A mandated section in the annual report is the Management Discussion and Analysis (MD&A). It is a direct message from the company’s management to all its shareholders. Over time, it has become a significant portion of the report, specifically for retail investors, as it helps present a bird’s eye view of the company’s overall functioning.
Although this section is a legal requirement, it is not a section that is audited by the Company’s auditors. This is because it contains the management’s opinion on how the company has performed in the previous financial year in relation to its industry performance, and how it has worked to overcome the obstacles thrown its way. It also lays down the goals that the management intends for the company to achieve in the near future and the methodology it seeks to follow.
The legal objective
The three main objectives, related to financial reporting, that the legal authorities had in mind when mandating this section in the annual report were:
To give a narrative explanation of the financial statements from the perspective of the 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
Intending to draw in rational comments from the management of organisations, the authorities have evolved this section of the report to function as a window into the leading minds of companies. This has meant that annual reports no longer just state the numbers, they present the management’s train of thought behind the company’s performance. It also encourages a pragmatic account of the company’s operations by insisting that the management present a true and fair view of both the positive and negative aspects.
The key elements of MD&A
The industry overview – The management is required to give an overview of how the industry in which the company operates performed, and the reasoning behind it. They can compare this year's performance with last years’ and their economy’s performance with economies the world over.
Business opportunities and threats – This section entails the management’s view on what opportunities the business can tap into and the threats it can or is already encountering. The roadmap for availing these opportunities and the methods employed to fight these threats are also outlined herein.
The financial performance of the previous year and the management’s interpretation of the same – Highlighting some financial facts, this section gives the management’s perspective into the economic performance of the business. If the company did really well, in comparison to its counterparts, the management is required to state how it achieved this. If the company could not achieve all that it set out to, this section will explain the reasons behind its lacking and the management’s plan to overcome the same in the near future.
The segment-wise or product-wise performance – Outlining the company’s performance as a whole is not enough, the management is required to break down the organisation’s performance in the different sectors that it operates. This will help clarify sector-wise performance and point out outliers, if any, to all stakeholders.
The future outlook – The company’s vision and its strategy in obtaining the same will help potential investors understand what their funds are going to be utilised for and give assurance to the existing investors. This broad topic can cover different aspects like the future of the company’s operations, its investment in technology, foreseeable changes in its organisational structure, etc.
The risks that the organisation faces and the mitigation measures it has implemented or plans to implement – All organisations face risks that could harm their businesses. These include market risks, operational risks, supply chain risks and societal risks. The management of the company is required to identify these risks and lay out a roadmap to mitigate them.
The company's internal control system and its adequacy – The manner in which the company governs its own workings, like its compliance, performance evaluation and other policies and procedures, need to be clearly highlighted here. This will help stakeholders get a clear insight into the workings of the company and the management’s opinions on the same.
Operational performance parameter – This area should highlight the operational performance of the company and explain any unusual activities that impacted the company’s operations. Further, all these unusual activities should be backed by facts and figures from credible sources.
The overview of the key managerial personnel of the company – Any changes in the key managerial personnel of the company, any new entries into the team and any exit therefrom need to be outlined here.
Related party transactions – If the company has entered into any related party transaction, the management of the company is required to disclose the same here. This helps in bolstering the transparency and thereby the credibility of the company.
The MD&A is transforming itself into a mechanism that enhances transparency and enables easy dissemination of information from the management to the community of stakeholders. A well-written MD&A can provide meaningful information and help investors better analyze companies and make informed decisions on the mobilization of their capital. A company whose MD&A is better than others will gain an edge as it will be perceived as one that engages in good corporate governance practices and maintains a healthy relationship with all its stakeholders.
Writing an MD&A that uniquely represents your company and transparently displays data with a convincing narrative is not an easy task. This requires expertise on multiple levels, including an in-depth understanding of the company and the industry which is then translated through compelling content, all the while ensuring easy readability.
For this reason, many companies look to specialised business report design agencies to help get their message across and one such agency is Report Yak, which has years of experience helping companies convey their stakeholder engagement results to all readers. Check out some of our work here or feel free to get in touch to discuss your next annual report.