Conventions and Standards

In this article, you will learn about the rules that govern accounting. GAAP sets the rules that accounts follow when making journal entries and standardizes accounting so outside parties can make comparisons between companies. Investors, creditors, even employees count on the consistency of financial reporting to evaluate operations.

The Disclosure Process

The process of disclosing financial statements is carried out through what is known as a Form 10-K.

Learning Objective

  • Define and outline the annual report known as a Form 10-K.

Key Points

  • A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company's performance.
  • The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.
  • In addition to the 10-K, which is filed annually, a company is also required to file quarterly reports on Form 10-Q.
  • In the case of a significant event (such as a CEO departing or bankruptcy), a Form 8-K must be filed in order to provide up-to-date information.
  • Form 10-K must be filed with the SEC within 90 days after the end of the company's fiscal year. However, in September 2002, the SEC approved a rule that changed the deadline to 75 days for "accelerated filers".
  • Every annual report contains 4 parts and 15 schedules.

Terms

  • Form 10-K

    an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company's performance

  • accelerated filer

    an issuer that has a public float of at least $75 million, has been subject to the Exchange Act's reporting requirements for at least 12 calendar months, has previously filed at least one annual report, and is not eligible to file its quarterly and annual reports on Forms 10-QSB and 10-KSB

Example

  • Example of Disclosures of Contingencies:
    • "A jury awarded USD 5.2 million to a former employee of the Company for an alleged breach of contract and wrongful termination of employment. The Company has appealed the judgment on the basis of errors in the judge's instructions to the jury and insufficiency of evidence to support the amount of the jury's award. The Company is vigorously pursuing the appeal. Since it presently is not possible to determine the outcome of these matters, no provision has been made in the financial statements for their ultimate resolution. The resolution of the appeal of the jury award could have a significant effect on the Company's earnings in the year that a determination is made. However, in management's opinion, the final resolution of all legal matters will not have a material adverse effect on the Company's financial position".

The process of disclosing financial statements is carried out through what is known as a Form 10-K. This is an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company's performance. Although similarly named, the annual report on Form 10-K is distinct from the often glossy "annual report to shareholders", which a company must send to its shareholders when it holds an annual meeting to elect directors (though some companies combine the annual report and the 10-K into one document). The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.

In addition to the 10-K, which is filed annually, a company is also required to file quarterly reports on Form 10-Q. Information for the final quarter of a firm's fiscal year is included in the annual 10-K, so only three 10-Q filings are made each year. In the period between these filings, and in case of a significant event (such as a CEO departing or bankruptcy) a Form 8-K must be filed in order to provide up-to-date information.

 

Filing Deadlines

Historically, a Form 10-K had to be filed with the SEC within 90 days after the end of the company's fiscal year. However, in September 2002, the SEC approved a rule that changed the deadline to 75 days for "accelerated filers". Accelerated filers are issuers that have a public float of at least $75 million, that have been subject to the Exchange Act's reporting requirements for at least 12 calendar months, that previously have filed at least one annual report, and that are not eligible to file their quarterly and annual reports on Forms 10-QSB and 10-KSB. These shortened deadlines were to be phased in over a three-year period; however, in 2004 the SEC postponed the three-year phase-in by one year.

In December 2005, the SEC created a third category of "large accelerated filers", which are accelerated filers with a public float of over $700 million. As of December 27, 2005, the deadline for filing for large accelerated filers was still 75 days; however, beginning with the fiscal year ending on or after December 15, 2006, the deadline is 60 days. For other accelerated filers the deadline remains at 75 days, and for non-accelerated filers the deadline remains at 90 days.

 

Structure of a Form 10-K

Every annual report contains 4 parts and 15 schedules:

 

Part I

ITEM 1. Description of Business

  • This describes the business of the company: who and what the company does, what subsidiaries it owns, and what markets it operates in. It may also include recent events, competition, regulations, and labor issues. Other topics in this section may include special operating costs, seasonal factors, or insurance matters.

ITEM 1A. Risk Factor

  • Here, the company lays out anything that could go wrong, likely external effects, possible future failures to meet obligations, and other risks in order to adequately warn investors and potential investors.

ITEM 1B. Unresolved Staff Comments

ITEM 2. Description of Properties

  • This section lays out the significant properties, or physical assets, of the company. This only includes physical types of property, not intellectual or intangible property.

ITEM 3. Legal Proceedings

  • Here, the company discloses any significant pending lawsuit or other legal proceeding. References to these proceedings could also be disclosed in the Risks section or other parts of the report.

ITEM 4. Mine Safety Disclosures

  • This section requires some companies to provide information about mine safety violations or other regulatory matters.

 

Part II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

  • Gives highs and lows of stock in a simple statement.

ITEM 6. Selected Financial Data

  • This section contains financial data showing consolidated records for the legal entity as well as subsidiary companies.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

  • Here, management discusses the operations of the company in detail by usually comparing the current period versus prior period. These comparisons provide a reader with an overview of the operational issues of what causes such increases or decreases in the business.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

ITEM 9A(T). Controls and Procedures

ITEM 9B. Other Information

 

Part III

ITEM 10. Directors, Executive Officers, and Corporate Governance

ITEM 11. Executive Compensation

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

ITEM 14. Principal Accounting Fees and Services

 

Part IV

ITEM 15. Exhibits, Financial Statement Schedules Signatures