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FASB Plans to Mull Feasibility of Standardizing EBITDA, Other Key Performance Metrics

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Research on FASB’s efforts to study the feasibility of standardizing the definition of financial key performance indicators (KPIs) for business entities will not start at once, FASB Technical Director Hillary Salo told a conference.

The board added a project to its research agenda last week to study KPIs including EBITDA, the acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization, which shows a measure of a company’s profitability.

Staff will wait until they are further along on a project on disaggregation of income statement expenses before starting research, Salo said on June 2, 2022, at the 40th Annual SEC and Financial Reporting Institute Conference hosted by University of South California’s Leventhal School of Accounting.

The board received mixed feedback on the topic from respondents to Invitation-to-Comment (ITC) No. 2021-004Agenda Consultation, about whether financial KPIs should be a priority on its five-year technical agenda.

A project was added to the board’s research agenda to consider the interaction with standardizing KPIs within the current regulatory framework.

“I certainly recognize there are different ways to do this, one mandating someone disclose something, or alternatively a regulator saying ‘if you don’t use some form of financial KPI you must start with, for example, a standalone FASB definition,’” FASB chair Richard Jones said during May 25 board discussions.

Generally, while financial statement preparers opposed the board defining common financial KPIs, financial statement users supported the board exploring the topic.

Responses from groups varied, with EBITDA and free cash flows the most frequently sited financial KPIs, FASB staff told the board. However, respondents said that different metrics could apply to different industries.

Those who identified financial KPIs as a top priority said that defining KPIs would provide investors with a common starting point for widely known KPIs and could result in better comparability and less diversity. Conversely, some said there are difficulties in providing standardized metrics across varying industries and that management is in the best position to define these metrics.

In general, FASB members agreed with a staff analysis that the need for greater transparency of financial reporting around KPIs may be able to be satisfied via the board’s current projects that would disaggregate information, including income statement expenses, segments, and tax disclosures in certain areas.

“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,” FASB member Marsha Hunt said.

“So for example, I think about trying to standardize a definition of EBITDA that could apply to everyone, well there could be manufacturers that their EBITDA – they capitalize depreciation and cost of goods sold so of course their EBITDA still has in essence capitalized a portion of the depreciation so it’s not necessarily a GAAP definition of depreciation that they may be using when they exclude something,” Hunt said. “So it’s not clear to me that it’s going to be easy tor possible to come up with standard definitions that apply to everyone, so I would need to see more research.”

Also important in the board’s research efforts is the boundaries of the items that would need to be defined, the discussions indicated.

“I don’t know the difference between a performance measure and a performance indicator because I often think performance indicators are things that incorporate things outside of GAAP today like same store sales,” Vice Chair James Kroeker said.

“It includes revenue but then it also takes that and breaks it into stores – I think people think that’s a KPI, or average daily users – those are performance indicators but they’re not necessarily GAAP measures,” he said. “And so I think doing research of ‘if we were to take on a project where would we sort of say the boundary of the things at least might be eligible for us to define’.”

Kroeker suggested researching to grasp what boundaries the board should to consider the eligible items. “Some are more practical for us to define like EBITDA – not that we couldn’t define ‘same store sales’ but we would have to define what we mean by ‘same’ and what we mean by ‘store’,” which is not as easy as it sounds, he said.

 

This article originally appeared in the June 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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