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February 12, 2020

SEC Issues Guidance on MD&A


On January 30, 2020, the SEC issued Guidance on the use of key performance indicators and metrics in MD&A.

Item 303(a) of Regulation S-K requires disclosure in MD&A of information not otherwise required, including key performance indicators and other metrics, that the company believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations. Some companies also disclose non-financial and financial metrics to describe their business, including those that relate to external or macro-economic matters, and/or those that are company or industry specific.

The Guidance reminds companies to consider the extent to which an existing regulatory disclosure framework applies to these metrics, such as GAAP or, for "non-GAAP measures," Regulation G or Item 10 of Regulation S-K. In addition, companies should consider what additional information may be necessary to provide adequate context for an investor to understand the metric presented, including: (i) a clear definition of the metric and how it is calculated; (ii) a statement indicating the reasons why the metric provides useful information to investors; and (iii) a statement indicating how management uses the metric in managing or monitoring the performance of the business. Companies 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.

Where the method by which a company calculates or presents a metric is changed, the company should consider the need to disclose, to the extent material: (i) the differences in the way the metric is calculated or presented compared to prior periods, (ii) the reasons for such changes, (iii) the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported, and (iv) 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.

The Guidance also notes that when key performance indicators and metrics are material to an investment or voting decision, companies should consider whether they have effective controls and procedures in place to ensure consistency as well as accuracy of these disclosures.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.