SEC Issues Guidance on Key Performance Indicators and Metrics

On January 30, 2020, the Securities and Exchange Commission (SEC) issued SEC Interpretive Release 33-10751, Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations. The interpretive release provides guidance on the use of key performance indicators (KPIs) and other metrics presented in management’s discussion and analysis (MD&A) disclosures.

The guidance is effective as of February 25, 2020. Here’s an overview of key provisions and related disclosures.

Key Provisions

The new guidance explains the SEC’s views on how to apply existing MD&A requirements to the disclosure of KPIs and other metrics. It doesn’t change the existing disclosure requirements in Regulation S-K.

Regulation S-K requires companies to disclose information relevant to understanding their financial condition as well as discussion of other statistical data that, in the company’s judgment, enhances a reader’s understanding of MD&A.

Companies may include nonfinancial and financial metrics in MD&A, which can vary significantly by company and industry—depending on facts and circumstances. These metrics may not necessarily be defined by a standard-setter or derived from amounts in the Generally Accepted Accounting Principles (GAAP) financial statements. Examples of these metrics—often referred to as KPIs—include the following:

  • Same-store sales
  • Number of subscribers
  • Average revenue per customer

KPI and Metric Disclosure

When disclosing metrics in MD&A, the guidance emphasizes that companies should consider existing MD&A requirements and provide a narrative that enables investors to see a company “through the eyes of management.”

Accordingly, metrics disclosed in MD&A shouldn’t materially deviate from those used to manage operations or make strategic decisions. Companies should also determine whether the metrics are:

  • GAAP measures subject to the GAAP disclosure framework
  • Non-GAAP measures subject to regulation G or Item 10 of Regulation S-K

Companies should also consider what additional information may be necessary to provide adequate context for an investor to understand the disclosed metrics. The SEC noted it would generally expect, based on the facts and circumstances, the following disclosures to accompany metrics:

  • A clear definition of the metric and how it’s calculated
  • A statement indicating the reasons why the metric provides useful information to investors
  • A statement indicating how management uses the metric in managing or monitoring the performance of the business

If necessary, companies should also disclose estimates or assumptions underlying the metric or its calculation to prevent the metric from being materially misleading.

Subsequent Disclosure

If a company changes how it calculates or presents a metric from the prior period, the new guidance states that a company should consider whether it needs to disclose the following information, if material:  

  • Differences in the way the metric is calculated or presented compared to prior periods
  • Reasons for the change
  • Effects of the change on the amounts or other information being disclosed as well as the amounts or other information previously reported
  • Other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects

Depending on the significance of the methodology change and results, a company should consider whether it’s necessary to recast prior metrics to conform to the current presentation, in order to place them in the appropriate context.

Disclosure Controls and Procedures

The guidance reminds companies that Exchange Act Rules 13a-15 and 15d-15 require companies to maintain effective disclosure controls and procedures, which are important when disclosing material KPIs or metrics derived from the company’s own information.

When KPIs and metrics are material to an investment or voting decision, a company should consider whether it has effective disclosure controls and procedures in place to process information related to the disclosure of these items to allow for consistency and accuracy.

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For more information on how the SEC guidance on KPIs and metrics in MD&A disclosures may affect your business, contact your Moss Adams professional.

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