On February' 9, 2002, an article in The Economist stated that the high-tech industry' seems to be inventing new accounting documents and rules. Non-standard “pro-forma” accounting is popular. Earnings are not calculated according to GAAP, but by creating unique formulas that exclude “special expenses.” This tends to improve the bottom line.
In January 2002, Amazon announced three different kinds of profit: $5m net profit in the previous quarter, calculated under GAAP; $59m “pro-forma operating profit;” and $35m “pro-forma net profit.” “Pro-forma operating profit" excludes stock option expense, amortization of goodwill, and restructuring costs. “Pro-forma net profit” excludes currency gains and losses and the “cumulative effect of change in accounting principle.”
Required:
Discuss the pros and cons of the types of disclosures described above.