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Management Discussion and Analysis (MD&A)

Information about a company’s performance in its previous fiscal year, its current financial standing, and projections by management for future performances

What is Management Discussion and Analysis (MD&A)?

Management discussion and analysis, or MD&A, is a section that can be found in the annual report of a company. The MD&A section provides key information regarding how a company is performing financially.

The information can also be found in the SEC Form 10-K. As per required by the Securities and Exchange Commission (SEC) and its jurisdiction, the MD&A must be disclosed for publicly-traded companies.

 

Management Discussion and Analysis (MD&A)
Fig. 1: Sample MD&A Document

 

The MD&A provides information on a company’s performance in its previous fiscal year, its current financial standing, and projections by management for future performances. The section assists investors with understanding how the management thinks, how the company performs following the management’s decision-making processes, and the company’s core financial fundamentals.

 

Summary

  • The management discussion and analysis, or MD&A, is a section that can be found in the annual report of a company. It provides key information regarding how a company is performing financially.
  • The MD&A provides information on a company’s performance in its previous fiscal year, its current financial standing, and projections by management for future performances.
  • Since a publicly-traded company falls under the jurisdiction of the SEC, the commission screens and oversees the MD&A section of the annual report to ensure that the company’s compliance with all its requirements.

 

The Securities and Exchange Commission (SEC) and MD&A

Since a publicly-traded company falls under the jurisdiction of the Securities and Exchange Commission (SEC), the commission screens and oversees the MD&A section of the annual report to ensure that the company has presented all noteworthy information about the company’s liquidity status, information on the capital of the company, and its operations.

In addition to that information, the management of the company should also add projections or estimates on their expectations of market performance and economic trends that can influence the company’s position in terms of liquidity and operations.

The MD&A section is also expected to present information on the risks and uncertainties that can lead to the potential failure to meet the projections or estimations made for future financial outcomes and operations.

An example of expected information can include political factors or unrest in the country in which a company operates. Political unrest can result in a major impact on the performance of a company and its operations. Information circling the effects of the political unrest on the company must be included in the report in order to depict the expected future earnings estimates.

 

Key Factors Found in the Management Discussion and Analysis

The following is some of the key information that should be found in the MD&A section of the annual report:

 

Important accounting policies and estimates

The SEC urges companies to provide detailed information regarding their accounting policies in the MD&A section of the annual report. It enables investors and other stakeholders to understand the impacts of the accounting policies and the decisions made following the application of the policies and possible variations should the company have applied other assumptions.

 

Operational results and position

Companies are expected to disclose the results or performance of operations following notable economic changes that may have had an influence on income or possible extraordinary events and transactions. In addition, the companies are expected to disclose any trends or risks that may positively or negatively impact revenue from operations.

 

Liquidity and capital resources

The management should report on any notable events that may have altered the liquidity and capital resources. They should also provide information on any existing or potential future capital expenditure commitments and the funding options available to meet the capex commitments.

 

Examples of Accounting Information Found in the MD&A

 

Recognition of revenue

Revenue recognition follows an accounting principle that provides a framework for particular conditions, under which revenue is (or can be) recognized. The conditions include the transfer of ownership from a seller to a buyer, assured collection of payment from the goods and services, and the revenue amount.

 

Restructuring costs or charges

In a situation where a company undergoes complete or partial restructuring, the management is expected to disclose the impact of the restructure on the company and highlight the cost implications related to the restructuring.

An example of cost implications can be the costs related to closing down a facility or severance payment to employees resulting from shutdowns.

 

Asset impairment

The impairment of an asset refers to the diminishing of its value or its quality. As per SEC expectations, a company is expected to report on the loss of an asset’s value and the causes of the loss. It is important information for shareholders of the company; thus, it should be reported. Depreciation and amortization are also key information factors concerning the impairment of the assets.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Analysis of Financial Statements
  • Earnings Guidance
  • Financial Statement Notes
  • Types of SEC Filings

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