What is the importance of the management discussion and analysis?

The term Management's Discussion and Analysis refers to a section of the annual report that provides investors with insights into how the business performed in the past, its current financial condition as well as projections of future performance. Management's Discussion and Analysis (MD&A) is normally included with a company's annual report or Form 10-K, allowing the investor-analyst to understand how the leaders of the business believe the company has performed over the last year and what the future may bring.


Also referred to as MD&A, Management's Discussion and Analysis of Financial Condition and Results of Operations is a required disclosure made by companies that fall under the jurisdiction of the Securities and Exchange Commission (SEC). The MD&A provides an overview of the performance of a business in the prior year as well as insights into its future prospects. Typically included as part of the company's annual report or Form 10-K, the document attempts to provide investors with a balanced view of the corporation as seen through the eyes of its management team.

While the information appearing in the MD&A is unaudited, it does help investors to understand how the company's management team reacts to both challenges and opportunities. Generally, this discussion will touch on several topics, including:

  • Growth and Strategy: industry trends, financial flexibility, core competencies, ability to execute, differentiators and capabilities.
  • Challenges and Opportunities: key events, demands on the business, commitments to others and uncertainties on the horizon, as well as their implications and significance to the business.
  • Historical Performance and Outlook: key performance indicators, observations with respect to financial statements, profits, earnings, cash flow, and whether or not past performance may be indicative of future results.
  • Financing and Investments: cash holdings, liquidity, capital requirements, and critical estimates.

The MD&A should present the reader with the most significant items up-front, and focus its analysis on information that is material to the finances of the company.

safe harbor, management's discussion and analysis

Critical Accounting Estimates, Liquidity and Capital Resources, variable interest entities, regulatory assets, regulatory liabilities, financing receivables, asset retirement obligation, related-party transactions, mine safety disclosures

Management's discussion and analysis is part of the disclosures section of the financial statements, in which prior period performance and projected results are discussed. This is one of the most closely reviewed parts of the financial statements, since a reader can interpret from it the opinions of management regarding the performance and future prospects of a business.

The MD&A section is a required part of the quarterly and annual financial reports of publicly-held companies, being mandated by the Securities & Exchange Commission (SEC). It is not a required part of the financial statements of privately-held entities. The SEC requires that the MD&A section describe opportunities, challenges, risks, trends, future plans, and key performance indicators, as well as changes in revenues, the cost of goods sold, other expenses, assets, and liabilities. These requirements are based on three SEC objectives related to financial reporting, which are:

  • To give a narrative explanation of the financial statements from the perspective of management

  • To enhance the numerical disclosures in the financial statements, as well as to provide a context within which to review this information

  • To discuss the quality and possible variability of an entity's earnings and cash flows

Best Practices for Management’s Discussion and Analysis

The MD&A section is a clear favorite of the SEC for critiques. The SEC staff wants to see interpretive comments from a company regarding the results of operations, rather than a dry recitation of the percentages by which revenues and expenses changed in the past year, with boilerplate reasoning given for changes in performance. It also wants to see a balanced presentation that delves into both the positive and negative aspects of the topics discussed.

When a company conducts earnings calls with the investment community, it  should maintain a record of the questions asked, and see if any of them could have been addressed within the MD&A section of its financial statements. This can form the basis for an increased amount of MD&A material in the next set of financials.

To provide a narrative explanation of a company's financial statements that enables investors to see the company through the eyes of management;

  • To enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and

  • To provide information about the quality of, and potential variability of, a company's earnings and cash flow so that investors can ascertain the likelihood that past performance is indicative of future performance.

  • 9110.2 MD&A should not consist of generic or boilerplate disclosure. Rather, it should reflect the facts and circumstances specific to each individual registrant. S-K 303 is a "principles-based" disclosure requirement. It is intended to provide management with flexibility to describe the financial matters impacting the registrant.

    9200 General Requirements

    (Last updated: 9/30/2008)

    The annual requirements with respect to MD&A are set forth in S-K 303(a). S-K 303(b) sets forth the requirements for MD&A related to interim periods, and the safe harbor provisions are set forth in S-K 303(c). See for MD&A requirements for EGCs.

    Release No. 33-8350 provided some suggested ways to improve MD&A. These suggestions included adding an overview section to MD&A, presenting the most material information early in the discussion, using headers, bullets or tabular presentations to improve the overall readability and omitting information that is no longer material or necessary. It should be noted these suggestions are not part of the requirements set forth in S-K 303. (Last updated: 6/30/2013)

    > 9210 Liquidity and Capital Resources [S-K 303(a)(1) and (2)]

    9210.1 These represent two separate requirements of S-K 303(a). The majority of registrants combine their discussion of these two items due to the degree of overlap which exists among the requirements. A key objective of the liquidity and capital resources discussion is to provide a clear picture of the company's ability to generate cash and to meet existing known or reasonably likely future cash requirements.

    9210.2 Liquidity is the ability of the registrant to generate adequate amounts of cash to meet its needs for cash. Any known trends, or any known demands, commitments, events or uncertainties that will result in or are likely to result in the registrant's liquidity increasing or decreasing in a material way should be discussed. To the extent a material deficiency is identified, the registrant should disclose the steps taken to remedy the deficiency. The discussion should also evaluate the amounts and certainties of cash flows, as well as whether there has been material variability in historical cash flows.

    9210.3 The requirements of the disclosures related to capital resources include a discussion of material commitments for capital expenditures, the general purpose of any commitments and how these commitments will be funded, and material trends in the registrant's capital resources, including expected changes in the mix (equity, debt and any off-balance sheet financing arrangements) and their relative cost.

    9210.4 The liquidity and capital resources discussion should address:

    1. Material cash requirements;

    2. Sources and uses of cash, including cash provided by/used in operations, as well as cash provided by/used in investing and financing activities; and

    3. Material trends and uncertainties related to a company's flexibility in determining when and how to use the available cash flows to satisfy obligations and make other capital expenditures.

    9210.5 It may be necessary for the liquidity and capital resources discussion to address debt instruments, guarantees and related covenants. Disclosure is likely to be necessary if:

    1. The registrant is, or is reasonably likely to be, in breach of debt covenants or

    2. Debt covenants impact the registrant's ability to obtain additional debt or equity financing.

    9210.6 Improving Liquidity and Capital Resources

    1. One of the most common deficiencies is when registrants simply repeat items reported in the statement of cash flows. Registrants should focus on the primary drivers of and other material factors necessary to an understanding of the registrant's cash flows and the indicative value of historical cash flows.

    2. Registrants should describe cash flows from operating, investing and financing activities associated with discontinued operations separately from continuing operations if that information is not apparent from the cash flow statement. Additionally, registrants should describe how the company's liquidity is likely to be affected by the absence of cash flows (or negative cash flows) associated with discontinued operations.

    > 9220 Results of Operations [S-K 303(a)(3)]

    9220.1 The discussion that is provided with respect to the results of operations should not consist merely of numeric dollar and percentage changes measured from period to period of various line items on the statement of comprehensive income. The focus should be on an analysis of the factors that caused these changes to occur. In providing this analysis, registrants may find it helpful to include a discussion of key variables and financial measures management is utilizing in managing the business. These variables may be non-financial in nature or may represent industry specific metrics.

    9220.2 The following disclosures are required by S-K 303(a)(3):

    1. Any unusual or infrequent event or transaction or any significant economic change that materially affected the amount of reported income from continuing operations;

    2. Significant components of revenues and expenses that are necessary in order to understand the results of operations (e.g., segmental information);

    3. Any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations;

    4. If events that are likely to cause a material change in the relationship between costs and revenues (increases in labor costs or raw materials for example), the change in the relationship should be disclosed; and

    5. To the extent there is a material increase in net sales, discuss the price vs. volume mix (whether the overall increase is attributable to increases in prices or increases in the volume of goods and services being sold).

    9220.3 In order to comply with the requirement to discuss significant components of revenue and expenses, registrants will often provide a discussion along segmental lines (as determined under ASC 280). Segment analysis is usually necessary to enable a reader to understand the consolidated amounts, but it should not result in repetitive disclosure that lengthens MD&A unnecessarily, or obscures salient information. The discussion and analysis of segments may be integrated with the discussion of the consolidated amounts to avoid unnecessary duplication. The discussion and analysis should be comprehensive. All components of the registrant's results of operations, including those that may not be allocated to the segments in determining the segmental profit or loss (such as certain corporate overhead items or income taxes for example) should be discussed.

    9220.4 Registrants should consider discussing and analyzing the tax implications related to material transactions, trends and other important items impacting their business as disclosed elsewhere in MD&A. A discussion of the nature and impact of significant tax rate reconciling items should also be considered. For example, discuss the tax rate reconciling item resulting from a change in assumptions related to an unrecognized tax benefit or a different final resolution related to the unrecognized benefit. Similarly, when uncertain tax positions are a critical accounting policy, MD&A should address why the assumptions were changed or why the actual resolution differed from management’s assumption. (Last updated: 9/30/2010)

    9220.5 Registrants should address the underlying reasons for changes in the price versus volume mix. For example, if sales declined because the volume of goods sold decreased by 20%, but this was offset by a 10% increase in price, the discussion in MD&A should not stop once it identifies the price and volume components. In this example, the underlying factors that contributed to the decline in volume as well as the increase in selling prices should also be discussed. In addition, discussions about changes in the price vs. volume mix should consider changes in foreign currency fluctuations.

    9220.6 The results of operations may not always be prepared on a consistent basis. This will occur, for example, when there has been a change in basis in the underlying financial statements. This might occur in the following situations:

    1. When there has been a material acquisition (either the acquisition of a target entity that is significant to the registrant or predecessor/successor step-up in basis) during the period;

    2. When pushdown accounting has been applied; or

    3. When the registrant has adopted fresh-start accounting upon its emergence from bankruptcy.

    9220.7 When events such as those described in 9220.6 occur, registrants should consider whether the discussion of the results of operations and financial condition set forth in the audited financial statements included in the filing should be supplemented by a discussion based upon pro forma financial information. This supplemental discussion may be meaningful in the case of a material acquisition, but generally would not be appropriate in the case of fresh-start accounting. A determination as to whether a discussion of the audited financial statements should be supplemented by a discussion based on pro forma information should take into consideration all of the facts and circumstances surrounding the transaction, the nature of the pro forma adjustments to be made, and the overall meaningfulness of any such supplemental pro forma discussion.

    9220.8 If it is determined that a supplemental discussion in MD&A based on pro forma financial information is appropriate, then the pro forma financial information may be presented in a format consistent with S-X Article 11. Other formats, such as the footnote pro forma information specified by ASC 805, may also be appropriate depending on the particular facts and circumstances. It would be inappropriate to merely combine information for the pre-and post-transaction periods without reflecting all relevant pro forma adjustments required by S-X Article 11. Pro forma financial information should only be prepared for the most recent fiscal year and interim period prior to the transaction occurring (although the staff will not object to the registrant providing a pro forma statement of comprehensive income for the corresponding prior interim period). If pro forma results are discussed in MD&A, they should not be discussed in isolation. Supplemental discussions based on S-X Article 11 pro forma financial information should not be presented with greater prominence than the discussion of the historical financial statements required by S-K 303. (Last updated: 9/30/2010)

    For example, assume a material acquisition occurs on August 31, 2007, and the registrant is a calendar year-end company. In accordance with the Form 8-K requirements, pro forma financial information prepared in accordance with S-X Article 11 is prepared for the year ended December 31, 2006 and the interim period ended June 30, 2007 and filed on the Form 8-K. When preparing its MD&A for the Form 10-K for the year ended December 31, 2007, the registrant could elect to supplement the discussion of its historical results with a discussion based on S-X Article 11 pro forma information for the year ended December 31, 2007 that gives effect to the August 31, 2007 acquisition. The pro forma December 31, 2007 information would then be compared to the pro forma information for the year ended December 31, 2006 previously filed via a Form 8-K. This discussion would be in addition to a comparison of the audited financial statements, which would reflect the acquisition occurring in mid 2007. A supplemental discussion based on pro forma financial information in more detail than revenues and costs of revenues for the year ended December 31, 2005 would not be appropriate. The comparison of results of operations and financial condition for the year ended December 31, 2005 to December 31, 2006 would be on an as reported (and audited) basis and would not reflect any impact of the acquisition. In its Form 10-K for the year ended December 31, 2008, the registrant may carry forward the discussion of the pro forma results for the year ended December 31, 2006 and 2007 as a supplement to the discussion of the audited financial statements. No adjustments would be appropriate or necessary to the year ended December 31, 2008 as the acquisition would be reflected in the audited financial statements for the entire year.

    NOTE: S-X 11-02(c)(2)(i) ordinarily prohibits the disclosure of pro forma information for annual periods prior to the most recent fiscal year preceding the August 2007 acquisition (i.e., fiscal year 2005 and prior years are prohibited). This prohibition differs from the above example, in which the company is simply including previously filed pro forma information for the purpose of providing a supplemental comparison of pro forma results in the 2007 Form 10-K. The staff would not object to the presentation in the above example even if the pro forma information had not been previously filed (e.g., in an IPO situation, where the company did not have an obligation to file pro forma information related to the August 2007 acquisition; the staff would look to what the company’s pro forma disclosure obligation would have been, had it filed a registration statement at that time).

    In the above example, because the business combination occurred in August 2007, pro forma information for 2005 (the annual period prior to the most recent fiscal year), is not permitted. Companies may provide pro forma information related to 2005 in MD&A, provided that such information is not in more detail than revenues and cost of revenues. If a company believes that in its unique situation the presentation in a greater level of detail is necessary to understand the implications of the transaction, the company is encouraged to discuss the issue with the staff prior to filing. (Last updated: 3/31/2012)

    9220.9 Disclosure should be provided to explain how the pro forma presentation was derived, why management believes the presentation to be useful, and any potential risks associated with using such a presentation (the potential that such results might not necessarily be indicative of future results for example, depending on how the information has been prepared, and the period that it covers). Typically, the presentation of complete pro forma financial information (reflecting the adjustments) in MD&A will be necessary in order to facilitate an understanding of the basis of the information being discussed. (In the circumstances described in the example in Section 9220.8, this presentation would include both 2006 and 2007.) However, there may be situations where the pro forma adjustments are limited in number and easily understood so that narrative disclosure of the adjustments alone will be sufficient.

    9220.10 MD&A should fully explain the results of operations. For example, MD&A should not merely state that the increase in revenues and costs of revenues is due to a significant acquisition. Rather, the contribution of the recent acquisition to total revenues should be quantified to the extent possible, and any increase or decrease in the underlying revenues of the pre-existing business should then be addressed.

    9220.11 There are two assessments that management must make where a trend, demand, commitment, event or uncertainty is known:

    1. Is the known trend, demand, commitment event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.

    2. If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant's financial condition or results of operations is not reasonably likely to occur.

    Note that "reasonably likely" is a lower threshold than "more likely than not" but a higher threshold than "remote". The concept of "reasonably likely" is used in the context of disclosure for MD&A purposes and is not intended to mirror the tests in ASC 450 established to determine when accrual is necessary, or when disclosure in the footnotes to the financial statements is required.

    > 9230 Off-balance Sheet Arrangements [S-K 303(a)(4)]

    9230.1 Off-balance sheet arrangements are any transaction, agreement or other contractual arrangement to which an entity not consolidated with the registrant is a party, where the registrant has:

    1. Any obligation under a guarantee contract that has any of the characteristics set forth in ;

    2. A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to the entity for the asset;

    3. Any obligation (including contingent obligations) under a contract that would be accounted for as a derivative instrument, except that it meets the scope exception (being both indexed to the company's own stock and classified in stockholder's equity) in ASC 815-10-15-74;

    4. Any obligation (including contingent obligations), arising out of a variable interest entity as defined in ASC 810-10-15 where the entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the registrant, and such activities are material.

    Note that equity-linked instruments (such as warrants, convertible debt or convertible preferred stock) where the criteria set forth in ASC 815 are met and therefore classification of either the warrant or the conversion option within stockholder's equity is appropriate (meaning that the instrument is eligible for the scope exception in ASC 815-10-15-74) meet the definition of an off-balance sheet arrangement as defined in (c) above, and should be assessed for materiality to determine whether disclosure is required. We would expect the assessment of materiality to include an analysis of the potential dilutive effect of such instruments, as well as an analysis of the likelihood that the scope exception will no longer be available with respect to the instrument (loss of the scope exception could occur as the result of modification to the terms of the instrument, or the issuance of new instruments that can be converted into an unlimited number of shares, thereby tainting other previously issued instruments), which would result in the instrument being treated as a derivative, brought on to the balance sheet at fair value, and marked to market at every period end. The disclosure requirements of this section are set forth in more detail below, but in this situation, the disclosure to be provided could include a discussion of why the registrant chose to issue that type of equity-linked instrument, the potential dilutive effect if the instrument were to be converted, and, depending on the likelihood of the registrant continuing to be able to meet the scope exception, the impact of a change in classification upon the registrant's financial statements.

    With respect to (d) above, in this context a variable interest refers to an investment in an unconsolidated entity that would meet the ASC 810-10-15 definition of a variable interest because the investment absorbs expected losses and residual returns that occur in the unconsolidated entity. However, the entity in which the interest is held does not need to meet the ASC 810-10-15 definition of a variable interest entity in order to qualify as an off-balance sheet arrangement requiring disclosure.

    9230.2 For the registrant's off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, disclosure should be provided that addresses:

    1. The nature and business purpose of the off-balance sheet arrangement;

    2. The importance to the registrant of the off-balance sheet arrangement to their liquidity, capital resources, market risk support, credit risk support or other benefits;

    3. The amounts of revenues, expenses and cash flows of the registrant arising from such arrangements; the nature and amounts of any retained interests, securities issued and other indebtedness incurred in connection with such arrangements; the nature and amounts of other obligations or liabilities of the registrant that are or are reasonably likely to become material and the triggering events that could cause them to arise;

    4. Any known event, demand, commitment, trend or uncertainty that will result in or is reasonably likely to result in the termination or material reduction in availability to the registrant of the off-balance sheet arrangements that provide material benefits, and the course of action that they have taken or propose to take in such circumstances.

    These requirements are intended to elicit disclosure about why the registrant engages in the off-balance sheet arrangement, the magnitude and importance of the arrangement and the circumstances that would cause the registrant to recognize material liabilities or losses related to the arrangement.

    9230.3 In December 2007, the Division of Corporation Finance sent an illustrative letter to certain public companies identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion and Analysis for their upcoming annual reports on Form 10-K or 20-F. The full letter is available at: http://www.sec.gov/divisions/corpfin/guidance/cfoffbalanceltr1207.htm.

    > 9240 Tabular Disclosure of Contractual Arrangements [S-K 303(a)(5)]


    Payments due by period

    Contractual Obligations


    Less than 1 year

    1-3 yrs

    3-5 yrs

    More than 5 yrs

    Long-Term Debt Obligations

    Capital (Finance) Leases

    Operating Lease Obligations

    Purchase Obligations

    Other Long-Term Liabilities


    9240.1 Overview

    As an aid to understanding other liquidity and capital resources disclosures in MD&A, the contractual obligations tabular disclosure should be prepared with the goal of presenting a meaningful snapshot of cash requirements arising from contractual payment obligations. Registrants are encouraged to develop a presentation method that is clear, understandable and appropriately reflects the categories of obligations that are meaningful in light of its capital structure and business. Registrants should highlight any changes in presentation that are made, so that investors are able to use the information to make comparisons from period to period. (Last updated: 9/30/2010)

    9240.2 Presentation

    The table should be in substantially the format shown above. Disaggregating the specific categories shown above is appropriate, particularly if the categories used are specific to the underlying business. Therefore, the captions may be changed, and the number of line items expanded, as long as it is clear what is included within each line item. However, to the extent that the registrant has obligations that fall within the above categories, they should be reflected in the table.

    9240.3 Purchase obligations

    Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding, that specify all significant terms, including the quantities to be purchased, price provisions and the approximate timing of the transactions. Additional guidance has not been issued by the staff with respect to what should be included within this category. However, registrants should undertake reasonable effort and expense to assess and aggregate outstanding purchase obligations. Disclosure should accompany the table to clarify how the purchase obligations amount has been calculated.

    9240.4 [Reserved]

    (Last updated 12/31/2010)

    9240.5 [Reserved]

    9240.6 Other considerations

    1. A registrant should evaluate whether or not it can reasonably estimate the amount and/or timing of payments it will be obligated to make under interest rate swap agreements to determine whether it can provide meaningful information in the table for these agreements. In some cases, market interest rates may have moved such that a registrant is in a position of receiving cash rather than paying cash under an interest rate swap; cash receipts under interest rate swaps should not be included in the table. If the swap is structured in such a way as to be a fixed rate loan, then the registrant should provide the information.

    2. Bank certificates of deposits are contractual payment obligations on the part of the bank. Therefore, principal and interest payments should be included in the table.

    3. The information disclosed in the table in respect of long-term debt obligations, capital (finance) leases and operating lease obligations should be consistent with the disclosures provided in the financial statements.

    9240.7 Footnotes

    The table of contractual obligations may be accompanied by footnotes to describe provisions that create, increase or accelerate obligations, or other pertinent data to the extent necessary for an understanding of the timing and amount of the registrant's specified contractual obligations. The footnote disclosure permits management to apply its judgment in determining what items should be included or excluded from the table. If management's judgment results in items being excluded from the table, accompanying footnotes should describe the nature of items excluded and why they are excluded. Management should also consider disclosing the prior year actual spending or budgeted amounts in cases where those purchase orders are not otherwise tracked by the registrant. Disclosure of the dollar amount up to which employees are authorized to make purchases could also be disclosed to help clarify the significance of amounts that may not be tracked by the registrant.

    9240.8 Smaller reporting companies are NOT required to provide a tabular disclosure of contractual arrangements.

    > 9250 Interim Period Requirements [S-K 303(b)]

    9250.1 In preparing the interim discussion, the registrant may presume that the reader has access to the discussion and analysis required by S-K 303(a) for the preceding fiscal year. The focus should therefore be on material changes in financial condition and results of operations. If disclosure in earlier reports does not adequately foreshadow subsequent events or if new information is available that impacts a known trend, demand, commitment, event or uncertainty, additional disclosure is likely to be necessary in the interim period.

    9250.2 [Reserved] (Last updated 10/30/20)

    9250.3 There may also be circumstances where information was not material in the context of the annual results of operations but is material in the context of the interim results, and therefore that information should be discussed (e.g., seasonal aspects of the business).

    9250.4 The tabular disclosure of contractual obligations is only required annually, and is not required on an interim basis. If there are material changes to information contained in the table, they may be discussed in the narrative during the interim period.

    > 9260 Safe Harbor Provisions [S-K 303(c)]

    The safe harbor provisions are intended to protect forward-looking statements against certain private legal actions alleging material misstatements or omissions. Statutory safe harbors are available for the disclosures required with respect to off-balance sheet arrangements and aggregate contractual obligations, as all information required by S-K 303(a)(4) and (5) (excluding statements of historical fact) are considered to fall within the definition of forward-looking.

    > 9270 SAB Topic 11M (SAB 74)

    (Last updated: 6/30/2013)

    9270.1 SAB Topic 11M provides disclosure guidance for registrants regarding recently issued accounting standards that have not yet been adopted. The SAB highlights the types of disclosures that should be considered by registrants in MD&A and in the financial statements. It is generally not necessary to provide duplicative disclosure in the MD&A and financial statements, nor is it necessary to provide disclosure for accounting standards that will not apply to a registrant’s financial statements. Registrants should exercise judgment consistent with the SAB in determining the nature, extent, and location of the disclosure.

    9270.2 EGCs should also follow .

    9300 [Reserved]

    9400 Foreign Private Issuers [Item 5 of Form 20-F]

    (Last updated: 9/30/2008)

    > 9410 Foreign Private Issuers [Item 5 of Form 20-F]

    9410.1 The requirements for MD&A are set forth in Item 5 of Form 20-F, under Operating and Financial Review and Prospects (sometimes referred to as the OFR). This Item calls for the same disclosure as S-K 303, so the overall objectives of MD&A are consistent with those set forth above.

    9410.2 The requirements of Item 5 of Form 20-F are as follows:

    1. Operating results — Item 5.A.

    2. Liquidity and capital resources — Item 5.B.

    3. Research and development, patents and licenses, etc. — Item 5.C.

    4. Trend information — Item 5.D.

    5. Off-balance sheet arrangements — Item 5.E.

    6. Tabular disclosure of contractual obligations — Item 5.F.

    7. Safe harbor — Item 5.G.

    9410.3 The discussion should focus on the primary financial statements in the document. References to the reconciliation to U.S. GAAP and a discussion of differences between home-country GAAP and U.S. GAAP should be provided to the extent they are necessary for an understanding of the financial statements as a whole. [Instruction 2 to Item 5 of Form 20-F]

    9410.4 Issuers that file financial statements under IFRS as issued by the IASB without a reconciliation to U.S. GAAP are not required to address U.S. GAAP in their MD&A. Where Item 5 refers to a specific FASB pronouncement, the issuer should provide disclosure that satisfies the objective of the disclosure requirement. [Release No. 33-8879]

    9410.5 The instructions to Item 5 of Form 20-F specifically refer to the SEC's 1989 interpretive release on MD&A disclosure. [Release No. 33-6835] The SEC’s 2003 interpretive release on MD&A [Release No. 33-8350] indicates that it applies to Form 20-F filers as well.

    9410.6 The requirement under Item 5.C. of Form 20-F is the only one that does not have a direct correlation to the requirements in S-K 303. For research and development (R&D), disclosure should be provided in Form 20-F of the R&D policies over the last three years.

    9500 Critical Accounting Estimates

    (Last updated: 12/31/2009)

    > 9510 Goodwill Impairment

    9510.1 Registrants should provide disclosure about critical accounting estimates pursuant to the guidance in Release 33-8350. Disclosure is appropriate when:

    1. The nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

    2. The impact of the estimates and assumptions on financial condition or operating performance is material.

    9510.2 Estimates related to goodwill impairment testing are commonly considered critical by registrants. As a result, the staff has developed guidance regarding these disclosures with the objective of ensuring that investors are provided with information that allows for an assessment of the probability of a future material impairment charge. Registrants should consider providing the disclosures outlined in Section 9510.3 in order to comply with the requirements of S-K 303(a)(3)(ii), which requires a description of a known uncertainty. Additional guidance appears in Section V of Release 33-8350, which states that under the existing MD&A disclosure requirements, a company should address material implications of uncertainties associated with the methods, assumptions and estimates underlying the company's critical accounting measurements.

    9510.3 Registrants should consider providing the following disclosures for each reporting unit that is at risk of failing step one of the impairment test (defined in ASC 350):

    1. The percentage by which fair value exceeded carrying value as of the date of the most recent test;

    2. The amount of goodwill allocated to the reporting unit;

    3. A description of the methods and key assumptions used and how the key assumptions were determined;

    4. A discussion of the degree of uncertainty associated with the key assumptions. The discussion regarding uncertainty should provide specifics to the extent possible (e.g., the valuation model assumes recovery from a business downturn within a defined period of time); and

    5. A description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.

    NOTE: A reporting unit may be at risk of failing step one of the impairment test if it had a fair value that is not substantially in excess of carrying value as of the date of the last impairment test. Whether or not the fair value was “substantially” in excess of carrying value is a judgment based on the facts and circumstances including, but not limited to, the level of uncertainty associated with the methods and assumptions used for impairment testing.

    9510.4 A registrant need not provide these disclosures if the registrant asserts and discloses that material goodwill does not exist at reporting units that are at risk of failing step one or that no reporting units are at risk. Registrants should consider disclosing the supporting rationale if material goodwill is allocated to a reporting unit that is at risk, but disclosure is deemed unnecessary.

    > 9520 Share-based Compensation in IPOs

    (Last updated: 2/6/2014)

    9520.1 Estimates used to determine share-based compensation are often considered critical by companies going public. In particular, estimating the fair value of the underlying shares can be highly complex and subjective because the shares are not publicly traded. The staff will consider if a company performing these estimates is providing the following critical accounting estimate disclosures in its IPO prospectus:

    1. The methods that management used to determine the fair value of the company’s shares and the nature of the material assumptions involved. For example, companies using the income approach should disclose that this method involves estimating future cash flows and discounting those cash flows at an appropriate rate.
    2. The extent to which the estimates are considered highly complex and subjective.
    3. The estimates will not be necessary to determine the fair value of new awards once the underlying shares begin trading.
    Companies may cross-reference to the extent that this, or other material information relevant to share-based compensation, is provided elsewhere in the prospectus.

    9520.2 The staff may issue comments asking companies to explain the reasons for valuations that appear unusual (e.g., unusually steep increases in the fair value of the underlying shares leading up to the IPO). These comments are intended to elicit analyses that the staff can review to assist it in confirming the appropriate accounting for the share-based compensation, not for the purpose of requesting changes to disclosure in the MD&A or elsewhere in the prospectus.

    9520.3 The staff will also consider other MD&A requirements related to share-based compensation, including known trends or uncertainties including, but not limited to, the expected impact on operating results and taxes.

    (Last updated: 9/30/2008)

    9610.1 In January 2002, an SEC Statement was issued which addressed several aspects of MD&A, including disclosures related to the effects of transactions with related and certain other parties. As discussed in , transactions involving related parties should not be presumed to be carried out on an arm's length basis, as the requisite conditions of a competitive market may not exist. Accordingly, where material, the disclosure requirements of S-K 404 with respect to certain relationships and transactions with related parties should be supplemented by additional discussion within MD&A.

    9610.2 Disclosure of the following may be necessary, where related party transactions are material:

    1. The business purpose of the arrangement;

    2. Identification of the related parties transacting business with the registrant;

    3. How transaction prices were determined by the parties;

    4. If disclosures represent that transactions have been evaluated for fairness, a description of how the evaluation was made; and

    5. Any ongoing contractual or other commitment as a result of the arrangement.

    9610.3 Consideration should also be given to whether disclosure is necessary about parties that fall outside of the definition of "related parties" set forth in ASC-MG, but with whom the registrant has a relationship that enables the parties to negotiate terms of material transactions that may not be available for other, more clearly independent, parties on an arm's-length basis. An example of this type of entity might be a company established and operated by former management of the registrant.

    Disclosure should be provided when an investor might not be able to understand the registrant's reported results of operations without a clear explanation of these arrangements and relationships.

    9700 Fair Value Measurements

    (Last updated: 9/30/2008)

    In March and September 2008, the Division of Corporation Finance sent illustrative letters to certain public companies that reported significant amounts of asset-backed securities, loans carried at fair value or the lower of cost or market, and derivative assets and liabilities in their recent 10-K filings. The letters highlight disclosure matters relating to ASC 820, and suggest disclosures that companies may consider in preparing their MD&A. The full letters are available at:

    http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm and http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0908.htm.

    9800 Other Items

    (Last updated: 9/30/2008)

    > 9810 S-X 3-05 and 3-09

    MD&A is not required for financial statements filed to comply with S-X 3-05 and 3-09. However, MD&A of companies being acquired may be required in registration and proxy statements under the Form requirements (for example, Items 15-17 of Form S-4 and F-4 and Item 14 of Schedule 14A).

    > 9820 S-X 3-10 and 3-16

    9820.1 S-X 3-10 (c), (d), (e), and (f) allows for the presentation of condensed consolidating financial information when certain criteria are met, rather than the separate financial statements of each issuer or guarantor of a registered security. There is no requirement for the results of operations as presented in the condensed consolidating financial information to be discussed. S-X 3-10(I)(9) and (10) require disclosure in the footnotes to the financial statements with respect to any parent liquidity issues. If there are material restrictions on the parent's ability to obtain funds from its subsidiaries, or if the information presented in the condensed consolidating financial information indicates that trends for the guarantor subsidiaries are materially different than that of the consolidated entity, this should be discussed in the liquidity section of MD&A.

    9820.2 If separate financial statements of an issuer or guarantor are filed pursuant to S-X 3-10(a), then MD&A is required.

    9820.3 A separate MD&A is not required for financial statements provided to comply with S-X 3-16.

    > 9830 Registration and Proxy Statements

    9830.1 Registration and proxy statements that include annual financial statements that have been retroactively revised to report discontinued operations occurring after the year-end balance sheet date should include a revised MD&A based on the revised financial statements. MD&A should describe the events or circumstances that led to the discontinued operation, the material terms of that termination, and the impact on the issuer's operating results and business. For example, the registrant should discuss the results of operations from continuing operations, and related trends based on the restated financial statements. In addition, the registrant should discuss any contingent obligations, financial commitments, or continuing relationship with the discontinued operation, and any impact on the company's liquidity and capital resources. Management should also describe the likely effect the discontinued operation will have on the registrant's continuing business and financial health. This discussion may be included in the registration or proxy statement or in a Form 8-K that includes the restated annual financial statements incorporated by reference.

    9830.2 Similarly, registration and proxy statements that include annual financial statements that have been retroactively revised to reflect revised segment reporting, with the revision taking place after the year-end balance sheet date, should include a revised MD&A based on the revised segmental footnote disclosure. MD&A should address the change in segmental presentation, and explain why the chief operating decision maker has changed how they make decisions about the allocation of resources or the assessment of performance. The registrant should discuss the results of operations on a segmental basis and related trends based on the revised segmental disclosures included in the restated financial statements.

    9830.3 Registration and proxy statements that include annual financial statements that have been retroactively revised to reflect the application of a different accounting principle in accordance with ASC 250 should also include a revised MD&A if the changes are material to the previously reported results of operations.

    9900 Additional Guidance

    (Last updated: 12/31/2010)

    > 9910 Additional Guidance Provided in Respect of MD&A Includes:

    • Concept Release on MD&A (No. 33-6711) issued in 1987

    • Interpretive Release (No. 33-6835) issued in 1989, portions of which were codified into FRC 501

    • Cautionary Advice about Critical Accounting Policies issued in 2001 (FR 60)

    • SEC Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations (No. 33-8056) issued in 2002 (FR 61)

    • Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies issued in 2003

    • Final Rule: Disclosure about Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations (No. 33-8182) issued in 2003. Available at: http://www.sec.gov/rules/final/33-8182.htm

    • SEC Interpretive Release on MD&A (No. 33-8350) issued in 2003 (FR 72). Available at: http://www.sec.gov/rules/interp/33-8350.htm

    • Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 on Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers issued in 2005. Available at: http://www.sec.gov/news/studies/soxoffbalancerpt.pdf

    • Sample Letter Sent to Public Companies on Accounting and Disclosure Issues Related to Potential Risks and Costs Associated with Mortgage and Foreclosure-Related Activities or Exposures issued in October 2010. Available at: http://www.sec.gov/divisions/corpfin/guidance/cfoforeclosure1010.htm

      Where is management discussion and analysis?

      Management discussion and analysis, or MD&A, is a section that can be found in the annual report of a company. The MD&A section provides key information regarding how a company is performing financially. The information can also be found in the SEC Form 10-K.

      Which of the following is an objective of management discussion and analysis?

      Item 303(a) states that the objective of the management's discussion and analysis (MD&A) is “to provide material information relevant to an assessment of the financial condition and results of operations of the registrant.” This requires the registrant to discuss: liquidity and capital resources; financial results of ...

      Is management discussion and analysis part of financial statements?

      MD&A, or Management Discussion and Analysis, is the part of financial statements where the company's management discusses the company's performance in the current year using qualitative and quantitative measures to help the investor realize the details that otherwise would not have been available for analysis.

      Is management discussion and analysis mandatory?

      The MD&A section is a required part of the quarterly and annual financial reports of publicly-held companies, being mandated by the Securities & Exchange Commission (SEC). It is not a required part of the financial statements of privately-held entities.