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Updated March 2023

If we’ve learned anything over the last couple of decades, it’s that public companies must be transparent. People don’t want stretched truths, half-truths, or uninformed guesstimates from public entities. Instead, they want – nay, demand – straight-shooting from leadership, and our friends at the Securities and Exchange Commission (SEC) are here to make sure they get it.

That’s what makes MD&A – management’s discussion and analysis of financial condition and results of operations – such an important component of your public company’s financial reporting. Unfortunately, MD&A also happens to be one of the biggest stumbling blocks for businesses first stepping underneath a far more scrutinizing regulatory heat lamp.

For that reason, we’re going to define MD&A, what the SEC expects from you, and provide a few key best practices and insights while we’re at it.

Going Public: The Pre-IPO Timeline

What Is Management’s Discussion and Analysis?

The MD&A disclosures in your financial statements perform an essential purpose. They give the investing public and other interested parties the background insights they need to better understand a registrant’s financial condition. The disclosures also allow investors to evaluate whether a company’s past performance is indicative of its future performance.

Put another way, such information tells your company’s story, as seen by management. In fact, it’s management’s perspective that the public is clamoring to hear about.

  • How do you think your company is operating right now?
  • Have there been any changes people should know about?
  • What do you foresee in both the short-term and long-term road ahead?

These are the types of insights a reader expects from your MD&A disclosures. And if you happen to gloss over the more negative items to emphasize the positive, the SEC is ready to step in and set you straight – MD&A needs to be both informative and objective.

That’s a balance newly public companies sometimes struggle with at first, where your initial instinct might be to slap some rose-colored glasses on everything. Granted, you don’t want to paint your business in an excessively negative light, either. However, regulators expect to see both the good and the bad, in parallel with your auditors ensuring your Form 10-K annual reports and Form 10-Q quarterlies are materially correct.

Wherever and whenever regulators perceive some imbalance, whether intentional on your part or not, the SEC is going to let you know about it through their comment letter process. Going a step further, the SEC expects to see a balanced, thorough discussion from management on all required parts of MD&A:

  • Result of operations
  • Liquidity & capital resources
  • Critical accounting policies
  • Off-balance sheet arrangements
  • Market risk disclosures (Item 7A)
  • Other disclosures – Adoption of new accounting standards, business combinations, restructuring, legal proceedings, related party transactions, etc.

Given their importance and relevance, we’re going to hone in on three distinct areas – liquidity and capital resources, results of operations, and critical accounting estimates.

Liquidity and Capital Resources

As the saying goes, cash is king. Therefore, your MD&A disclosures should pay particular attention to your company’s overall liquidity state, including:

  • Demands or commitments you have to fulfill
  • The full extent material increases, decreases, known trends, or uncertainties could affect your liquidity
  • How you plan to address such changes or uncertainties impacting material cash requirements
  • Your overall access to liquidity from operations and outside sources

Obviously, capital expenditures go hand-in-hand with liquidity, so this section of your MD&A should include a closer look at your capital commitments and how you expect your aggregate obligations to impact your liquidity.

In other words, you need to address any new buildings, investments, or technology – to name a few common expenditures – that either just occurred in the most recent financial period or will have a future effect on cash flows.

For example, maybe you’re planning on growing the business by entering a new sector. In this case, you must explain where the investment for those capital expenditures will come from, how you'll keep investing in them, and what impact they’ll have on your liquidity.

Note, however, that new instruction from the SEC eliminated the need to include a separate contractual obligations table in this section. Prior SEC guidelines only extended to smaller reporting companies.

Results of Operations

What are the material changes between the different periods you’re presenting? That’s the focus of your Results of Operations, basically comparing the different income statements and discussions on any changes that occurred.

You’re trying to provide the reader and regulators with some context behind the numbers, material trends, and overall quality of the company’s earnings. By explaining any noteworthy dynamics – once again, both good and bad – you’re painting a fuller picture of what’s occurring in your operations.

For instance, if you’ve seen a drastic jump in revenues lately, you must explain where it came from – price changes, a new line of widgets, or whatever else. Also, note that you’re also required to discuss prospective information and disclose anything reasonably likely to have a material impact on the company. 

Critical Accounting Estimates

This is an area regulators recently codified to provide a bit more structure, even though the requirement has been in place forever and a day. In this Critical Accounting Estimates section, you’re providing more insight into possible sources of variability in your financial operating results and performance.

This includes key accounting policies or assumptions as well as additional information on any estimates you use. In essence, the Critical Accounting Estimates section provides supplementary financial information to your financial statement disclosures, especially regarding estimates and the like. Such information might include discussions on sensitivity analysis concerning estimates, changes to a critical accounting estimate, or a breakdown of your estimates across various business segments.

Keep in mind, however, that this is another section the SEC tends to hone in on with comment letters. Thus, be sure to avoid simply revisiting the GAAP (Generally Accepted Accounting Principles) financial disclosure requirements. Instead, look at this section as a chance to supplement those disclosures. In short, the regulators are looking for color that’s missing from your existing disclosures.


Amended MD&A Disclosure Requirements From the SEC

We already discussed the recent adopting release from the SEC on MD&A – specifically, Items 301, 302, and 303 from Regulation S-K – so we won’t repeat ourselves here. However, given the topic of discussion today, it’s only right to provide a brief overview of how the SEC recently changed MD&A requirements:

  • Added a new Item 303(a), Objective, to state the principal objectives of MD&A;
  • Amended current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amended current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
  • Added a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
  • Amended current Item 303(a)(4) (amended Item 303(b)), Material changes to line items
  • Replaced current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
  • Eliminated current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
  • Amended current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.

Some of the other high-level changes to MD&A disclosure requirements to keep in mind include:

  • The much-maligned selected financial data from Item 301 – it’s gone!
  • The elimination of the tabular presentation in Item 302 in favor of a discussion of material retrospective changes, as reflected in comprehensive income and EPS changes.
  • The elimination of the required discussion on the impact of discontinued operations and unusual or infrequently recurring items in Item 302.
  • Amended rules to simplify interim period reporting in Item 303 – more on this in a bit.

Also, note the SEC adopted similar changes to the current requirements for foreign private issuers, including Form 20-F and Form 40-F.

Effective Dates

Yes, these have come and gone. But for the sake of thoroughness, the SEC published these amendments to the Federal Register on January 11, 2021. Therefore, the rule amendments had an effective date of February 10, 2021, meaning companies had to comply beginning with the first fiscal year ending on or after August 9, 2021. For example, December 31, 2021 was the mandatory compliance date for calendar year-end SEC filers.


MD&A Best Practices and Insights

Finally, it wouldn’t be an Embark blog if we didn’t include a few best practices from our collective experience with MD&A disclosures. These will be especially beneficial for companies planning to file their S-1 registration statement and still trying to familiarize themselves with these new regulatory demands.

Start Early and Practice

Write your MD&A as you complete your reporting periods. This is particularly important for companies already anticipating going public since, besides getting valuable practice, you’re also preparing for the S-1.

With this approach, you won’t be scrambling for information from recent fiscal years to include in your S-1 filing – it will all be sitting there, waiting for you in those old practice disclosures. In the meantime, don't hesitate to hop on EDGAR and see what similar companies do with their MD&A disclosures.

Give the SEC What It Wants

To revisit a previous topic, the SEC isn’t looking for eloquent prose from your disclosures. Instead, it wants unbiased transparency into your operations and financials.

For example, while everyone is super proud of your fantastic quality of earnings and wants to hear all about it, don’t forget to discuss any significant changes or material prospective information as well. Remember, the point is to give outsiders what they need to know about your company, good and bad.

You should also order your MD&A disclosures by making the more important and material information prominent, using a “layered” approach and eliminating anything immaterial or duplicative. Most companies start their MD&A by providing an executive level overview that provides context for the remaining discussion in the disclosures. 

Quantify Material Impact

As you’re discussing certain events, you’ll want to include relevant numbers that help flesh out the discussion, particularly when it comes to the results of your operations. For instance, don’t just say your net sales went up or down. Instead, provide the quantitative backing data and speak to the underlying reasons and consequences of such events.


Choose the Most Appropriate Interim Periods

Thanks to the recent SEC guidance in amended Item 302, companies can now discuss interim results in one of two ways:

  • Compare the most recent quarter to the immediately preceding quarter
  • Compare the most recent quarter to the same quarter of the prior year.

Therefore, if you’re a seasonal company, it doesn’t help the reader much if you use the immediately preceding quarterly financial data for comparison. Instead, choose the most relevant period, the one that provides the most useful insights to your narrative rather than a skewed illustration of it.  Keep in mind, you must still provide a comparison and discussion of year-to-date results in the interim periods.

Rely on Experience

If your company and team are both new to this side of regulations and reporting, don’t slap on the blinders, march forward, and hope for the best. The SEC already scrutinizes MD&A disclosures, so there’s no point in tempting the regulators to respond with a novel’s worth of comments.

Instead, rely on an experienced partner like Embark, a group that can draw on its significant expertise to lead the way. With Embark, you’re never alone on the financial reporting front, MD&A or otherwise. So let’s talk.

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