[Federal Register Volume 66, Number 237 (Monday, December 10, 2001)]
[Notices]
[Pages 63731-63732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30414]


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SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-8039, 34-45124, FR-59]


Cautionary Advice Regarding the Use of ``Pro Forma'' Financial 
Information in Earnings Releases

AGENCY: Securities and Exchange Commission.

SUMMARY: The Securities and Exchange Commission is issuing a statement 
regarding the use by public companies of ``pro forma'' financial 
information in earnings releases.

FOR FURTHER INFORMATION CONTACT: John M. Morrissey, Deputy Chief 
Accountant,

[[Page 63732]]

at 202-942-4400, or Paula Dubberly, Chief Counsel of the Division of 
Corporation Finance, at 202-942-2900.

SUPPLEMENTARY INFORMATION: As we approach year end, we believe it is 
appropriate to sound a warning to public companies and other 
registrants who present to the public their earnings and results of 
operations on the basis of methodologies other than Generally Accepted 
Accounting Principles (``GAAP''). This presentation in an earnings 
release is often referred to as ``pro forma'' financial information. In 
this context, that term has no defined meaning and no uniform 
characteristics. We wish to caution public companies on their use of 
this ``pro forma'' financial information and to alert investors to the 
potential dangers of such information.
    ``Pro forma'' financial information can serve useful purposes. 
Public companies may quite appropriately wish to focus investors' 
attention on critical components of quarterly or annual financial 
results in order to provide a meaningful comparison to results for the 
same period of prior years or to emphasize the results of core 
operations. To a large extent, this has been the intended function of 
disclosures in a company's Management's Discussion and Analysis section 
of its reports. There is no prohibition preventing public companies 
from publishing interpretations of their results, or publishing 
summaries of GAAP financial statements.
    Moreover, as part of our commitment to improve the quality, 
timeliness, and accessibility of publicly available financial 
information, we believe that--with appropriate disclosures about their 
limitations--accurate interpretations of results and summaries of GAAP 
financial statements taken as a whole can be quite useful to investors.
    Nonetheless, we are concerned that ``pro forma'' financial 
information, under certain circumstances, can mislead investors if it 
obscures GAAP results. Because this ``pro forma'' financial information 
by its very nature departs from traditional accounting conventions, its 
use can make it hard for investors to compare an issuer's financial 
information with other reporting periods and with other companies.
    For these reasons, we believe it is appropriate to alert public 
companies and their advisors of the following propositions:
    First, the antifraud provisions of the federal securities laws 
apply to a company issuing ``pro forma'' financial information. Because 
``pro forma'' information is information derived by selective editing 
of financial information compiled in accordance with GAAP, companies 
should be particularly mindful of their obligation not to mislead 
investors when using this information.
    Second, a presentation of financial results that is addressed to a 
limited feature of a company's overall financial results (for example, 
earnings before interest, taxes, depreciation, and amortization), or 
that sets forth calculations of financial results on a basis other than 
GAAP, raises particular concerns. Such a statement misleads investors 
when the company does not clearly disclose the basis of its 
presentation. Investors cannot understand, much less compare, this 
``pro forma'' financial information without any indication of the 
principles that underlie its presentation. To inform investors fully, 
companies need to describe accurately the controlling principles. For 
example, when a company purports to announce earnings before ``unusual 
or nonrecurring transactions,'' it should describe the particular 
transactions and the kind of transactions that are omitted and apply 
the methodology described when presenting purportedly comparable 
information about other periods.
    Third, companies must pay attention to the materiality of the 
information that is omitted from a ``pro forma'' presentation. 
Statements about a company's financial results that are literally true 
nonetheless may be misleading if they omit material information. For 
example, investors are likely to be deceived if a company uses a ``pro 
forma'' presentation to recast a loss as if it were a profit, or to 
obscure a material result of GAAP financial statements, without clear 
and comprehensible explanations of the nature and size of the 
omissions.
    Fourth, we commend the earnings press release guidelines jointly 
developed by the Financial Executives International and the National 
Investors Relations Institute and we encourage public companies to 
consider and follow those recommendations before determining whether to 
issue ``pro forma'' results, and before deciding how to structure a 
proposed ``pro forma'' statement. A presentation of financial results 
that is addressed to a limited feature of financial results or that 
sets forth calculations of financial results on a basis other than GAAP 
generally will not be deemed to be misleading merely due to its 
deviation from GAAP if the company in the same public statement 
discloses in plain English how it has deviated from GAAP and the 
amounts of each of those deviations.
    Fifth, as always, and especially in light of the disclosure that we 
expect to see accompanying these presentations, we encourage investors 
to compare any summary or ``pro forma'' financial presentation with the 
results reported on GAAP-based financials by the same company. Read 
before you invest; understand before you commit.
    Companies with questions about the use of ``pro forma'' financial 
presentations in earnings releases are encouraged to call John M. 
Morrissey, Deputy Chief Accountant, at 202-942-4400, or Paula Dubberly, 
Chief Counsel of the Division of Corporation Finance, at 202-942-2900. 
Investors are encouraged to read our investor alert on ``pro forma'' 
financial statements (available at http://www.sec.gov/investor.shtml).

    By the Commission.

    Dated: December 4, 2001.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-30414 Filed 12-7-01; 8:45 am]
BILLING CODE 8010-01-P