What the SEC wants to see in your MD&A.

• Author: Herdmand, Robert K.
• Position: Securities and Exchange Commission - Management's discussion and analysis - Financial Reporting

What the SEC wants to see in your MD&A

The SEC recently issued interpretive guidance for preparing Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations in its Financial Reporting Release (FRR) 36. The guidelines reiterate the SEC's view on the importance of the MD&A to a company's financial reporting, as well as highlight the need for companies to carefully consider existing disclosure requirements in order to improve the quality of MD&As.

The release explains the overall framework of the MD&A rules and addresses a number of areas where the SEC believes improvements need to be made. Its principal focus, however, is on improving disclosures pertaining to currently known trends, events, and uncertainties that might impact the financial statements in the future ("prospective information"). While this is not a new disclosure requirement, we believe the SEC's interpretation of matters to which it applies will require that many companies rechallenge their approach to the MD&A.

Recent MD&A developments

In 1980, the SEC departed from a fairly rigid set of MD&A rules and replaced them with a set of general requirements. At that time, the SEC staff expected that the new approach would elicit more meaningful analysis and would avoid the inclusion of boilerplate discussions.

Although the SEC believed this approach generally worked well, it issued a release in 1987 that solicited comments on a number of MD&A issues, including whether the disclosures went far enough with respect to disclosure about risks and uncertainties. Most commentators to that release believed that no rule changes were necessary and suggested that the SEC address individual disclosure concerns through the staff's normal review and comment process.

As a result, the staff undertook a major project to review 1987 and 1988 annual reports, with a focus on MD&A disclosures. Special review procedures were developed to enhance the staff's understanding of each company selected for review. For example, press releases and other public information about the company and its industry(ies) were considered.

To date, reviews of more than 350 companies in 24 industries have been completed, and reviews of approximately 150 more companies are scheduled. The SEC believes that the results of the review process indicate improvements are needed - amendments to existing filings were made by approximately 35 percent of the companies selected for review. While some of...