4.3 Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The purpose of MD&A is to give readers the information they need to understand a company’s financial condition, changes in financial condition, liquidity and capital resources, and results of operations (collectively, “financial condition and operating performance”), as well as its prospects for the future. Since the initial adoption of the MD&A disclosure requirements in 1980, the SEC has issued numerous rules and interpretive guidance intended to enhance the overall quality of MD&A disclosures. General disclosure requirements for domestic companies can be found in Regulation S-K, Item 303, as interpreted in Section 501 of the SEC’s Codification of Financial Reporting Policies and Topic 9 of the FRM.

Regulation S-K, Item 303(a), states that the “objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources.” To that end, the discussion should:

Focus on material events and uncertainties.
Include discussion of the financial statements and other data that would be useful to understanding the registrant’s financial condition, cash flows, and results of operations.
Allow investors to understand management’s perspective on the business.

An MD&A section typically includes an overview section about the company and its business, an analysis of results of operations that addresses period-to-period changes in income statement line items, a discussion of liquidity and capital resources that focuses on the company’s financial position and cash flows, and a summary of the company’s critical accounting estimates (CAEs) intended to highlight financial statement items for which significant management estimates and judgment are required. In addition to the discussion and analysis of historical information, companies must disclose in MD&A any known trends, events, or uncertainties that are reasonably likely to have a material effect on their future liquidity, capital resources, or results of operations. As part of the discussion of liquidity and capital resources, registrants should include an analysis of “material cash requirements from known contractual and other obligations” and disclose material off-balance-sheet arrangements. Registrants should consider whether this disclosure requirement would be met by referring to the financial statement footnotes (e.g., debt maturity table) or whether additional tabular or narrative disclosure would be appropriate.

For each CAE, a registrant should discuss, to the extent material and reasonably available, (1) why the CAE is subject to uncertainty; (2) how much the CAE or assumption (or both) has changed during the relevant period; and (3) the sensitivity of reported amounts to the methods, assumptions, and estimates underlying the CAE’s calculation. Further, Instruction 3 to Item 303(b) states that disclosure of CAEs should “supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.”

At the 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff noted that MD&A is consistently one of the staff’s top focuses and that comments regarding registrants’ MD&A have specifically addressed topics such as accounting estimates, impacts of current market events, and liquidity and capital resources. The SEC staff specifically emphasized that registrants should ensure that their discussion of changes in financial condition includes insights into the underlying reasons for those changes from both a qualitative and a quantitative perspective (i.e., “answering the why”). In doing so, registrants might consider using liquidity-related metrics (e.g., days sales outstanding or days payable outstanding) to provide a more robust description of their financial condition and cash flows. The staff also noted that registrants with negative cash flows should expand their disclosures to address their plans to generate sufficient cash to meet their cash requirements, particularly in the short term.

Moreover, at The SEC Speaks in 2025 Conference, the SEC staff discussed MD&A disclosures related to risks and uncertainties. The staff stated that disclosures in MD&A are required if a known uncertainty is reasonably likely to have a material impact on future results or financial conditions. As registrants consider sources of volatility and known uncertainties (e.g., changes in economic policy, tax law, geopolitical factors, regulatory changes, innovation, and shifting consumer sentiment), it is often challenging to determine the likelihood of a known uncertainty and estimate its potential impact. If either the likelihood of a known uncertainty is not remote or the impact cannot currently be assessed but may be material, an issuer may still need to consider disclosing the nature of the uncertainty in MD&A.