PORTFOLIO

Management's Discussion and Analysis (Portfolio 5107)

Accounting Policy and Practice Portfolio 5107, Management's Discussion and Analysis, analyzes the requirement that annual and quarterly financial statements of public companies must be accompanied by management's narrative discussion of certain issues (MD&A). 

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Accounting Policy and Practice Portfolio 5107, Management's Discussion and Analysis, analyzes the requirement that annual and quarterly financial statements of public companies must be accompanied by management's narrative discussion of certain issues (MD&A). The Securities & Exchange Commission has promulgated regulations mandating the form and content of these narrative descriptions. Although the Sarbanes-Oxley Act of 2002 expanded the significance of MD&A, the requirements precede that legislation. This Portfolio consists of two parts: Detailed Analysis of Rules (Part 1) and Highlights and Illustrations (Part 2).
Part 1, by Brian J. Lane and Gillian McPhee, analyzes the history, purpose, and components of MD&A and forward looking information. The Portfolio analyzes both the SEC's regulations and significant relevant judicial and administrative actions. Echoing the significance of MD&A under the Sarbanes-Oxley Act, the Portfolio emphasizes MD&A disclosures in 2001 and beyond.
Part 2, by William Ruland, highlights the SEC's requirements and illustrates contemporary reporting practice. The highlights summarize major MD&A requirements as reflected in major directives from the SEC. The illustrations are taken primarily from annual reports of companies that have received recognition for the quality of financial reporting as reflected in the AIMR Corporate Disclosure Survey, February 2000, the final and most recent edition of that series.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5107, Lane, McPhee, and Ruland, Management's Discussion and Analysis. Please note, however, that Mr. Lane and Ms. McPhee had no part in preparing and take no responsibility for Part 2 of the Portfolio. Accordingly, they take no position with respect to the merits of the MD&A of any company including the companies identified in Part 2.


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AUTHORS

BRIAN J. LANE
Brian J. Lane is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. Mr. Lane focuses on securities regulation and disclosure issues and sophisticated capital markets counseling. He represents U.S. and foreign clients in proxy contests, complex mergers and acquisitions, public and private offerings and corporate governance matters. Mr. Lane received his law degree in 1983 from the American University, Washington College of Law. He has served as an adjunct professor of law at Georgetown University Law Center. Before joining Gibson, Dunn & Crutcher, Mr. Lane served at the Securities and Exchange Commission (SEC) for 16 years, where he held a variety of positions. Mr. Lane served as Director of the Division of Corporation Finance, Counsel to Chairman Arthur Levitt, Counsel to Commissioner Richard Roberts, and staff attorney with the Corporation Finance and Market Regulation Divisions.

GILLIAN MCPHEE
Gillian McPhee is an associate in Gibson, Dunn & Crutcher's Washington, D.C. office. She currently practices in the firm's Corporations Department where she focuses her practice on securities regulatory issues and corporate governance matters. Ms. McPhee has co-authored a variety of articles and other publications on securities law and corporate governance issues, including “Liability of Officers and Directors; Statutory Limitations, Indemnification and D&O Insurance,” in Corporate Governance: Law and Practice, LexisNexis/Matthew Bender (2005); “The Business Roundtable's 2002 Principles of Corporate Governance,” The Corporate Governance Advisor, September/October 2002; “The Investment Company Act of 1940: Why the Time Has Come to Revive Section 3(b)(1),” in Villanova Journal of Law and Investment Management, Spring 2001. Prior to joining Gibson, Dunn & Crutcher in 1999, Ms. McPhee was an associate in the Washington, D.C. office of Fulbright & Jaworski LLP. Ms. McPhee received her J.D., with Honors, from the University of Texas in 1997. She received her Bachelor of Arts magna cum laude from Yale University in 1993.

WILLIAM RULAND
William Ruland, Ph.D., SUNY at Buffalo, New York (1976), MBA, SUNY at Buffalo, BS, Pennsylvania State University Industrial Engineering. Areas of expertise include financial accounting and financial statement analysis. Author of numerous publications in journals of accounting and finance. Editorial Board, Journal of Accounting and Public Policy, 1982-present.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction and Scope of Portfolio

II. History, Purpose, and Components of MD& A

A. Historical Development

B. Purpose and Components of MD& A

1. Liquidity

2. Capital Resources

3. Results of Operations

C. The SEC's Interpretive Release

1. Prospective Information

2. Material Changes in Financial Statement Line Items

3. Interim Period Reporting

4. Segment Analysis

5. Participation in High Yield Financings, Highly Leveraged Transactions or Non-Investment Grade Loans and Investments

6. Effects of Federal Financial Institutions Upon Operations

7. Preliminary Merger Negotiations

III. Forward-Looking Information

Introductory Material

A. Required Disclosure Versus Voluntary Forward-Looking Information

B. Safe Harbors For Forward-Looking Information

1. Introduction

2. Rule 175 and Rule 3b-6

3. The "Bespeaks Caution" Doctrine

4. The "Puffing" Doctrine

5. The Private Securities Litigation Reform Act of 1995

a. Background

b. The Statutory Safe Harbors

c. "Forward-Looking" Statements

d. Meaningful Cautionary Language

e. Actual Knowledge

C. The Duty to Update Forward-Looking Statements

IV. Significant Judicial and Administrative Action Involving MD& A

A. Introduction

B. Disclosure About Past Performance

1. Segment Disclosure: Individual Components of Overall Performance

2. Risks Associated With a Company's Activities

C. Known Trends and Uncertainties

1. Known to Management and Reasonably Likely to Have a Material Adverse Effect on Financial Condition

2. Quantifying a Material Adverse Effect

V. Recent Years' Guidance on MD& A Disclosure in 2001 and Beyond

Introductory Material

A. December 2001: Cautionary Advice on Disclosure About Critical Accounting Policies

B. January 2002: Interpretive Guidance on Enhanced MD& A Disclosure

C. May 2002: Proposed Rules on Disclosure About Critical Accounting Policies

1. Purpose and Scope of Proposed Rules

2. Disclosure Presentation

3. Critical Accounting Estimates

a. Definition of "Critical Accounting Estimate"

b. Specific Disclosures About Critical Accounting Estimates

4. Disclosure Regarding Initial Adoption of Accounting Policies

5. Status of Rule Proposals

D. Results of SEC Fortune 500 Review

1. Critical Accounting Policies

2. Non-GAAP Financial Information, Off-Balance Sheet Arrangements, and Securitized Financial Assets

3. Restructuring Charges

4. Impairment of Long-Lived Assets, Investment Securities, and Intangible Assets

5. Pension Plans

6. Segment Reporting

E. Off-Balance Sheet Arrangements and Tabular Disclosure of Contractual Obligations

1. Definition of "Off-Balance Sheet Arrangement"

2. Disclosure About Off-Balance Sheet Arrangements

3. Tabular Disclosure of Contractual Obligations

4. Safe Harbor for Forward-Looking Statements

F. Non-GAAP Financial Information

G. Interpretive Guidance on Drafting MD& A

1. Overall Presentation

2. Focus and Content

3. Liquidity and Capital Resources

4. Critical Accounting Estimates

H. "Dear CFO" Letters Regarding Fair Value (March and September 2008)

VI. Organization and Relationship to Part 1

Introductory Material

A. Highlights

B. Role of SEC Guidelines

VII. Introduction or Overview Section of MD& A

Introductory Material

A. Highlights

B. Observations

C. Cisco Systems, Inc.

D. Procter and Gamble Company

E. Leggett & Platt Incorporated

VIII. Liquidity and Capital Resources

Introductory Material

A. Highlights

B. Pall Corporation

C. Herman Miller, Inc.

D. Teleflex Incorporated

IX. Results of Operations

Introductory Material

A. Highlights

B. Southwest Airlines Co.

C. Paychex, Inc.

D. Home Depot, Inc.

X. Key Indicators of Financial Condition and Operating Performance

Introductory Material

A. Highlights

B. Observations

C. Phelps Dodge Corporation

D. Google, Inc.

E. Home Depot, Inc.

XI. Known Trends and Uncertainties

Introductory Material

A. Highlights

B. Observations

C. Expedia, Inc.

D. Boeing Company

E. Princeton Review, Inc.

XII. Forward Looking Information

Introductory Material

A. Highlights

B. Gap, Inc.

C. Home Depot, Inc.

D. Intel Corporation

XIII. Safe Harbors - Meaningful Cautionary Language

Introductory Material

A. Highlights

B. The Procter & Gamble Co.

C. EMC Corporation

D. CVS Corp.

XIV. Material Changes in Financial Statement Line Items

A. Highlights

B. Leucadia National Corporation

C. Norfolk Southern Corporation

D. Teleflex Incorporated

XV. Interim Period Reporting

A. Highlights

XVI. Segment Analysis

A. Highlights

B. Intel Corporation

C. Staples, Inc.

D. Nike, Inc.

XVII. Critical Accounting Estimates

A. Highlights

B. Target Corporation

C. Meade Instruments Corp.

D. Dell Inc.

XVIII. Off-Balance Sheet Arrangements and Tabular Disclosure of Contractual Obligations

A. Highlights

B. Leucadia National Corporation

C. Laureate Education, Inc.

D. Sun Microsystems, Inc.


WORKING PAPERS

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Item 303 of Regulation S-K (Management's Discussion and Analysis of Financial Condition and Results of Operations)

Worksheet 2 Concept Release on Management's Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 6711, Exchange Act Release No. 24356 (April 17, 1987)

Worksheet 3 Interpretive Release: Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities Act Release No. 6835, Exchange Act Release No. 26831 (May 24, 1989)

Worksheet 4 Cautionary Advice Regarding Disclosure About Critical Accounting Policies, Securities Act Release No. 8040, Exchange Act Release No. 45149 (Dec. 12, 2001)

Worksheet 5 Commission Statement About Managment's Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 8056, Exchange Act Release No. 45321 (Jan. 22, 2002)

Worksheet 6 Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Securities Act Release No. 8098, Exchange Act Release No. 45907 (May 10, 2002)

Worksheet 7 Final Rule: Conditions for Use of Non-GAAP Financial Measures, Securities Act Release No. 8176, Exchange Act Release No. 47226 (Jan. 22, 2003)

Worksheet 8 Final Rule: Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Securities Act Release No. 8182, Exchange Act Release No. 47264 (Jan. 28, 2003)

Worksheet 9 Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies (February 2003)

Worksheet 10 Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures (June 2003)

Worksheet 11 Interpretation: Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 8350, Exchange Act Release No. 48960 (Dec. 19, 2003)

Worksheet 12 Current Accounting and Disclosure Issues in the Division of Corporation Finance (Excerpt Concerning MD& A) (March 4, 2005)

Worksheet 13 Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 on Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers (Excerpt Concerning MD& A) (June 21, 2005)

Worksheet 14 List of Significant Accounting Pronouncements Principally Discussed

Worksheet 15 March 2008 SEC "Dear CFO" Letter Regarding Fair Value

Worksheet 16 September 2008 SEC "Dear CFO" Letter Regarding Fair Value

Bibliography

OFFICIAL

Statutes:

Legislative Materials:

Court Cases:

Securities and Exchange Commission:

Adminstrative Proceedings:

Advice, Findings, and Statements:

Regulations:

Rule Releases:

Other SEC Materials:

UNOFFICIAL

American Institute of Certified Public Accountants:

Financial Accounting Standards Board:

Other Sources: