Informative or misleading?

A recent Canadian study examined the reporting of pro forma earnings by TSX S&P 300 firms. The objectives of the study included identifying the extent to which Canadian firms used pro forma earnings, the types of adjustments made to GAAP earnings, and whether the pro forma earnings were given precedence (i.e., highlighted) in the earnings press release. The Canadian firms' reported pro forma measures were derived using three main types of adjustments to GAAP earnings (typically income-increasing adjustments). The most common (33%) related to adjusting GAAP earnings for costs related to major business reorganization activities including restructurings, mergers or acquisitions. This was followed by adjustments for what firms described as onetime or non-recurring items (28%) such as gains or losses from the settlement of lawsuits. The third most common adjustments are accounting-motivated (19%). This includes adjusting GAAP earnings for various non-cash expenses (e.g., amortization), or for actual changes to accounting standards.