FASB Invites Stakeholders to Comment on Financial Key Performance Indicators
Overview
On November 14, 2024, the FASB published an invitation to comment1 (ITC) to solicit feedback from stakeholders on financial key performance
indicators (“financial KPIs”). Comments on the ITC are due by April 30, 2025.
For ease of reference, the ITC’s questions for respondents are reproduced in the
appendix of this Heads Up.
Background
The FASB has previously explored the topic of KPIs, most recently in its 2021
agenda consultation ITC,2 which generated diverse feedback. Some investors observed that defining
KPIs in GAAP would provide “a common starting point” and thereby enhance
comparability. Others, including certain preparers, commented that
standardization may not be necessary and highlighted that management may be best
equipped to determine its KPIs. While at that time the Board decided not to
include this topic in its technical agenda, it added the project to its research
agenda.
Financial KPIs
The ITC defines a financial KPI as “any financial measure that is calculated or
derived from the financial statements and/or underlying accounting records that
is not presented in the GAAP financial statements.” An example of this would be
a current ratio calculated as current assets divided by current liabilities,
which would be derived from amounts presented in a classified balance sheet.
Another example would be adjusted earnings per share (EPS), which would be
derived from adjustments to amounts presented in the financial statements.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) would
also be considered a financial KPI because the amount is calculated on the basis
of other information included in financial records.
Connecting the Dots
The ITC defines a financial KPI differently from the manner in which the
SEC defines non-GAAP measures. For example, a current ratio would be
considered a financial KPI but not a non-GAAP measure because the metric
is calculated by using two GAAP amounts, current assets and current
liabilities, as presented on a classified balance sheet. SEC Regulation
G and Regulation S-K, Item 10(e),3 define a non-GAAP measure as follows:
A numerical measure of a
registrant’s historical or future financial performance, financial
position or cash flows that:
(i) Excludes amounts, or is subject to adjustments that
have the effect of excluding amounts, that are included in
the most directly comparable measure calculated and
presented in accordance with GAAP in the statement of
comprehensive income, balance sheet or statement of cash
flows (or equivalent statements) of the issuer; or
(ii) Includes amounts, or is subject to adjustments that
have the effect of including amounts, that are excluded from
the most directly comparable measure so calculated and
presented.
See Deloitte’s Roadmap Non-GAAP Financial Measures
and Metrics for more information about the SEC’s
requirements related to non-GAAP measures.
Scope of the ITC
Increased Use and Lack of Comparability of Financial KPIs
As part of its research project on financial KPIs, the FASB staff identified
an increase in the use of such financial KPIs and concluded that since
standardized definitions do not exist, comparability may be reduced. The
staff noted that some of the most common financial KPIs are EBITDA (or
adjusted EBITDA), adjusted EPS, adjusted net income, adjusted operating
income, and free cash flow (or adjusted free cash flow). As a result of its
research on a sample of public companies that report EBITDA (the most common
measure), the staff determined that such companies define earnings,
interest, depreciation, and amortization in different ways, resulting in a
lack of comparability. Accordingly, the FASB is seeking information about
the use of these financial KPIs to determine the next steps in the research
project.
Key Questions
The ITC’s 25 questions for respondents (see the appendix) are intended to
solicit feedback on the following two overarching questions:
- Should Financial KPIs be standardized and, if so, which ones?
- Should Financial KPIs be required or permitted to be disclosed in an entity’s [GAAP] financial statements and, if so, when and for what types of entities?
Potential Approaches
The ITC outlines two approaches for potential projects. The
Board seeks feedback on these approaches, a combination thereof, or any
other approaches it should consider as well as input on potential
disclosures related to financial KPIs that entities should present.
Approach 1
The FASB would define certain commonly used financial
KPIs and require or permit disclosure of them in an entity’s GAAP
financial statements. Under this approach, the Board would first
determine which financial KPIs to define. Alternatively, rather than
defining financial KPIs that are commonly presented or used, the FASB
would define financial KPIs that are common to specific industries. For
example, the FASB would define return on invested capital in the retail
industry; earnings before interest, taxes, deprecation, amortization,
and rent (EBITDAR) in the hospitality industry; or funds from operations
(FFO) in the real estate industry. The FASB would also determine whether
disclosing the defined measures should be required or optional in an
entity’s GAAP financial statements.
Approach 2
The FASB would require or permit an entity to disclose in its GAAP
financial statements any financial KPIs that are presented outside such
statements. In a manner similar to Approach 1, the FASB would still need
to determine whether disclosing the defined measures should be required
or optional in those statements. However, such determination would be
based on the information management presents outside the financial
statements. The FASB would need to determine the scope of that
information, which could range from all financial KPIs that are
presented outside the financial statements to only those financial KPIs
that are communicated in earnings announcements and regulatory filings.
Connecting the Dots
In April 2024, the IASB issued IFRS 18,4 which is effective for annual reporting periods beginning
on or after January 1, 2027. IFRS 18 requires entities to
present management-defined performance measures (MPMs) in the
notes to the financial statements, including a reconciliation to
the nearest IFRS® measure. MPMs consist of a subtotal
of income and expenses that an entity uses in public
communications outside the financial statements that does not
specifically have to be presented or disclosed under IFRS
Accounting Standards. The presentation requirements under the
Approach 2 above could be aligned with those for MPMs under IFRS
18.
Appendix — ITC’s Questions for Respondents
The ITC’s questions for respondents are reproduced below for reference.
Background
Question 1 (All Respondents): Please describe what type of stakeholder
you (or your organization) are from the list below, including a discussion
of your background and what your point of view is when responding to this
ITC:
- Academic
- Investor, other allocator of capital, or other financial statement
user, such as:
- Equity analyst: buy side
- Equity analyst: sell side
- Credit-rating agency analyst
- Fixed-income analyst
- Accounting analyst
- Quantitative analyst
- Portfolio manager
- Private equity
- Individual investor
- Lender
- Long-only focus
- Long/short focus
- Other
- Practitioner/auditor
- Not-for-profit organization preparer
- Private company preparer
- Public company preparer
- Regulator
- Standard setter
- Other.
Question 2 (All Respondents): What is the relative priority of a
project on Financial KPIs given the FASB’s progress on other recent
projects, including projects on financial statement disaggregation as well
as other recognition and measurement projects? Do you believe the relative
priority differs for public entities versus private companies? Please
explain why or why not.
Question 3 (Investors): How often, if at all, do you use Financial
KPIs in your analysis? If used, which ones?
Question 4 (Investors): If you use Financial KPIs in your analysis, do
you calculate the measures yourself, use measures provided by a financial
data service, or use the measures provided by management? If provided by
management, do you make any additional adjustments before using the
Financial KPIs in your analysis?
Question 5 (Preparers): Does your company present Financial KPIs
outside the financial statements? Do your company’s peers present Financial
KPIs outside the financial statements?
Question 6 (Investors): If you use Financial KPIs in your analysis,
are the Financial KPIs you use comparable across different entities? If you
believe that those Financial KPIs are comparable across different entities,
how do you know that those Financial KPIs are calculated on a comparable
basis?
Question 7 (Preparers): If your company and your company’s peers
present Financial KPIs outside the financial statements, are the Financial
KPIs comparable? If you believe that the Financial KPIs that are presented
are comparable, how do you know that those Financial KPIs are calculated on
a comparable basis?
Approach 1: Define and Require (or Permit) Disclosure of Common Financial KPIs
Question 8 (Investors): Would you benefit from standardized GAAP
definitions of commonly used Financial KPIs? Please explain why or why
not.
Question 9 (All Respondents): If the FASB defines certain Financial
KPIs, should the defined Financial KPIs be measures that are commonly used
across all entities, measures that are industry-specific, or both? What
should the FASB consider in determining which Financial KPIs to define?
Question 10 (All Respondents): Are there certain Financial KPIs you
believe that the FASB should define? If so, what are they and why?
Question 11 (All Respondents): Should disclosure of certain defined
measures be required or optional? If required, how should that requirement
be determined (for example, should all entities be required to disclose the
defined measure or only entities in specified industries)? Please
explain.
Question 12 (All Respondents): Should the FASB provide criteria for
entities to use to determine when a defined Financial KPI needs to be
disclosed? For example, an entity could be required to disclose a Financial
KPI that has been defined by the FASB in the financial statements if it
presents it or an adjusted version outside the financial statements (for
example, if EBITDA is defined and an entity presents adjusted EBITDA).
Question 13 (All Respondents): If the FASB defines certain Financial
KPIs that are common within specific industries, should all entities within
those industries be required to disclose the defined measure?
Approach 2: Require (or Permit) Disclosure of Financial KPIs Presented by Management Outside the Financial Statements
Question 14 (All Respondents): Should an entity be required to
disclose a Financial KPI in GAAP financial statements if the entity
communicates the Financial KPI elsewhere? If so, what incremental benefits
does requiring (rather than permitting) disclosure provide?
Question 15 (All Respondents): If the FASB pursues Approach 2, should
the criteria for identifying Financial KPIs that must be (or are permitted
to be) disclosed in GAAP financial statements be broad or narrow? For
example, should all Financial KPIs communicated outside financial statements
be disclosed or should only those communicated in earnings announcements and
regulatory filings be disclosed?
Question 16 (All Respondents): Are there other criteria that you
believe should be used to identify Financial KPIs that would be required to
be (or are permitted to be) disclosed in GAAP financial statements? If so,
what are they and why should they be included?
Overall Preferred Approach and Disclosure
Question 17 (All Respondents): Which potential approach for standard
setting on Financial KPIs do you prefer and why?
Question 18 (Investors): Would a combined approach that incorporates
elements of Approaches 1 and 2 provide decision-useful information that is
incremental to either approach in isolation? Please explain how the
approaches should be combined, including why that approach would provide
incremental decision-useful information.
Question 19 (Preparers and Practitioners): Is either Approach 1 or 2
inoperable? Please explain why or why not.
Question 20 (All Respondents): Are there other approaches that should
be considered? If so, please describe and comment on whether (and what)
incremental disclosures should be required under an alternative
approach.
Question 21 (All Respondents): For any undefined Financial KPIs that
must be (or are permitted to be) disclosed in GAAP financial statements,
should an entity be required to provide a reconciliation in the financial
statements to the most comparable GAAP requirement? Please explain why or
why not.
Question 22 (All Respondents): Would disclosure about the components
of Financial KPIs and the financial statement line items in which those
components are included be useful? Please explain why or why not. If yes,
should that disclosure be required?
Question 23 (All Respondents): For any undefined Financial KPIs that
must be (or are permitted to be) disclosed in GAAP financial statements,
should management be required to explain the element of their performance
the undefined Financial KPI is meant to convey and how the undefined
Financial KPI is used by management?
Question 24 (All Respondents): If an entity provides comparative
financial statements, should it be required to disclose comparative period
information for Financial KPIs disclosed? Please explain why or why not.
Question 25 (All Respondents): Are there any other disclosures that
you believe should accompany Financial KPIs (defined or undefined) that
would be disclosed in GAAP financial statements? If so, what are they and
why?
Contacts
|
Christine Mazor
Audit & Assurance
Partner
Deloitte &
Touche LLP
+1 212 436
6462
|
|
Kathleen Malone
Audit & Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761
3770
|
|
Amanda Lank
Audit & Assurance
Manager
Deloitte & Touche LLP
+1 714 436 7257
|
Footnotes
1
FASB Invitation to Comment, Financial Key Performance Indicators for
Business Entities.
2
FASB Invitation to Comment, Agenda Consultation. On June 29, 2022,
the FASB released a report summarizing the stakeholder feedback the
Board received during the 2021 agenda consultation project.
3
SEC Regulation S-K, Item 10(e), “General: Use of Non-GAAP
Financial Measures in Commission Filings.”
4
IFRS 18, Presentation and Disclosure in Financial
Statements.