Management’s Discussion and Analysis (MD&A)
FASAB Contact: Robin Gilliam, email@example.com, 202-512-7356
This project is a segment of the Board’s reporting model initiative.
Currently, most of the standards-based language for developing MD&A resides in Statement of Federal Financial Accounting Concepts (SFFAC) 3, Management’s Discussion and Analysis, rather than in Statement of Federal Financial Accounting Standards (SFFAS) 15, Management’s Discussions and Analysis.
Most of the standards-based language is included in SFFAC 3 and not SFFAS 15 due to the following history:
The Board originally worked on MD&A during the window in which it was seeking generally acceptable accounting principles (GAAP) recognition from the American Institute of CPAs (AICPA). As a result, SFFAC 3 was written more like an SFFAS to holistically describe MD&A even though it was exposed as a concepts statement.
During the exposure draft response period, the audit and preparer community said to achieve a GAAP-based statement that always included MD&A, the Board must create standards that required it. The Board, therefore, quickly used the MD&A outline from SFFAC 3 and proposed SFFAS 15 as required supplementary information.
As a result, the guidance in SFFAC 3 is not concepts-based but standards-based and should be read with SFFAS 15 by preparers to understand what to include in MD&A. However, most preparers only rely on SFFAS 15—which is very limited.
The primary goals of this project are to:
- incorporate standards-based language from SFFAC 3 into SFFAS 15 to provide a standalone SFFAS for preparing MD&A;
- update forward looking information to include risk reporting standards as guidance for discussing how resources will be used efficiently and effectively in achieving performance goals for the reporting entity as a whole and any mission-related programs, functions, and/or activities;
- explain what information to analyze and discuss about the reporting objectives to achieve a financial focus; and
- reduce preparer burden by streamlining MD&A to focus on material changes to amounts in financial statements and supplemental information resulting from management of operating performance for the reporting entity as a whole and any mission-related programs, functions, and/or activities.
HISTORY OF BOARD DELIBERATIONS (reverse chronology)
Oct 21-22, 2020
At the October meeting, members continued to update the draft MD&A vision framework (the framework) in preparation for the MD&A pilot.
Members agreed that the first sentence should be the vision statement, describing what MD&A should accomplish. The remaining information should explain how to achieve the MD&A vision. In addition, members agreed to emphasize in the framework the theme from the following sentence in SFFAS 15, Management’s Discussions and Analysis, paragraph 6:
MD&A should deal with the “vital few” matters; i.e., the most important matters that will probably affect the judgments and decisions of people who rely on the GPFFR as a source of information.
Members agreed to update the framework to:
- include a clearer connection between cost and performance to help with decision making;
- encourage management to discuss significant changes in trends over multiple years;
- change the term “balances” to “amounts” to include all financial statement items and not just balance sheet balance; and
- remove specific reference to hyperlinks to avoid auditing issues and replace with wording similar to SFFAS 47, Reporting Entity, and 52, Tax Expenditures. For example, “provide additional information…”
Staff discussed the following items concerning the pilot with members:
- Pilot Timeline: Pilot agencies will have two months between January and February 2021 to complete a sample MD&A from the MD&A vision framework and objectives. The sample MD&A will use the information from the agency’s FY 2020 MD&A. Staff will monitor agency progress to determine if the deadline needs to be extended.
- Recruiting Pilot Agencies: Staff is recruiting up to eight agencies for the MD&A pilot. Staff hopes to include the following populations: one to two small agencies, one to two medium agencies, and three to four large agencies. Staff is scheduled to present the pilot and recruitment efforts at the November 17, 2020, CFOC meeting.
- Training for MD&A Pilot Agencies: Staff will provide training for MD&A pilot agencies and will be fully engaged one on one with each agency and/or in group workshops to assist with developing the sample MD&As.
- User Focus Groups: Members agreed that staff should engage user focus groups after the pilots complete their sample MD&As to determine if the information is concise, relevant, easily understood, and useful. Populations identified for user focus groups to date are graduate students in finance and public policy and relevant congressional committees. Staff will also reach out to the Association of Government Accountants (AGA) Certificate of Excellence in Accountability Reporting (CEAR) for help to recruit users for focus groups.
Briefing materials – Tab E
August 26-27, 2020
At the August meeting, members began work on the MD&A vision framework (the framework). The framework was in response to members’ request to develop a cohesive vision of the MD&A without duplicative language found in the MD&A objectives. The framework will be used for the MD&A pilot to begin in early 2021. After an in-depth discussion about each section, members agreed on the following draft MD&A vision framework:
MD&A should provide a concise summary of the mission and organization, financial activities and results, and performance accomplishments and challenges to help users understand the financial position and condition of the reporting entity:
- by analyzing reasons for significant changes to financial statement balances during the reporting period and significant performance and financial trends;
- by discussing ongoing, current, and planned actions to address
- significant ongoing, current and prospective challenges and/or risks that could significantly affect financial statement balances, budgetary resources, and performance objectives in the future; and
- conditions, such as those related to systems and controls, that could affect the ability to produce reliable financial information; and
- by including hyperlinks to digital materials, such as, organizational charts, mandated legislative performance information, and other sections of the financial report with more in-depth information.
Members agreed that staff should continue to work on a strong lead-in section that summarizes the MD&A vision about how funding received contributed to results achieved. Members emphasized that one of the major goals of the MD&A project is to streamline MD&A and unburden preparers.
Briefing materials – TAB F
June 24 – 25, 2020
At the June 2020 Board meeting, members completed work on identifying MD&A objectives according to the reporting objectives framework in Statement of Federal Financial Accounting Concepts 1, Objectives of Federal Financial Reporting. This exercise helped them to determine what information to include in an MD&A proposal. To complete this exercise, the Board reviewed three objectives at the June 2020 meeting: two stewardship objectives (one for financial position and one for financial condition) and one system and controls objective.
The following catalogs the MD&A objectives the Board has identified as general (G) or for the reporting objectives: budgetary integrity (BI), operating performance (OP), stewardship (ST), and systems and control (S&C).
|G-1||MD&A should concisely explain—in plain language—any budget and financial terms used, such as but not limited to, unfunded, unobligated, and net cost of operations.||Aug 2019|
|BI-1||MD&A should concisely explain financing resources and the sources and status of budgetary resources.||Aug 2019|
|BI-2||MD&A should concisely explain why significant changes in budgetary and/or financing resources were needed during the reporting period.||Aug 2019|
|OP-1||MD&A should concisely explain if significant costs contributed to agency performance.||Oct 2019|
|OP-2||MD&A should concisely explain reasons for significant changes in net cost from the prior year and any significant trends cost over multiple years.||Oct 2019
|OP-3||MD&A should provide an integrated discussion and analysis of the entity’s mission, organization, budget, cost, and performance, for the entity’s significant major program investments and the entity as a whole, including what types of resources the entity used and what the entity achieved during the reporting period.||Feb 2020|
|OP-4||MD&A should provide a concise/balanced discussion/summary of significant financial and non-financial operating performance information, including electronic references to legislative performance framework documents, such as GPRAMA reporting, for the entity’s major program investments and the entity as a whole.||Feb 2020|
|ST-1||MD&A should concisely explain reasons for significant changes in assets, liabilities, costs, and/or revenues from the prior year and any significant trends.||June 2020|
|ST-2||MD&A should concisely describe planned agency actions to address current and prospective mission-related issues, challenges, and/or risks that could significantly affect assets, liabilities, costs, revenues, and budgetary resources.||June 2020|
|S&C-1||MD&A should concisely describe the conditions of data, systems, and controls that affect the ability to produce reliable financial information.||June 2020|
|S&C NOTE||A number of members recommended that MD&A should also include a summary discussion about ongoing and planned actions to address non-compliance and control weaknesses that may be causing material weaknesses. This includes references to other sections that have a more in depth discussion of those items.|
Members did not have time to agree on the wording. Therefore, staff will include these draft objectives in the MD&A vision framework for discussion at a future meeting.
Next steps are for staff to consolidate these objectives into an MD&A vision framework in preparation for the agency pilot. The pilot will determine how well agencies understand and can produce an updated MD&A according to the MD&A vision framework. The pilot will then help members to develop the proposed standards and determine what terms to define.
Briefing materials – TAB F
February 26-27, 2020
At the February 2020 meeting, members approved the technical plan with one change—to implement a task force earlier to help develop MD&A standards and the pilot. Task force members will be selected in the next six months. If you are interested, please contact Ms. Gilliam at the contact information below.
To support developing updated MD&A standards, members completed identifying the MD&A objectives for operating performance and tentatively agreed on preliminary language.
Staff plans to address the stewardship and systems and control objectives during the April 2020 meeting. Upon identification of all objectives, staff will curate a conceptual framework to help the Board develop updated MD&A standards.
Issue Paper for February 26-27, 2020 – Tab C (PDF)
December 17-18, 2019
At the December 2019 meeting, the Board discussed the interrelationship between the reporting model, note disclosures, and MD&A projects. Please see the reporting model phase II section for a detailed discussion on the session.
Issue Paper for December 17-18, 2019 – Tab F (PDF)
October 23-24, 2019
At the October 2019 meeting, members began developing management’s discussion and analysis (MD&A) objectives for operating performance and agreed on the following:
- MD&A should concisely explain how significant costs contributed to agency performance.
- MD&A should concisely explain reasons for significant changes in components of net cost for the prior year and any significant related trends and costs over multiple years.
Members will continue identifying additional operating performance objectives at future meetings.
Issue Paper for October 23-24, 2019 – Tab G (PDF)
August 28-29, 2019
At the August 28 meeting, members approved the proposed project plan for the management’s discussion and analysis (MD&A) amendments project.
The Board then began developing objectives for MD&A based on the standards in SFFAC 1, Objectives of Federal Financial Reporting: budgetary integrity, operating performance, stewardship, and systems and control.
Members agreed on the following MD&A objectives for budgetary integrity:
- MD&A should concisely explain financing resources and the sources and status of budgetary resources.
- MD&A should concisely explain why significant changes in budgetary and/or financing resources were needed during the reporting period.
In addition, members added a general objective to encourage a more concise and readable MD&A.
- MD&A should concisely explain—in plain language—any budget and financial terms used, such as but not limited to unfunded, unobligated, and net cost of operations.
Members will begin developing MD&A objectives for operating performance at the October 2019 Board meeting.
Issue Paper for August 28-29, 2019 – Tab C (PDF)
June 26-27, 2019
At the June 2019 Board meeting, staff introduced the new project, MD&A amendments. This is a consolidation of the risk reporting and reporting model phase I: MD&A and stewardship investments improvements projects. Research from those projects identified that Statement of Federal Financial Accounting Concepts (SFFAC) 3, Management’s Discussion and Analysis, includes most of the standards-based language that staff will use to amend SFFAS 15, Management’s Discussions and Analysis.
Members were curious about staff’s recommendations about the future of SFFAC 3. Staff explained the initial analysis of SFFAC 3 was only to present proposed amendments to SFFAS 15. Decisions about what to relocate or rescind from SFFAC 3 and information included in other concepts about MD&A will be presented at a future Board meeting. Members agreed, noting that SFFAS 15 amendments should provide clarity and focus to help manage and reduce any additional burdens currently placed on preparers.
The following items were discussed in relation to amending SFFAS 15.
Members agreed that materiality is applied differently to MD&A than basic information. While the financial statements include materially quantitative information, management should apply more judgment to what qualitative information to include in MD&A. For example, management should understand trending issues to determine what citizens are getting for their money and what qualitative information will be useful for those interest groups. Management could also include a qualitative discussion in MD&A to explain why a financial statement balance is growing, the associated risk, and potential effect on operations.
To ensure inclusion of important information, members agreed not to include the materiality boilerplate as an amendment to SFFAS 15. Instead, the Board wants to include a discussion about the concept of materiality and how it applies to MD&A.
The following administrative amendments were approved for SFFAS 15 to conform to current SFFAS formats: change the header title from “Statement of Standards” to “Standards” and add a scope and definition section. Members agreed to add items to be defined at future meetings. Possible terms include financial condition and financial position.
Members requested that staff develop objectives for the MD&A before continuing to develop standards. Objectives should independently help preparers understand what should be achieved in MD&A and prevent the mentality that checklist compliance will lead to an effective MD&A.
Issue Paper for June 26-27, 2019 – Tab G (PDF)