AGENCY:

Securities and Exchange Commission.

ACTION:

Guidance.

SUMMARY:

We are providing guidance on key performance indicators and metrics in Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

DATES:

Effective February 25, 2020.

FOR FURTHER INFORMATION CONTACT:

Questions about specific filings should be directed to staff members responsible for reviewing the documents the company files with the Commission. For general questions about this release, contact Angie Kim, Special Counsel, at (202) 551-3430, Office of Rulemaking, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Guidance on Key Performance Indicators and Metrics

We are providing guidance on disclosure of key performance indicators and metrics in MD&A (the “Guidance”).^[1] Item 303(a) of Regulation S-K requires disclosure of information not specifically referenced in the item that the company believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations.^[2] The item also requires discussion and analysis of other statistical data that in the company's judgment enhances a reader's understanding of MD&A.^[3]

When proposing the current MD&A framework, the Commission noted that “[f]or each business, there is a limited set of critical variables which presents the pulse of the business.” ^[4] The Commission previously has emphasized that, when preparing MD&A, “companies should consider whether disclosure of all key variables and other factors that management uses to manage the business would be material to investors, and therefore required.” ^[5] The Commission also previously stated that companies should identify and address those key variables and other qualitative and quantitative factors that are peculiar to and necessary for an understanding and evaluation of the individual company.^[6] Such information could constitute key performance indicators and other metrics.

Some companies also disclose non-financial and financial metrics when describing the performance or the status of their business. Those metrics can vary significantly from company to company and industry to industry, depending on various facts and circumstances. For example, some of these metrics relate to external or macro-economic matters, some are company or industry specific, and some are a combination of external and internal information. Some companies voluntarily disclose specialized, company-specific sales metrics, such as same store sales or revenue per subscriber. Some companies also voluntarily disclose environmental metrics, including metrics regarding the observed effect of prior events on their operations.

We remind companies that, when including metrics in their disclosure, they should consider existing MD&A requirements ^[7] and the need to include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading.^[8] In this regard, a company should first consider the extent to which an existing regulatory disclosure framework applies, such as Generally Accepted Accounting Standards (“GAAP”) ^[9] or, for “non-GAAP measures,” Regulation G or Item 10 of Regulation S-K.^[10] In addition, the company should consider what additional information may be

necessary to provide adequate context for an investor to understand the metric presented.^[11] We would generally expect, based 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.

The company should also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading.

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: (1) The differences in the way the metric is calculated or presented compared to prior periods, (2) the reasons for such changes, (3) the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported, and (4) 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. Depending on the significance of the change(s) in methodology and results, 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.

Additionally, we remind companies of the requirement to maintain effective disclosure controls and procedures.^[12] Effective controls and procedures are important when disclosing material key performance indicators or metrics that are derived from the company's own information. When key performance indicators and metrics are material to an investment or voting decision, the company should consider whether it has effective controls and procedures in place to process information related to the disclosure of such items to ensure consistency as well as accuracy.^[13]

II. Codification Update

The “Codification of Financial Reporting Policies” announced in Financial Reporting Release 1 (April 15, 1982) [47 FR 21028] is updated by adding new Section 501.16, captioned “Additional Guidance on Key Performance Indicators and Metrics” to the Financial Reporting Codification and under that caption including the text in Section I of this release.

The Codification is a separate publication of the Commission. It will not be published in the Federal Register or Code of Federal Regulations.

III. Other Matters

Pursuant to the Congressional Review Act,¹⁴ the Office of Information and Regulatory Affairs has designated this guidance as not a “major rule,” as defined by 5 U.S.C. 804(2).

List of Subjects in 17 CFR Parts 211, 231, and 241

• Securities

Amendments to the Code of Federal Regulations

For the reasons set forth above, the Commission is amending title 17, chapter II, of the Code of Federal Regulations as set forth below:

PART 211—INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS

1. The authority citation for part 211 continues to read as follows:

Authority: 15 U.S.C. 77g, 15 U.S.C. 77s(a),15 U.S.C. 77aa(25) and (26), 15 U.S.C. 78c(b), 17 CFR 78l(b) and 13(b), 17 CFR 78m(b) and 15 U.S.C. 80a-8, 30(e) 15 U.S.C. 80a-29(e), 15 U.S.C. 80a-30, and 15 U.S.C. 80a-37(a).

2. The table in subpart A is amended by adding an entry for Release No. 87 at the end of the table to read as follows:

Subpart A—Financial Reporting Releases

PART 231—INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

3. The authority citation for part 231 is added to read as follows:

Authority: 15 U.S.C. 77a et seq.

4. Part 231 is amended by adding an entry for Release No. 33-10751 at the end of the table to read as follows:

PART 241—INTERPRETATIVE RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

5. The authority citation for part 241 continues to read as follows:

Authority: 15 U.S.C. 78a et seq.

6. Part 241 is amended by adding an entry for Release No. 34-88094 at the end of the table to read as follows:

Footnotes