Pro forma financial statements allow businesses and stakeholders to see what historical results would have looked like if a specific transaction or event had occurred at an earlier date. Unlike forecasts that predict the future, a pro forma compilation reconstructs the past under a different set of assumptions, making it an essential tool for evaluating mergers, divestitures, and changes in capitalization. Understanding how pro forma financial statements work and what the latest professional standards require is critical for any company considering a significant financial decision.
What Are Pro Forma Financial Statements?
Pro forma financial statements are modified versions of a company’s historical financials that incorporate hypothetical adjustments. These adjustments reflect a specific transaction or event, such as a business combination, the disposition of a business line, or a change in capitalization structure, presented as if it had already taken place at an earlier date.
The purpose is not to predict the future. Instead, pro forma financial information answers a retrospective question: “What would our financial position and results have looked like if this event had happened sooner?” This distinction matters because it separates pro forma compilations from prospective financial presentations like forecasts and projections, which deal with expected future outcomes.
Public companies registered with the Securities and Exchange Commission face their own pro forma rules under Regulation S-X. Article 11 of that regulation, codified at 17 CFR 210.11-01, specifies when registrants must file pro forma financial information and how those presentations must be structured for significant acquisitions and dispositions. Privately held companies are not bound by Regulation S-X, but the underlying concept is the same: show users a clear, adjusted picture of how a transaction reshapes the numbers.
Businesses use pro forma financial statements in several practical scenarios. A company acquiring another business may prepare pro forma statements to show combined revenues and expenses as if the acquisition had closed at the start of the fiscal year. A firm divesting a product line might present pro forma results excluding that segment’s contributions. Investors, lenders, and boards of directors rely on this information to assess the financial impact of strategic decisions before committing resources.
How SSARS 22 Changed Pro Forma Compilation Standards
The American Institute of Certified Public Accountants (AICPA) issued SSARS 22 to clarify the professional standards that govern pro forma compilations. This guidance, part of the Statements on Standards for Accounting and Review Services, is effective for compilation reports on pro forma financial information dated on or after May 1, 2017, and it established specific requirements for both accountants and their clients.
SSARS 22 applies whenever an accountant is engaged to perform a compilation engagement on pro forma financial information. The standard recognizes that a pro forma compilation can be undertaken as a standalone engagement or performed alongside a compilation, review, or audit of historical financial statements. This flexibility means companies do not need to engage a separate firm for the pro forma work, though the compilation must still meet every one of the standard’s requirements regardless of how the engagement is structured.
Pairing a pro forma compilation with broader audit and assurance services often makes practical sense, because the historical statements the pro forma rests on may already be undergoing an audit or review. Coordinating both engagements with a single firm can shorten timelines and reduce duplicated requests for supporting records.
One of the key contributions of SSARS 22 is the formal framework it provides for documentation and disclosure. Prior to this guidance, practices around pro forma compilations varied. The standard now ensures consistency in how these engagements are performed and reported, which benefits both the preparers and the users of the financial information.
What Management Must Provide for a Pro Forma Compilation
Under SSARS 22, management carries specific responsibilities when a CPA performs a pro forma compilation. The company’s leadership must provide written acknowledgment accepting full responsibility for the preparation and fair presentation of the pro forma financial information in accordance with the applicable financial reporting framework.
Beyond that written acknowledgment, any document containing pro forma financial information must include, or make readily available, several supporting items:
- The company’s financial statements for the most recent year. These serve as the historical baseline from which pro forma adjustments are made.
- A summary of significant assumptions. Every pro forma adjustment rests on assumptions, and readers need to understand what those assumptions are to evaluate the information properly.
- Interim period historical financial information, if interim period pro forma financial information is presented. This ensures that shorter reporting periods also have a verifiable historical foundation.
- Relevant historical financial information for significant constituent parts of a combined entity, in the case of a business combination. When two or more businesses are merged in a pro forma presentation, the historical data for each part must be accessible.
The standard also defines what “readily available” means in practice. Financial statements and historical interim information qualify as readily available if a third party can obtain them without any further action by the entity. For example, interim financial data posted on a company’s website would meet this threshold. Information that is only available upon request does not qualify, because the distinction turns on passive accessibility rather than willingness to share.
Requirements for the Underlying Historical Financial Statements
Pro forma financial statements cannot be built on unverified data. SSARS 22 requires that the underlying historical financial statements have been compiled, reviewed, or audited before they serve as the foundation for pro forma adjustments. This requirement protects the integrity of the pro forma presentation by ensuring that the starting point, the historical numbers, has already undergone a recognized level of professional scrutiny.
This means a company cannot simply hand a CPA a set of internally prepared, unreviewed financials and ask for a pro forma compilation. The historical statements must carry at least a compilation-level engagement, which confirms that the accountant has applied professional standards in presenting the information, even though a compilation does not provide assurance on the accuracy of the data.
Additionally, SSARS 22 requires management to obtain the CPA’s permission before including the compilation report in any document that references the pro forma financial information and states that a compilation was performed. This provision gives the accountant control over the context in which their work product appears, reducing the risk that a compilation report is used in misleading or incomplete presentations.
When Businesses Should Consider Pro Forma Compilations
Pro forma compilations are most valuable during periods of significant change. Any transaction that materially alters a company’s financial structure is a candidate for pro forma analysis. Common triggers include:
- Mergers and acquisitions: Showing combined financial results as if the deal had already closed helps acquirers, target companies, and financing parties evaluate the transaction’s financial logic.
- Divestitures and spin-offs: Presenting financials without the divested segment clarifies the ongoing entity’s standalone performance.
- Recapitalizations and debt restructurings: Pro forma adjustments can illustrate how a new capital structure would have affected interest expense, equity, and cash flow in prior periods.
- Significant asset purchases or disposals: Large-scale asset transactions can shift balance sheet composition materially, and pro forma statements quantify that shift.
Engaging a CPA early in the process is advisable. Because pro forma financial information must rest on compiled, reviewed, or audited historical statements, the preparation timeline depends on the state of the company’s existing financials. Companies with up-to-date, professionally prepared statements can move faster. Those without may need to complete a historical engagement first, which is one reason ongoing client accounting services pay off when a transaction appears on the horizon.
Pro forma analysis frequently overlaps with deal evaluation more broadly. A buyer weighing an acquisition will often combine a pro forma compilation with transaction advisory services, using the adjusted statements to test deal economics, model financing structures, and support discussions with lenders. The pro forma compilation supplies a standards-based presentation, while the advisory work interprets what those adjusted figures mean for the transaction.
It is important to set expectations about the level of assurance a pro forma compilation provides. A compilation does not include the inquiry, analytical procedures, or testing found in a review or audit, so the accountant expresses no opinion or conclusion on whether the pro forma information is free of material misstatement. The value lies in a CPA presenting the adjusted information in conformity with professional standards and disclosing the assumptions behind it, which gives readers a consistent, transparent basis for their own judgment.
Frequently Asked Questions
What is a pro forma compilation?
A pro forma compilation is an engagement in which a CPA presents historical financial statements adjusted to reflect a hypothetical transaction or event as if it had occurred at an earlier date. It follows the standards established under SSARS 22 and requires management to take responsibility for the pro forma financial information presented.
How do pro forma financial statements differ from forecasts?
Pro forma financial statements look backward, adjusting historical results to show the effect of a past or proposed transaction. Forecasts and projections look forward and estimate expected future results. A pro forma compilation answers “what would have happened,” while a forecast answers “what might happen.”
What is SSARS 22 and why does it matter?
SSARS 22 is a statement issued by the AICPA that governs how accountants perform compilation engagements on pro forma financial information. It took effect for reports dated on or after May 1, 2017, and it standardized the documentation, disclosure, and management responsibility requirements for these engagements.
What does “readily available” mean under SSARS 22?
Under SSARS 22, financial information is considered readily available if a third party can access it without requesting it from the entity. For example, financial data published on a company’s website qualifies. Information that requires a specific request does not meet the standard.
Can pro forma financial statements be based on unaudited financials?
The underlying historical financial statements must have been at least compiled by a CPA under professional standards. They can also be reviewed or audited. Internally prepared financials that have not undergone any professional engagement cannot serve as the basis for a pro forma compilation.
When should a company prepare pro forma financial statements?
Companies typically prepare pro forma financial statements during mergers, acquisitions, divestitures, recapitalizations, or other transactions that significantly change their financial structure. The statements help stakeholders understand how the transaction would have affected historical results.
