Definition and Examples of Form 10-K
Form 10-K is an annual business disclosure report that has to be filed with the SEC by publicly traded companies. It contains almost everything about the business that an investor would want to know before buying or selling its stock or investing in the firm's corporate bonds. This includes:
- Changes in management
- Areas of concern and competition
- Current operations
- Future plans
In addition to the information that you're required to put in a 10-K, you must also include any other material information that clarifies the required information and ensures that no parts of the report are misleading.
Financial statements, such as the income statement and balance sheet—which show you how much money a company made, its debt levels, and other important data—are the most important part of the Form 10-K filing. Together, they allow you to see what is going on with a company’s finances.
The documents are free and can be downloaded online from a company's website and public databases such as the SEC's EDGAR.
Who Uses a Form 10-K?
A Form 10-K is filed by public companies. Once it is filed, it is used by investors and prospective investors. It allows them to study the specific ways a company operates and makes its money. It also explains where the company operates and any risks the company faces, including any current and pending lawsuits.
This information allows investors to make informed decisions about whether to trade or own stock in the company.
Benefits of a Form 10-K
A Form 10-K provides significant benefit to investors by disclosing information about a company's financial health that can be difficult to find anywhere else.
Current accounting rules are written in a way that if management cannot accurately predict the potential damage of certain risk, it may not have to put aside any reserve at all. This means that the exposure doesn't show up in the financial statements.
Many forms of debt can make a company go bankrupt that do not show up on the balance sheet due to accounting rules. But the law requires the payments to be disclosed in the Form 10-K filing.
Imagine you owned a small clothing boutique at the local mall and had no debt. You signed a lease with the mall owner that required a monthly rent charge of $10,000. According to guidelines prior to 2016 that determined how finances must be disclosed, you might have ended up showing little or no debt on your balance sheet. Updated accounting standards now require that companies disclose lease liabilities.
If revenues decline, and you stop sending checks to the landlord, the mall owner can kick you out of your storefront and force your company into bankruptcy due to the missed lease payment. These obligations are also disclosed somewhere in the Form 10-K, often under a section called "operating leases," "fixed payments," or "minimum cash payments due."
There are many important parts of the Form 10-K that provide vital information to investors.
Accounting Policies and Practices
Imagine that you are considering buying stock in a washing machine manufacturer. Suddenly, the company makes national headline news, because thousands of models are breaking down beyond repair. Is the company on the hook for taking them back from customers? In the Form 10-K filing, a company must disclose its warranty policies and estimated warranty costs for products it sells or manufactures.
Signed Letters From the CEO and CFO
The CEO and CFO must provide signed letters swearing under oath that the company's books are accurate to their knowledge. These letters are a way for the government to prosecute executives who knowingly falsify their Form 10-K or other required disclosures.
The signed letters were made a requirement after the accounting frauds following the dot-com bust, when WorldCom and Enron dominated the headlines.
Letter From the Independent Auditor
This letter should detail the scope of the auditing firm's certification of the financial records, as well as any material deficiencies it uncovered. If the auditor thinks the company could face imminent demise, you might see the auditor referencing a question as to the company's ability to "continue as a going concern" or something similar. If you ever come across something like those words, alarm bells should go off.
Alternatives to Form 10-K
A Form 10-Q filing is a briefer version of its Form 10-K filing. The Form 10-Q report is filed at the end of each business quarter with the SEC. It is also available to investors through a company's website and EDGAR.
- A Form 10-K is an annual report that all public companies must file with the Securities and Exchange Commission.
- It gives investors a detailed picture of a company's financial situation, and also can highlight future risks.
- Form 10-K is available free from a company's website and the SEC's EDGAR database of public filings.
- Form 10-Q is a shorter version and is filed quarterly.