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Release No. 33-8039 Release No. 34-45124 Financial Reporting Rel. No. 59 66 Fed. Reg. 63731 - Dec. 10, 2001
ACTION: Cautionary Advice Regarding the Use of "Pro Forma" Financial
Information in Earnings Releases
SUMMARY: The Securities and Exchange Commission is issuing a
statement regarding the use by public companies of "pro forma" financial
information in earnings releases.
FOR FURTHER INFORMATION CONTACT: John M. Morrissey, Deputy Chief
Accountant, at 202-942-4400, or Paula Dubberly, Chief Counsel of the
Division of Corporation Finance, at 202-942-2900.
SUPPLEMENTARY INFORMATION:
As we approach year end, we believe it is appropriate to sound a
warning to public companies and other registrants who present to the
public their earnings and results of operations on the basis of
methodologies other than Generally Accepted Accounting Principles ("GAAP").
This presentation in an earnings release is often referred to as "pro
forma" financial information. In this context, that term has no defined
meaning and no uniform characteristics. We wish to caution public
companies on their use of this "pro forma" financial information and to
alert investors to the potential dangers of such information.
"Pro forma" financial information can serve useful purposes. Public
companies may quite appropriately wish to focus investors' attention on
critical components of quarterly or annual financial results in order to
provide a meaningful comparison to results for the same period of prior
years or to emphasize the results of core operations. To a large extent,
this has been the intended function of disclosures in a company's
Management's Discussion and Analysis section of its reports. There is no
prohibition preventing public companies from publishing interpretations
of their results, or publishing summaries of GAAP financial statements.
Moreover, as part of our commitment to improve the quality,
timeliness, and accessibility of publicly available financial
information, we believe that - with appropriate disclosures about their
limitations - accurate interpretations of results and summaries of GAAP
financial statements taken as a whole can be quite useful to investors.
Nonetheless, we are concerned that "pro forma" financial information,
under certain circumstances, can mislead investors if it obscures GAAP
results. Because this "pro forma" financial information by its very
nature departs from traditional accounting conventions, its use can make
it hard for investors to compare an issuer's financial information with
other reporting periods and with other companies.
For these reasons, we believe it is appropriate to alert public
companies and their advisors of the following propositions:
First, the antifraud provisions of the federal securities laws apply
to a company issuing "pro forma" financial information. Because "pro
forma" information is information derived by selective editing of
financial information compiled in accordance with GAAP, companies should
be particularly mindful of their obligation not to mislead investors
when using this information.
Second, a presentation of financial results that is addressed to a
limited feature of a company's overall financial results (for example,
earnings before interest, taxes, depreciation, and amortization), or
that sets forth calculations of financial results on a basis other than
GAAP, raises particular concerns. Such a statement misleads investors
when the company does not clearly disclose the basis of its
presentation. Investors cannot understand, much less compare, this "pro
forma" financial information without any indication of the principles
that underlie its presentation. To inform investors fully, companies
need to describe accurately the controlling principles. For example,
when a company purports to announce earnings before "unusual or
nonrecurring transactions," it should describe the particular
transactions and the kind of transactions that are omitted and apply the
methodology described when presenting purportedly comparable information
about other periods.
Third, companies must pay attention to the materiality of the
information that is omitted from a "pro forma" presentation. Statements
about a company's financial results that are literally true nonetheless
may be misleading if they omit material information. For example,
investors are likely to be deceived if a company uses a "pro forma"
presentation to recast a loss as if it were a profit, or to obscure a
material result of GAAP financial statements, without clear and
comprehensible explanations of the nature and size of the omissions.
Fourth, we commend the earnings press release guidelines jointly
developed by the Financial Executives International and the National
Investors Relations Institute and we encourage public companies to
consider and follow those recommendations before determining whether to
issue "pro forma" results, and before deciding how to structure a
proposed "pro forma" statement. A presentation of financial results that
is addressed to a limited feature of financial results or that sets
forth calculations of financial results on a basis other than GAAP
generally will not be deemed to be misleading merely due to its
deviation from GAAP if the company in the same public statement
discloses in plain English how it has deviated from GAAP and the amounts
of each of those deviations.
Fifth, as always, and especially in light of the disclosure that we
expect to see accompanying these presentations, we encourage investors
to compare any summary or "pro forma" financial presentation with the
results reported on GAAP-based financials by the same company. Read
before you invest; understand before you commit.
Companies with questions about the use of "pro forma" financial
presentations in earnings releases are encouraged to call John M.
Morrissey, Deputy Chief Accountant, at 202-942-4400, or Paula Dubberly,
Chief Counsel of the Division of Corporation Finance, at 202-942-2900.
Investors are encouraged to read our
investor
alert on "pro forma" financial statements (available at
http://www.sec.gov/investor.shtml).
By the Commission.
Jonathan G. Katz
Secretary
Dated: December 4, 2001
http://www.sec.gov/rules/other/33-8039.htm
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