Departmental Reports and Management’s Discussion and Analysis

Best Practice

The Governmental Accounting Standards Board (GASB) introduced the notion of management’s discussion and analysis (MD&A) to the public sector in GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments. The purpose of MD&A is to “provide an objective and easily readable analysis of the government’s financial activities based on currently known facts, decisions, or conditions.”1 The GASB has clearly mandated that MD&A accompany the separately issued basic financial statements of any financial reporting entity or component unit. To date, however, authoritative accounting and financial reporting standards have not specifically addressed the contents of separately issued financial reports of units that are not legally separate (e.g., departmental reports and reports of individual funds). Consequently, there is no authoritative basis for extending GASB’s mandate to present MD&A to such reports. Because authoritative accounting and financial reporting standards have not specifically addressed the contents of the separately issued financial reports of units that are not legally separate, there has been considerable confusion regarding whether MD&A should, in fact, be included in such reports. It would appear that the presentation of MD&A would benefit the users of departmental reports, individual fund reports, and similar reports, just as it does the users of the report of a financial reporting entity and the separately issued reports of component units.


GFOA recommends that MD&A be presented in conjunction with departmental reports, individual fund reports, and similar reports.2 When MD&A are presented voluntarily, GFOA recommends that their contents be closely modeled on the requirements for MD&A set forth in GASB Statement No. 34 and tailored to the reporting unit’s specific circumstances. MD&A that are presented voluntarily should properly be classified in such cases simply as supplementary information rather than as required supplementary information. All the same, they should still precede rather than follow the basic financial statements and required supplementary information. Financial statement preparers are encouraged to label MD&A that is presented voluntarily as “unaudited” to avoid confusion with those portions of the financial section of a comprehensive annual financial report that receive “in-relation-to” coverage from the independent auditor.3

Alternatively, preparers of departmental and fund financial statements may present MD&A as if it were required supplementary information under the following theory espoused by the AICPA in their audit and accounting guide, State and Local Governments.

Although GASB standards do not address the accounting and financial reporting for separately issued GAAP-based financial statements for the government’s departments, agencies, or programs, in meeting their reporting obligations, auditors should consider long-established practice dictating that those presentations should apply all relevant GAAP. Thus, in developing an opinion on separately issued GAAP-based departmental financial statements, the auditor considers whether the financial statements include all relevant GAAP financial statements, note disclosures, MD&A topics, and other RSI topics.


1 GASB Statement No. 34, paragraph 8.
2 There would be no need to label the MD&A as “unaudited” if the independent auditor agreed to extend the same “inrelation-to” coverage to MD&A as to other supplementary information in the financial section.


This best practice was previously titled Including Management’s Discussion and Analysis in Departmental Reports.

Approved by GFOA's Executive Board: 
March 2004