SEC backs reform of pro forma rule

NEW YORK: The Securities and Exchange Commission proposed a rule change last week that would regulate the way companies present their financials to investors via their quarterly earnings releases.

NEW YORK: The Securities and Exchange Commission proposed a rule change last week that would regulate the way companies present their financials to investors via their quarterly earnings releases.

The rule is the first attempt by the SEC to address the practice of presenting shareholders with so-called "pro forma" financials in earnings releases.

It is an issue that continues to be a hot button in the IR space.

Pro-forma results are profit figures that exclude certain expenses, and do not conform to the nationally recognized accounting standard called the "generally accepted accounting principles," or GAAP. While considered by many to be an acceptable accounting convention for companies enduring large one-time costs, critics have argued that pro forma has become overused and abused by some corners of corporate America in recent years.

Under the proposed rule, if companies choose to present pro-forma results, they must clearly explain how they were derived from the original GAAP number. The rule also states that pro-forma results should not be used in a "misleading" manner.

"If you are a company that releases financial information that departs from the GAAP standard, you have to show exactly how it is different," said SEC spokesman John Nester.

The proposed rule change is a step in a new direction for the SEC, which has typically not regulated the content of earnings releases outside of cases involving either blatant fraud or misrepresentation.

Nevertheless, the SEC is compelled to adopt a rule change on the pro-forma front, as the corporate-reform legislation passed this summer by Congress requires that the SEC address the issue. Under the reform act, know as Sarbanes-Oxley, the SEC must have a new rule on pro forma in place no later than January 26, 2003.

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