Annual reports v SEC 10-K filings
Published: March 3 2011 12:27 | Last updated: March 3 2011 15:26
Sixty days after the end of every fiscal year, companies listed in the US have to file a Form 10-K with the Securities and Exchange Commission. For many of them, that was Tuesday. Shareholders tend to ignore these horrendously presented filings in favour of annual reports with glossy photos of management gifting wind farms to poor communities. That is a mistake. The 10-K is one of the best sources of information investors can get.
EDITOR’S CHOICE
Canny providers target workplace - Feb-20
Notice served on the quoted managers - Feb-06
Hurrah, tough talk on bans and caps - Jan-30
Disadvantaged by the refund option - Jan-23
How to navigate the document? First, go to item 7, where a company’s management has to give its most thorough assessment of current conditions and future prospects. Read it carefully. It is here that shareholders might discover that a corporation holds most of its liquid assets overseas, or that a large proportion of its financing is off-balance sheet. Consider management’s views alongside risk factors outlined earlier in item 1A.
Once satisfied with the fundamentals of the business, it is time to check for financial tomfoolery. Look at the explanation for the difference in generally accepted accounting principles and non-GAAP measures, in particular whether the exceptional events that flattered the non-GAAP numbers really are one-offs. Credit Suisse analysts recommend examining what is called “accumulated other comprehensive income”, where anything from currency gains and losses to changes in pension fund status can be found. If lawyers are lining up to sue the company, potential damages are estimated in item 3.
Finally, do not forget the footnotes. For example, the 10-K shows gross positions for derivative assets and liabilities rather than netting them off. That sort of information is useful to know. If goodwill has been impaired, try to find out why. Do the reasons reconcile with management’s expectations for earnings power in item 7? After a thorough interrogation of its 10-K, investors shouldn’t have to read a company’s annual report ever again.
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Copyright The Financial Times Limited 2011.
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