Management Discussion and Analysis (MD&A)
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.
Objectives of MD&A
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.
Format and Extent of Management Discussion and Analysis
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.
Principles of MD&A
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-
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.
Integration with Financial Statements –
MD&A should complement, as well as supplement, the financial statements.
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.
Forward-Looking Orientation –
A forward-looking orientation is fundamental to useful MD&A reporting.
Strategic Perspective –
The MD&A should explain management’s strategy for achieving short-term and long-term objectives.
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.
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