What is the ‘Management Discussion and Analysis – MD&A’
Management discussion and analysis (MD&A) is the section of a company’s annual report in which management provides an overview of the previous year’s operations and how the company performed financially. Management also discusses the upcoming year by outlining future goals and approaches to new projects. The MD&A is an important document for analysts and investors who want to review the company’s financial fundamentals and management performance.
Explaining ‘Management Discussion and Analysis – MD&A’
A company that sells securities to the public must register its stock offerings with the Securities and Exchange Commission (SEC), which provides oversight and ensures investors receive adequate disclosure for investments. The SEC requires firms to file periodic disclosures to investors, including Form 10-K annually and Form 10-Q each quarter. The MD&A section is included with the annual report or the Form 10-K filing.
The Differences Between MD&A and Audited Financials
The SEC requires an independent CPA firm perform an annual audit of a company’s financial statements, and an audit is an opinion as to whether the financials are free of material misstatement. Auditors perform test work to determine if the financial statements are materially correct, but CPAs do not audit the information in the MD&A section. The MD&A represents the thoughts and opinions of management and provides a forecast of future operations.
Examples of Financial Indicators
Management uses many financial indicators to explain the firm’s recent performance results, including a comparison of the company’s net income and sales for the last three to five years and if the numbers are trending up or down. The MD&A separates net income and sales by company divisions and also discusses cash flow, because generating cash inflows is required to fund the needs of the business.
Factoring in Capitalization
The MD&A discusses capitalization, or the firm’s capital structure of debt and equity. Firms can raise money to run the business by issuing stock to shareholders or by issuing bonds to creditors, and the MD&A explains the current capital structure and any additional stock or bond offerings management may be planning.
How Management Discusses Projections
Analysts and investors consider how senior management makes smart business decisions to improve company results, so discussions about management’s future plans are an important part of the MD&A section. Management explains how the firm’s products and services are positioned in the market, and how the business can grow sales by achieving a larger market share or by introducing new products to drive sales.
Further Reading
- Incremental information content of required disclosures contained in management discussion and analysis – www.jstor.org [PDF]
- The impact of audit committee financial expertise on management discussion and analysis (MD&A) tone – www.tandfonline.com [PDF]
- A classification scheme to examine management discussion and analysis compliance – search.proquest.com [PDF]
- Linguistic tone of municipal management discussion and analysis disclosures and future financial reporting delays – meridian.allenpress.com [PDF]
- Management discussion and analysis: A review and implications for future research – search.proquest.com [PDF]
- The incremental information content of tone change in management discussion and analysis – papers.ssrn.com [PDF]
- Management discussion and analysis in the US financial companies: A data mining analysis – link.springer.com [PDF]
- Management discussion and analysis: an evaluation of practice in UK and US companies – www.tandfonline.com [PDF]
- Management discussion and analysis: a tone analysis on US financial listed companies – www.emerald.com [PDF]
