Financial statements/MD&A
What are financial statements and management’s discussion and analysis?
Financial statements 
communicate information that is useful to you. In Canada, public companies must issue annual financial statements every year and interim financial reports for each three-, six-, and nine-month periods during its financial year. Once a year, they must arrange for an auditor to audit the company’s annual financial statements. The company's board of directors must approve the financial statements.
Whenever a company issues annual financial statements or interim financial reports, it must also produce management’s discussion and analysis (MD&A) . As the title suggests, MD&A provides an opportunity for management to discuss how it performed during the period covered by the financial statements or reports, along with its financial condition and future prospects. MD&A may also provide disclosure on additional areas, such as transactions with related parties and legal proceedings.
Some companies post their annual financial statements, interim financial statements or reports, and MD&A on their websites.
What to focus on
Don’t be put off by all the numbers. You can find important information in these documents even without financial training. We have arranged the explanation below in no particular order and this may not be in the order in which you see the statements are usually presented. The trick is to zero in on what is most important to you.
Statement of comprehensive income or income statement. This was sometimes referred to as a statement of operations. It sets out revenue and expenses for the period under review and the year-to-date. Focus on the net income/profit (or net loss) or net income/profit (or loss) attributable to common shares and then compare this to the information for the prior period(s).
Statement of cash flows/cash flow statement. This presents cash received and spent for the period and year-to-date for operating, financing and investing activities. For operating activities, it will show if the company is bringing in more cash from operations than it is spending. For financing activities, see if the company raised money in this period by selling additional shares or borrowing money. For investing activities, see if the company spent money on new equipment – a necessary expenditure in many companies.
Statement of financial position or balance sheet. This is also known as a statement of financial position. It compares what the company owns and owes on the last day of the period under review. The difference between the company’s total assets (what it owns) and its total liabilities (what it owes) is called equity or shareholders' equity. How do total assets and liabilities compare to each other and to last year? If current liabilities exceed current assets, how does the company intend to pay these debts? How much is assigned to intangible assets or goodwill? Both represent future economic benefits and may be subject to factors outside of management’s control.
Notes. These explain how the company arrived at the numbers and related issues. Has the company changed its accounting policies? If so, did it affect its financial statements? IFRS will apply to most Canadian publicly accountable enterprises for financial years beginning on or after January 1, 2011. For these companies, you will notice changes to reported performance because of the change in accounting standards. What do they say about properties or other assets acquired or disposed of? Carefully read all notes, including those about related party transactions.
Auditor’s report. If this is an annual audited set of statements, the statements will include an auditor’s report. The financial statements are the company’s records not the auditor’s records.
If you own shares in a company, it must send you any financial statements you request and may send you financial statements as part of their annual report,unless you choose not to receive these materials. You can also find the company’s financial statements on SEDAR and sometimes usually on the company’s own website.
MD&A. Focus first on the discussion that deals with questions you had about the financial statements. Then look at the changes the company’s management expects over the next period. Finally go back to the financial statements and see if changes and explanations about the company’s performance detailed in the MD&A make sense to you.
For the next few years, pay particular attention to the portion of the MD&A dealing with key differences for the company between old-Canadian GAAP and IFRS. Each company's MD&A should summarize the key impacts of the differences between old-Canadian GAAP and IFRS.
What questions should you ask yourself?
Questions on financial statements and MD&A are available as a separate form that you can download and print.
If you do not feel you have sufficient information or you do not understand the information in the financial statements and MD&A, you have some options:
- Ask your advisor to discuss your questions with you
- Ask another trusted professional (your accountant, for example) to discuss your questions with you
- Call the company and ask for a further explanation
- Ask your question(s) at the company’s annual general meeting
Some public companies have their financial statements and MD&A available on their website.