Nine tips for effective MD&A reporting

Deciding what to include in the management discussion and analysis (MD&A) section of a company’s financial report seldom is an easy task.

Although the SEC issued guidance regarding MD&A, a fair amount of judgment is required. Obeying MD&A guidance is a case of complying with the spirit of a rule rather than following a checklist, Katherine Gill-Charest, CPA, said Monday during a session at the AICPA Conference on Current SEC and PCAOB Developments in Washington.

“I want to be consistent with the spirit of the guidance,” said Gill-Charest, the chief accounting officer at Viacom. “I want to give forward-looking information when I think it’s material and I think it’s something that meets the rules. But by the same token, I don’t want to forecast anything.”

Gill-Charest’s fellow panelist at the conference, Brian Lane, said it’s a myth that projections are required in MD&A reports.

“Projections are not required,” Lane said. “… You do have to talk about known uncertainties and how they could impact the future, but you don’t have to make projections.”

Lane, a corporate securities lawyer with Gibson, Dunn & Crutcher, who has expertise in SEC issues, gave nine tips for effective MD&A reporting:

1. Use plain language. Lane said good MD&A reports minimize the jargon and provide plenty of tables.

2. Keep the overview brief. “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. That’s the overview.”

3. 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.

4. Pay attention to what your competitors and peers are disclosing. “The [SEC] staff 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.”

5. 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.”

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

7. Quantify and describe effects of multiple factors. “They [the SEC] want you to quantify things,” Lane said. “If you say that, basically, the results for the quarter were down based on foreign currencies, product mix … the economy, that sort of thing, they’re going to say, ‘Fine. How much of that was attributable to the economy, how much to your unfavorable product mix, and how much to foreign currencies?’ ”

8. 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. He advises plotting the information from both years on one chart.

9. Use your disclosure committee as a gateway. Lane advises having a checklist of items for the disclosure committee to consider that includes:

• 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.
• Monitoring the company’s litigation developments.
• Asking key personnel what’s bothering them about the business.
• Asking key personnel what good news is on the horizon.

Regarding what’s bothering key personnel about the business, Lane said it’s important to look for the vice president who looks worried. Ask the VP: “What’s causing you to frown, other than the choices in the company cafeteria?” Lane said.

Gill-Charest said she seeks a balanced perspective of the people who know the business the best when she prepares an MD&A report. She consults with a wide range of departments in addition to finance. She talks to legal, planning, sales representatives, and anyone she thinks has a pulse of what is going on at her organization.

That’s one additional tip: to create a cohesive working group of people at the company who touch base frequently and talk about what’s going on at the company.

“They may not be writing it for me,” Gill-Charest said. “But I certainly want to know what they think.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.