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09Class6 - Pro Forma Earnings A Background/Concept Some...

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1 Pro Forma Earnings A. Background/Concept Some items in Income from Continuing Operations such as restructuring changes and write downs may be transient while most items in this category are recurring. The FASB has been criticized for not being more helpful, and in fact has a project entitled, Financial Reporting Performance by Enterprises. One response to improve on GAAP is the income statement we studied at the beginning of class today which includes EBITDA and EBIT. Another response is Pro Forma earnings which began appearing in practice around 1990.
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2 Pro Forma earnings represent an attempt to identify the (recurring, continuing, persistent) portion of a firm’s earnings. Pro forma earnings begin with Income from Continuing Operations but then exclude a number of items considered to be one-time such Restructuring charges, Merger- Related charges, In-Process R and D (special type of merger related charge), Write-Downs of assets, Gains and losses of sale of assets. Like earnings, Pro forma earnings must be on an after-tax bases.
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