A Primer for Writing an Effective Management's Discussion and Analysis
Patton, Terry K., Kinnersley, Randall L., Patton, Suesan R., The Journal of Government Financial Management
The users of governmental financial statements-citizens, legislative and oversight officials, and investors and creditors-have a great interest in the accountability of state and local governments. However, each of these user groups reads financial statements for different reasons. An important question for government officials is, "How can we effectively communicate the information needed by each of these groups to assess the financial position and operations of our government?"
Since its inception in 1984, the Governmental Accounting Standards Board (GASB) has focused on establishing reporting requirements that it hopes will improve how governments communicate financial information. This focus led GASB to issue Statement No. 34, Basic Financial Statements-and Managements Discussion and Analysis- for State and Local Governments, in June 1999. Statement No. 34 requires substantial changes in the content and format of state and local governments' annual financial reports. One important change requires governments to include a Management's Discussion and Analysis (MD&A) in their annual financial reports, preceding their basic financial statements.
"[MD&A] introduces you to your government's financial statements and provides a framework and context for understanding the information they contain. Upon reading the MD&A, you should be better prepared to obtain meaning from the information in the statements and to better understand them."'
The preface to Statement No. 34 notes that GASB "developed these new requirements to make annual reports more comprehensive and easier to understand and use."' GASB believes that the changes required by Statement No. 34 will provide financial information that is of interest to groups who historically have not shown much interest in a government's financial reports. Some GASB members believe that the addition of MD&A has the greatest potential to interest new users, particularly citizens and taxpayers.
GASB's July 1999 "Action Report" indicates that the board "established MD&A as a place for a government's financial managers to speak."' According to Statement No. 34, financial managers of governments are "knowledgeable about the transactions, events and conditions that are reflected in the government's financial report and of the fiscal policies that govern its operations."4
In general, financial managers should write an MD&A that provides an overview of the financial statements by giving readers an "objective and easily readable analysis of the government's financial activities based on currently known facts, decisions or conditions."' What follows are some pointers from the authors that will help financial managers meet that goal.
Required Contents of MD&A
According to Statement No. 34, MD&A should include a fact-based analysis of both the short- and long-term effects of the current period's activities. MD&A must be presented as required supplementary information (RSI), which means that the information must be presented whenever basic financial statements are presented. The RSI presentation also means that the government's independent auditors must apply certain limited procedures to the information. For this reason, MD&A should never include any projections or predictions of future events. Governments should base their analysis primarily on comparisons between the current and prior year with emphasis on the current year.
Statement No. 34, paragraph 11, lists the eight categories of financial information that financial managers must include in MD&A:
* Abrief discussion of the relationship between the government-wide and fund financial statements and significant differences in the information that they provide. Meeting this requirement should help readers understand how the information in the fund financial statements either reinforces the information provided in the government-wide statements or provides additional information. …