May 26, 2023
Form 10-K or the more commonly used term 10-K, is a comprehensive and complex review of a company’s financial performance over the last fiscal year, and is much more detailed than an annual report created for shareholders. The 10-K report most likely gets its name from Regulation S-K, a set of SEC rules that describe the detailed disclosure requirements for companies, as mandated by the Securities Exchange Act of 1934.
Every publicly traded company is required by the US Securities and Exchange Commission (SEC) to annually submit a 10-K. Sometimes referred to as an annual report, people can confuse the two. Annual report and 10-K are often used interchangeably, with financial pros referring to 10-K reports as an annual report because it summarizes the financial activity from the last year.
There are distinct similarities and differences between these two reports. Both reports are required, under SEC guidelines, to be submitted at the end of a company’s fiscal year and both documents include information pertaining to the company’s financial health and performance.
The simplest way to differentiate between the reports is the intended audience and the detail of the content. The 10-K is a formal regulatory filing with the SEC, whereas the annual report is intended to be viewed by existing retail shareholders and other stakeholders like lenders, potential investors and customers. An annual report would take advantage of marketing tools like graphs, illustrations and photographs to make the company look more attractive and healthy whereas the 10-K includes a larger amount of data and uses strict formatting restrictions set by the SEC. There are many individual investors that look to a company’s 10-K as a useful tool to help make important decisions about their investments. And as with any investment choices, the individual shareholder is recommended to consult a knowledgeable financial advisor before making any decisions. As a retail shareholder, you can find an annual report on a company’s website, and individual investors looking for a 10-K report can find it on the SEC website and linked in company profiles on financial websites.
A 10-K report is a complete description of the company's financial activity during a specified fiscal year, including an analysis of risks, legalities, liabilities, corporate agreements, operations and market performance. In addition these reports include an analysis of any relevant industries, the landscape of the marketplace, and the status of operations. The SEC sets the formatting for the topics that all companies must cover in their 10-K reports and how the information should be represented. And though the information they require be submitted is extensive, the main aspect of the report can be broken down into five sections.
The way the company makes money and its product and/or services are outlined in the first section. Any potential risks, either current or future, are described in the second section and these are typically listed in order of the severity of the risk. Specific financial information about the company spanning the last five years is shared in the third section. People seek out the information from this section to find a more clear illustration of the health of the company by looking at its most recent financial performance.
In the fourth section senior management presents the company’s performance with qualitative and quantitative analysis, or gives their subjective account of the year. This section is also known as MD&A (Management’s Discussion and Analysis). The company cannot be audited for this section as it includes the opinions of the C-Suite executives.
The fifth section consists of the company’s audited financial statements, including the income statement, balance sheets, and statement of cash flows. Also included in this section are letters from the company’s senior management and independent auditor certifying the scope of their review.
Having access to the health of a company through its financial statements, and researching how that changes from year to year can be a helpful tool to guide the individual investor in their decision making. Though the 10-K is richly detailed document, by utilizing the perspective of a trained investment analyst, the individual investor could gain a better understanding of the companies in their portfolio, and those that they might be interested in investing in.
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