Another Doctoral Consortium post–this one from a managerial accountant!  Whose to say we can’t all learn from one another….RJB.

Nonfinancial performance measures (NFPM) are parameters used to evaluate nonfinancial performance aspects of an organization.  Frequently the MD &A or company web pages that disclose information include Key Performance Indicators (KPI) or Non-Financial Performance Measures.  Researchers have found NFPM are important value drivers for organizations and they are predictive of financial performance.  Many intangible assets are not well accounted for on the balance sheet, especially when they are internally developed; organizations track them using NFPM.  Analysts follow organizations’ NFPM as indicators of revenue.  For example, they consider Same Store Sales in the retail industry, Available Seat Miles in the airline industry, and Market Share in many industries along with other NFPM.

Many people, including investors, are interested in NFPM and organizations voluntarily disclose some of them some of the time.  In most, if not all, situations where NFPM are disclosed there is no standard definition of the metric.  While some industries regularly disclose relevant NFPM, there is no standard definition which makes them comparable across organizations.  Additionally, because there are no standards for NFPM, they are not reported consistently; they may come and go from web pages or MD & A when the organization pleases.  NFPM are sometimes disclosed with financial statements; but, NFPM are not audited.  In their Final Report on Improvements to Financial Reporting to the United States Securities and Exchange Commission dated August 1, 2008, the Advisory Committee suggested development of

“…industry-wide and activity-specific KPIs that conform to uniform or standard definitions, as well as company-specific KPIs. Then companies could voluntarily disclose these commonly-defined KPIs in their periodic reports, as well as other disclosure formats such as earnings releases.”

The SEC does not recommend requiring any NFPM disclosure at this point.  Given their widespread use in decision making doesn’t it make sense to develop some NFPM standards?  At the very minimum, NFPM that are disclosed should conform to Concept 2 information characteristics of relevancy, reliability, comparability and consistency.