Unlike other financial statements, Proforma financial statement is made to highlight a particular incident or event. The proforma financial statement lays stress on projected data or any current change.
Changes may include a prospective reformation in the organizational structure, acquisition, mergers. The Proforma financial statement may also highlight figures (dividends, bonus) announced by the company. One should be very cautious while studying the proforma financial statement.
Information not as per GAAP norms:
Carefulness is suggested because the figures depicted may not be in accordance with the GAAP or the generally accepted accounting principles. There are instances, when the figures greatly differ from the numbers obtained by generally accepted accounting principles.
The proforma financial statement has been accepted and is steadily on the rise. However, its authenticity has been questioned time and again. The proforma financial report furnishes figures and statistical data, which are reckoned to be manipulated. This in turn confuses shareholders, employees, bond holders, vendors. These reports may contain incorrect data or figures, and cannot be relied up on. The reason being the non compliance of the generally accepted accounting principles or GAAP.
Proforma financial statement is used in the following manner:
It is obligatory for all public companies to work out financial reports as per GAAP norms. If the management of a company feels that the information contained in the financial statement is incorrect and does not depict the actual economic scenario of the company, the chief operating officer may as well create a proforma financial statement for the shareholders. It means, the information contained in the newly created modified report is what the management feels and is not authenticated by any professional body.
Many a times, this kind of financial statement is used by companies to inflate or deflate losses, profits and statistical data.
Ways to counteract such practices:
Investors ought to keep track of what is going on in the market. If it is found that a particular company publishes proforma financial statement very often, investing in bonds, equities and shares of these companies should to be avoided.
One can also get the proforma financial statement verified by a professional to check for any misappropriations.
Last Updated on : 26th June 2013