The Beginning of my investments

When I was looking through the annual report of Tata Consultancy Services, which one of the largest IT service provider company in India, I came across a separate section called the ‘Management Discussion and Analysis’. This Management Discussion and Analysis section included various topics including Macro Economic Performance including that of the IT industry, the Company’s Vision and Strategy and some key financial indicators and their rationale.

As an investor, that was very insightful information provided by the Company to co- relate macro- economic barometers and performance of the Company in light of them. Similar case was with Infosys, Just Dial, Coal India Limited, etc. This section of Management Discussion and Analysis was included in companies’ annual reports, providing a similar section analyzing the company performance and decoding the financial ratios and various indicators for the investors.

Why is this exercise required for all companies? Surely, there is a legal background for these efforts which are made by all registered companies in India. Let’s look into the regulation framework to understand the specific requirements which need to be included in the Management Discussion and Analysis section and various practices adopted in Indian Corporate world, as well as, in other countries.

Management Discussion and Analysis (MD&A)

The corporate world have adopted MD&A route to demonstrate their commitment to the Company’s vision and strategy, and how the management has created value and delivered performance in light of their long term goals. When the term management is referred throughout this topic, it will be involving complete structure of organization including the Board of Directors, Chief Executive Officer and other Chiefs, their reporting officers/ controllers of various departments– Human Resources (People), Finance, Marketing, Production and Operations, etc and the remaining middle and lower management levels. Hence, MD&A does not only scrutinize financial figures/ results, but also looks into Human resources and operations side of the business, which the fundamental and key factors to any business organization.

MD&A helps in understanding the operational and financial results in better lights, with objectives of –

  • Enabling readers of the financial statements to understand in better way the numbers, financial condition and to get into management’s shoes to understand certain strategic and operational decisions which are bold and largely impacting the future performance and position of the Company.
  • Additional supplementary/ complimentary information provided in MD&A will help readers understand what exactly the financial statements depict and what is not reflected.
  • Addressing the investors’ perception towards the risks associated with the business operations and outlining past trends to indicate the management’s efforts towards mitigating those risks and leading the path towards future financial statements.
  • There might be certain information, which though not mandated to be disclosed in the financial statements, its additional reference and disclosure by the management can be of added value for the informed decision making by the stakeholders, which include Government authorities.

Government authorities, let it be Taxation authorities, capital market watchdogs, fiscal policy makers, banking regulators, etc., try to formulate the operational, fiscal and monetary policies not only based on the quantitative information provided by the Corporate through financial statements, but also based on the qualitative information mentioned in the Management Analysis section on the economy and the industry performance and their future goals.

What serves as objectives of MD&A is the benefiting factor to the stakeholder community. First time investors in the equity markets can adopt qualitative and informed decision making based on the information provided by the company’s management in their annual reports.

Format and Extent of Management Discussion and Analysis

As you can note from the above mentioned objectives and governing regulations in India, there is prescribed and constantly followed practice of how the information is presented in the annual report. However, neither there is any comprehensive reporting format prescribed by the Government in this regard, nor we can notice any universal practice of disclosing such information among various companies from various industries or various countries. Hence, accounting professional governing institutions acting in the respective countries might provide guidance for the presentation of MD&A. For example, Federal Accounting Standards Advisory Board (FASAB) in the United States has issued a recommended accounting standard on the Management Discussion and Analysis with first draft published in January 1997, which can be accessed using following link– FASAB standard on MD&A. In India, there is no standard or guidance note in this behalf, however, the Institute of Company Secretaries of India (ICSI) has issued Reference Note on Board’s Report under their Companies Act 2013 series, but leaving MD&A presentation to the interpretation of the industry.

So, taking FASAB standard for our understanding purpose, MD&A should address: –

– the entity’s mission and organizational structure;

– the entity’s performance goals and results;

– the entity’s financial statements;

– the entity’s systems, controls, and legal compliance; and

– the future effects on the entity of existing, currently-known demands, risks, uncertainties, events, conditions and trends.

Taking note from another prominent institution’s guidance on Management Discussion and Analysis originally published in November 2002, the Canadian Performance Reporting Board has laid down certain principles based on which MD&A should be prepared. Those principles are[1]

1. Through the Eyes of Management –

A company should disclose information in the MD&A that enables readers to view it through the eyes of management.

2. Integration with Financial Statements –

MD&A should complement, as well as supplement, the financial statements.

3. Completeness and Materiality –

MD&A should be balanced, complete and fair as well as provide information that is material to the decision-making needs of users. FASAB has described this requirement in other words, saying MD&A should deal with the “vital few” matters.

4. Forward-Looking Orientation –

A forward- looking orientation is fundamental to useful MD&A reporting.

5. Strategic Perspective –

The MD&A should explain management’s strategy for achieving short-term and long-term objectives.

6. Usefulness –

To be useful, MD&A should be understandable, relevant, comparable, verifiable and timely.

Consolidating what we have learnt till now, let it be FASAB in USA or Canadian Performance Reporting Board in Canada or ICSI in India, every governing agency have tried to foster the stakeholder’s informed decision making function by providing guidance to the corporate world on how the investors can step up and look the situations from the management’s point of view. A good corporate governance practice exercised by a company will always to try to improve its information dissemination function to improve its relations with various stakeholders and the society at large.

MD&A Disclosure Framework

A publication by Canadian Performance Reporting Board on MD&A Guidance on Preparation and Disclosure[2] has provided following disclosure framework. Any corporate entity shall ensure to factor all of the following elements, while framing MD&A section of their annual reports.

1. Core Business and existence instinct –

Any investing decision taken requires understanding of the core business of an organization and its purpose. This gives close view of the business segments and products operated by the Company and to understand its risk-return profile. It’s obvious that without knowing the underlying business products and structure, one will not be able to value the firm fairly. Also, it is important to present management’s strategies, plans and near term proposed actions to help investors understand the trends and threats to the business.

2. Key Performance Drivers –

Since dynamic environment surrounding the business operations affects the business functions and indirectly, the financial performance barometers. To help better understand the causes-effect relationship, the management needs to provide extensive details on the key performance drivers which in turn affect the strategy formulation and its implementation, and hence, requiring continuous monitoring. These drivers might of financial or non- financial nature.

I would like to throw a focus on the difference between an indicator and a driver. We will take financial terms only for this learning purpose. Gross margin, i.e., Cost of goods sold divided by Total Sales, is an indicator which is a number based on certain economic activities (activities in the form of production of goods and subsequent selling of them) undertaken by the enterprise. Number of goods produced and sold per hour is a driver, which derives/ generates the margin to the enterprise.

So what can be interpreted from this? Driver is what is underlying at the bottom of the business and which in fact generates revenue or profit or results in expenditures. While indicator on the other side is a reflection of what has happened and remained after the above drivers were operating in their normal course of business.

3. Capability to deliver results –

The management demonstrates its capabilities to deliver results by justifying the working capital arrangements, assets base, geographical structure and reach. Relating these underlying assets to the financial indicators can provide more clear picture to the investors and can also provide the growth opportunity indications.

4. Results and Outlook –

With the complete management and operation of the business in the hands of the Board of Directors, the managements are well positioned to provide the insightful explanation for the running trends, resource utilization and forecasts.

5. Risk –

Every industry and a company carries specific risks, arising from the general economic activities (driven by external environmental factors) and from certain internal reasons. Risk assessment and management, including data and cyber security, mechanism deployed in the organization by the management helps stakeholders to understand the risk profile of the company and that of the industry, and thereby, to take factor in such factors considering their impact on results and performance in present and longer term horizon.

Taking an example from the largest software provider firm of India

When the corporate governance is at its peak, investors recall Tata group entities for their solid and committed corporate governance practice. Tata Consultancy Services (TCS), the crown jewel in the Tata group, has shown leader’s quality in establishing how MD&A can be used by a company to connect with the investors for enhanced trust and confidence. I have tried analyzing MD&A clause in the Annual Report of TCS for the fiscal period ended on March 31, 2016. [The annual report can be accessed from the following link – TCS Annual Report, 2016].

  • MD&A has been started with a view on Macro Economy of India as well as the condition of world economy. On this backdrop, investors can analyze the operational and financial performance in realistic manner.
  • Gradually stepping down from Economy to Industry and then to the Company specific level, Top-Down approach can provide better understanding of micro level indicators, based on the macro level conditions.
  • The management has then given a clear picture on the Company’s longer term goals and strategy for short and medium term. After discussing the operational aspects of the Company, namely the technological developments and innovations, the discussion has been shifted to yet another important element of the business operations – Human Resources. Giving various aspects of the policies and efforts taken for talent development and retention were also discussed to highlight the commitment towards the People factor of an organization.
  • Discussing on the risk management and the Company’s efforts on cyber security, an investor can interpret and understand the compliance model of the Company and management’s approach to the risks and security related concerns.
  • Financial data has been represented using various graphical ways to provide better understanding of the underlying financial result for the given fiscal. Financial results have been presented by dissecting important elements such as revenues, assets, expenditures to provide analytical capabilities to the investors / stakeholders to interpret the results from various perspectives. There has been a separate table on the ratio analysis where investors can co-relate various variables and get a better picture of the financial position of the Company. In overall, this exercise has used past data to understand the present and help to depict the future capabilities.

Final Thoughts on MD&A

In light of increased participation of retail as well as foreign investors in the capital market in the recent years, especially when the Economic Survey of 2017 depicts India as the beckoning sweet spot in the darkness of world economy, a more comprehensive and transparent mechanism of information dissemination is always required to provide insightful and sufficient information to the stakeholders community to analyze companies based on their performance and help better mobilization of the capital. MD&A is being one of very efficient way to provide meaningful and highly useful information to the investors. Any improvements in MD&A and its presentation, format will lead to good corporate governance practice and healthy investors’ relationship

Additional Reading and References

[1] CPA Canada (2017) Management’s discussion and analysis: Guidance on preparation and disclosure. Available at: (Accessed: 2 February 2017).

[2] Canadian Performance Reporting Board (2009) – MD&A Guidance on Preparation and Disclosure. Available at: (Accessed: 2 February 2017).

About Author

Author Mayur P. Kharche is a freelance content writer and Founding member of Planet Finance, an academy for learning share market and mutual fund investing. The author has written articles and reports mainly relating to Financial Management and Capital Markets. Some of the articles have been published on

You can get in touch with the author at [email protected]

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Author Bio

Qualification: CA in Job / Business
Location: BHUSAVAL, Maharashtra, IN
Member Since: 27 May 2017 | Total Posts: 4

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June 2021