On January 30, 2020, the Securities and Exchange Commission ("SEC" or "Commission") published interpretive guidance (the "Guidance") that companies should consider when disclosing key performance indicators ("KPIs") and other metrics in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The Guidance, which is consistent with staff comments in this area, describes the type of information that the Commission generally would expect to accompany a presentation of KPIs and other metrics. The Guidance builds on the existing disclosure requirements for MD&A, including the SEC's emphasis on disclosing critical variables that management uses to manage the business, and provides a framework for presenting KPIs and metrics in MD&A. Measurements that are subject to another disclosure framework, such as non-GAAP financial measures, should not be affected by the Guidance.
Background. Item 303 of Regulation S-K requires a company's MD&A disclosure to include a discussion and analysis of statistical data that the company believes will enhance a reader's understanding of its financial condition. In previous guidance, the SEC has emphasized the importance of disclosing in MD&A "key variables" that are critical to understanding how a company manages its business. Staff comment letters have focused for some time on the use and presentation of KPIs and other metrics, often directing companies to provide additional context for such disclosure. The new Guidance reflects many of the disclosure issues raised by the staff through the comment process and may address some uncertainties about the type of information that should be disclosed with the presentation of metrics.
Scope of the Guidance. The Guidance reflects the Commission's views on the appropriate presentation of KPIs and other metrics within MD&A. Examples of metrics identified in the Guidance include: operating margin, same store sales, sales per square foot, total customers/subscribers, average revenue per user, daily/monthly active users/usage, active customers, net customer additions, total impressions, number of memberships, traffic growth, comparable customer transactions increase, voluntary and/or involuntary employee turnover rate, percentage breakdown of workforce, total energy consumed and data security measures. The list of metrics cited by the Commission is not exhaustive and companies should be mindful that KPIs and other metrics differ from company to company and industry to industry. The Guidance also applies to environmental metrics that companies may voluntarily disclose.
The following table provides examples of operating metrics used by companies in certain industry sectors:
The Guidance directly addresses the use of KPIs and other metrics in MD&A but does not discuss the use of such measures in other parts of a company's disclosure filing. Given that the Commission based its Guidance on broad principles of presenting disclosure in a manner that is not misleading, companies generally should consider providing similar disclosures in connection with the presentation of KPIs and other metrics outside of MD&A, including in the description of business and graphics. Companies should pay similar attention to KPIs and metrics presented outside of their SEC filings, such as investor presentations. However, metrics that are covered by other disclosure frameworks, such as U.S. GAAP or the SEC's rules applicable to non-GAAP financial measures (i.e., Regulation G and Item 10(e) of Regulation S‑K), should not be affected by the Guidance, regardless of whether they appear in MD&A or elsewhere.
Expected Disclosure. If a company includes metrics in its MD&A, the Commission generally expects certain disclosure to accompany the metric:
Disclosure Controls and Procedures. The Guidance cites the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain effective disclosure controls and procedures and advises companies to consider these requirements when disclosing key performance indicators or metrics. Companies should pay close attention to this aspect of the guidance in preparing their upcoming Forms 10-K and 10-Q to ensure the accuracy of their disclosures about the effectiveness of the company's disclosure controls and procedures.