FASB Eyes Standardizing Key Performance Indicators

As part of its process to narrow priorities for 2025, the Financial Accounting Standards Board in November invited stakeholders to weigh in on whether certain financial key performance indicators – better known as KPIs – should be standardized and disclosed in financial statements.

In an invitation to comment that could open the door for new rules, FASB requested input on how best to define and report financial KPIs that do not fall under Generally Accepted Accounting Principles, which means they are not reflected in official financial statements. FASB said it will use that feedback, which is due April 30, as it determines whether to add a project on financial KPIs to its technical agenda.

Members of the Financial Accounting Standards Advisory Council discussed the state of financial KPIs at a meeting three weeks later. Attendees concurred that financial KPIs are an increasingly important tool used by companies and investors, and they advocated for greater consistency among the most frequently reported financial indicators that investors use – earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow.

But council members also voiced concern about inconsistencies among companies that report the same financial KPIs. They noted the lack of transparency in financial KPI calculations and adjustments reported by some entities.

FASB may be worried about these concerns in part due to the significant increase in the use of KPIs by issuers. In its request for comments, FASB said from 2013 to 2022 the proportion of SEC filers reporting a financial KPI increased from 36% to 53%. Among the S&P 500, that number increased from 65% to 85% over the period. Increases occurred across most industry sectors, FASB said.

Adding to the confusion: Standardized definitions of financial KPIs do not exist, FASB research found. For example, definitions of EBITDA differ. Some include interest income, some do not, and some combine amortization and depreciation into a single amount. The definition of amortization and how the capitalization of costs affect depreciation are also hazy.

The Securities and Exchange Commission has shown interest in KPIs as well. The agency in 2020 released guidance on KPIs and metrics, SEC staff members have requested information on how companies define and calculate KPIs and how they are used by management. SEC staffers have also asked companies why KPIs are useful for investors. Additionally, they’re seeking clarity on why KPIs or other performance metrics are discussed in companies’ earnings releases and investor presentations.

Recent SEC comments identified using the Intelligize platform offer insight into issues of interest related to KPIs. For example, the agency requested clarification from Japanese real estate company LogProstyle Inc. on its use of occupancy rate, average daily rate, or revenue per available room as KPIs in its hotel management business. An SEC inquiry to software vendor Workday Inc. asked for information regarding the company’s gross and net retention rate metrics, their definitions, and whether they are considered KPIs. An exchange between the SEC and NCR Atleos Corp. delved into the reasons behind the retail banking company’s decision to revisit the KPIs it discloses in its public filings.

In the end, it appears it will be up to regulators to determine if KPIs are TMI.