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U.S. Securities and Exchange Commission

Office of the Chief Accountant:
Key Performance Indicators

November 22, 2000

Ms. Arleen Thomas
Vice President - Professional Standards and Services
American Institute of Certified Accountants
1211 Avenue of the Americas
New York, NY 10036-8775

Dear Ms. Thomas:

The American Institute of Certified Public Accountants has been a leader in calling for enhanced disclosure of information that would provide investors with greater transparency into the drivers of value of a business, such as critical success factors or key performance indicators. Recent market developments, in which companies routinely trade at price/earnings ratios approaching stratospheric dimensions, have given a sense of urgency to the need to identify those "value drivers" or performance measures. Such information can provide insights into factors affecting current market valuations, have predictive value for investors, and add to the excellent base of information already provided in the current financial reporting model.

One of the more prominent groups studying the issue, the FASB Steering Committee of the Business Reporting Research Project, is about to publish a final report on voluntary disclosures being presented by leading companies. Interestingly, the FASB Business Reporting Research Project represents a follow up to the work of the AICPA Special Committee on Financial Reporting formed in the mid-1990s to address concerns about the relevance and usefulness of financial reporting. Similar to the report issued by the AICPA Special Committee, we currently understand the FASB Steering Committee report will include certain recommendations based on the voluntary disclosures noted in its survey but will leave the implementation of its recommendations to other public and private-sector groups.

The FASB Steering Committee report will emphasize that it is useful for companies to provide disclosures of what management views as the critical success factors impacting the company along with trends surrounding those factors. In this connection, the report will indicate that it often is useful for companies to disclose the metrics used to manage their operations and drive their business strategies. The report further will note that these metrics should be explained and consistently disclosed from period to period to the extent that they continue to be relevant to a company’s success. However, the latest draft of the report does not provide definitions that would go a long way toward "standardizing" the content of the disclosures.

While this letter has singled out the current initiatives of the FASB Business Reporting Research Project, similar projects currently are being conducted by the Panel on Investors Information, led by Professor Jeffrey Garten and by the Brookings Institute in its project entitled "Understanding Intangible Sources of Value."

Ensuring Comparability and Quality of Reported Disclosures

Given its broad constituency and expertise in specialized industry reporting matters, the AICPA is uniquely positioned to provide the guidance necessary for ensuring that enhanced financial information disclosures, such as non-GAAP performance measures, are of a sufficient quality to meet the needs of the capital markets. The AICPA will be able to bring together the necessary skills and knowledge, by drawing on its broad constituency including representatives from industry, auditing firms, analysts, regulators, etc.

A characteristic of high quality financial reporting is that information provided to investors is comparable, verifiable and provided on a consistent basis from period to period. For example, investors and other users of financial information may be confused if a disclosure item shown by one company is calculated on a different basis than a similarly termed disclosure made by another entity. To avoid potential investor confusion, I would ask that the AICPA undertake this project, with the oversight of the FASB, to provide common definitions to a core set of non-GAAP performance measures including critical success factors and key performance indicators. These are often contained in analysts’ reports and the FASB Steering Committee has identified some.

I also believe that part of this project, as noted in speeches by Chairman Levitt and myself, will need to address the classification of items in the financial statements. For example, if a key performance indicator for a company is the percentage of revenues spent on marketing, then the consistent classification of what constitutes marketing expenses is necessary to achieve comparability from company to company.

In envisioning the scope of a potential AICPA project, it is of paramount importance that the project be directed at providing guidance to ensure that public disclosures meet the qualitative characteristics of being high quality financial disclosures. Often companies calculate Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") differently. Other similar examples would include the reporting of revenues per employee where a common question is raised regarding whether or not to include leased employees in the calculation, or the reporting of revenue for the year from new product introductions and what is defined as a "new" product versus a minor upgrade.

Because non-GAAP performance measures such as EBITDA are calculated on different bases by different SEC registrants, the SEC staff in its review process typically will request companies that voluntarily present this measure in a filing document, to also show the composition of the measure. This detailed disclosure enables investors to reconcile any differences between the measure presented by this registrant and other companies also being considered for an investment decision. However, investors generally do not have the benefit of reviewing the detailed calculation when the measure is highlighted in a press release or quoted in the financial press.

The staff would be pleased to meet and discuss this issue in further detail with you. Please contact John Morrissey or Jack Albert at (202) 942-4400 with any questions or comments you might have.


Very truly yours,


Lynn E. Turner
Chief Accountant


Edmund Jenkins