Question

QUESTION

1. What is PRO FORMA reporting according to regulation SX of the SEC? How has PRO FORMA reporting been used by corporations over the years? Summarize the arguments for and against this type of reporting.

2. Provide sample earnings announcements and PRO FORMA information release by Proxim and Cisco systems, respectively. Do you believe these disclosures are consistent with the spirit of the SEC regulation or are they corporate abuses of financial disclosure? As a CFO of these companies, what would you have reported in your earnings announcement for the respective period?

3.Do you believe the SEC should permit the type of disclosure shown in Exhibits 1 and 2?

4. What is the usefulness of the PRO FORMA versus GAAP earnings disclosure found in Exhibits 1 and 2 with regards to evaluating:

a. Recent financial performance

b Expectations of future earnings

c. Credibility of Management

d. Quality of earnings

e. Equity valuation

Answer 1

1.Ans:-

Pro forma reporting according to regulation SX of the SEC

• Pro forma reporting is required in circumstances where we need to show how transactions have affected historical financial statements had they occurred at an earlier date.
• There are many typical transactions which require pro forma reporting which may be related on a significant portion of a business.

​Proforma reporting will include

• A proforma balance sheet as of the end of the most recent period, a proforma income statement, a pro forma income statement for the most recent subsequent interim period

Pro forma reporting been used by corporations over the years

• Pro forma earnings figures are different for different corporations.
• Though there are no universal guidelines that companies must follow when reporting pro forma earnings which makes the distinction between pro forma and earnings reported using GAAP is very important.

​
​Summarize the arguments for and against this type of reporting

• Pro forma reporting helps the corporations to formally account for the impact on rvenue or expenses related with historical event.
• On the other part it is considered that despite the positive reasoning behind pro forma statements, there are many ways in which pro forma earnings can be manipulated.
• There are many items which is often left out of this reporting which includes depreciation, goodwill, amortization, restructuring and merger costs.

​2.Ans :-

PROXIM ADJUSTMENTS TOTAL
ASSETS Current Assets:
Cash and cash equivalents = 9,546 + 24,177 = 33,723
Short-term investments = 9,908 + 5,715 = 15,623
Accounts receivable, net = 30,230 + 17,283 = 47,513
Inventories = 21,163 +22,740 945(a) = 44,848
Deferred tax assets = 4,197 = 4,197
Other current assets = 2,371 + 1,328 = 3,699
______________________________________________________________

Total current assets = 77,415 + 71,243 + 945 = 149,603
Property and equipment, net =8,742 + 9,933 = 18,675
Goodwill and other intangibles =39,478 + 26,021 + 174,203(a) = 239,702
Long-term investments and other =3,110 + 2,866 = 5,976
Other long-term assets = 2,840 = 2,840
Deferred tax assets = 3,455 = 3,455

• Post studying the financial report these disclosures seems to be consistent with the spirit of the SEC regulation.

​As a CFO of these companies, what would you have reported in your earnings announcement for the respective period

• The reported figures ar OK. Even as me being a CFO the same figures would have been reported. All the figures are already audited.

3.Ans :-
The SEC should permit the type of disclosure shown in exhibits 1 and 2

• Since the figures are already audited it is believed that SEC should permit this type of disclosure

4.Ans :-

a) Recent financial performance

• Proforma financial performance tell us how much the company made from its ordinary business activities.

b) Expectations of future earnings

• Investors like to view proforma earnings and financial statements to help them determine company growth

c) Credibility of management

• Management are able to show future earnings as well impact from historical impact