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SEC Issues Guidance for Key Performance Indicators and Metrics in MD&A

Client Updates

On January 30, 2020, the Securities and Exchange Commission issued new guidance on key performance indicators and metrics in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

The guidance, available here, will be effective upon publication in the Federal Register and therefore will be applicable to annual reports on Form 10-K and Form 20-F that companies are currently preparing. As a companion to the guidance, the SEC also issued a Proposing Release, available here, in which it proposes a major overhaul of the rules governing MD&A. We discuss the Proposing Release in a separate Client Alert available here.

Purpose of MD&A

As the SEC has previously stated, in MD&A, the company should “provide a narrative that enables investors to see a company ‘through the eyes of management.’” The guidance reminds companies that Item 303(a) of Regulation S-K requires disclosure of information not specifically referenced in that item that the company believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations. The instructions to that item also indicate that companies must provide discussion and analysis of other statistical data that in the company’s judgment enhances a reader’s understanding of MD&A.

Framework for Evaluating Disclosure of Metrics

The guidance provides a framework for companies to consider in determining whether and how to include key performance indicators and other metrics. Companies should consider “the need to include such further information, if any, as may be necessary in order to make the presentation of the metric, in the light of the circumstances under which it is presented, not misleading.” First, companies should evaluate the extent to which an existing regulatory disclosure framework applies, such as GAAP, or Regulation G or Item 10 of Regulation S-K for “non-GAAP measures,” and requirements of Item 303 of Regulation S-K. Next, companies should consider what other information may be needed to provide investors adequate context to understand the metric presented.1

The guidance explains that the SEC would generally expect, depending on the facts and circumstances, the following disclosures to accompany the metric:

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

Companies should also assess whether any disclosure of estimates or assumptions underlying the metric or its calculation are necessary for the metric not to be materially misleading.

The guidance also emphasizes that when a company changes the metrics presented or the method by which the metric is calculated, it should consider the need to add disclosure. To the extent material, such disclosure may include the differences in the old and new calculation or presentation of the metric; the reasons the company is making the change; the effects of the change on the amounts or other information being disclosed and the effect on previously reported information; and other relevant differences in methodology or results. If the change is significant, the guidance indicates that companies should consider recasting prior metrics to conform to the current presentation.

The SEC concludes with a reminder that the requirement to maintain effective disclosure controls and procedures applies to material key performance indicators or metrics. When key performance indicators and metrics are material to an investment decision, companies should consider whether they have effective controls and procedures in place to process information related to such information—both to ensure consistency as well as accuracy.

What to Do Now

Companies preparing their annual reports should evaluate the key performance indicators they present and the accompanying disclosure. For example, companies should review whether their MD&A covers the material metrics highlighted in their earnings releases and other investor presentations. Like discussions of non-GAAP measures, companies should review whether they clearly define each metric and explain why and how it is used.


1The SEC provided the following examples of the types of metrics to which it intends the guidance to apply: 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 (e.g., active workforce covered under collective bargaining agreements); total energy consumed; and data security measures (e.g., number of data breaches or number of account holders affected by data breaches).

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