Federal Accounting Standards 

Advisory Board

_________________________________________________________________

Statement of Recommended 

Accounting Standards Number 15

MANAGEMENT'S DISCUSSION

AND ANALYSIS

April 1999 _________________________________________________________________

THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD
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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

 The Secretary of the Treasury, the Director of the Office of 

 Management and Budget, and the Comptroller General established the 

 Federal Accounting Standards Advisory Board (the FASAB or "the 

 Board")in October 1990 to consider and recommend accounting 

 principles for the United States Government.

The Board communicates its recommendations by publishing

recommended accounting concepts and standards after considering

the financial and budgetary information needs of Congress,

executive branch agencies, and other users of federal financial

information. The Board also considers comments from the public on

its proposed recommendations, which are published for comment as

"exposure drafts." The three officials who established the Board

then decide whether to adopt the recommendations. If they do, the

standard is published by the OMB and the GAO and becomes

effective.

Additional background information is available from the FASAB,

including: (1) the "Memorandum of Understanding among the General

Accounting Office, the Department of the Treasury, and the Office

of Management and Budget on Federal Government Accounting

Standards and a Federal Accounting Standards Advisory Board" and

(2) the "Mission Statement of the Federal Accounting Standards

Advisory Board."

Federal Accounting Standards Advisory Board

Wendy M. Comes, Executive Director

441 G Street, NW -- Room 3B18

Washington, DC 20548

Telephone (202) 512-7350

Fax (202) 512-7366
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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

STATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS

MANAGEMENT'S DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY............................................. i

STATEMENT OF STANDARDS........................................ 1

APPENDIX A: BASIS FOR CONCLUSIONS............................. 4

Background, Rationale, and Project History............... 4

Concepts and Standards................................... 5

Responses to Second Exposure Draft....................... 6

Accountability Reports................................... 8

Forward-looking Information.............................. 8

Incorporation by Reference............................... 9

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

EXECUTIVE SUMMARY

This document establishes standards for preparing Management's

Discussion and Analysis (MD&A). MD&A is an important vehicle for

(1) communicating managers' insights about the reporting entity,

(2) increasing the understandability and usefulness of the

general purpose federal financial report (GPFFR),1

 and (3) providing

understandable and accessible information about the entity and its operations, service levels,

successes, challenges, and future. Some federal agencies also refer to MD&A as the "overview."

The basic concept that underlies the standards for MD&A is:

Each general purpose federal financial report (GPFFR) should include a section

devoted to management's discussion and analysis (MD&A). It should address the

reporting entity's performance measures, financial statements, systems and

controls, compliance with laws and regulations, and actions taken or planned to

address problems. The discussion and analysis of these subjects may be based

partly on information contained in reports other than the GPFFR. MD&A also

should address significant events, conditions, trends and contingencies that may

affect future operations.

A separate document titled Concepts for Management's Discussion and Analysis explains the

conceptual basis for the role and importance of MD&A, the general content of the GPFFR, and

the elements of MD&A. The concepts provide a foundation for the standards presented in this

document. The concepts include suggestions about the contents of MD&A, but those suggestions

are not accounting standards or principles for federal reporting entities. In particular, the concepts

are not "prescribed guidelines" for required supplementary information as discussed in section

558 of the Codification of Statements on Auditing Standards published by the American Institute

of Certified Public Accountants (AICPA). The only standards and prescribed guidelines for

MD&A are in paragraphs 1-8 of this document.

The standards require MD&A to be included in each GPFFR as required supplementary

information (RSI). MD&A should address:

 -- the entity's mission and organizational structure;

-- the entity's performance goals and results;

-- the entity's financial statements;

-- the entity's systems, controls, and legal compliance; and

-- the future effects on the entity of existing, currently-known demands, risks,

uncertainties, events, conditions and trends.

The discussion and analysis of these subjects may be based on information in other discrete
EXECUTIVE SUMMARY 2

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

sections of the GPFFR or it may be based on reports separate from the GPFFR.

The standards are effective for reporting periods that begin after September 30, 1999.
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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

MANAGEMENT'S DISCUSSION AND

ANALYSIS

STATEMENT OF STANDARDS

1. A report that presents a Federal reporting entity's financial

statements in conformance with Federal accounting principles should

include management's discussion and analysis (MD&A) of the

financial statements and related information. MD&A should provide a

clear and concise description of the reporting entity and its mission,

activities, program and financial performance, systems, controls, legal

compliance, financial position, and financial condition. MD&A should

provide a balanced presentation that includes both positive and

negative information about these topics. MD&A should be regarded as

"required supplementary information" as that term is used in auditing

standards.2

2. MD&A should contain sections that address the entity's:

o mission and organizational structure;

o performance goals, objectives, and results;

o financial statements; and

o systems, controls, and legal compliance.
2 MANAGEMENT'S DISCUSSION AND ANALYSIS

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

3. MD&A should include forward-looking information regarding the

possible future effects of the most important existing, currently-known

demands, risks, uncertainties, events, conditions and trends. MD&A

may also include forward-looking information about the possible

effects of anticipated future demands, events, conditions, and trends.1

Forward-looking information may comprise a separate section of

MD&A or may be incorporated with the sections listed above.

4. MD&A should discuss important problems that need to be

addressed, and actions that have been taken or planned. Actions

needed, taken, and planned may be discussed within the sections listed

above or in a separate section of MD&A.

5. Because MD&A must be concise if it is to be useful, management

must select the most important matters to discuss. This means that

some items that are material to the financial statements, notes, and

other sections of the GPFFR may not be discussed in MD&A.

6. MD&A should deal with the "vital few" matters; i.e., the most

important matters that will probably affect the judgments and decisions

of people who rely on the GPFFR as a source of information. (The

specific topics mentioned in Concepts for Management's Discussion

and Analysis are examples of items that might be relevant for MD&A

of a given entity.) Matters to be discussed and analyzed are those that

management of the reporting entity believes it is reasonable to assume

could:

o lead to significant actions or proposals by top management of the

 

1

The word "anticipated" is used in a broad, generic sense in this document. In

this context the term may encompass both "probable" losses arising from events

that have occurred, which should be recognized on the face of the basic or

"principal" financial statements, as well as "reasonably possible" losses

arising from events that have occurred, which should be disclosed in notes to

those statements. "Anticipated" may include the effects of future events that

are deemed probable, for which a financial forecast would be appropriate. The

term may also encompass hypothetical future trends or events that are not

necessarily deemed probable, for which financial projections may be

appropriate. Such information about the possible effects of anticipated future

demands, events, conditions and trends, if presented, should include the term

or label "projected" or "projection," and the key hypothetical underlying

assumptions should be explained. As with other information presented in MD&A,

no examination of this information by the auditor is now routinely included

within the scope of an audit of a federal entity's financial statements;

however, preparers and auditors may find useful background information in the

AICPA's Statements on Standards for Attestation Engagements Nos. 1 and 4,

codified as section 200, "Financial Forecasts and Projections," of the AICPA's

Codification of Statements on Standards for Attestation Engagements. 
STATEMENT OF STANDARDS 3

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

reporting unit;

o be significant to the managing, budgeting, and oversight functions

of Congress and the Administration; or

o significantly affect the judgment of citizens about the efficiency

and effectiveness of their Federal

Government.

7. Management of the reporting unit is responsible for the content

MD&A.

8. The standards are effective for reporting periods that begin after

September 30, 1999.

This Statement of Recommended Standards was adopted

unanimously by the eight members of the Federal Accounting

Standards Advisory Board serving on the Board in April 1999.
4 MANAGEMENT'S DISCUSSION AND ANALYSIS

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

4

APPENDIX A: BASIS FOR CONCLUSIONS

Background, Rationale, and Project History

9. The Board identified MD&A as a topic for its agenda shortly after the Board's inception. The

Board deferred work on this topic, however, until it completed recommendations for an initial set

of basic accounting standards.

10. FASAB published an initial exposure draft on MD&A in January, 1997. It was presented as a

statement of recommended concepts rather than standards. The Board proposed that it would deal

with MD&A conceptually, with the understanding that OMB would provide authoritative

guidance on MD&A to implement the concepts. This approach would have been similar to the

one used to deal with the topics of entity and display. The Board dealt with those topics

conceptually in SFFAC 2. OMB then provided authoritative guidance in its Bulletin on Form and

Content.

11. The Board received comment letters on the initial exposure draft from the following sources:
BASIS FOR CONCLUSIONS 5

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

 

FEDERAL

(internal)

NONFEDERAL

(external)

TOTAL

CITIZENS, USERS, ACADEMICS AND

OTHERS3

4 4

AUDITORS 7 3 10

PREPARERS AND FINANCIAL

MANAGERS

16 16

TOTALS 23 7 30

Concepts and Standards

12. The first exposure draft asked respondents whether all or part of the exposure draft's

provisions should be issued as recommended standards rather than recommended concepts.

Responses were mixed; most of those who commented on this question favored concepts, but a

significant number expressed the view that standards would be appropriate. The Board concluded

that, given the importance of MD&A as an integral part of the GPFFR, it would be appropriate

for federal accounting principles to include standards for MD&A.

13. At the same time, the Board concluded that MD&A should be treated as required

supplementary information. The Board agreed that it would recommend no detailed requirements

or guidelines for MD&A at this time, beyond those in paragraphs 1-8. In other words, a

discussion and analysis by management that addresses the listed topics should be required,

because it is an essential part of a complete GPFFR. At the same time, management should have

great discretion regarding what to say about those topics, subject only to the criteria in paragraphs

1-8 and the pervasive requirement that MD&A not be misleading. The standard itself, therefore,

is not extremely prescriptive.

14. Because of this change from what was originally exposed for comment, the Board decided to

expose separately the proposed standards and concepts for further comment. The exposure drafts

were issued in October, 1998; responses were requested by January 1999.
6 MANAGEMENT'S DISCUSSION AND ANALYSIS

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

The proposed standard, like the final recommended standard, would require the auditor to note

the omission of MD&A or the failure to address the specified topics. At the same time, RSI

status for MD&A--coupled with the lack of specific, detailed, prescriptive standards for the

content of MD&A--would minimize the requirement for the auditor to scrutinize MD&A. This,

the Board believed, would provide the flexibility appropriate for dealing with topics such as

performance measurement at this point in the evolution of federal financial reporting.

Responses to Second Exposure Draft

15. The Board received comment letters on the second exposure draft from the following

sources:

FEDERAL

(internal)

NONFEDERAL

(external)

TOTAL

CITIZENS, USERS, ACADEMICS AND

OTHERS

3 3

AUDITORS4 3 36

PREPARERS AND FINANCIAL

MANAGERS

11 11

TOTALS 14 6 20

16. Most comments were generally favorable, but comments were mixed regarding some points.

A few auditors and preparers expressed some concern about requiring forward-looking

information as RSI. Others expressed support for doing so. After considering these responses, the

Board agreed to defer the recommended implementation date of the standard by one year and to

make minor editorial changes to the standards and concepts that were exposed for comment.

17. Although the resulting standard differs from private sector standards, the Board expects that,

in practice, the effect on auditors will not be greatly different.2

 In the private sector, corporations

frequently include with their annual financial report the MD&A that they are required to file with

the SEC. Because it is required by the SEC rather than by accounting standards, the auditor

engaged to audit the corporation's financial statements normally treats MD&A as "accompanying

information" that is not audited in the context of the audit of the financial statements. The auditor

also may review the submission to the SEC and may have certain responsibilities in that regard,

but the auditor's usual role regarding MD&A is, nevertheless, fairly limited.

 

2

The standard itself differs from the SEC's guidance for MD&A in ways that

reflect the unique federal reporting environment. This will affect what

financial statement preparers must do to comply with the standard. For example,
BASIS FOR CONCLUSIONS 7

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

18. Because this standard defines MD&A for federal reporting entities as RSI, auditors will have

certain responsibilities regarding it; however, both the accounting standards specified here and

the auditing standards specified by the AICPA (and incorporated in Government Audit

Standards) for RSI are rather general. Therefore, the Board does not expect that this standard will

cause the auditor to be deeply involved in reviewing the contents of MD&A.

19. More specific requirements regarding the content of MD&A may be added later by OMB

acting on its own authority or pursuant to future FASAB recommendations. For example, OMB

might at some time in the future require preparers to address certain of the suggested items in

Concepts for Management's Discussion and Analysis. OMB also may provide more specific

guidance regarding the auditor's responsibility for MD&A. That guidance may call for more

extensive review of all or parts of MD&A than the minimum contemplated by this accounting

standard in the context of current auditing standards. For example, OMB might at some time in

the future decide that the minimum scope of engagements to audit federal financial statements

should be expanded to include a review or examination of all or parts of MD&A, consistent with

attestation guidelines published by the AICPA.3

Accountability Reports

20. The Board notes that the concept and practice of the "Accountability Report" continue to

evolve through the pilot project voluntarily undertaken by several agencies.5 The Board supports

this evolution and encourages agencies to participate in the pilot project. The concepts and

standards FASAB recommends are intended to be applicable to the GPFFR of Federal entities,

whether those reports are prepared pursuant to the Chief Financial Officers Act, the Government

Management Reform Act, or some future law that might establish a statutory basis for

Accountability Reports. In the event of such future legislation, OMB will need to resolve any

questions about how to apply existing Federal accounting standards in the context of new

legislative requirements.

Forward-looking Information

 reporting on performance of governmental programs requires measures in addition

to net income or net cost.

3

See Statement on Standards for Attestation Engagements No. 8, Management's

Discussion and Analysis, issued by the Auditing Standards Board of the AICPA,

March 1998.
8 MANAGEMENT'S DISCUSSION AND ANALYSIS

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999

21. MD&A should include forward-looking information regarding the future effects of existing,

currently-known demands, risks, uncertainties, events, conditions and trends. This kind of

forward-looking information is required when management believes it would be important to

people who read the financial report. Though not required, MD&A may also include forwardlooking information about the possible effects of anticipated future demands, events, conditions,

and trends. FASAB encourages management to include forward-looking information about the

possible effects of anticipated future demands, events, conditions, and trends to the extent

management believes such information would be useful and relevant. This information can be

highly useful, but management should avoid turning this part of MD&A into mere "lobbying" for

more budgetary authority.

Incorporation by Reference

22. Some respondents expressed concern that, if MD&A is to be regarded as RSI, audit problems

might arise from "incorporation by reference" in MD&A of information drawn from other

sources that might not have been subject to audit or review as basic or required supplementary

information, and for which authoritative guidance had not been provided by a standard setter.

The Board noted that most of those who commented, including most auditors, did not appear to

be greatly concerned about this potential problem. The Board concluded, therefore, that any such

problems were not likely to be insurmountable. The Board did, however, agree to defer by one

year the implementation date of the standard to allow OMB and GAO time to resolve any audit

issues that may arise.
BASIS FOR CONCLUSIONS 9

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Federal Accounting Standards Advisory Board

Standards for Management's Discussion and Analysis

April 1999
10 MANAGEMENT'S DISCUSSION AND ANALYSIS

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FASAB Board Members

David Mosso, Chairman

Linda Blessing (ending 1/1/99)

James L Blum (ending 2/24/99)

Barry B. Anderson (beginning 2/25/99)

Philip T. Calder

Donald H. Chapin

Norwood Jackson

Donald Hammond

James E. Reid (ending 12/31/98)

Kenneth J. Winter (beginning 1/1/99)

Nelson Toye -------------------------------------

Wendy M. Comes, Executive Director

Federal Accounting Standards Advisory Board

441 G Street NW

Suite 3B18

Washington, DC 20548

Telephone (202) 512-7350

FAX (202) 512-7366 ------------------------------------- 1.The term "general purpose federal financial report," abbreviated GPFFR, is

used as a generic term to refer to the report that contains the entity's

financial statements that are prepared and audited pursuant to the CFO Act of

1990, as amended. Entities may refer to these reports using different terms,

such as "Annual Report," "Accountability Report," "Financial Management

Report," etc. Paragraphs 54-112 and Appendix 1 of Statement of Federal

Financial Accounting Concepts 2, Entity and Display, describe and illustrate

the contents of the GPFFR.

2.See section 558, "Required Supplementary Information," in Codification of

Statements on Auditing Standards, American Institute of Certified Public

Accountants (AICPA).

3.This category includes representational organizations, retired federal

employees, federal employees responding as individuals, and federal

contractors, as well as academics and other GPFFR users.

4.Includes the AICPA's Federal Accounting and Auditing Subcommittee and the

Comptroller General's Advisory Council on Government Audit Standards.

5.Accountability reports are broader in scope than traditional general purpose

financial reports. As explained by OMB: "Six pilot agencies volunteered to

produce an 'Accountability Report' for FY 1995 to provide more useful
BASIS FOR CONCLUSIONS 11

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April 1999

information to decision makers by linking together information required by

several management statutes....Accountability Reports integrate the following

information: the FMFIA report, the CFOs Act Annual Report (including audited

financial statements); management's Report on Final Action as required by the

IG Act; Civil Monetary Penalty and Prompt Payment Act reports; and available

information on agency performance compared with its stated goals and

objectives, in preparation for implementation of GPRA." Federal Financial

Management Status Report and Five Year Plan, June 1996, pp. 33-34. Twelve

agencies produced accountability reports for FY 1997; eighteen plan to do so

for FY 1998; the number will increase to 23 for FY 2000. (The requirement to

include Civil Monetary Penalty and Prompt Payment Act reports has been

deleted.)