Pro forma

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The term pro forma, Latin for "as a matter of form" or "for the sake of form", is a term applied to practices or documents that are done as a pure formality, perfunctorily, or seek to satisfy the minimum requirements or to conform to a convention or doctrine. It has different meanings in different fields.

Contents

Accounting

The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" 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.

There was a boom in the reporting of pro forma results in the USA 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 US GAAP accounting showed. The U.S. Securities and Exchange Commission requires publicly traded companies in the United States to report US GAAP-based financial results, and has cautioned companies that using pro forma results to obscure US GAAP results would be considered fraud if used to mislead investors.

Business

Financial statements

In business, pro forma financial statements are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity.[1] The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements.[2] For example, when a transaction with a material effect on a company's financial condition is contemplated, the Finance Department will prepare, for management and Board review, a business plan containing pro forma financial statements demonstrating the expected effect of the proposed transaction on the company's financial viability. Lenders and investors will require such statements to structure or confirm compliance with debt covenants such as debt service reserve coverage and debt to equity ratios. Similarly, when a new corporation is envisioned, its founders will prepare pro forma financial statements for the information of prospective investors. Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained.

Invoices

In trade transactions, a pro forma 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. Simply, a 'Proforma Invoice' is a Confirmed Purchase Order where buyer and Supplier agree on the Product Detail and cost to be shipped to buyer. A sales quote is prepared in the form of a pro forma invoice which is different from a commercial invoice. 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 may change in advance of the final sale.

A pro forma invoice can also be used for shipments containing items that are not being bought or sold, such as gifts, samples and personal belongings, whereas a Commercial Invoice is used when the commodities shipped are being bought or sold. [3]

Banks usually prefer a pro forma invoice to a quotation for establishment of a letter of credit or for advance payment by the importer through his bank.

In some countries, customs may accept a pro forma invoice (generated by the importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs. The U.S. Customs and Border Protection, for example, uses pro forma invoices to assess duty and examine goods, but the importer on record 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.

Law

In law, pro forma court rulings are intended merely to facilitate the legal process (to move matters along).

Pro forma audiences are used to obey a formal demand. For example, one pro forma audience may be heard for a judge to order the production of a certain proof or to schedule another date.

Engineering

In engineering, pro forma drawings are used to facilitate the drawing release of imaginary pieces.

Government

Commonwealth system

In certain Commonwealth nations with a Westminster system, such as the United Kingdom, Canada, 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. They symbolize the authority of the parliament to discuss matters other than those specified by the head of state, for which ostensibly parliament was summoned. After first reading, the bill is never considered further. The pro forma bill was first introduced in the British House of Commons in 1558.[4]

In the Parliament of the United Kingdom, the equivalents are the Outlawries Bill in the House of Commons and the Select Vestries Bill in the House of Lords. In the Parliament of Canada, such bills are titled Bill C-1, An Act respecting the Administration of Oaths of Office, and Bill S-1, An Act relating to Railways in the Canadian House of Commons and Canadian Senate, respectively. In the Parliament of Australia and the parliaments of the Australian states and territories, the pro forma bills consist only of a short title, and do not proceed beyond the first reading stage.

United States

In the United States federal government, either house of the Congress (the House of Representatives or the Senate) can hold a pro forma session at which no formal business is expected to be conducted.[5] This is usually to fulfill the obligation under the Constitution "that neither chamber can adjourn for more than three days without the consent of the other."[6] Pro forma sessions can also be used to prevent the President pocket-vetoing bills, or calling the Congress into special session.[7] They have also been used to prevent presidents from making recess appointments. However, in 2012, President Barack Obama made four appointments during a pro forma session,[8] calling the practice of blocking recess appointments into question.[9][dead link]

Similar practices exist in the state legislatures, and for similar reasons; for example, in Minnesota, legislative bodies have the same every-three-days meeting requirement that Congress has. Pro forma sessions are held to meet this requirement.[10]

Pakistan

In Pakistan, the term is only used in educational communities and not in government.

International Trade

A pro forma invoice is much the same as a commercial invoice which, when used in international trade, represents the details of an international sale to customs authorities. A pro forma invoice is presented in the place of a commercial invoice when there is no sale between the sender and the importer (for example, in the case of an RMA for replacement goods), or if the terms of the sale between the seller and the buyer are such that a commercial invoice is not yet available at the time of the international shipment. A pro forma invoice is required to state the same facts that the commercial invoice would and the content is prescribed by the governments who are a party to the transaction.

See also

References