Financial statements alone are not sufficient to communicate the entity’s overall performance, Management Discussion and Analysis (‘MD&A’) has become a core element of the communication package for external reporting purpose now a days.
MD&A is also known as management’s commentary; management’s report, operating and financial review. It is a section of company’s annual report in which management discusses variety of issues including the nature of business, past performance and future outlook. In nutshell, MD&A aid in understanding company’s past, present and future. MD&A should provide a native explanation, through the eyes of management, of how an entity has performed in the past, its financial conditions and its future prospects. Please note that some parts of the management’s commentary may be unaudited.
A discussion of firm’s long term debt is also found in management discussion and analysis section. This discussion is both quantitative, such as identifying obligations and commitments that are due in future, and qualitative, such as discussing capital resource trends and material changes in the mix and cost of debt. Further, disclosure of each financial statement generally should be reviewed based on footnotes and management discussion and analysis.
In US, SEC requires that MD&A discuss trends and identify the significant events and uncertainties that affect firm’s liquidity, capital resources and results of operations.
MD&A must also discuss:
- Effect of inflation & changing prices, if material
- Accounting policies that require significant judgement by management
- Impact of off- balance sheet obligations and contractual obligations such as purchase commitments
- Forward looking expenditure and divestitures
- Description of unusual or infrequent operating results that materially affected or are expected to materially affect income, etc.
Significant policies and estimates that require management judgement when addressed in MD&A along with footnotes, analyst can use such disclosure to evaluate what policies are discussed, whether they cover all the relevant data in the financial statements, which policies required management to make estimates and whether disclosures and estimates have changes since the prior period.
The focus in MD&A should be on management’s strategy for generating value for investors over time. Management is better positioned than outsiders to provide information about an entity to capital market. MD&A indeed is a powerful tool for management to communicate how entity creates its value and to showcase its plans.
(For any queries, author can be reached at [email protected] )
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