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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 18 – Management’s Discussion and Analysis (MD&A)
Common MD&A Mistakes

A well-written agency Management’s Discussion and Analysis (MD&A) (or Note 18 for statewide reporting) is generally 1 to 4 pages maximum. Length alone is not the issue — but in practice, overly long MD&A sections almost always indicate poor quality. Excessive length typically reflects:

  • Inclusion of unnecessary narrative
  • Discussion of immaterial items
  • Repetition of information already presented in the financial statements (or Notes)

MD&A is intended to be a focused, analytical overview of significant financial activity, not a comprehensive restatement of the AFR.

Explaining Every Change Instead of Only Material Changes

The most common issue is agencies attempting to explain every variance, regardless of significance. Under GASB 103, MD&A must focus only on significant financial changes that affect the agency’s overall financial position or results of operations.

Weak Example Strong Example

“Supplies expense increased by 2.1% due to higher office supply purchases.”

This is routine operational fluctuation and does not belong in MD&A.

Agencies must include:

  • Major changes in net position
  • Significant revenue increases or decreases (such as federal funding shifts)
  • Major program or policy changes
  • Significant one-time events

Repeating the Financial Statements

Agencies must not restate numbers already shown in the financial statements. This provides no analytical value.

The MD&A must explain:

  • Why balances changed
  • What caused the change
  • Whether the change is expected to continue
Weak Example Strong Example
“Total assets were $5.2 million and liabilities were $3.1 million.” “Net position increased primarily due to a one-time increase in federal grant funding associated with disaster recovery programs.”

Boilerplate or Generic Language

Agencies must not copy the same language every year. Boilerplate language is generic, non-financial and irrelevant to MD&A.

Weak Example Strong Example
“The agency remains committed to fiscal responsibility and efficient service delivery.”

MD&A must be:

  • Specific to the agency
  • Tied to actual financial activity
  • Different each year based on results

Budget Discussions That Are Not Material

Under the old GASB 34 model, agencies often included detailed budget variance discussions. Routine budget differences must not appear in MD&A.

Under GASB 103, budget discussion is only necessary if:

  • The variance is significant.
    –AND–
  • It has a material impact on financial position or operations.
Weak Example Strong Example

“Actual expenditures were 3% lower than budget.”

This is routine and not meaningful.

 “Expenditures were significantly below budget due to delays in implementing a major program, resulting in a material increase in ending fund balance.”

Missing Forward-Looking Information

Agencies frequently omit or under-develop the Currently Known Facts, Decisions or Conditions section. This is a required and critical component of MD&A. This section must address known events expected to affect future financial position, such as:

  • Anticipated funding changes
  • Legislative actions affecting programs or revenues
  • Implementation of new programs or initiatives
  • Execution of major contracts
  • Planned capital projects or debt issuances
Weak Example Strong Example
  • Omits the section entirely
  • Includes only vague or generic statements
 “The agency expects a reduction in federal funding in the next fiscal year, which may result in decreased program expenditures and staffing adjustments.”

Quick Review Checklist

Assess MD&A quality by asking each of the following questions:

  1. Does it explain major financial changes?
  2. Does it avoid repeating the financial statements?
  3. Does it include a financial summary table?
  4. Does it discuss capital assets and debt activity?
  5. Does it include forward-looking information?

If the answer to several of these is no, the MD&A likely needs revision.