Management Discussion & Analysis- Nature, Scope, Objectives
Meaning of 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. It gives a narrative explanation of the financial statements from the perspective of management.
MD&A or Management Discussion and Analysis is the part of financial statements where the company’s management discuss the company’s performance in the current year using qualitative and quantitative measures to help the investor in realizing the details that which otherwise would not have been available for analysis. The MD&A section includes various topics including the Macro-Economic Performance of the industry, the Company’s Vision and Strategy and some key financial indicators and their rationale.
As an investor, that is very insightful information provided by a company to co-relate macroeconomic parameters and the performance of the company in light of them. The section containing Management Discussion and Analysis is included in companies’ annual reports in addition to a similar section analyzing the company’s performance and decoding the financial ratios and various indicators for the investors.
The corporate world has adopted the MD&A route to demonstrate their commitment to the Company’s vision and strategy, and how the management has created value and delivered a 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 dissect financial figures/results but also looks into the Human resources and operations side of the business, which the fundamental and key factors to any business organization.
Nature of MD&A (Management Discussion and Analysis)
Executive Overview and Outlook:
Executive Overview and Outlook section focus on details of the business, number of segments and geographies that they operate. It also provides details on the focus areas of the management and how they look forward to achieving the business and financial objectives.
Discussion on Results of Operations:
In this section, the company discusses key Highlights of the current fiscal period’s financial performance. In this, the management provides details of net Sales, Gross margins, Selling General and Admin Costs, Income taxes, etc. Also, it provides details of any Dividend declared and its payment details.
Discussion of Segment Results:
The company also provides details of its individual segment, its contribution to the overall sales, growth rates and other performance measures.
Non-GAAP Financial Measure:
Generally, the company uses Non-GAAP measures for internal budgeting, segment evaluation, and understanding overall performances. Therefore the management shares this information with the shareholders so that they can get better insights into the financial performance of the Company.
Liquidity and Capital Resources:
This section provides details of cash flow debt issuances that will help meet the business operating and recurring cash needs.
Off-Balance Sheet Arrangements :
This section provides details of any off-balance sheet financing arrangements if the company has entered into.
Managing Foreign Currency, Interest Rate, Commodity Prices and Credit Risk Exposure:
In this section, the company discloses how it manages its currency risk, interest rate risks, and price fluctuations.
Critical Accounting Policies and Use of Estimates :
In this section, the company management discusses critical accounting policies that have a meaningful impact on the financial representation of the company’s health.
Scope of MD&A
Typically, the MD&A, as part of form 10-K, attempts to give a balanced view of the company through the eyes of the company’s management team. The section covers several topics of interest-
Liquidity and Capital Resources-
The management must identify any known trends, events, commitments, demands, or uncertainties that are likely to result in material changes in liquidity or capital resources. The section should also discuss the company’s material commitments for capital expenditures and any anticipated sources of funds to meet such commitments. For example, the management should explain the current capital structure and any plans to offer additional bonds or stocks.
Results of Operations-
When discussing the results of operations, the management must focus on unusual events or transactions and any significant economic changes that have affected income from continuing operations. They must explain any known trends or uncertainties that have had or that they expect to have a favorable or unfavorable impact on the net revenues from operations. In case the company has experienced a significant rise in sales or revenues compared to previous periods, they must explain the degree to which the increase is attributable to a price increase, introduction of a new product or service, or to some other factor(s).
Critical Accounting Estimates-
The SEC encourages companies to give a full explanation of their accounting policies in the MD&A. This helps investors to understand the effects of the accounting policies, the judgement made when applying the policies, and the likelihood of a material difference in the reported results if the company applied different assumptions. For example, a company may explain its adherence to FIFO or LIFO inventory accounting. In the past, SEC staff have acknowledged that the quality of disclosure of critical accounting policies by public companies has been unsatisfactory. Therefore, public companies should make full disclosures of their critical accounting policies in the MD&A to help investors understand the company’s performance.
Objectives of MD&A
MD&A helps in understanding the operational and financial results in a better light. MD&A has certain definite objectives, which are as follows:
- Enabling the readers of the financial statements to understand in a better way the numbers, financial condition and to get into management’s shoes to understand certain strategic and operational decisions that are bold and largely impacting the future performance and position of the Company.
- Additional supplementary/complementary information provided in MD&A will help readers understand what exactly the financial statements depict and what is not reflected.
- Addressing the investors’ perception of 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.
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