, GAAP rules require this cost to be included in earnings. However, in its pro forma statements, the company might exclude this expense, arguing it’s a one-time event that doesn’t reflect ongoing business performance.

While this might give a clearer picture of regular operations, it could also make the company’s financial health appear better than it is. From here, too, it’s also pretty apparent how pro forma statements can be used to shift enough into supposed “one-time costs” so as to be misleading—which is against the law.

The Bottom Line

Pro forma financial statements serve to show how a company’s major changes, like selling off a brand or merging with another company, might affect its bottom line. While these projections can be valuable and clarifying, investors should treat them as educated guesses rather than guarantees.

Always compare pro forma numbers with standard GAAP financial statements, which must follow strict accounting rules.