The Form 10-K is an annual business disclosure report all publicly traded companies are legally required to file with the Securities and Exchange Commission (SEC) and make available to investors.
What Is a Form 10-K?
The Form 10-K contains almost everything about the business that an investor would want to know before buying or selling shares of stock in the corporation or investing in the firm's corporate bonds. This includes revenues, changes in management, areas of concern and competition, current operations, and future plans.
Financial statements—such as the income statement and balance sheet that 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 because, 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 and used by investors and prospective investors 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.
Benefits of a Form 10-K
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, so 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.
To help you understand this concept better, imagine you owned a small clothing boutique at the local mall and had no debt. You signed a lease to the mall owner that requires a monthly rent charge of $10,000. According to the guidelines that determine how finances must be disclosed, you may end up showing little or no debt on your balance sheet.
But, 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 disclosed somewhere in the Form 10-K, often under a section called "operating leases," "fixed payments," or "minimum cash payments due."
Other Important Parts of a Form 10-K:
- Description of the company’s 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 swearing under oath that the books are accurate to their knowledge. These letters were made a requirement after the accounting frauds following the dot-com bust when Worldcom and Enron dominated the headlines. They are a way for the government to prosecute executives that knowingly falsify their Form 10-K or other required disclosures.
- A letter from the company's 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 reference a question as to the company's ability to "continue as a going concern" or some derivation thereof. If you ever come across those words, or a similar phrase, alarm bells should be ringing.
Alternatives to Form 10-K
A Form 10-Q filing is a briefer version of the 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 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.