A Few MD&A Thoughts for Quarter or Year End

We have been posting in recent weeks about issues to be thoughtful about as we approach our next quarter or year-end.  MD&A is always an area for care and clear focus at period end.  In all our SEC reporting workshops we make the point that the SEC frequently comments on MD&A.  The themes of MD&A comments are generally deeper analysis of causal factors and quantification of the impact of factors on operations and liquidity and capital resources.

To really understand the comments, and to write MD&A effectively, it is always smart to review the objectives of MD&A disclosure.  Here is the articulation of these objectives from the 2003 Release FR 72:

.“The purpose of MD&A is not complicated. It is to provide readers information “necessary to an understanding of [a company’s] financial condition, changes in financial condition and results of operations.”2 The MD&A requirements are intended to satisfy three principal objectives:

  • to provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management;
  • to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
  • to provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance”

Here are a few example comments you can use in your thoughts about MD&A disclosures.  The first one is about taxes and relates to causal factors.

  1. We note your income tax rate reconciliation table showing the effective tax rate of (27%) in fiscal 2017, 567% in fiscal 2016 and 58% in fiscal 2015. However, you provide no discussion or insight in the footnotes or management’s discussion and analysis into the specific factors or circumstances that caused the significant changes in your effective tax rate. Please provide the following:
  • a discussion of the specific facts or circumstances that resulted in this significant change per ASC 740-10-50-14;
  • explain in detail the line item “changes in valuation allowance” which include state NOL and deferred tax true ups; and
  • discuss whether you separately disclosed each line item meeting the materiality thresholds in Rule 4-08(h) of Regulation S-X.

This second comment is about clearly explaining and quantifying what issues are behind change in revenues so that readers can understand why revenues changes and assess whether such changes are likely to continue to occur in the future.

Revenues, page 30

  1. We note that your revenue decreased by approximately $8.3 million from 2015 to
    2016. While we note from your disclosure that revenue decreased by approximately $14 million due to near completion of projects in your e-ID division, and it appears that those revenue losses were partially offset by revenue gains from other divisions, it is not clear how you have accounted for all material changes in your revenues for the periods presented. Please tell us what the numbers in the last sentence of this paragraph represent in terms of dollar amounts and show us how those revenue gains, combined with your revenue losses, account for all material changes in your revenue for the periods presented. In addition, revise future filings to clearly disclose and quantify the reasons underlying each material change in your revenues for the periods presented.

We hope these reminders help as you work towards quarter or year-end, and as always, your thoughts and comments are welcome!

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