Management's discussion and analysis definition
/What is Management’s Discussion and Analysis?
Management's discussion and analysis is part of the disclosures section of the financial statements , in which prior period performance and projected results are discussed. This is one of the most closely reviewed parts of the financial statements, since a reader can interpret from it the opinions of management regarding the performance and future prospects of a business.
The MD&A section is a required part of the quarterly and annual financial reports of publicly-held companies, being mandated by the Securities & Exchange Commission (SEC). It is not a required part of the financial statements of privately-held entities. The SEC requires that the MD&A section describe opportunities, challenges, risks, trends, future plans, and key performance indicators , as well as changes in revenues , the cost of goods sold , other expenses, assets , and liabilities . These requirements are based on three SEC objectives related to financial reporting, which are as follows:
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To give a narrative explanation of the financial statements from the perspective of management
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To enhance the numerical disclosures in the financial statements, as well as to provide a context within which to review this information
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To discuss the quality and possible variability of an entity's earnings and cash flows
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Limitations of Management’s Discussion and Analysis
There are several limitations to the MD&A section, which are as follows:
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Non-quantitative . This is a discussion and analysis section, so management can put its spin on the numerical information presented elsewhere in the financial statements.
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Not explanatory . A business does not want to reveal too much about itself through the MD&A, since its competitors may be reading this document. Consequently, the MD&A tends to be full of generalities.
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Not necessarily accurate . The MD&A contains management’s viewpoints regarding company operations and the direction in which it is headed. The investment community may disagree with these viewpoints, resulting in stock prices going in a different direction than what the MD&A text would indicate.
Best Practices for Management’s Discussion and Analysis
The MD&A section is a clear favorite of the SEC for critiques. The SEC staff wants to see interpretive comments from a company regarding the results of operations, rather than a dry recitation of the percentages by which revenues and expenses changed in the past year, with boilerplate reasoning given for changes in performance. It also wants to see a balanced presentation that delves into both the positive and negative aspects of the topics discussed.
When a company conducts earnings calls with the investment community, it should maintain a record of the questions asked, and see if any of them could have been addressed within the MD&A section of its financial statements. This can form the basis for an increased amount of MD&A material in the next set of financials.