Management's Discussion and Analysis
Management's Discussion and Analysis (MD&A) is required supplementary information (RSI) that precedes the basic financial statements in a state or local government's Annual Comprehensive Financial Report (ACFR). Required by GASB Statement No. 34, MD&A presents a narrative overview and analysis of the government's financial activities based on currently known facts, decisions, or conditions — written by management to help readers understand the financial statements.
This section maps to BAR Area III, Group A, Topic 6 – Management's discussion and analysis. Representative tasks:
- Recall the objectives and components of management's discussion and analysis in the annual comprehensive financial report for state and local governments.
Purpose and Nature of MD&A
MD&A serves as an introductory narrative that provides government management the opportunity to present both a short-term and long-term analysis of the government's financial activities. It is designed to help users of the financial report assess whether the government's financial position improved or deteriorated during the year.
| Characteristic | Description |
|---|---|
| Authoritative source | GASB Statement No. 34, paragraphs 8–11 |
| Classification | Required Supplementary Information (RSI) |
| Placement | Immediately before the basic financial statements |
| Responsibility | Government's management |
| Basis | Currently known facts, decisions, or conditions |
| Perspective | Objective, factual analysis (not promotional material) |
MD&A is required — it is not optional. However, it is classified as RSI, not as part of the basic financial statements. This distinction matters for auditing: the auditor applies limited procedures to RSI rather than auditing it as part of the basic financial statements.
Where MD&A Fits in the ACFR
The ACFR follows a specific ordering. MD&A occupies a unique position as the only RSI that appears before the basic financial statements.
| Component | Position | Classification |
|---|---|---|
| MD&A | Before basic financial statements | RSI |
| Government-wide financial statements | Basic financial statements | Audited |
| Fund financial statements | Basic financial statements | Audited |
| Notes to financial statements | Basic financial statements | Audited |
| Budgetary comparison schedules | After basic financial statements | RSI |
| Pension/OPEB schedules | After basic financial statements | RSI |
Do not confuse MD&A with the transmittal letter. The transmittal letter is in the introductory section and is unaudited supplementary information. MD&A is in the financial section, is RSI, and is subject to limited auditor procedures. The transmittal letter may be more promotional in tone; MD&A must be factual and analytical.
Required Components of MD&A
GASB 34 specifies eight required topics that must be addressed in the MD&A. Governments should confine their discussion to these topics.
| # | Required Component | Focus |
|---|---|---|
| 1 | Brief discussion of the basic financial statements | Explain what they show and the relationships between them |
| 2 | Condensed comparative financial data | Current and prior year data from government-wide statements |
| 3 | Overall financial position and results of operations | Analysis of changes in net position and activities |
| 4 | Individual fund analysis | Significant changes in balances and transactions of individual funds |
| 5 | Budget variances | Significant variations between original budget, final budget, and actual results for the General Fund |
| 6 | Capital asset and long-term debt activity | Significant activity during the year |
| 7 | Infrastructure condition (if modified approach) | Condition assessments and maintenance/preservation levels |
| 8 | Currently known facts, decisions, or conditions | Events expected to significantly affect future financial position or operations |
A helpful mnemonic for the eight MD&A components: "Big Cities Build Infrastructures For Better Future Growth" — Basic financial statements discussion, Condensed comparative data, Budget variances, Infrastructure (modified approach), Fund analysis, capital asset/debt (Balance sheet long-term items), Future known facts, Government-wide overall analysis.
Condensed Comparative Financial Data
One of the most important MD&A components is the presentation of condensed comparative financial data derived from the government-wide statements. This includes both the Statement of Net Position and the Statement of Activities, comparing the current year to the prior year.
Condensed Statement of Net Position (Example)
| Governmental Activities | Business-Type Activities | |||
|---|---|---|---|---|
| Current Year | Prior Year | Current Year | Prior Year | |
| Current and other assets | $18,300,000 | $17,100,000 | $5,800,000 | $5,500,000 |
| Capital assets (net) | 85,000,000 | 82,000,000 | 32,000,000 | 30,500,000 |
| Total assets | 103,300,000 | 99,100,000 | 37,800,000 | 36,000,000 |
| Deferred outflows of resources | 2,200,000 | 1,900,000 | 400,000 | 350,000 |
| Current liabilities | 3,500,000 | 3,200,000 | 1,200,000 | 1,100,000 |
| Long-term liabilities | 42,500,000 | 40,000,000 | 15,200,000 | 14,500,000 |
| Total liabilities | 46,000,000 | 43,200,000 | 16,400,000 | 15,600,000 |
| Deferred inflows of resources | 3,000,000 | 2,800,000 | 200,000 | 150,000 |
| Net investment in capital assets | 42,500,000 | 41,000,000 | 16,800,000 | 16,000,000 |
| Restricted | 5,500,000 | 5,200,000 | 1,200,000 | 1,100,000 |
| Unrestricted | 8,500,000 | 8,800,000 | 3,600,000 | 3,500,000 |
| Total net position | $56,500,000 | $55,000,000 | $21,600,000 | $20,600,000 |
Condensed Statement of Activities (Example)
| Governmental Activities | Business-Type Activities | |||
|---|---|---|---|---|
| Current Year | Prior Year | Current Year | Prior Year | |
| Program revenues: | ||||
| Charges for services | $3,200,000 | $3,000,000 | $5,900,000 | $5,600,000 |
| Operating grants | 1,800,000 | 1,700,000 | — | — |
| Capital grants | 2,500,000 | 2,000,000 | 1,000,000 | 800,000 |
| General revenues: | ||||
| Property taxes | 10,500,000 | 10,000,000 | — | — |
| Sales taxes | 4,800,000 | 4,500,000 | — | — |
| Other | 900,000 | 850,000 | 200,000 | 180,000 |
| Total revenues | 23,700,000 | 22,050,000 | 7,100,000 | 6,580,000 |
| Total expenses | 22,200,000 | 21,500,000 | 6,100,000 | 5,900,000 |
| Transfers | (500,000) | (400,000) | 500,000 | 400,000 |
| Change in net position | $1,000,000 | $150,000 | $1,500,000 | $1,080,000 |
Analysis of Overall Financial Position
After presenting the condensed data, MD&A must include narrative analysis explaining the reasons for significant changes. The analysis should address both the Statement of Net Position and the Statement of Activities.
Example Analysis Paragraph
"The net position of the City's governmental activities increased by $1,000,000 (1.8%) during the current fiscal year, compared to an increase of $150,000 in the prior year. The improvement is primarily attributable to a $500,000 increase in property tax revenues resulting from new construction and a $500,000 increase in capital grant funding for the Main Street bridge project. These increases were partially offset by a $700,000 increase in public safety expenses due to new collective bargaining agreements effective July 1."
Effective MD&A analysis should:
- Explain why changes occurred, not merely restate the numbers
- Identify specific causes of significant fluctuations
- Discuss the implications of changes for the government's financial health
- Use dollar amounts and percentages to quantify changes
Individual Fund Analysis
MD&A must discuss significant changes in balances and transactions for individual major funds. This section bridges the government-wide perspective with the fund-level detail.
| Fund | Key Items to Discuss |
|---|---|
| General Fund | Changes in fund balance, revenue trends, expenditure changes |
| Major special revenue funds | Significant grant activity, restricted revenue changes |
| Major capital projects funds | Project status, bond proceeds received and spent |
| Major enterprise funds | Operating income changes, rate increases, capital investment |
Budget Variance Analysis
MD&A must analyze significant variances between:
- Original budget and final budget (explains amendments during the year)
- Final budget and actual results (explains performance vs. plan)
This requirement applies to the General Fund and, at the government's option, other major governmental funds with legally adopted annual budgets.
Example Budget Variance Discussion
| General Fund | Original Budget | Final Budget | Actual | Variance (Final vs. Actual) |
|---|---|---|---|---|
| Total revenues | $14,000,000 | $14,200,000 | $14,500,000 | $300,000 favorable |
| Total expenditures | 13,800,000 | 14,100,000 | 13,900,000 | 200,000 favorable |
| Net change in fund balance | $200,000 | $100,000 | $600,000 | $500,000 favorable |
"The original budget was amended during the year to appropriate $300,000 from fund balance for emergency road repairs following the March storm. Actual revenues exceeded the final budget by $300,000 primarily due to higher-than-anticipated sales tax collections in the fourth quarter. Actual expenditures were $200,000 below the final budget because the emergency road repairs cost less than originally estimated."
Remember that budget variance analysis in MD&A focuses on why the variances occurred. The budgetary comparison schedule (separate RSI) presents the numbers; MD&A provides the narrative explanation of significant deviations.
Capital Asset and Long-Term Debt Activity
MD&A must describe significant capital asset and long-term debt activity during the year.
Capital Asset Activity Example
| Capital Assets (Net) | Governmental Activities | Business-Type Activities |
|---|---|---|
| Beginning balance | $82,000,000 | $30,500,000 |
| Additions | 6,500,000 | 3,200,000 |
| Retirements | (300,000) | (100,000) |
| Depreciation | (3,200,000) | (1,600,000) |
| Ending balance | $85,000,000 | $32,000,000 |
Long-Term Debt Activity Example
| Outstanding Debt | Governmental Activities | Business-Type Activities |
|---|---|---|
| Beginning balance | $40,000,000 | $14,500,000 |
| New issuances | 5,000,000 | 2,000,000 |
| Retirements | (2,500,000) | (1,300,000) |
| Ending balance | $42,500,000 | $15,200,000 |
Infrastructure Condition (Modified Approach)
If a government uses the modified approach for reporting infrastructure assets (preserving them at a target condition level rather than depreciating), MD&A must discuss:
| Required Disclosure | Description |
|---|---|
| Condition assessment results | Most recent assessment vs. condition level established by government |
| Comparison of estimated vs. actual maintenance | Whether actual preservation spending met estimated needs |
| Significant changes | Any changes in condition levels or estimated maintenance |
Under the modified approach, infrastructure assets are not depreciated. Instead, the government commits to maintaining them at a condition level established by the government. All maintenance and preservation costs are expensed. This approach is only available for infrastructure assets that are part of a network or subsystem managed as such.
Currently Known Facts, Decisions, or Conditions
The final required component addresses forward-looking information — but only information based on facts that are currently known as of the report date. This is not a forecast or projection section.
Examples of items to discuss:
- Approved but not-yet-issued debt
- Pending litigation with probable outcomes
- Planned facility closures or program eliminations
- Enacted tax rate changes effective in future periods
- Known grant awards for future periods
- Natural disaster impacts not yet fully reflected
Limitations on MD&A Content
GASB 34 explicitly limits what may be included in MD&A:
| Permitted | Not Permitted |
|---|---|
| Discussion of the eight required topics | Information GASB does not require or authorize |
| Objective, factual analysis | Subjective opinions without factual basis |
| Currently known facts | Speculation about future events |
| Comparative data from government-wide statements | Fund-level comparative data not required by GASB 34 |
| References to other sections of the ACFR | Promotional or marketing content |
A government cannot use MD&A to present information that GASB does not specifically require or authorize for MD&A. This is a common exam point — if a question asks whether a particular item belongs in MD&A, check whether it falls within one of the eight required topics.
Comprehensive Exam Tips
High-yield MD&A concepts for the BAR exam:
- MD&A is RSI — not part of the basic financial statements, but it is required (not optional).
- MD&A is placed before the basic financial statements — it is the only RSI with this placement.
- MD&A must include condensed comparative data from the government-wide statements (current vs. prior year).
- The eight required components are specifically enumerated by GASB 34 — governments should confine their discussion to these topics.
- Budget variance analysis covers original vs. final budget and final budget vs. actual for the General Fund.
- MD&A is based on currently known facts — it is not a forecast or promotional document.
- Management is responsible for preparing MD&A — not the auditor.
- If the government uses the modified approach for infrastructure, MD&A must discuss condition assessments and maintenance levels.
- The auditor applies limited procedures to MD&A (it is RSI, not audited financial statements).