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Basics of the Management’s Discussion and Analysis (MD&A) Required Supplementary Information for Government Entities

bar chart with management analysis MD&A

All government entities – small or large, state or local, new or established – are required to prepare a Management’s Discussion and Analysis (MD&A) which is required supplementary information that precedes the financial statements. It became a requirement almost 20 years ago when the Governmental Accounting Standards Board (GASB) issued Statement 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. The MD&A should provide an objective and easily readable analysis that summarizes your entity’s annual performance, your current financial position, and projections for future stability. Even though it is a requirement, it is also an opportunity to look at your activities from a different perspective and make improvements for the year to come.

Filing Requirements

The GASB requires the MD&A to accompany all state and local governments’ basic financial statements. The controller, CFO, or any other financial head should jointly prepare the statement with input from other leaders in your organization. The GASB believes that these financial leaders are uniquely qualified to prepare the MD&A because:

  • They know the organization’s operations;
  • They are aware of outside influences affecting the financials; and,
  • They understand the entity’s policies and procedures surrounding financial reporting.

Components of the MD&A

Although the MD&A is presented alongside your annual report, it is different from your financial statements in one important manner: management is responsible for drafting it, not the auditors. Your auditors can assist you by showing you what needs to be included, but the content should be your own.

There are eight key components to the MD&A, and much of the information will overlap what is disclosed in the notes to the financial statements. In those instances, you can simply summarize the information and refer your readers to the appropriate footnote. The eight key components to the MD&A are:

  1. A brief discussion of the basic financial statements.It should address the relationships of the statements to each other and the significant differences in the information they provide.
  2. Condensed comparative financial information from government-wide financial statements. At a minimum, it should include total assets, distinguishing between capital and other financial statements; total liabilities; total net position; program revenues, by major source; general revenues, by major source; total revenues; program expenses, at a minimum by function; transfers; and increase (decrease) in net position.
  3. Analysis of the government’s overall financial position and result of operations. This analysis should address both government-wide financial statements and should include reasons for significant changes from prior year.
  4. Analysis of balances and transactions of individual funds. The analysis should address reasons for significant changes in fund balances or fund net position and whether restrictions, commitments, or other limitations significantly affect the availability of fund resources for future use.
  5. Analysis of significant variances between original and final budget amounts. Let your readers know why your budgets have changed throughout the year.
  6. Description of significant capital asset and long-term debt activity. State any changes in your capital assets – new purchases, retirements, upgrades, etc. and discuss if your credit rating has changed enough during the year to affect your long-term debt.
  7. Descriptions of significant changes in condition and estimated maintenance expenses for infrastructure assets. If you are using a modified approach to report your infrastructure assets, discuss changes that may affect these assets, otherwise skip this requirement.
  8. Discussion of currently known facts, decisions, or conditions. This section is where you can share anything else that may affect your entity going forward. Anything that is expected to significantly impact your entity’s financial position should be disclosed here.


The MD&A is a tool your investors (and other users of the financial statements) will use to look at your financial statements in a different light. Because your management team is expected to prepare the MD&A, readers can see the financials through your eyes rather than the eyes of your auditors. It is a unique opportunity to point out the exact details you want them to remember. However, remember that the GASB specifies the above required components and it precludes adding additional components. Anything that you wish to convey that is not one of the required components can be discussed in the transmittal letter that is included in the comprehensive annual financial report.

In their Statement of Financial Accounting Concepts No. 1, the Governmental Accounting Standards Board (GASB) talks in detail about why the MD&A is required for governmental entities. They think that the MD&A will be a tool to help financial statement users do some of the following:

  • See the big picture. The MD&A is an overview of the financial statements, so it will provide a summary of your organization’s financial position and operating results. This narrative often compares prior year to current, and actual to budgeted. Comparing actual to budget is especially important for you because, without the narrative, the financial statement users would have no true understanding of why the budget shifted as the year progressed, or why you did not quite meet your goals.
  • Assess the company from different angles. The MD&A will look at how you’re able to service your current-year needs, both by looking at operations and by looking at financing. If your revenues from operations were not high enough to pay for the services you provided, explain why you had to dip into your savings. If your fund balances were insufficient, offer insight.
  • Gain information they wouldn’t otherwise know. The financials don’t always show your accomplishments, so share them in the MD&A. The readers will want to know how you are fulfilling your mission from a financial perspective. They may also have a hard time seeing your long-term plans for the entity, so share information about upcoming regulations, future purchases, or outside influences that will have an impact.

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Even though the MD&A is a requirement, we recommend that you think of it as a reminder to take a good, hard look at your financial performance for the year. It’s during this review that you yourself can see the big picture – something you may not see day-to-day. Seeing the big picture can help you draft policy changes that will improve your financial position for years to come. If you have any questions, please contact a member of LaPorte’s Public Sector Industry Group.