When firms like General Electric announce total assets, they sometimes give separate figures to the Federal Reserve and their own investors. The "pro forma" calculations given to investors are often meant to provide a better representation of the company - or so they claim.
In a Wall Street Journal article about these practices, J.M. Tull School of Accounting professor Ben Whipple, who has studied the issue, explained the logic behind reporting differing sets of figures to different audiences.
In the best case, pro forma metrics can reveal details that might be lost in official figures, Whipple said. Consumer products companies, for instance, regularly report sales excluding currency effects to show the strength of underlying demand. But the problem for investors is that, by definition, there aren’t any rules for coming up with pro forma data.
“The discretionary nature of non-GAAP reporting might allow some firms to simply use metrics that portray firm performance in a more favorable light and that are not necessarily better measures of performance,” Whipple said.
The full article is available online.