variance-analysis-advisor

Variance Analysis Advisor — Reference Skill

Purpose

Provide the complete analytical framework for variance decomposition and MD&A commentary drafting, consistent with SEC Regulation S-K Item 303 requirements and FASB ASC 270 (Interim Reporting) expectations.

Official Documentation

Standard	Source	Access
SEC Regulation S-K Item 303 (MD&A) — eCFR	https://www.ecfr.gov/current/title-17/chapter-II/part-229/subpart-229.300/section-229.303	Fully public (eCFR)
SEC Regulation S-K Item 303 — Cornell LII	https://www.law.cornell.edu/cfr/text/17/229.303	Fully public
SEC Final Rule 33-10890 (2020 MD&A Amendments)	https://www.sec.gov/files/rules/final/2020/33-10890.pdf	Fully public PDF
SEC 2020 Interpretive Guidance on MD&A	https://www.sec.gov/files/rules/interp/2020/33-10751.pdf	Fully public PDF
SEC 2003 MD&A Guidance	https://www.sec.gov/rules-regulations/2003/12/commission-guidance-regarding-managements-discussion-analysis-financial-condition-results-operations	Fully public
FASB ASC 270 (Interim Reporting)	https://asc.fasb.org/270	Free account required
FASB ASC 280 (Segment Reporting)	https://asc.fasb.org/280	Free account required
FASB ASC 205-20 (Discontinued Operations)	https://asc.fasb.org/205-20	Free account required
SEC Non-GAAP Financial Measures Guidance	https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm	Public

---

SEC Regulation S-K Item 303 — MD&A Requirements

Annual (10-K) Results of Operations Requirements (S-K 303(b)(2))

Required disclosures:

1. Material changes in net sales/revenues between periods — explain underlying causes, not just state the number
2. Material changes in cost of revenues — distinguish volume, price, and mix effects
3. Material changes in gross margin — quantify and explain
4. Material changes in each significant operating expense line
5. Material changes in income from operations
6. Known trends, demands, commitments, events, or uncertainties expected to materially affect results (S-K 303(b)(1)) — this is forward-looking and requires careful legal review

Key SEC guidance (Release 33-8350):

• "Material" = would a reasonable investor consider the information important in making an investment decision (qualitative + quantitative)
• Quantitative threshold generally used in practice: ≥5% change in a line item, or absolute dollar threshold based on company size
• Comparative period requirement: typically year-over-year (most recent two fiscal years)
• Causes must be described with specificity — "other income increased primarily due to gain on sale of building" not "other income increased"

Interim (10-Q) Requirements (S-K 303(b)(1), ASC 270)

Required disclosures:

1. Material changes vs. the corresponding period of the prior year (year-to-date and quarterly)
2. Material changes vs. the most recent annual period (when seasonal or where there are significant changes)
3. ASC 270-10-45-14: Disclose information about unusual or infrequently occurring items
4. ASC 270-10-45-4: Each interim period stands on its own — do not defer recognition to a later "expected" quarter

Key SEC guidance: Interim MD&A may be less detailed than annual but must cover material changes. The SEC staff frequently comments on interim MD&A that simply repeats boilerplate from prior periods without explaining period-specific drivers.

---

Driver Decomposition Framework

Standard Four-Factor Decomposition

For every material revenue or cost-of-revenue variance, decompose into:

Factor	Definition	How to Compute
Volume effect	Change attributable to selling more/fewer units	(Current units − Prior units) × Prior price
Price/Rate effect	Change attributable to price changes	Current units × (Current price − Prior price)
Mix effect	Change attributable to shift in product/segment composition	Total change − Volume effect − Price effect − FX effect
One-time items	Non-recurring items: restructuring, asset sales, legal settlements	Identify and quantify each; tag as one-time

Total check: Volume + Price + Mix + One-time = Total $ variance ± rounding

Extended Decomposition for Operating Expenses

Factor	Definition
Headcount-driven	Change in FTE count × average cost per FTE
Rate-driven	FTE count × change in average cost per FTE (compensation, benefits)
Program-driven	Discretionary spend (marketing programs, R&D projects, capex timing)
One-time	Non-recurring charges: impairments, restructuring, severance

FX Translation Effect (Multinationals)

Disclose separately when the company reports in a currency other than functional currencies of subsidiaries:

• Constant currency revenue = prior-period revenue × (current-period FX rate / prior-period FX rate)
• FX effect = actual change − constant currency change
• SEC staff routinely comments on non-GAAP constant currency metrics that are not reconciled per SEC Non-GAAP guidance

---

MD&A Commentary Structure

Recommended Section Structure (Results of Operations)

1. Overview (1-2 sentences): "Results for [period] reflected [top driver], partially offset by [counter-driver]."
2. Revenue:
   a. Total revenue: $X vs. $Y prior period (+/-$Z, +/-W%)
   b. By segment or product line (if material)
   c. Driver explanation: volume, pricing, mix, one-time
   d. Geographic breakdown (if material)
3. Cost of revenues / Gross margin:
   a. Total cost: $X vs. $Y (+/-$Z)
   b. Gross margin: X% vs. Y% (±Z bps)
   c. Driver explanation: material cost drivers
4. Operating expenses (by line):
   a. S&M / R&D / G&A: each with $ change, % change, driver explanation
5. Income from operations:
   a. GAAP operating income / loss: $ change
6. Non-GAAP reconciliation (if company presents non-GAAP): per SEC Non-GAAP guidance
7. Liquidity and Capital Resources (separate section, not covered here)

Paragraph Tagging

Tag each paragraph before finalizing:

Tag	Meaning
required-disclosure	Mandated by S-K 303; must be in the filing
material-trend	Material change meeting quantitative/qualitative threshold
management-chosen	Discretionary color; legal must review for forward-looking statement compliance
safe-harbor	Forward-looking statements that require safe-harbor language under PSLRA

---

Materiality Thresholds

Quantitative guidance (practice standard):

• Revenue variance ≥ 5% of prior period revenue → material; requires explanation
• Operating expense variance ≥ 5% of prior period operating expense AND > $X materiality (company-size dependent) → material
• Any line item that moves gross margin ≥ 50 basis points → material

Qualitative override: A <5% variance is still material if it represents a reversal of a trend, involves a new business line, or signals a future uncertainty.

Single-driver concentration risk: If one driver accounts for >80% of a total variance explanation, flag for auditor review — this pattern appears in many restatement cases (channel stuffing, bill-and-hold).

---

Restatement-Risk Trigger Catalog

Flag these patterns as risk indicators requiring internal audit or external auditor review:

Trigger	Pattern	Associated Standard
Revenue recognition cutoff	Spike in deferred revenue or unearned at period-end; large reversals in subsequent period	ASC 606-10-25-23
Channel stuffing	Revenue increase concentrated in last two weeks of period with high return rates	ASC 606-10-25-1(e) collectability
Bill-and-hold	Physical goods revenue recognized without customer possession or control	ASC 606-10-55-83 through 55-84
Improper capitalization	Unusual decrease in operating expense correlated with unusual increase in capex	ASC 340-40, ASC 730
One-time items misclassified	Operating income improved significantly but pre-tax income did not → items below the line?	S-K 303 materiality
FX timing games	Revenue spike correlated with period-end FX rate movements	ASC 830 functional currency
Segment recast	Business unit results improve markedly in a quarter when segment definitions changed	ASC 280-10

---

Mandatory Advisory Note

Every output from this agent must end with:

Advisory: This draft is advisory and based solely on the data and descriptions provided. It does not constitute authoritative financial guidance, legal advice, or a professional opinion. Final disclosure language requires CFO certification, Disclosure Committee review, and approval from legal counsel and external auditors before filing with the SEC or any regulatory body. Forward-looking statements require specific safe-harbor language under the Private Securities Litigation Reform Act (PSLRA).