Pro forma
From Wikipedia, the free encyclopedia
The term pro forma (occasionally written proforma) comes from a Latin phrase meaning, "as a matter of form". Its meaning depends on the context in which it is used.
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[edit] General
Doing something in a pro forma manner is to do it in a perfunctory way to satisfy the minimum requirements or to conform to a convention or doctrine.
Sometimes a pro forma, or proforma, can refer to a partially completed document, designed by one person to be fully completed and returned by a number of others. The aim is to standardise the information returned to the designer. Usually, a pro forma would contain pointers guiding a user in its completion.
A price quotation prepared in the form of an invoice, a pro forma invoice, is different from commercial invoices. It is used to create a sale and is sent in advance of the commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price might change in advance of the final sale.
For establishment of LC or for advance payment by the importer through his bank, usually banks prefer a pro forma invoice to a quotation.
In some countries, the US for example, Customs may accept a pro forma invoice (generated by the US importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents (entry - the process of filing documents with US Customs at the port of entry to get goods released from Customs). U.S. Customs may use a pro forma invoice to assess duty and examine goods. The importer on record however, is required to post a bond and produce a commercial invoice within 120 days from the date of entry. If the required commercial invoice is needed for statistical purposes the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer.
[edit] Business
A pro forma document is provided in advance of an actual transaction. Such a document serves as a model for the actual documents of the transaction. For example, when a new corporation is envisioned, its founders may prepare a business plan containing pro forma financial statements, such as projected cash flows and income statements. In addition, pro forma operating figures or profit and/or loss figures may be preferred or even demanded by investors when the actual figures are known to be inaccurate because of sloppy or suspected falsified business accounting practices. Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained.
In trade transactions, a pro forma (or proforma) invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices and terms. It is used to declare the value of the trade. It is not a true invoice, because it is not used to record accounts receivable for the seller and accounts payable for the buyer.
[edit] Legal proceedings
Pro forma court rulings are intended merely to facilitate the legal process (to move matters along).
[edit] Accounting
Some companies report pro forma earnings, in addition to actual earnings calculated under the Generally Accepted Accounting Principles ("GAAP"), in their quarterly and yearly financial reports.
The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" (unusual and nonrecurring expenses) when stating how much money the company actually made. Expenses often excluded from pro forma results include company restructuring costs, a decline in the value of the company's investments, or other accounting charges, such as adjusting the current balance sheet to fix faulty accounting practices in previous years.
Companies that report a pro forma income statement or balance sheet usually do so because, they say, the unusual events being excluded really were unusual, so the GAAP financial reports required by law are misleading to investors and potential investors. The crisis that happened this last quarter is not going to recur in future quarters, so the pro forma results can be used by investors to forecast what a "regular" quarter might portend in the future.
Critics note that pro forma numbers always look more profitable than GAAP numbers, and state that many companies intentionally use pro forma results in order to mislead investors into believing the company is in much better financial shape than it is; that there is no defined meaning or accounting standard for "pro forma" and that it is therefore impossible to make an "apples to apples" comparison between companies with pro forma results in the way that GAAP accounting allows; and that most "unusual events" reported as such are part of the ordinary course of business and should be reported as such. Most companies in most capitalist countries restructure themselves often, for example, so, it is argued, it is dishonest to claim that restructuring charges are unusual, one-time events that investors should not anticipate in the future.
There was a boom in the reporting of pro forma results starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the GAAP accounting showed. The U.S. Securities and Exchange Commission requires publicly traded companies in the United States to report GAAP-based financial results, and has cautioned companies that using pro forma results to obscure GAAP results would be considered fraud if used to mislead investors.
[edit] Legislation
In certain Commonwealth nations, such as Canada the United Kingdom and Australia, pro forma bills are introduced immediately before consideration of the Speech from the Throne. Pro forma bills are incomplete pieces of legislation and undergo only the first reading stage, in order to symbolize the authority of the Houses of Parliament to discuss matters other than those specified in the reasons for Parliament having been summoned. After first reading, the bill is never considered further. In Canada, such bills are titled Bill C-1, An Act respecting the Administration of Oaths of Office in the Commons and Bill S-1, An Act relating to Railways in the Senate; in the UK, the equivalents are the Outlawries Bill in the Commons and the Select Vestries Bill in the Lords. In Australia, and the Australian States, the pro forma bills consist only of a short title, and do not proceed beyond the first reading stage.
In the United States a "pro forma" session of the Senate can be held, in which no formal business is conducted. This is usually to fulfill the "constitutional obligation that neither chamber can adjourn for more than three days without the consent of the other."[1] A pro forma session can also be used during Senate recesses to block recess appointments by the Executive Branch.
