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Accounting Group May Review Pro Forma Issue

August 22, 2001|From Bloomberg News

The group that sets U.S. accounting standards may take a stand in the debate over so-called pro forma profit reports, which critics say can make evaluation of companies' financial performance difficult for investors.

The Financial Accounting Standards Board on Tuesday proposed adding the issue of pro forma reports, which depart from standard accounting procedures, to its agenda. The proposed project would focus on how information is presented in financial statements.

"Pro forma numbers are all derived from [traditional] financial statements, but they're not consistently done," said Tim Lucas, FASB's director of research and technical activities. "We may try to standardize some aspects of that."

The review also might examine whether standard accounting procedures need changing.

"If there are lots of companies out there that seem to believe the only meaningful way to convey information about their performance is to use these non-standard measures, maybe that tells us that we need to take a look at whether we have the right standardized measures," Lucas said.

In pro forma accounting, companies often omit costs they consider incidental to their primary business, which can inflate their reported earnings. It has been a popular--and growing--practice with Internet and high-tech firms, which say that traditional accounting measures don't let them demonstrate their true profitability.

As many as 300 companies have switched to reporting some type of pro forma earnings, says Thomson Financial/First Call, a Boston- based research firm that tracks profit estimates. They include Cisco Systems Inc., the largest maker of computer-networking equipment, and Procter & Gamble Co., the largest U.S. household- products maker.

The trouble is, "Each company has its own list of things that it wants to subtract," Lucas said. As a result, pro forma numbers are often not comparable from one company to another.

U.S. Rep. Cliff Stearns (R-Fla.), chairman of the House subcommittee on commerce, trade and consumer protection, raised the same issue at a Capitol Hill hearing three weeks ago.

"If every company comes up with its own definitions, the utility of pro forma reporting is diminished for a small investor, as he or she has no frame of reference to compare the pro forma results with," Stearns said.

FASB also may examine how companies should account for intangible assets--such as brand names, customer lists and patent rights--that are generated internally. Often there is little information about intangibles in financial reports, FASB said.

The proposals, which request public comment by Sept. 19, represent only the first step of the standard-setting process.

"We're a long way away from any definitive guidance, that's for sure," said Robert Willens, an analyst with Lehman Bros. Holdings Inc. "Probably years away."

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