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CHECKLIST

MD&A reporting tips

 

By Ken Tysiac
February 2013

ChecklistDeciding what to include in the management discussion and analysis (MD&A) section of a financial report isn’t always easy. During a session at the AICPA Conference on Current SEC and PCAOB Developments, Katherine Gill-Charest, CPA, the chief accounting officer at Viacom, and Brian Lane, a corporate securities lawyer at Gibson, Dunn & Crutcher, offered tips on crafting an effective and compliant report.

 Use plain language, and keep the overview brief. Good MD&A reports minimize jargon and provide plenty of tables. “Assume that one of your directors is Rip Van Winkle and they woke up at the end of the quarter,” Lane said. “And they’re like, ‘Hey, I just woke up. How did it go?’ That’s the overview. OK, sales are up 8%, and here’s why.”

 Give a top-down analysis. Focus on the most important items first, and save the minutiae for the bottom of the report—if you include it at all. And remember: Projections are not required. “You do have to talk about known uncertainties and how they could impact the future,” Lane said. “But you don’t have to make projections.”

 Pay attention to what your competitors and peers are disclosing. The SEC is going to look at them. “They are going to look at you in that same lens,” Lane said. “So you can anticipate comments by looking at your peers.”

 Answer the most important question: “Why?” “There’s the ‘who,’ ‘what,’ ‘where,’ and ‘when,’ but then there’s the ‘why,’” Lane said. “And that’s really what MD&A is about.”

 Make risk factors less boilerplate. It’s a mistake to include the same risk factors in the same order with the same explanation year after year, Lane said.

 Quantify and describe effects of multiple factors. If you say that the results for the quarter were down based on foreign currencies, product mix, and the economy, Lane said, the SEC will ask: How much was attributable to the economy, how much to your unfavorable product mix, and how much to foreign currencies?

 Combine your charts. In the SEC Form 10-K, don’t have one chart showing 2012 data and another chart showing 2011 data. “That’s painful to read,” Lane said. Plot the information from both years on one chart.

 Use your disclosure committee as a gateway. Have a checklist for the disclosure committee to consider. It could include items such as: reviewing financial covenants; taking a close look at liquidity and cash reserves; monitoring changes in legislation and regulation; considering problems with customers or suppliers; considering the effect if your company is disproportionately dependent on one product or segment; watching for significant swings in results between quarters—those may need to be disclosed; and monitoring the company’s litigation developments.

 Ask key personnel for good news—and potential bad news. It’s important to look for the vice president who seems worried and ask, “What’s causing you to frown, other than the choices in the company cafeteria?” Lane said.

 Seek a broad, balanced perspective. Consult with a wide range of departments—in addition to finance, Gill-Charest said. Talk to legal, planning, and sales representatives—anyone who has a pulse on the organization. Create a cohesive working group of people who touch base frequently and talk about what’s going on at the company.

By Ken Tysiac, (ktysiac@aicpa.org), a JofA senior editor.

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