What is MD&A?

Management’s Discussion and Analysis (MD&A) is a required section of your annual financial report under GASB standards. It appears at the beginning of the financial statements and must be prepared by management, not the auditors. MD&A is classified as Required Supplementary Information (RSI) under GASB and is included as part of your audited annual financial report.

The purpose of the MD&A is to explain the financial statements in plain language. The financial statements show what happened. The MD&A explains why it happened, including:

  • Why revenues increased or decreased
  • Why expenses changed
  • Why the budget was amended
  • Why actual results differed from the budget
  • How capital projects and debt decisions affected the government’s financial position

MD&A is intended to help board members, elected officials, and the public understand the government’s financial results without needing technical accounting knowledge. GASB Statement No. 103 strengthens the expectations for this required section by shifting the focus from repeating numbers to clearly explaining the reasons behind financial changes beginning with fiscal years starting after June 15, 2025 (2026 year-ends for calendar governments).

Although this change applies to 2026 year-ends, preparation should begin during 2025 to allow time to improve documentation and narrative explanations.

Key Changes That Affect You

  • Removal of certain comparative summary tables previously required.
  • Structured analysis required for governmental activities, business-type activities, and major funds.
  • Expanded explanation of original-to-final budget changes and significant variances.
  • Clearer discussion of capital asset additions and long-term debt activity.
  • Greater emphasis on entity-specific discussion rather than generic language.

MD&A must address both government-wide results and major funds, depending on how your government reports its activities.

 

What a Strong MD&A Will Include 

  • Clear explanations of why revenues and expenditures changed.
  • Direct linkage between financial results and real-world events (tax base changes, grants, staffing, capital projects, etc.).
  • Meaningful discussion of budget amendments and variance drivers.
  • Transparent explanation of capital projects and debt strategy.
  • Clear discussion of events that are expected to affect future financial results, not just general statements about monitoring operations.
  • Concise, readable language tailored to your government.

A complete MD&A must include an overview of the financial statements, a financial summary, detailed analysis of operations and major funds, discussion of capital assets and long-term debt, and currently known facts or conditions.

A well-prepared MD&A improves transparency and strengthens communication with governing boards, taxpayers, and stakeholders.

 

Before and After Examples

Management’s Discussion and Analysis

BEFORE:

This section of the Department’s annual financial report presents an overview of the Department’s financial performance for the fiscal year ended December 31, 2025.

 

AFTER:

Management’s Discussion and Analysis (MD&A) is a required part of the Department’s annual financial report. It provides an overview of the Department’s financial activities for the fiscal year ended December 31, 2025, and explains the reasons for significant changes in financial results.

The financial statements show what occurred during the year. This section explains why those changes occurred and how they affect the Department’s financial position.

 

Overview of Financial Statements

BEFORE:

The Department’s financial statements include the statement of net position, the statement of revenues, expenses, and changes in net position, and the statement of cash flows.

 

AFTER:

The Department reports its activities as governmental and business-type activities, as applicable.

The financial statements include:

  • A Statement of Net Position, which reports assets, liabilities, and net position
  • A Statement of Revenues, Expenses, and Changes in Net Position
  • A Statement of Cash Flows

These statements provide information about the Department’s overall financial condition and operating performance.

 

Financial Summary and Analysis

BEFORE:

  • Total assets exceeded liabilities by $24.6 million.
  • Operating revenues were $8.4 million.
  • Operating expenses were $7.9 million.
  • Net position increased by $350,000.

Operating revenues increased by $600,000 from the prior year. Operating expenses increased by $550,000 from the prior year.

 

AFTER:

The Department’s net position increased by $350,000 during 2025.

Operating revenues increased by $600,000 primarily due to a 5% service rate adjustment and increased demand for services during the year. Total operating expenses increased by $550,000 due to higher personnel costs, increased operating supplies, and additional maintenance and service-related expenses.

Nonoperating revenues included $220,000 in grant funding related to capital or operational improvements.

Overall, the Department generated sufficient operating income to cover operating costs and scheduled debt payments.

 

Capital Assets and Long-Term Debt

BEFORE:

Capital assets increased by $4.2 million. Long-term debt decreased by $700,000.

 

AFTER:

Capital assets increased by $4.2 million during the year due to capital improvement projects and equipment upgrades. These projects were funded through a combination of grant proceeds and existing debt or internal funds.

Long-term debt decreased by $700,000 due to scheduled principal payments. No new debt was issued during the year.

The Department continues to evaluate long-term capital improvement needs and available funding options.

 

Currently Known Facts, Decisions, or Conditions

BEFORE:

The Department will continue to monitor operating results.

 

AFTER:

The Department plans to implement a modest service rate adjustment of 3% in 2026 to address rising operating costs and support future capital needs. In addition, management is evaluating operational efficiencies and long-term strategic initiatives to ensure financial sustainability.

Management continues to monitor regulatory, economic, and operational factors that may affect future results.

 

MD&A 2026 Readiness Checklist

☐ Assign clear ownership for drafting and management review.

☐ Review prior-year MD&A and remove repetitive content.

☐ Document significant financial changes (revenues, expenditures, capital activity, debt, and budget amendments) throughout the year.

☐ Prepare explanations for significant budget-to-actual variances.

☐ Schedule early planning discussion with your audit team.

 

Responsibility and Support

MD&A is management’s responsibility and must be prepared by the government. While auditors are required to read the MD&A and perform limited procedures, we do not draft it. However, if you would like assistance understanding the new requirements, reviewing your draft, or discussing best practices, our team at Abacus! is happy to help!

 

Official Resources