EDGAReView

Annual reports for most companies are due in March. Any company that sells securities to U.S. investors must report to the SEC on their business, their people, their successes and failures. But knowing exactly what kind of information is available to the investing public, where to find it inside the 10-K, and how to use it — that’s another story.

The required 10-K forms companies must file with the SEC contains much more detail (and fewer omissions) than the glossy Annual Report marketing brochure companies put out each year to impress their shareholders and attract more investors. In the 10-K form, all companies have to supply the same kind of information, and follow the same overall format, although they still have a lot of flexibility in telling their stories.

Let’s take a look inside these bulky, small print documents to see how they are organized. Then, let’s see how to actually find and use the information you want!

How the 10-K is organized

The Management’s Discussion and Analysis (MD & A)

Part 1 describes the business

• Overview of the company and its business model
• All the properties it owns
• Any legal proceedings
• Matters that will require shareholder approval

Part 2 discloses the numbers and what’s behind them

• Management’s Discussion and Analysis
• Quantitative and qualitative disclosures about market risk
• Financial statements and supplementary data
• Changes in and disagreements on accounting and financial disclosures

The Management’s Discussion and Analysis (MD&A) generally makes for good reading. It’s primarily the executive team’s explanation of the financials. The people running the company must describe the year’s operations; offer an assessment of how the company fared; and say how they think the company will do in the coming year, given their stated goals and outline their plans to achieve them.

Part 3 gives information on the people running the business

• Directors and officers
• Executive compensation
• Security ownership of certain beneficial owners and management
• Certain relationships and related transactions
• Principal accounting fees and services

Note: Starting in 2011, in a response to public outcry over the financial crisis and who was responsible, the SEC will require much more information about the board of directors, including their qualifications and other boards they serve on, and more about their responsibilities in overseeing the company.

Part 4 includes the exhibits and financial schedules

How to actually find and use the information you need

Corporations, like people, tend to tell their stories in flattering lights, and seek to bury negative information in small type and footnotes, or in legalese, obtuse language. So knowing where the information should be is not a guarantee of finding it. For example, a footnote regarding executive compensation might explain that an amount has increased by 4%, but you’d have to find and read back through years of reports to find the actual number the percentage increase is based on.

Transparency is the main reason that the SEC has changed the rules for how companies report their information.

It used to be that companies could simply file an electronic copy of the paper-based 10-K report form. They filed a PDF and/or html document. An investor would still have to read every word and number, and then copy and paste numbers into an Excel spreadsheet.

Now, companies are required to switch to an interactive data format called XBRL, which can be instantly searched and analyzed by computer software. These put individual investors on an equal playing field with large companies that do financial analysis. It also means you don’t have to follow the paper-based format to find information. Any specific information you want can be automatically flowed into a spreadsheet for analysis — and hundreds of companies can be instantly compared!

In the first year of the XBRL mandate, only the largest 500 companies were required to file in XBRL, but by 2011, all public companies will report the annual and quarterly in this format. The XBRL data is available from the SEC website and from other sources, such as a live, EDGAR Online data feed.

Initially, a company has to submit just their financials in the XBRL format, but in their second year submissions, the detailed information (numbers and text) in the notes of an annual or quarterly report must also be formatted as XBRL.

For those of our newsletter readers who are not subscribers to I-Metrix, you can play around with XBRL data at www.tryXBRL.com or get a 7-day free subscription to compare what it is like to read (and copy and past) information from an annual report, to simply entering what you want into a search box and letting the software do the work.