Management Discussion and Analysis

Management discussion and analysis (MDA) is an unaudited section of an annual report in which the management discusses the company's financial performance for the past period and its current financial position and provides insight into the company's future prospects in light of its strategy. Additionally, it discloses its basis for critical accounting estimates.

Management discussion and analysis (MDA) is a term normally used by companies in the US. Directors' Report is the UK (and to some extend international) equivalent of MDA.

Audited financial statements and accompanying notes are standardized representation of the company's performance and its financial position which does not allow the management to have their say. MDA fills this gap by giving them an opportunity to justify the performance and communicate what they plan to do in future. The flexibility which MDA allows in communicating plans about future makes it a very important section for the company's stakeholders. However, it ought to be used with caution because the unaudited forward-looking statements of the management might be too optimistic.

Example

ExxonMobil annual report for the year ended 31 December 2011 contains a management discussion and analysis. It tells the stakeholders about ExxonMobil's:

  1. Business environment and risk management (in which it discusses long-term business outlook for upstream, downstream and chemical businesses;
  2. Segment-wise performance for financial year 2010 and 2011;
  3. Liquidity and capital sources (in which it discusses sources and uses of cash, commitments, guarantees and informs about available sources of financing and warns about ongoing litigation and other contingencies);
  4. Capital and exploration expenditures;
  5. Taxes;
  6. Environmental matters (environmental expenditures incurred and potential liabilities related to environmental obligations);
  7. Market risk, inflation and other uncertainties (in which it discusses the company's risk management policies and discloses uncertainties); and
  8. Critical accounting estimates (related to valuation of oil and gas reserves, asset retirement obligations, consolidation, employee benefits, litigation contingencies, tax contingencies and foreign currency translation).

Written by Obaidullah Jan