Management Discussion and Analysis, or MD&A, has been a required part of governmental financial statements since GASB 34 became effective almost 20 years ago. At that time, many governments put together the MD&A using boilerplate language and some assistance from the auditors. A great deal of the discussion was focused on year-over-year changes that often were explained in only the most general of terms or not at all. Since then, the MD&A has been updated each year for the current year’s activity (often with the numbers rolled forward by the auditors), possibly tweaking the wording but without really adding much additional information.
It has become, for some, a very mechanical process, with the result being that the GASB’s original intent of providing pertinent information to financial statement users in an easy-to-read format is not being achieved. The MD&A can be a very useful tool for financial statement users to understand the government’s financial position and outlook and an excellent means for the municipality to tell its story, but only if it is completed as the GASB intended.
Essential elements of the MD&A
First, a bit of review. According to the GASB Codification Section 2200.109, eight essential elements are required to be included in the MD&A (paraphrased for brevity):
- A brief discussion of the basic financial statements
- Condensed financial information, comparative with the prior year
- Analysis of overall financial position and results of operations
- Analysis of balances and transactions of individual (major) funds
- Analysis of significant budget amendments and budget-to-actual variances (General Fund only)
- A description of significant capital asset and long-term debt activity
- Discussion of modified approach infrastructure status, if applicable
- Currently known facts, decisions, or conditions that are expected to have a financial impact
For items #3, #4, and #5 above, the key word is “analysis.” According to the Codification section referenced above, the analysis should include the following (paraphrased for brevity):
- Address both governmental and business-type activities, including reasons for significant changes from the prior year, not simply the amounts or percentages of change.
- Address the reasons for significant changes in fund balances/net position and any factors that may affect the availability of resources for the future.
- Include currently known reasons for budget amendments and variances that are expected to have a significant effect in the future.
Tips to refresh the MD&A
If your MD&A needs a refresh, this may be a great time to add that additional analysis and make it more useful.
- When writing the required analysis, focus more on “why” changes occurred and add more information about how these factors are expected to significantly impact the future.
- Look at the boilerplate language that is probably at the beginning of the document. Can any of that be condensed or eliminated?
- Focus on readability. The GASB always intended that the MD&A be written in a way that it could be easily understood by those with only a basic level of understanding of the financial statements. To make the MD&A more readable, try to remove some of the repetitive information often included. Shift the focus away from reporting changes and satisfying minimum requirements to including more information that will help users understand where your organization has been and where it is going.
Contact your Yeo & Yeo professional if you need assistance with improving your government entity’s MD&A.