Any company that has a financial year that ended on 31 December will soon be faced with the issue of what to include in the management discussion and analysis (MD&A) section of their annual financial report. Given that most economies are still in a state of ‘austeria’ and business confidence is not good – something Deloitte’s latest CFO Signals survey for Q4 yet again picked up on – it’s not an easy task. Most regulators, such as the US Securities and Exchange Commission (SEC), provide guidance, but it’s not meant to be a definitive checklist and still calls for a heap of judgement, especially when commenting on the uncertainties about the future that the SEC asks for.
Speaking at an AICPA conference last month, Brian Lane, a corporate securities lawyer with Gibson, Dunn & Crutcher, who has considerable expertise in SEC issues, shared some timely tips for effective MD&A reporting to ease the pain:
- Use plain language rather than jargon and make optimal use of tables and charts.
- Keep the overview brief.
- Give the important top-down analysis before getting into the detail.
- Make sure you explain ‘Why?’ the results are like they are – it’s the most important thing readers are looking for!
- Monitor what competitors and peers are disclosing.
- Try to weave risk factors into the narrative rather than simply listing the same old checklist.
- Follow SEC guidance and endeavour to quantify the effect that each of the external and internal factors you mention had on your results.
- When talking about year on year comparisons, combine the data into a single easy-to-grasp chart.
- Use your disclosure committee to audit that important issues are covered off, namely:
- Financial covenants, liquidity and cash reserves.
- Changes in legislation and regulation.
- Any business critical issues with customers or suppliers.
- Disproportionate reliance on particular products, segments or geographies.
- Significant swings in quarterly results across the year that may need to be disclosed.
- Any important litigation that may be imminent.
- Both the good and bad news that is bothering the executives and senior management team – it may not have hit results yet, but it’s a good way to health check the future.
Excellent advice and it goes without saying that best way to ensure the timely production of a quality MD&A like Brian recommends is by empowering the team responsible for its delivery with a solution such as SAP Disclosure Management that allows them to assign responsibilities, share information and automate workflows and sign off. The PWC white paper on building a business case for disclosure management comes highly recommended. But if you’ve got any tips about how you go about producing your MD&A section, I’m sure there’s lots of folk out there looking for guidance of any kind that smooths the process for them this year.