Which of the following is an objective of management discussion and analysis?
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Management Discussion and Analysis is basically business related information that has been mandated by the Securities and Exchange Commission, which must also come with 3 years of financial statements that have been audited. At present, it is considered as a prominent part of filing of registration and must reveal the liquidity related position, operations results, capital resources, prominent causes of material alterations in the finance related statements, events of infrequent or unusual nature, negative and positive trends as well as important uncertainties of the corporation. Show
Apart from this, the company management should also offer, in a narrative format, a discussion pertaining to the inflation effects on the finances of the corporation. This particular information should be offered without bias owing to relations with the public and hype. Objective of Management Discussion and Analysis The primary objective of the Management Discussion and Analysis is to offer the company’s existing as well as potential investors an overall and clear view of its present, future and past through the eyes of the management. Thus, Management Discussion and Analysis offers a complete overview of a company’s last year’s operations and the manner in which the company performed in that particular period. The management also discusses the future plans, goals and the approach of a company towards its new projects. The Management Discussion and Analysis must be based on facts since its main purpose is to offer the readers the views of the management in terms of what is crucial for a the future of a company and what has the company’s historical performance been like. What is MD&A (Management Discussion and Analysis)?
As an investor, that is very insightful information provided by a company to co-relate macroeconomic parameters and the company’s performance in light of them. The section containing Management Discussion and Analysis is included in companies’ annual reports. A similar section analyzes the company’s performance and decodes the financial ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more and various indicators for the investors. Table of contents
You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked What details must You look at in MD&A?The corporate world has adopted the MD&A route to demonstrate its commitment to the Company’s vision and strategy and how the management has created value and delivered a performance in light of their long-term goals. Hence, MD&A not only dissects financial figures/results but also looks into the business’s human resources and operations side, which are fundamental factors to any business organization. When the term management is referred to throughout this topic, it will involve the complete structure of the organization, including the Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, Chief Executive Officer, and other Chiefs, their reporting officers/controllers of various departments – Human Resources (People), Finance, Marketing, Production, and Operations, etc. and the remaining middle and lower management levels. # 1 – Executive Overview and OutlookThe executive Overview and Outlook section focus on the business details, segments, and geographies. It also provides details on the focus areas of the management and how they look forward to achieving the business and financial accounting objectives. source: Colgate SEC Filings
# 2 – Discussion on Results of OperationsIn this section, the company discusses key Highlights of the current fiscal period’s financial performance. In this, the management provides details of net Sales, Gross margins, Selling General and Admin CostsSelling General And Admin CostsSelling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.read more, Income taxes, etc. Also, it provides details of any Dividend declaredDividend DeclaredDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more and its payment details. source: Colgate SEC Filings
# 3 – Discussion of Segment ResultsThe company also provides details of its segment, its contribution to the overall sales, growth rates, and other performance measures. source: Colgate SEC Filings Colgate operates in over 200 countries with primarily two segments – Oral, Personal, and Home Care; and Pet Nutrition. # 4 – Non – GAAP Financial MeasureGenerally, the company uses Non-GAAP measures for internal budgeting, segment evaluation, and understanding of overall performances. Therefore, the management shares this information with the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more to get better insights into the company’s financial performance. source: Colgate SEC Filings The above table provides a reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more of Net Sales Growth (GAAP) to Non-GAAP measures for Colgate. # 5 – Liquidity and Capital ResourcesThis section provides details of cash flow debt issuances that will help meet the business operating and recurring cash needs. source: Colgate SEC Filings Colgate generated a Cash Flow from OperationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more of $3,141 million in 2016 and its cash flow from investing activitiesCash Flow From Investing ActivitiesCash flow from investing activities refer to the money acquired or spent on the purchase or disposal of the fixed assets (both tangible and intangible) for the business purpose. For instance, the purchase of land and joint venture investment is cash outflow, while equipment sale is a cash inflow.read more was $499 million. Additionally, cash flow from Financing ActivitiesCash Flow From Financing ActivitiesCash flow from financing activities refers to inflow and the outflow of cash from the financing activities like change in capital from securities like equity or preference shares, issuing debt, debentures or repayment of a debt, payment of dividend or interest on securities.read more was an outgo of $2,233 million in 2016. Additionally, Long-term debt, including the current portion, decreased to $6,520 in 2016 # 6 – Off-Balance Sheet ArrangementsThis section provides details of any off-balance sheetDetails Of Any Off-balance SheetOff-balance sheet items are those assets that are not directly owned by the business and therefore do not appear in the basic format of the balance sheet. However, they tend to impact the financials of the company indirectly.read more financing arrangements that the company has entered into. As we note above, Colgate does not have any off-balance sheet financingOff-balance Sheet FinancingOff-balance sheet financing is a company’s practice of excluding certain liabilities and, in some cases, assets from getting reported in the balance sheet in order to keep the ratios such as the debt-equity ratios low to ease financing at a lower rate of interest and also to avoid the violation of covenants between the lender and the borrower.read more arrangements. # 7 – Managing Foreign Currency, Interest Rate, Commodity Prices and Credit Risk ExposureIn this section, the company discloses how it manages its currency risk, interest rate risksInterest Rate RisksThe risk of an asset's value changing due to interest rate volatility is known as interest rate risk. It either makes the security non-competitive or makes it more valuable. read more, and price fluctuations. source: Colgate SEC Filings
# 8 – Critical Accounting Policies and Use of EstimatesIn this section, the company management discusses critical accounting policiesCritical Accounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more that have a meaningful impact on the financial representation of the company’s health. source: Colgate SEC Filings As we note above, Colgate uses both FIFO and the LIFO method for inventory valuationInventory Valuation Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average) used to value the company's inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company's bottom-line numbers and cash flow situation.read more. From the details mentioned above, a fair idea can be taken to what kind of information and disclosures in today’s corporate world are required to make them accountable to the investors’ community and society at large and transparency in the reporting. Since the management is well positioned than the stakeholders, who are the outsiders to provide information regarding the performance of the Company, based on such management’s analysis, only certain present actions taken by the Company can be justified, and the management can demonstrate a walk towards their committed goals. How does it help?MD&A helps in understanding the operational and financial results in a better light. MD&A has certain definite objectives, which are as follows:
Government authorities, ranging from the Taxation authorities to capital market watchdogs to fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more makers to banking regulators, etc., try to formulate the operational, fiscal, and monetary policies not only based on the quantitative information provided by the Corporate through financial statements but also based on the qualitative information mentioned in the Management Analysis section on the economy and the industry performance and their future goals. What serves as the objective of MD&A is the benefiting factor to the stakeholder community. First-time investors in the equity marketsThe Equity MarketsAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more can adopt qualitative and informed decision-making based on the information provided by the company’s management in their annual reports. Format and Extent of information that MD&A should reveal:As you can note from the objectives mentioned above and governing regulations in India, there is a prescribed and constant practice of presenting the information in the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more. However, neither is there any comprehensive reporting format prescribed by the Government nor can we notice any universal practice of disclosing such information among various companies from various industries or countries. Hence, the accounting professionals and the governing institutions acting in the respective countries might guide the presentation of MD&A. For example, the Federal Accounting Standards Advisory Board (FASAB) in the United States has issued a recommended accounting standard on the Management Discussion and Analysis, with the first draft published in January 1997, which can be accessed using the following link – FASAB standard on MD&A. There is no standard or guidance note in India on this behalf; however, the Institute of Company Secretaries of India (ICSI) has issued Reference Note on Board’s Report under their Companies Act 2013 series but leaving MD&A presentation to the interpretation of the industry. So, taking the FASAB standard for our understanding purpose, MD&A should address the following:
Taking a note from another prominent institution’s guidance on Management Discussion and Analysis (originally published in November 2002), the Canadian Performance Reporting Board has laid down certain principles based on which MD&A should be prepared. Those principles are as follows:
Consolidating what we have learned till now, let it be FASAB in the USA or Canadian Performance Reporting Board in Canada or ICSI in India, every governing agency has tried to foster the stakeholder’s informed decision-making function by guiding the corporate world on how the investors can step up and look the situations from the management’s point of view. A good corporate governance practice exercised by a company will always try to improve its information dissemination function to improve its relations with various stakeholders and society. Differences Between MD&A & Audited FinancialsAs per SEC, an independent accounting firm should perform an annual audit of a company’s financial statementsCompany's Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more and provide an opinion on any material misrepresentations. However, auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more are not required to audit the Management Discussion and Analysis section. MD&A section in SEC FilingsSEC FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more are the opinions of the management about the company’s financial and business health and provide details of its future operations. ConclusionIn light of the increased participation of retail and foreign investors in the capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more in recent years, a more comprehensive and transparent mechanism of information dissemination is always required. MD&A must provide insightful and sufficient information to the stakeholder community to analyze companies based on their performance and help better mobilize the capital. It is more required in India, especially after the Economic Survey of 2017 depicts India as the beckoning sweet spot in the darkness of the world economy. MD&A is one of the very efficient ways to provide meaningful and highly useful information to investors. Improvements in MD&A and its presentation format will lead to good corporate governance practices and a healthy relationship between companies and the investor community. MD&A VideoRecommended Articles
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