9 Tips on writing an effective Management Discussion and Analysis report

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:

1. Use plain language rather than jargon and make optimal use of tables and charts.
2. Keep the overview brief.
3. Give the important top-down analysis before getting into the detail.
4. Make sure you explain ‘Why?’ the results are like they are – it’s the most important thing readers are looking for!
5. Monitor what competitors and peers are disclosing.
6. Try to weave risk factors into the narrative rather than simply listing the same old checklist.
7. Follow SEC guidance and endeavour to quantify the effect that each of the external and internal factors you mention had on your results.
8. When talking about year on year comparisons, combine the data into a single easy-to-grasp chart.
9. 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.