The Voluntary Disclosure of Pro Forma Earnings: A U.S.-Canada Comparison

Abstract

This study compares managers' voluntary disclosure of pro forma earnings—an alternative measure to generally accepted accounting principals (GAAP) earnings—in the U.S. and Canada. The results indicate some distinct differences between the two countries in that U.S. managers (1) disclose pro forma earnings more frequently, (2) place greater emphasis on the pro forma earnings number relative to the GAAP earnings figure, and (3) make greater (income-increasing) adjustments from GAAP in calculating pro forma earnings than do their Canadian counterparts. While we find distinct differences in the use of pro forma between the U.S. and Canada, we do not find evidence that it is used for different purposes. Our evidence suggests that in both countries pro forma earnings is used by some corporations to affect users' perceptions of firm performance. Overall, given the differences in managers' use of pro forma, a form of voluntary disclosure, our results suggest caution in moving to a uniform (cross-border) system of financial regulation.

Does the New Conceptual Framework Provide Adequate Concepts for Reporting Relevant Information about Performance?

“…Although evidence is found for the strategic use of alternative performance measures (e.g. Doyle and Soliman, 2002;Bhattacharya et al, 2004;Lougee and Marquardt, 2004;Bowen et al, 2005;Entwistle et al, 2005;Black and Christensen, 2009;Doyle et al, 2013), results suggest that reported alternative performance measures are relevant for investor decisionmaking (e.g. Bhattacharya et al, 2003;Brown and Sivakumar, 2003;Lougee and Marquardt, 2004) and provide incremental information beyond the net income number alone.…”

Post-regulation G findings

“…Common components of non-GAAP adjustments Bhattacharya, Black, Christensen, and Larson (2003), Bhattacharya, Black, Christensen, and Mergenthaler (2004), Bowen, Davis, and Matsumoto (2005), and Entwistle, Feltham, and Mbagwu (2005) identified categories of adjustments from GAAP earnings to derive non-GAAP earnings information. These studies used data from periods prior to the implementation of Reg.…”

“…Three of the categories were used four times in prior studies: depreciation and amortization costs, stock based compensation, and restructuring charges. Bhattacharya et al (2004), Entwistle et al (2005), and Elliott (2006) identified common adjustments to GAAP earnings used by US companies prior to the enactment of Reg. G. Bowen et al (2005) examined the emphasis placed on non-GAAP measures in pre-Reg.…”

“…5 A random sample of 100 companies was drawn from this group, and all 200 year-end press releases (FYE 2002 andFYE 2005) were collected. As in prior research (Bhattacharya et al 2003(Bhattacharya et al , 2004Entwistle et al 2005;Entwistle et al 2006;Marques 2006), we hand-collect original press releases to determine and analyze the usage and calculation of non-GAAP measures. Unlike previously cited studies, we accept the use of any measure that would be regarded as a non-GAAP measure under Reg.…”

Misleading Disclosure of Pro Forma Earnings: An Empirical Examination

“…The existing research, the majority of which is empirical, has examined these two competing disclosure motives for reporting pro forma earnings: to manage investor's perceptions (i.e., to potentially mislead), or to provide value relevant information. Studies reporting evidence consistent with the first motive include Bowen et al (2004), Doyle and Soliman (2002), Entwistle et al (2005), and Lougee and Marquardt (2004). Research supporting pro forma earnings having value relevance includes Bhattacharya et al (2003), Bradshaw and Sloan (2002), Brown and Sivikumar (2003), and Entwistle et al (2004).…”