In late May, the Financial Accounting Standards Board (FASB) added a project to its research agenda to study key performance indicators (KPIs) for business entities. The plan is to study the feasibility of standardizing definitions for KPIs, including earnings before interest, taxes, depreciation and amortization (EBITDA). But work won’t start until the FASB progresses further on its project on disaggregation of income statement expenses.
Public response
The FASB received mixed feedback from respondents to Invitation-to-Comment (ITC) No. 2021-004, Agenda Consultation, about whether financial KPIs should be a priority on its five-year technical agenda. Generally, financial statement preparers oppose the FASB defining common financial KPIs. But financial statement users support the FASB exploring the topic.
Responses vary, with EBITDA and free cash flows the most frequently cited financial KPIs. However, respondents say that different metrics could apply to different industries.
Those who identify KPIs as a top priority say that uniform definitions would provide investors with a common starting point for widely known indicators. The definitions also could result in better comparability and less diversity. Conversely, some believe there are difficulties in providing standardized metrics across varying industries and that management is in the best position to define these metrics.
Scope of project
FASB staff analysis suggests that the need for greater transparency around KPIs might be satisfied through other current FASB projects that would disaggregate information. Examples include projects related to disaggregation of income statement expenses, segments and tax disclosures in certain areas. That’s why the FASB decided to hold off on launching its KPI standardization project.
“It’s not clear to me — so I guess I’m saying I would need more research to be convinced — that standardizing some of these [KPI] definitions would result in better reporting than what is actually available today when you look at everything that is available as whole,” said FASB member Marsha Hunt.
FASB members also indicated the need to set boundaries related to the items that would need to be defined. Many KPIs incorporate metrics outside of U.S. Generally Accepted Accounting Principles (GAAP), such as same store sale or average daily users. Defining these terms may not necessarily be easy.
Wait and see
Many companies use KPIs, such as EBITDA and other profitability metrics, when reporting financial results. But there’s some inconsistency in practice across industries. When using these indicators in your financial statements, transparency is key. Contact your accounting professional for more information and the latest developments on the KPI standardization and related disaggregation projects.
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