The Management Discussion and Analysis (MD&A) section of an SEC filing is your company’s opportunity to tell its financial story in plain language with context and with candor.

Yet too many MD&As read like a regurgitation of financial statement line items. Among the most scrutinized sections of any annual filing, MD&A consistently draws some of the highest volume of SEC staff comments, with the same themes coming up year after year.

Explain the Drivers Behind Period-to-Period Changes

The SEC staff frequently requests more specific explanations of material period-to-period changes, asking registrants to identify and quantify the underlying drivers (including both favorable and unfavorable factors) for revenue, cost of goods sold, gross profit, and operating expenses.

A statement like “Revenue increased $42 million, or 8%, year-over-year” is a starting point but not an explanation. The same boilerplate appearing quarter after quarter is a readability red flag and a comment letter invitation.

One of the most effective ways to present period-to-period changes is through driver tables, which is a format that makes each factor visible and quantified at a glance. For revenue, cost of sales, and operating expense movements, a simple table communicates far more clearly than prose. The SEC’s own Financial Reporting Manual calls for this level of specificity across all material line items and not just revenue.

Revenue:

Cost of Sales:

Operating Expenses:

Each table is transparent, easy to follow, and far more useful than a narrative that buries multiple factors in a single sentence, and the SEC expects this level of specificity across all material line items, not just revenue.

Go Beyond Cash Balances in Your Liquidity Disclosure

The staff has focused heavily on the need for more robust liquidity and capital resources discussions, including sources and uses of cash, known trends and uncertainties such as the interest rate environment, and forward-looking factors impacting future results.

Many filers treat the Liquidity section as a recitation of cash balances and revolving credit availability, yet it is precisely where the SEC staff has been pressing hardest for improvement.

Rather than one dense block of text, consider clear subheadings for sources of liquidity, uses of cash, and forward outlook. A reader should be able to navigate directly to what they need. The best filings go well beyond cash balances and available credit.

A more complete disclosure might read:

“Sources of liquidity. As of December 31, we had $280 million in cash and $500 million available under our revolving credit facility, with no significant covenant restrictions on availability. We generated $95 million in operating cash flow during the year.

“Uses of cash. Operating cash flow is sufficient to fund ongoing operations and capital expenditures of approximately $40 million in the coming year. Our $350 million of senior notes mature in Q3 of next year; we are targeting completion of the refinancing in Q2, well ahead of maturity.

“Forward outlook. Elevated market interest rates have increased our floating-rate borrowing costs by approximately $8 million annually compared to prior year, an impact we expect to persist through the refinancing.”

Know the Difference Between a Critical Accounting Policy and a Critical Accounting Estimate

The SEC staff has called for critical accounting estimates disclosures that go beyond describing accounting policies, pushing for analysis that helps investors understand the sensitivity of financial results to management’s key judgments, particularly for goodwill impairment analyses, including methods, assumptions, and at-risk reporting units.

The most pervasive deficiency in this section is duplication: companies label it “Critical Accounting Policies and Estimates” and fill it with footnote policy descriptions. The SEC has been explicit that this section must supplement the footnotes, not repeat them.

A critical accounting policy describes how you account for something (e.g., “We test goodwill for impairment annually using a quantitative assessment”). That belongs in the footnotes. A critical accounting estimate explains how much judgment is involved, what assumptions management made, the sensitivity of reported results to those assumptions, and how changes in business conditions could affect them going forward. That belongs in MD&A.

The difference is stark. Here is what most companies write:

“The Company tests goodwill for impairment annually, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company performs a quantitative assessment comparing the estimated fair value of each reporting unit to its carrying value. If the carrying value exceeds fair value, an impairment charge is recorded.”

That is a policy description lifted almost verbatim from the footnotes. It tells investors nothing about judgment, risk, or sensitivity. Here is what the SEC staff expects instead:

“Our goodwill impairment assessment requires significant judgment in estimating the fair value of our three reporting units. The most sensitive assumption is the discount rate, currently set at 10.5%. As of our annual test date, the estimated fair value of our Technology Services reporting unit exceeded its carrying value by approximately 8% — the reporting unit with the least headroom. A hypothetical 150 basis point increase in the discount rate would have caused the carrying value of that unit to exceed its estimated fair value, resulting in an impairment charge.”

Recent filings illustrate the standard the SEC staff expects to see. In the best examples, a company with a reporting unit carrying limited headroom disclosed that the estimated fair value exceeded carrying value by approximately 13%, identified the discount rate as the most sensitive assumption, and quantified that a hypothetical 350 basis point increase in the discount rate would have caused the carrying value to exceed fair value.

Remember the SEC Reads Your Filing Alongside Everything Else You Say Publicly

One of the most overlooked sources of comment letter risk has nothing to do with the filing itself. The SEC staff routinely reviews earnings call transcripts, investor day presentations, press releases, and company websites alongside the filing. Inconsistencies between what management says publicly and what appears in MD&A are a reliable trigger for comments even when the MD&A is technically compliant on its own terms.

A company that describes significant pricing pressure on its earnings call but characterizes the same period in MD&A as a modest revenue decline with no further explanation will draw questions. A business described in three distinct segments on an investor day but reported as a single segment in the filing invites scrutiny of its segment aggregation judgments. A CEO who highlights a major operational risk on a conference call that goes unaddressed in MD&A is creating an inconsistency the staff is likely to notice.

The practical implication is straightforward: before filing, read your MD&A alongside your most recent earnings call transcript and investor presentations. The key drivers, the risks highlighted, and the language used to describe business conditions should tell a coherent story across all of them. Where they don’t, the filing is what needs to change. A comment letter is a slow and painful way to discover that inconsistency.

The Bottom Line

Explain the numbers and show the drivers behind every material change. Treat liquidity as a forward-looking narrative. Make sure your estimates reflect judgment, not policy. And remember that the SEC reads everything you publish, not just the filing.