March 27, 2023

Volume XIII, Number 86


March 24, 2023

Subscribe to Latest Legal News and Analysis

MD&A’s Makeover, Part II: Interpretive Guidance on the Use of KPIs and Metrics in MD&A

When preparing the Management’s Discussion and Analysis, or MD&A, sections of their upcoming Form 10-K filings and registration statements, companies should consider new Securities and Exchange Commission (SEC) interpretive guidance on the disclosure of key performance indicators (KPIs) and metrics. The guidance, released by the SEC on January 30, 2020, will become effective upon publication in the Federal Register. In addition, the SEC simultaneously proposed amendments to simplify and enhance certain financial disclosure requirements in Regulation S-K, which we discuss in Part I of this two-part “MD&A’s Makeover” alert.

Item 303(a) of Regulation S-K requires discussion of companies’ financial condition, changes in financial condition and results of operations, which may require disclosure of KPIs and other metrics in MD&A. While the new interpretive guidance specifically applies to MD&A, companies should also take it into consideration when using KPIs and metrics in other disclosures.

The guidance provided some sample metrics, including operating margin, same store sales, total customers/subscribers, average revenue per user, active customers, total energy consumed, total impressions, voluntary and/or involuntary employee turnover rate and more.

Companies that include KPIs or metrics in their MD&A disclosures should keep in mind existing MD&A requirements 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.” In this regard, companies should consider:

  • The extent to which an existing regulatory framework applies (e.g. GAAP, Regulation G or Item 10 of Regulation S-K)

  • What additional information may be necessary to provide adequate context for an investor to understand the metric presented

    • The SEC generally expects, 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 of the reasons the metric provides useful information to investors

      • A statement of how management uses the metric in managing or monitoring the performance of the business

  • Whether there are estimates or assumptions underlying the metric or its calculation and whether disclosure of those items is necessary for the metric to not be materially misleading

The guidance also reminds companies that they should provide a narrative that enables investors to see a company “through the eyes of management,” so the metrics presented should not deviate materially from those used by the company to manage operations or make strategic decisions.

If a company changes the method by which it calculates or presents a metric from one period to another or otherwise, it should consider the need to disclose, to the extent material:

  • The differences in the way the metric is calculated or presented compared to prior periods

  • The reasons for the changes

  • The effects of the change on the amounts or other information being disclosed and on amounts or other information previously reported

  • Any other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects

Furthermore, depending on the significance of the change 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.

Finally, the SEC reminds companies of “the requirement to maintain effective disclosure controls and procedures” and reiterates that effective controls and procedures are important when disclosing material KPIs or metrics that are derived from the company’s own information. If the KPIs or metrics are material to an investment decision, then companies should 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.

© 2023 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 45

About this Author

Elizabeth A. Diffley, Corporate, Securities Attorney, Drinker Biddle, Law Firm

Elizabeth A. Diffley is an accomplished and pragmatic advisor to public and private clients on corporate and securities matters, including corporate governance, capital raising transactions, public company reporting and compliance, and mergers and acquisitions, as well as general corporate matters. Knowledgeable across a broad range of industries, Beth has particular experience advising insurance and other financial services companies on a variety of securities, mergers and acquisitions, governance and general corporate matters.

Caroline Henry Associate Corporate Group Mergers & Acquisitions

Caroline Henry* represents public and private clients in a variety of corporate and securities matters. Her experience includes public company reporting and compliance, mergers and acquisitions, public and private capital raising transactions, and governance and general business counseling.

*Admitted in Illinois only. New York bar admission pending.

Marc Leaf, Corporate lawyer, Drinker Biddle

Marc A. Leaf is Regional Partner in Charge of the New York office of Drinker Biddle, and a trusted counselor and adviser to senior government officials, corporate leaders, and independent directors. An experienced and practical dealmaker with a proven record of success, Marc helps issuers and investors in technology, media, telecom and other industries achieve their goals in capital raising transactions, business combinations, and joint ventures.

Prior to joining Drinker Biddle, Marc served on the Executive Staff of the U.S....