CFA INSTITUTE MEMBER

SURVEY REPORT
Usefulness of Key Performance Indicators and Other
Information Reported Outside Financial Statements
CFA INSTITUTE MEMBER SURVEY REPORT
Usefulness of Key Performance Indicators and Other Information
Reported Outside Financial Statements

FOREWORD
"We are delighted to see CFA Institute looking more deeply into how investors use and value
critical areas of information outside the core financial statements. The report highlights
shortcomings with a subset of alternative performance measures, including financial,
operational and intellectual capital KPIs, showing there is a real forgotten middle across the
financial versus nonfinancial continuum, which Integrated Reporting is ideally positioned to
address." – Richard Howitt, CEO, IIRC

EXECUTIVE SUMMARY
Headline findings from the member survey results include the following:
• Top three most commonly applied categories of management, discussion, and
analysis (MD&A)/narrative reporting information. An analysis of the relative
application by investors of information contained across 11 identified broad categories
within the MD&A/narrative reporting portion of the annual report shows that the top
three most commonly applied categories were (1) operational metrics, (2)
contextualizing strategy and business model descriptions, and (3) supplemental
financial information. Sustainability reporting was the least applied category. The
findings on relative usage affirm the need for regulators, standard setters, and other
authorities (e.g., stock exchanges) to go beyond focusing on non-GAAP financial
measures (NGFMs) and environmental, social, and governance (ESG) information and
to also focus on other alternative performance measures (APMs), including financial
and operational key performance indicators (KPIs).

• Top five financial and operational metrics. Across a subset of 16 financial, customer,
and operational metrics, the top five most-used metrics are NGFMs, organic sales
growth measures, gross margin disaggregation, market share, and future revenue

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 2
 potential measures. In contrast, customer metrics (5 of the 16) were clustered below the
median ranking of relative usage and perceived reporting quality. The results likely
reflect the relatively nascent reporting of customer metrics. In general, the survey found
a positive correlation between the extent of use and the perceived quality of reporting of
individal metrics.

• Top three intellectual capital metrics. Across a subset of 10 intellectual capital

metrics, the top three most-used metrics are research and development expenditure as
a percentage of sales, new product/research pipeline information, and intellectual
property expiry exposure (revenue from products coming off patent in the next “x”
years). As with the financial, customer, and operational metrics, the survey found a
positive correlation between the extent of use and the perceived quality of reporting of
individal metrics.

• Similar KPI & NGFM reporting concerns. NGFM reporting concerns also apply to
financial and operational KPIs. Staple concerns around the reporting of NGFMs can be
extended to other KPIs. These include: (a) the lack of comparable reporting of these
performance measures across similar business models; (b) period-to-period
inconsistencies in management definitions; (c) misleading positive bias; and (d)
questionable reliability due to the lack of or inadequate assurances. These
shortcomings with NGFMs were highlighted in the 2016 CFA Institute report Investor
Uses, Expectations, and Concerns on Non-GAAP Financial Measures.

Recommendations made as a result of the findings include an idea that has gotten traction in
several stakeholder conversations to ensure consistent reporting of KPIs over time, namely,
the need for a “three-year standstill” requirements by securities regulators, whereby issuers
have to stick to the same definition of individual metrics for a period of three years.

There is also a potential opportunity for a private-sector–driven industry/business model

specific definition of relevant KPIs. It can be quite a balancing act between pursuing desirable
comparability versus allowing companies discretion to “tell their story,” bearing in mind that
these KPIs are voluntary supplemental measures and are not meant to be mandatory
standardized information. Examples of business-model–relevant guidance that currently exists

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 3
includes the real estate investment trust (REIT) sector definition of the funds from operations
and the gold mining sector definition of cash cost per ounce.

Finally, in tandem with improving reporting guidance, the audit standard-setting authorities and
regulators, and the audit profession, should evaluate and respond to the demand for increased
assurance of this type of information.

1 OVERVIEW
Financial reporting information, including the primary financial statements 1 and notes to the
financial statements, is often described as the bedrock of decision-useful 2 information available
for investors. At the same time, as portrayed in Figure 1, investors depend on a lot more than
the main financial statements information when they are evaluating the prospects, financial
condition, performance, and value creation story of companies.

A core plank of the filed corporate report (i.e., annual or interim report) is the information
located in the “management discussion and analysis (MD&A)” or “narrative reporting” or
“management commentary” section. The information reported outside the main financial
statements is largely intended to be supplemental and contextualizing to GAAP/IFRS
information (e.g., risk reporting). It includes forward-looking information (e.g., capital
commitments) and is also meant to convey performance and entity-specific information
through the “eyes of management,”

The November 2017 International Accounting Standards Board (IASB) staff paper 3 related to
the update of the management commentary practice statement (MCPS) categorizes
information outside the financial statements as consisting of (a) prefinancial information (i.e.,
leading indicators of future periods’ financial impact); (b) description of a company’s strategy,
business model, and operating environment; (c) non-GAAP Financial Measures (NGFMs); and
(d) forward-looking information. In effect, the IASB MCPS staff paper affirms that different

1 Income statement, statement of financial position, statement of cash flows, and statement of equity.
2 As reflected in the IASB and FASB respective conceptual framework documents, financial statements aim to provide relevant
and faithfully representative information.
3 http://www.ifrs.org/-/media/feature/meetings/2017/november/iasb/wider-corporate-reporting/ap28a-wcr-mcps.pdf

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 4
strands of information reported outside are relevant for assessing the value creation of
companies.

Financial
statements
information

Risk,
governance, Non-GAAP
sustainability financial
measures
information

Deciphering the
value creation
story

Customer Operational
metrics KPIs

Intellectual
capital
metrics

Figure 1: Relevant Information for Analyzing Companies

OVERVIEW OF GUIDANCE FOR REPORTING INFORMATION OUTSIDE THE MAIN

FINANCIAL STATEMENTS

As described below, varied degrees of guidance relate to the information reported within the
MD&A or narrative reporting section.

• MD&A/narrative reporting guidance varies across jurisdictions. MD&A guidance

can influence the reporting of alternative performance measures reported outside the
primary financial statements. MD&A/narrative reporting guidance varies across
countries. Furthermore, in many cases, the guidance tends to be voluntary, high-level
and principles based, leaving companies with a lot of discretion on how they report
information outside the primary financial statements.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 5
 • “Tyranny of choice” on sustainability reporting requirements. A plethora of
initiatives are focused on enhancing companies’ reporting of environmental, social, and
governance (ESG) factors of interest to different stakeholders. These include guidance
from global and stakeholder/industry-driven initiatives as well as stock exchange and
country/region-specific guidance 4. Examples of ESG-reporting guidance include the
Sustainability Accounting Standards Board, Global Reporting Initiative, Climate
Disclosure Standards Board, and Financial Stability Board Task Force on Climate-
Related Financial Disclosures. Among other attributes, these initiatives vary in their
intended primary audience, definitions of materiality, and level of specificity in defining
metrics. As a result of these varied reporting requirements, investors and other
stakeholders are faced with a “tyranny of choice” and a corresponding need for
increased levels of alignment across these multiple reporting requirements.

• Heightened regulatory focus on enhancing guidance for NGFMs. NGFMs are

defined as measures derived by adjusting GAAP/IFRS line items (e.g., adjusted
earnings) or measures derived from GAAP/IFRS information but not defined by
GAAP/IFRS financial statement presentation requirements (e.g., free cash flow, net
debt). Several securities regulators across the globe (e.g., SEC, ESMA, IOSCO, UK-
FRC, and various other country/region regulators) have respectively issued or updated
their guidance for the reporting of NGFMs. There has been a justifiable focus on
NGFMs by securities regulators due to (a) increasing concerns that these measures are
going beyond being supplemental measures and instead are treated by market
participants as alternatives to the audited and intended to be decision-relevant
GAAP/IFRS information; and (b) high frequencies of period-to-period inconsistent
reporting, lack of comparability across similar business models, lack of clarity on the
adjustments within the calculation, undue prominence, and often misleading positive
bias in companies’ reporting of NGFMs.

• A subset of key performance indicators (KPIs) is minimally addressed by

regulators’ guidance. The concerns related to the potentially misleading reporting of

4
Examples of country/region requirements include the US SEC climate change disclosures, France Article 173, and EU nonfinancial reporting
directive. Furthermore, a UN Conference on Trade and Development report highlights that there are 32 stock exchanges across the globe with
ESG reporting requirements.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 6
 NGFMs can be extended to other financial, operational, customer, and intellectual
capital KPIs that are reported outside the financial statements (e.g., same store sales).
Yet, there is a paucity of applicable guidance related to the reporting of this important
subset of nonfinancial information and KPIs. This situation of inadequate guidance
exists notwithstanding that the communication of these KPIs by companies is intended
to be a key part of their value creation story. Despite the limited regulatory guidance, the
need for reliable and consistent reporting of other KPIs was emphasized by the SEC
Chief Accountant in a 2017 speech.

“I believe much of the experience with non-GAAP financial metrics reporting also
provides lessons for other kinds of reporting by companies” – SEC Chief
Accountant Wes Bricker 5, May 2017

The observation that there are KPIs, relevant for investment decision making, reported
outside the main financial statements—but with limited regulatory guidance—was the
motivation for this particular survey with an objective of eliciting investor perspectives on
financial, operational, and intellectual capital metrics.

OBJECTIVES OF SURVEY

Over the last few years, CFA Institute has elicited member/investor perspectives on different
strands of information reported outside the primary financial statements, including NGFMs 6
and ESG 7 reporting. This survey’s objective is to build on these previous surveys by
ascertaining investor perspectives on financial, operational, customer, and intellectual capital
metrics that are important yet have minimal related reporting guidance.

The survey obtained user views on the high-level usage of a selection of broad sections within
the narrative reporting or MD&A sections (i.e., supplemental, financial, operational, business
model, customer, risk, governance, intellectual capital, and sustainability information). The
survey also established usage of and perceptions on availability and quality of specific
financial, operating, customer, and intellectual capital metrics. The specific metrics assessed

5
http://ww2.cfo.com/auditing/2017/05/issuers-address-other-reporting/
6
Investor uses, expectations, and concerns on Non-GAAP Financial Measures; Bridging the Gap: Ensuring Effective Non-GAAP and
Performance Reporting.
7
Environment, Social and Governance Survey—2017; Environmental, Social and Governance Issues in Investing—2015.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 7
were derived from several related publications (2016 KPMG Room for Improvement 8; 2016
WICI Intangibles Reporting Framework; 2007 CFA Institute Comprehensive Business
Reporting Model) and from earlier feedback obtained from CFA Institute members.

The survey was primarily targeted at buy-side portfolio managers and research analysts, sell-
side analysts, credit analysts, and corporate financial analysts. The survey had 305 initial
respondents. Response rates to the detailed questions ranged from 154 to 250. See the
Appendix for additional details of the survey.

2 INVESTOR FEEDBACK ON NARRATIVE REPORTING SECTIONS

The member survey findings regarding the extent of use of broad categories within the
narrative reporting sections (MD&A or management commentary) are reflected in Table 1 and
Table 2 below.

Table 1: Extent to which information within different sections is applied

Sections within corporate reports # 1 2 3 4 5 Av Score Rank

Operational metrics 250 2% 3% 10% 34% 50% 4.28 1

Description of business model, business 249 2% 3% 14% 29% 52% 4.27 2
plans, and strategy
Supplemental financial performance, revenue, 249 2% 1% 18% 35% 44% 4.19 3
asset quality, funding, and liquidity information
Capital commitments (near and long term) 249 2% 5% 14% 38% 40% 4.08 4
Principal risks and uncertainties 249 2% 6% 22% 36% 34% 3.94 5
Going concern and business viability related 250 3% 12% 20% 31% 34% 3.82 6
information
Off balance sheet arrangements 250 2% 10% 24% 34% 31% 3.82 7
Customer-related metrics 250 2% 8% 33% 34% 24% 3.68 8
Corporate governance information 249 2% 15% 35% 28% 21% 3.51 9
Intellectual capital information 248 6% 22% 38% 21% 13% 3.11 10
Sustainability information (environmental, 249 12% 30% 33% 14% 11% 2.82 11
society, and reputational risk)
# = Number of respondents; 1 = Never use; 2 = Rarely use; 3 = Sometimes use; 4 = Often use; 5 = Always use. Av Score = Average score—
the weighted average of percentage responses to rating 1 to 5.

8
The KPMG report reviews the state of narrative reporting across 270 companies spread worldwide and has
recommendations on metrics that can be insightful for investors.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 8
Table 2: Reasons for applying information within corporate reports
Sections within corporate reports # Assess Valuation S/t risk L/t risk F/stat
Mgmt Qual ctxt
Operational metrics 238 48% 73% 40% 54% 52%
Description of business model, business plans, and strategy 237 56% 52% 32% 60% 41%
Supplemental financial performance, revenue, asset quality, 242 29% 72% 46% 55% 56%
funding, and liquidity information
Capital commitments (near and long term) 230 21% 65% 48% 61% 32%
Principal risks and uncertainties 229 25% 36% 58% 77% 23%
Going concern and business viability related information 214 31% 30% 46% 61% 17%
Off balance sheet arrangements 221 19% 48% 46% 63% 35%
Customer-related metrics 225 34% 51% 38% 44% 38%
Corporate governance information 207 65% 8% 24% 45% 14%
Intellectual capital information 177 26% 27% 15% 33% 24%
Sustainability information (environmental, society, and 145 32% 11% 16% 38% 10%
reputational risk)
# = Number of respondents who sometimes (3 rating), often (4 rating), and always (5 rating) use information within sections.
Mgmt Qual = Management quality; S/t = Short-term; L/t = Long-term; F/stat ctxt = Financial statements context.

The following inferences are drawn from the results in Tables 1 and 2:

• Top three most commonly applied categories of MD&A/narrative reporting

information. An analysis of the relative application by investors of information
contained across 11 identified broad categories within the MD&A/narrative reporting
portion of the annual report shows that the top three most commonly applied categories
were (1) operational metrics; (2) contextualizing strategy and business model
descriptions; and (3) supplemental financial information. Sustainability reporting was the
least applied category.

• There is varied and extensive use of the information within MD&A or management
commentary. The average score shows that “often used” (i.e., 9 of 11 broad categories
had an average score of greater than 3.5) would be a representative characterization on
the extent of use for most of the information categories except for intellectual capital and
sustainability information where “sometimes used” is the representative score (see
Table 1).

• Information reported outside financial statements has multiple applications. The

findings reflected in Table 2 confirm that investors use KPIs and information outside
financial statements not only to contextualize the information within the main financial

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 9
 statements but also as independent inputs for valuation, assessing management
quality, and assessing risk across multiple horizons.

• Enhancing ESG information is necessary but should not be the exclusive focus of
efforts to enhance information reported outside the primary financial statements.
Several investor surveys, including CFA Institute surveys 9 conducted in 2015 and 2017,
affirm the growing importance for investors of ESG information. The 2017 CFA Institute
ESG survey shows that 73% of respondents take ESG issues into account in their
investment analysis and decisions, with governance being the topmost factor.

As can be seen in Table 1, this report affirms the findings from past CFA Institute ESG
surveys that indicate that most investors use at least one of the ESG factors. Note the
following findings:

o Most respondents (84%) indicated that they “sometimes,” “often,” or “always” use
corporate governance information; only 2% never use this information.
o A majority of respondents (58%) indicated that they “sometimes,” “often,” or
“always” use sustainability information; only 12% never use this information.

At the same time, the results reveal that ESG information is currently used to a lesser
extent than supplemental financial, operational, customer, risk-related, and intellectual
capital measures. The observed ranking of investors’ application of different sections of
MD&A/narrative reporting suggests that any initiative aimed at enhancing the reporting
of narrative/nonfinancial information should not be disproportionately focused on just
ESG/sustainability information.

• Integrated reporting principles should be adopted by companies. The observed

widespread use and by implication relevance of different strands of information reported
within the MD&A/narrative reporting section strengthen the case for the greater adoption
of the integrated reporting approach as has been proposed by the International
Integrated Reporting Council (IIRC). An integrated reporting approach necessitates the
connectivity of different material, company-specific strands of information as a way of

9
Environment, Social and Governance survey - 2017; Environmental, Social and Governance Issues in Investing - 2015.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 10
 conveying the link between performance, value creation, and the risk profile of reporting
entities.
• An update of guidance related to MD&A/narrative reporting is desirable. As
articulated by many stakeholders, an update of the IASB MCPS could strengthen the
quality of narrative reporting practices across the widespread IFRS-reporting
jurisdictions. As pointed out by the 2017 MCPS staff paper 10, the IASB nonmandatory
guidance issued in 2010 has had a discernible, positive effect, enhancing the quality of
narrative reporting. Therefore, an MCPS update has the potential to further strengthen
the related reporting. Some of the ideas enunciated in the recent MCPS-related IASB
staff paper are: (a) strengthen and make explicit the linkage or connectivity principle; (b)
augment the reporting of forward-looking information; (c) enhance the business model
and strategy description; and (d) augment the principles of performance reporting
(NGFMs, financial, operational, customer KPIs, and intellectual capital metrics) and risk
disclosures. The UK FRC strategic report requirements provide an example of effective
guidance as it encompasses many of the ideas espoused by the integrated reporting
framework and those being thought of by the IASB for its potential MCPS update.

Along similar lines, the efforts by the US SEC to modernize disclosures (via updating
Reg S-K requirements) with the objective of enhancing the information content within
reported MD&A sections is a step in the right direction.

3 FINANCIAL, CUSTOMER, AND OPERATIONAL KPIs

3.1 MEMBER SURVEY FEEDBACK
Survey findings (see Tables 3, 4, and 5) show the following situations.
• Top five financial and operational metrics. Across a subset of 16 financial, customer,
and operational metrics, the top five most-used metrics are NGFMs, organic sales
growth measures, gross margin disaggregation, market share, and future revenue
potential measures. In contrast, customer metrics (5 of the 16) were clustered below the
median ranking of relative usage and perceived reporting quality. The results likely
reflect the relatively nascent reporting of customer metrics. In general, the survey found

10
http://www.ifrs.org/-/media/feature/meetings/2017/november/iasb/wider-corporate-reporting/ap28a-wcr-mcps.pdf

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 11
 a positive correlation between the extent of use and the perceived quality of reporting of
individal metrics.

• Moderate to extensive use of financial, customer, and operational metrics. Table 3

shows that most (12 of 17) of the financial and operating KPIs can be characterized as
being applied “often” (average score can be approximated as 4) with the rest (5 of 17)
being applied “sometimes” (average score can be approximated as 3).

• Poor to moderate quality of related reporting. Table 4 shows that most (11 of 17) of
the financial and operating KPIs are on average perceived as being of “moderate
quality” (average score can be approximated as 3) with the rest (6 of 17) being of “poor
quality” (average score can be approximated as 2). Also notable is that a significant
number of respondents believe some of these metrics are unavailable for their purposes
(e.g., 42% for customer satisfaction).

Table 3: Extent of use of financial and operational metrics

Metric # 1 2 3 4 5 Av Rank
Score
Non-GAAP financial measures (e.g., EBITDA, free 209 2% 3% 14% 28% 52% 1
cash flow, core profit, etc.) 4.25
Comparable or organic sales growth data (e.g., like for 208 2% 4% 15% 35% 43% 2
like or same-store sales, constant currency sales) 4.12
Gross margin disaggregation (revenue mix & cost-of- 208 1% 6% 13% 40% 39% 3
sales mix breakdown) 4.10
Market share 210 1% 4% 20% 40% 36% 4
4.05
Future revenue potential measures (e.g., contracted 209 2% 8% 25% 41% 24% 5
sales not yet recognized as revenue, order backlog) 3.78
Capacity utilization measures 210 1% 6% 30% 40% 23% 6
3.77
Asset utilization (e.g., occupancy) 210 2% 7% 29% 36% 26% 7
3.77
Customer base (numbers, profile) 209 2% 6% 32% 37% 23% 8
3.72
New customers, subscribers 208 3% 9% 26% 39% 22% 9
3.68
Fixed versus variable cost analysis 207 2% 11% 29% 34% 24% 10
3.67
Customer retention rate (e.g., subscriber renewal rate, 208 4% 7% 29% 39% 20% 11
customer visits, footfall) 3.65
Sales per unit (e.g., sales per square foot, sales per 209 4% 13% 32% 33% 17% 12
room) 3.45
Sales conversion (average revenue per customer, 208 5% 15% 33% 31% 16% 13
cross-selling measures) 3.39
Productivity ratios (e.g., employee productivity 208 3% 15% 38% 29% 14% 14
measures) 3.37
Customer acquisition costs 210 4% 15% 37% 30% 14% 15
3.35
Customer satisfaction scores 210 9% 27% 39% 19% 7% 16
2.88
# = Number of respondents; 1 = Never use; 2 = Rarely use; 3 = Sometimes use; 4 = Often use; 5 = Always use. Av Score = Average Score—
the weighted average of percentage responses to rating 1 to 5.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 12
 • Inadequate reporting influences extent of use of information. As reflected in Table
5, the relative rankings of the individual financial and operating metrics show a
correlation between the availability and quality of information, and the extent of its
usage.

• Concerns on KPIs echo those related to reporting of NGFMs. Member comments

show that investors have concerns on the incomplete, inconsistent, incomparable, and
biased calculation of KPIs that are quite similar to the concerns related to the reporting
of NGFMs.

Table 4: Perception of quality of financial and operational metrics

Financial and operational metrics # 1 2 3 4 No Av Rank
opinion Score
Non-GAAP financial measures (e.g., EBITDA, Free 181 2% 12% 42% 36% 9% 1
cash flow, Core Profit, etc.) 3.23
Comparable or organic sales growth data (e.g., like for 182 9% 7% 41% 35% 9% 2
like or same-store sales, constant currency sales) 3.11
Sales per unit (e.g., sales per square foot, sales per 182 10% 10% 41% 27% 12% 3
room) 2.95
Market share 182 12% 15% 40% 27% 7% 4
2.87
Asset utilization (e.g., occupancy) 181 11% 17% 36% 27% 8% 5
2.87
Gross margin disaggregation (Revenue mix & cost of 181 15% 13% 39% 24% 8% 6
sales mix breakdown) 2.78
Future revenue potential measures (e.g., contracted 179 9% 20% 46% 16% 8% 7
sales not yet recognized as revenue, order backlog) 2.76
New customers, subscribers 182 12% 16% 45% 18% 8% 8
2.75
Capacity utilization measures 181 19% 15% 38% 20% 8% 9
2.64
Customer base (customer numbers, profile) 183 17% 22% 39% 15% 7% 10
2.55
Fixed versus variable cost analysis 181 28% 15% 33% 15% 8% 11
2.39
Productivity ratios (e.g., Employee productivity 178 22% 21% 35% 10% 13% 12
measures) 2.37
Customer retention rate (e.g., subscriber renewal rate, 182 26% 20% 34% 10% 10% 13
customer visits, footfall) 2.32
Sales conversion (Average revenue per customer, 182 25% 26% 29% 10% 10% 14
cross-selling) 2.26
Customer acquisition costs 182 31% 26% 25% 5% 13% 15
2.05
Customer satisfaction scores 182 42% 26% 16% 4% 10% 16
1.81
# = Number of respondents; 1 = Usually unavailable; 2 = Available and poor quality; 3 = Available and moderate quality; 4 = Available and
high quality. Av Score = Average score, determined after excluding respondents with no opinion.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 13
Table 5: Financial and operational metrics: Extent of use versus perception of reporting
quality—rankings comparison
Other financial and operational metrics Usage rank Quality
rank
Non-GAAP financial measures (e.g., EBITDA, Free cash flow, Core Profit, etc.) 1 1
Comparable or organic sales growth data (e.g., like for like or same-store sales, constant currency 2 2
sales)
Gross margin disaggregation (Revenue mix & cost of sales mix breakdown) 3 7
Market share 4 5
Future revenue potential measures (e.g., contracted sales not yet recognized as revenue, order 5 8
backlog)
Capacity utilization measures 6 10
Asset utilization (e.g., occupancy) 7 6
Customer base (numbers, profile) 8 11
New customers, subscribers 9 9
Fixed versus variable cost analysis 10 12
Customer retention rate (e.g., subscriber renewal rate, customer visits, footfall) 11 14
Other financial and operational metrics 12 4
Sales per unit (e.g., sales per square foot, sales per room) 13 3
Sales conversion (Average revenue per customer, cross-selling measures) 14 15
Productivity ratios (e.g., Employee productivity measures) 15 13
Customer acquisition costs 16 16
Customer satisfaction scores 17 17

CFA Institute Member Comments on Quality of Financial, Customer, and Operational

KPIs
Poor Accessibility
Organic revenue growth is a metric I use heavily; however, oftentimes you really have to
dig into the annual reports to find this. Frequently companies’ management do not
reveal organic growth on a divisional basis if it is poor, or indeed the implement
rounding on the number. A tabulated format for this info is the ideal situation.

Too much of this is inconsistent and not always available across most firms (i.e.,
available only for a subset).

Lack of Comparability
Sales per square foot (sq ft) is not uniform across Real Estate Investment Trusts
(REITS) and retailers - some split out large shops and small shops, some split out
selling sq ft and total sq ft, occupancy also not uniform, rent per sq ft not uniform.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 14
Biased Calculation
Companies tend to fudge their organic / same-store revenue numbers. They also often
choose inappropriate definitions for non-GAAP measures, for example excluding share-
based payments, or restructuring costs which are actually ongoing. I've even seen
efforts to rig cash flow numbers by excluding pension or other costs.

I find that EBITDA, Free Cash Flow, and Operating Profit are measures that I use all the
time. It is VERY disappointing that these are not defined by GAAP, and so every
management selects its own definition to make its results look good.

There is a lot of subjectivity in the exact calculation of many of these measures, which
limits comparability.

I’ve encountered two companies this year that have outright lied (in my opinion) about
organic vs non-organic revenue growth. This has been a systemic issue with many
acquisitive companies. It would be extremely helpful if there was a really simple
requirement to have a breakdown of organic vs non-organic revenue growth in a more
standardized forma… this would at least prevent the kind of outright lying (or intentional
misleading) I have come across a number of times.

3.2 RECOMMENDATIONS ON FINANCIAL, CUSTOMER, AND OPERATIONAL KPIs

Survey findings on the financial, customer, and operational KPIs support the following
measures.
• Enhance regulatory guidance and scrutiny of financial, customer, and operational
KPIs. The development or strengthening of any existing guidance related to alternative
performance measures reported outside the primary financial statements, including
financial, customer, and operational KPIs, is needed to ensure greater transparency,
consistent period-to-period definitions, and more comparable and reliable reporting of
these measures.

An idea that has gotten traction in several stakeholder conversations is the need for the
three-year standstill requirements by securities regulators, whereby issuers have to
stick to the same definition of individual metrics for a period of three years.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 15
 • Appropriate private-sector bodies should develop guidance that enhances
comparability of KPIs. There is a potential opportunity for a private-sector–driven
industry/business model specific definition of relevant KPIs. It can be quite a balancing
act between pursuing desirable comparability versus allowing companies discretion to
“tell their story,” bearing in mind that these KPIs are voluntary supplemental measures
and are not meant to be mandatory standardized information. Examples of business
model-relevant guidance that currently exists include the REIT sector definition of
NGFMs and the gold mining sector definition of cash cost per ounce.

• Enhance related assurance requirements. Existing assurance requirements need to

be enhanced to increase the reliance that investors can place on these measures.
Existing assurance requirements have a fairly low threshold of providing assurance–
auditors only have to ascertain that there are no inconsistencies between the
information within and outside the primary financial statements notwithstanding that the
linkage between some of these KPIs and financial statement line items can, at face
value, be indirect and difficult to readily ascertain. In other words, there is limited
transparency and it is hard to discern how auditors ascertain the absence of
inconsistencies.

4 INTELLECTUAL CAPITAL METRICS

In their 2016 textbook The End of Accounting and the Path Forward for Investors and
Managers, 11 Lev Baruch and Feng Gu strongly advocate for the significant enhancement in the
reporting of intangible assets (e.g., intellectual property rights, brands) as that would be
aligned with the pattern of intangible assets increasingly becoming pervasive and being a core
asset for modern economy companies. They observe that the rate of corporate investment in
physical capital (tangible assets) fell by 35% from 1977 to 2012, whereas the rate of
investment in intangibles increased by 60% during the same period. In effect, corporate
investment in intangible assets has outstripped that made toward tangible assets.

11
Lev Baruch, Feng Gu, The End of Accounting and the Path Forward for Investors and Managers (Hoboken, NJ:
John Wiley & Sons, Inc., 2016).

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 16
4.1 MEMBER FEEDBACK ON INTELLECTUAL CAPITAL METRICS

The member survey findings on the usefulness and quality of intellectual capital metrics
(Tables 6, 7, and 8) suggest that there is yet to be a widespread use of these metrics. Survey
results show the following:

• Top three intellectual capital metrics. Across a subset of 10 intellectual capital

metrics, the top three most-used metrics are research and development expenditure as
a percentage of sales, new product/research pipeline information, and intellectual
property expiry exposure (revenue from products coming off patent in the next “x”
years). As with the financial, customer, and operational metrics, the survey found a
positive correlation between the extent of use and the perceived quality of reporting of
individal metrics.

• Rare to moderate use of intellectual capital metrics. Table 6 shows that most (6 of
11) of the intellectual capital KPIs can be characterized as being on average applied
“sometimes” (average score can be approximated as 3) with 4 of 11 being on average
applied “rarely” (average score can be approximated as 2).

• Unavailable, poor quality of related reporting. Table 7 shows that most (9 of 11) of
the intellectual capital KPIs are on average perceived as being either “unavailable” or of
“poor quality” (average score can be approximated as 2) with the rest (2 of 11) being on
average of “moderate quality” (average score can be approximated as 3).

• Inadequate reporting influences extent of use of information. As reflected in Table

8, the relative rankings of the individual intellectual capital KPIs show a correlation
between the availability and quality of information, and the extent of usage.

• Questionable intangibles valuation could affect usefulness of related disclosures.

Intellectual capital disclosures are meant to convey the future cash-generating potential
of related assets and where available, the standalone/realizable values of individual
assets. That said, skepticism by investors regarding the economic relevance of any
standalone valuation of intellectual capital assets (e.g., brand values) could influence
the usefulness of such disclosures as reflected in the member comment below:

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 17
 The valuation of intellectual capital is closely associated with the earnings or
cash flows generated by that intellectual capital. It is rarely the case the
intellectual capital has separable realizable value apart from these cash flows.
Table 6: Extent of use of intellectual capital metrics
Intellectual capital metrics # 1 2 3 4 5 Av Rank
Score
Research and development (R&D) expenditure ratios 161 7% 11% 28% 35% 19% 1
(e.g., R&D/Sales) 3.50
New product/research pipeline information 162 10% 10% 38% 38% 5% 2
3.18
Intellectual property expiry exposure - revenue from 159 14% 21% 41% 17% 7% 3
products coming off patent in the next “X” years. 2.81
New product ratios (sales of products launched within 161 15% 27% 32% 20% 6% 4
recent X years/total sales) 2.76
Details, indicators of the value of intellectual property 160 11% 30% 38% 16% 6% 5
owned (patents, trademarks, licenses, franchises, 2.76
copyrights, and concessions)
Number and revenue/EBIT derived from patents with 159 19% 27% 31% 18% 4% 6
economically meaningful remaining terms 2.60
Human capital profile (e.g., expert staff headcount, 161 20% 30% 30% 17% 2% 7
disaggregation by key functional areas) 2.50
Brand valuation measures 159 21% 28% 36% 12% 3% 8
2.47
Other intellectual capital metrics 60 43% 10% 33% 5% 8% 9
2.25
Brand perception scores (e.g., net promoter scores) 162 28% 32% 28% 10% 1% 10
2.23
Training expenditure per employee 160 44% 32% 19% 4% 1% 11
1.87
# = Number of respondents; 1 = Never use; 2 = Rarely use; 3 = Sometimes use; 4 = Often use; 5 = Always use. Av Score = Average Score—
the weighted average of percentage responses to rating 1 to 5.

Table 7: Perception of quality of intellectual capital reporting

Intellectual capital metrics # 1 2 3 4 No Av Rank
Opinion Score
Research and development (R&D) expenditure ratios 156 10% 12% 33% 35% 10% 1
(e.g., R&D/Sales) 3.05
New product/research pipeline information 155 15% 23% 43% 9% 10% 2
2.51
Intellectual property (IP) expiry exposure—revenue from 154 27% 18% 29% 11% 15% 3
products coming off patent in the next “X” years. 2.27
New product ratios (sales of products launched within 155 29% 15% 29% 10% 16% 4
recent X years/total sales) 2.25
Details, indicators of the value of intellectual property 154 28% 23% 25% 11% 13% 5
owned (patents, trademarks, licenses, franchises, 2.22
copyrights, and concessions)
Number and revenue/EBIT derived from patents with 155 32% 18% 25% 8% 16% 6
economically meaningful remaining terms 2.12
Human capital (e.g., expert staff headcount, 154 34% 19% 25% 5% 16% 7
disaggregation by key functional areas) 2.01
Other intellectual capital metrics 115 30% 11% 18% 4% 37% 8
1.96
Brand perception scores (e.g., net promoter scores) 156 46% 19% 16% 3% 17% 9
1.71
Brand valuation measures 154 53% 18% 13% 3% 14% 10
1.62
Training expenditure per employee 156 54% 11% 17% 2% 17% 11
1.60
# - Number of respondents; 1 = Usually unavailable; 2 = Available and poor quality; 3 = available and moderate quality; 4 = Available and high
quality. Av Score = Average score determined after excluding respondents with no opinion.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 18
Table 8: Intellectual capital metrics: Extent of use versus perception of reporting
quality—rankings comparison
Intellectual capital metrics Usage Quality
rank rank
Research and development (R&D) expenditure ratios (e.g., R&D/Sales) 1 1
New product/research pipeline information 2 2
Intellectual property expiry exposure - revenue from products coming off patent in the next “X” years 3 3
New product ratios (sales of products launched within recent X years/total sales) 4 4
Details, indicators of the value of intellectual property owned (patents, trademarks, licenses, franchises, copyrights, 5 5
and concessions)
Number and revenue/EBIT derived from patents with economically meaningful remaining terms 6 6
Human capital profile (e.g., expert staff headcount, disaggregation by key functional areas) 7 7
Brand valuation measures 8 10
Other intellectual capital metrics 9 8
Brand perception scores (e.g., net promoter scores) 10 9
Training expenditure per employee 11 11

4.2 RECOMMENDATIONS ON INTELLECTUAL CAPITAL METRICS

Notwithstanding the increasing relevance of intellectual capital assets as highlighted by Baruch
and Gu (2016), the current poor state of the reporting of these assets contributes to the limited
use of this information by investors. Hence, we recommend the following:

• Enhance authoritative intellectual capital reporting guidance. Various publications

(2016 KPMG Room for Improvement; 2016 WICI Intangibles Reporting Framework;
2007 CFA Institute Comprehensive Business Reporting Model; 2014 UK FRC Report on
Investor Perspectives on Intangible Assets and Their Amortisation; The End of
Accounting and the Path Forward for Investors and Managers) offer specific proposals
that could guide the development of comprehensive and useful intellectual capital
disclosures. These proposals should be incorporated into authoritative guidance from
either the accounting standard setters (e.g., IASB management commentary practice
statement) or from securities regulators guidance.

• The IIRC should heighten focus on intellectual and human capital reporting. The
IIRC should champion and encourage the curation of intellectual capital metrics in a
similar fashion to what it has done for some of the other capitals within the integrated
reporting framework (natural and social). In other words, the IIRC has been highly
visible in its support, promotion and coordination of sustainability/ESG reporting
initiatives and it should do the same for intellectual and human capital reporting
initiatives.

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 19
.

5 APPENDIX:
2017 CFA INSTITUTE CORPORATE REPORTING SURVEY PROFILE
The survey administered in August 2017 was primarily targeted at buy-side portfolio managers
and research analysts, sell-side analysts, credit analysts, and corporate financial analysts. The
survey had 305 initial respondents representing a response rate of 1.4 percent. Response
rates to the detailed questions ranged from 154 to 250 resulting in a margin of error ranging
from 6.2 to 7.9%. Below is a breakdown of respondents by functional area, investment horizon,
asset class, and broad region.

Response by Functional Area

6.9%

17.4%
43.6%

6.9%

7.2%

18.0%

Portfolio manager Research analyst: buy-side Research analyst: sell-side

Credit analysts Corporate finance analysts Other

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 20
 Respondents by Investment Horizon
5.9% 3.0%

30.5%

60.6%

Short term (one year or less)

Long term
Balanced combination of short-term and long-term
Not applicable

Response by Asset Class

10.1%

6.2%

20.7%

63.0%

Equity Fixed income Private equity Other

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 21
 Respondents by Broad Region

23.6%

14.8% 61.6%

Total Americas APAC EMEA

© 2018 CFA Institute. All rights reserved. CFA Institute Member Survey Report 22