SEC Releases New Guidance on KPIs

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The release of MD&A interpretive guidance on KPIs and metrics reinforces their key role in company disclosure.

On January 30, 2020, the US Securities and Exchange Commission (the “SEC”) published guidance on the disclosure of key performance indicators (“KPIs”) and metrics in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section (“MD&A”) set forth in Item 303 of Regulation S-K and contemplated by Item 5 of Form 20-F.1

The first aspect of the guidance reminds companies of the fundamental principle that KPIs should be included in MD&A. MD&A is supposed to provide a snapshot of a company through the eyes of management and this may necessitate disclosure of material financial and non-financial metrics—KPIs—used by management to manage or evaluate the performance of the business. This requirement is not new and was embodied in the proposing release for the current MD&A framework in 1980 and in SEC guidance provided in 2003. However, since that time there have been significant changes in how companies communicate with investors, with earnings releases and accompanying investor presentations that contain KPIs often taking center stage. Most companies view these materials as their primary tools to communicate with investors, but some companies fail to reflect in the MD&A the KPIs included in these materials.2

The second aspect of the guidance is to remind companies that it may be necessary to provide additional information in order to facilitate investor understanding of a KPI. A company should first consider the extent to which an existing regulatory disclosure framework applies, such as whether a KPI is a GAAP financial measure, a non-GAAP financial measure or an operating or statistical metric. The distinction between non-GAAP metrics and operating or statistical metrics is critical to framing disclosure correctly.3

In addition, the company should consider what additional information may be necessary to provide adequate context for an investor to understand the metric presented. In this regard, the SEC generally expects the following disclosures to accompany any KPI metric:

  1. a clear definition of the metric and how it is calculated, 
  2. a statement indicating the reasons why the metric provides useful information to investors, and
  3. a statement indicating how management uses the metric in managing or monitoring the performance of the business.

These requirements go beyond the SEC’s prior guidance from 2003. The SEC also noted that it may be necessary to include estimates or assumptions underlying a KPI.

If a company changes the method by which it calculates or presents the metric from one period to another or otherwise, the company should consider the need to disclose, to the extent material: (i) the differences in the way the metric is calculated or presented compared to prior periods, (ii) the reasons for such changes, (iii) the effects of any such change on the amount or other information being disclosed and on amounts or other information previously reported, and (iv) such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects. In addition, depending on the significance of a change to a KPI calculation method from one period to the next, the company should consider whether it is necessary to recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context.

The third aspect of the guidance is a reminder that KPIs need to be subject to a company’s disclosure controls and procedures. Effective controls and procedures are important when disclosing material key performance indicators or metrics that are derived from the company’s own information. Companies should therefore consider whether they have effective controls and procedures in place to process information related to the disclosure of such items to ensure consistency as well as accuracy.4



1 Available here.
2 Earnings releases must be furnished with (rather than filed with) the SEC on EDGAR under cover of Item 2.02 of Form 8-K. As a result, earnings releases are not incorporated by reference into a company’s annual report on Form 10-K or quarterly reports on Form 10-Q. They are also not incorporated by reference into any registration statement under the Securities Act or prospectus issued thereunder. The same is often true for foreign private issuers that furnish quarterly earnings releases to the SEC on EDGAR voluntarily. This can result in challenging outcomes when a company wishes to raise capital and discovers that its KPIs, including non-GAAP adjustments, are not part of its “disclosure package.”
3 For example, “Annual Recurring Revenue” that is calculated by multiplying revenues from the last month of a period by 12 is likely to be an operating metric, not a non-GAAP financial measure, thereby not requiring a reconciliation to the nearest GAAP equivalent.
4 KPIs that are operating or statistical metrics will generally not be the subject of “comfort” by auditors at the time of an offering to raise capital. This underscores the need for robust disclosure controls and procedures to support such data and the “CFO certificate” that will often be given to underwriters at the time of such an offering.


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