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Financial statement reporting
1-What information can the pro-forma earnings number provide that the GAAP earnings number does not?
Capital markets heavily depend on reliable financial statement reporting to function in a proper effectively and efficiently. Investors rely on information provided in reported financial statements to decide on which investment decisions are worth taking into consideration as well as in evaluating the performance of an organization’s management and company portfolio over time.
Non-GAAP metrics (pro forma) are also financial reporting instruments used by organizations to record and show figures that are not shown in GAAP financial reporting instruments. As much as figures between the two forms of financial reporting may be different, the difference is minimal.
Looking at the financial reporting presented by Facebook, differences in the exchange market rates are not presented in the GAAP figures as well as losses or profits realized from the sale of capital items (Facebook).
2-What are the potential advantages and disadvantages of using pro-forma earnings to assess a firm’s performance?
Pro forma statements exclude some of an organization’s income revenues from financial statements. These include items which include balance sheet items which have to be reported in conventional GAAP financial reporting instruments. Most of the items excluded include non-cash items. For example, restructuring expenditures, asset depreciation and amortization of intangible items are not included in GAAP reports. Pro forma statements may include items regarding accrued profits or losses from the sale of an organization’s assets, external market changes on investments or financial derivatives that an organization to hold onto until maturity.
Financial managers often favor non-GAAP metrics as it is believed that the exclusion of some of the items offers a more realistic approach towards measuring and evaluating an organization’s performance for a given financial reporting period.
A major disadvantage of non GAAP metrics is that they are often abused by financial managers to overstate earning made thus misleading investors in decision making processes.
3-How does Facebook’s performance look under GAAP and pro-forma?
One notable feature with non-GAAP earnings is that they tend to be much higher than GAAP earnings. This is because of the additional items added to earnings in pro forma earnings reporting. The difference is not as big as one may believe it to be as some of the items are recorded in the company’s balance sheet. However the GAAP reports show a loss of 157 million dollars while the pro forma earnings show profits of nearly 300 million dollars (Facebook). This is a huge difference and can mislead a poorly informed investor.
Facebook. Facebook Second Quarter 2012 Earnings Conference Call. 2012.
Facebook. Quarterly Earnings Slides. 2012 .