The SEC’s Fortified Stance on Metrics Presentations in MD&A
On January 30, 2020, the Securities and Exchange Commission provided additional guidance on the disclosure of key performance indicators and metrics in Management’s Discussion & Analysis of Financial Condition and Results of Operation.
The SEC originally proposed the current MD&A framework as a description of a “limited set of critical variables which presents the pulse of the business.” In determining the appropriate disclosures in an MD&A, the SEC has instructed companies to identify the factors that an investor would find to be material. The disclosure of these material variables and factors is a necessary step to provide investors with an understanding of and platform to evaluate a company.
Additionally, when describing the performance or status of their businesses, some companies also disclose non-financial and financial metrics. These metrics vary significantly and cover a wide variety of disclosures, including measurements of industry trends, external events, environmental metrics and economic matters. Other examples may include company-specific matters such as data security measures, daily/monthly active users/usage, operating margin, traffic growth, total impressions, and same store sales. Performance metrics do not usually fall within the definition of “non-GAAP” measures; however, certain financial metrics may require compliance with Regulation G and Item 10(e) of Regulation S-K.
In this latest guidance, the SEC is reiterating the need to provide all information that may be necessary to understand any metric presented. The SEC will generally expect the following disclosures to accompany any presented metric:
- A clear definition of the metric and how it is calculated;
- A statement indicating the reasons why the metric provides useful information to investor; and
- A statement indicating how management uses the metric in managing or monitoring the performance of the business.
The SEC also stressed that companies should consider the disclosure of any estimates or assumptions used to determine a metric or its calculation, which, if forgone, could result in a materially misleading metric.
Further, if there has been any change in the method by which a company calculates or presents metrics from one period to another or otherwise, the company should consider the need to disclose, to the extent material, the effect of the changes, the differences between periods, and the reasons for the changes. Companies should note that it may be necessary to recast prior metrics to ensure the comparison is not misleading.
In light of the SEC’s latest guidance, the SEC may take a harder look at underlying data behind disclosed metrics and undisclosed metrics that investors may deem material. This scrutiny could manifest itself in the issuance of SEC comments in connection with reviews of Exchange Act reports and registration statements. Clients should begin to consider how to fortify and supplement MD&A disclosures in their next annual and quarterly reports.