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Your 10-K Is Too Long; Here’s How to Shorten It

Scott Taub | November 25, 2014

Most likely, I’ve never read your 10-K, but I can still say, with some confidence, that it is longer than it should be. And you probably even agree.

You probably think that the Securities and Exchange Commission mandates that your company put way too much stuff into the 10-K and that the Financial Accounting Standards Board mandates you include too much information in footnotes. Both of those things may well be true. The SEC and FASB have projects on their agendas to look at ways to focus disclosure requirements on things that are truly meaningful. I look forward to the results of those projects.

When I say your 10-K (and 10-Q, for that matter) is too long, however, what I mean is that it is longer than it needs to be, even in light of the current requirements. I’m saying that there are a lot of words in your filings that are neither useful nor required. And since they aren’t important or necessary, you should take them out. Now. You don’t need to wait for FASB and the SEC to finish their projects, and you shouldn’t.

Don’t believe me? Take a look at recent speeches in which members of the SEC’s Division of Corporation Finance gave a number of suggestions on how to make disclosure more effective. Most suggestions point to things that can be eliminated, so as to leave what remains uncluttered by unnecessary information. With that as a starting point, here’s a list of easy things to target as you prepare your 2014 10-K.

Analyze Results of Operations Once, Not Twice

The Management’s Discussion and Analysis of Financial Position and Results of Operations (MD&A) section is one of the longest parts of just about any periodic filing. In most 10-Ks, the results of operations portion of the MD&A includes a comparison of the most recent year’s results to those of the immediate prior year, and another comparison of the prior year’s results to those of the year before that. There is no reason these comparisons need to be done in separate sections. Instead, combine the discussion of the three years into a single narrative.

I’m saying that there are a lot of words in your filings that are neither useful nor required. And since they aren’t important or necessary, you should take them out. Now. You don’t need to wait for FASB and SEC to finish their projects, and you shouldn’t.

Imagine how much shorter your MD&A will be when you only discuss growth and changes once instead of twice. Of course, combining the two sections into one won’t cut the length of the section in half, but I bet it’ll reduce it by at least 30 percent. Give it a try—the only thing you have to lose is a few pages of repetitive discussion. As a bonus, discussing three years of results together makes it easier to explain longer-term trends, so those reading your filing have a better chance of following what’s been going on in the company.

Stop Disclosing Risks That Apply to Everybody

Just about any time I review a “Risk Factors” section of a filing, I can cross out at least 20 percent of the disclosed risks as unnecessary. Why? Because the SEC’s requirements related to risk factors state: “Do not present risks that could apply to any issuer.” Despite the clear admonition against doing it, issuers constantly disclose such universal risks. Here are just a few:

  • We rely on key members of management to pursue our strategy.
  • Our stock price may be volatile.
  • If competitive products are introduced, our sales may suffer.
  • If we are unable to keep up with customer desires for product innovation, our revenues and profits may decrease.
  • New regulations could affect our business.
  • If we or our auditors conclude that our prior accounting treatments did not comply with GAAP, we will be forced to restate our financial statements.
  • The loss of a significant customer could materially affect our results of operations.

I could go on, but hopefully you get the idea. These and many other commonly disclosed risk factors could apply to any company, at least as they are generally discussed. If, of course, one of these risks is particularly important to you (for example, a regulator is currently contemplating new regulations that would be difficult for you, or there is a particular competitive product that is about to come out that worries you), then that’s your risk factor, not the generic language that is in there now. But if not, get the generic risk factors out of the document.

The Risk Factorsdisclosure isn't supposed to include a CYA section that mentions every possible bad thing that could happen to your company. Instead, it’s supposed to help investors differentiate the risks of investing in your company from the risks of investing in another company. If everyone discloses the same generic risks, then the disclosures are meaningless and don’t accomplish anything. Don’t waste words while obscuring the actual important information. 

Stop Talking About Every New Accounting Standard

The SEC mandates discussion of the anticipated effect of new accounting standards that haven’t yet been adopted. Don’t take that requirement too literally, though, and discuss every new standard, even the ones that would obviously not affect your company. Don’t waste space describing a bunch of new standards, with each paragraph ending with: “We do not expect this standard will have a material impact on our financial statements.” The only new standards that need to be discussed are (1) those that management believes will or might affect the financial statements, or (2) those that management thinks that investors might believe could materially affect the financial statements. That’s it. Drop the rest of the discussion.

Some companies even talk about this stuff twice for some reason—once in the footnotes to the financial statements and once in MD&A. There’s certainly no need for that. So discuss new standards once, and only mention the standards that might reasonably affect the company.

Stop Disclosing That You Follow GAAP

Footnote one in almost every set of financial statements is “… a description of significant accounting policies of the entity ...” as required by ASC 235. Too many companies seem to stop reading ASC 235 after that phrase. And that’s too bad, because just two paragraphs later, ASC 235 explains that the disclosure should generally focus on areas involving “a selection from existing acceptable alternatives,” “methods peculiar to the industry,” and “innovative applications of GAAP.”

So there’s no need to disclose that you account for inventory at historical cost with writedowns when cost exceeds market, that you test goodwill for impairment annually (or more frequently when triggering events arise) using the two-step model required by ASC 350, that you measure derivatives at fair value, or that you record deferred income tax assets and liabilities related to temporary differences. These are the only choices under GAAP for those items. Yet most companies disclose those policies. It’s a waste of space, and it makes it harder for readers to find the disclosures about accounting policies followed in areas where there are actually alternatives. Those are the policies that actually should be discussed in footnote one.

Don’t Repeat Yourself

There are many topics that are frequently discussed in multiple places in a filing. A couple of the more common repetitive discussions are those related to critical accounting policies and litigation, because those areas of required disclosure outside the financial statements overlap to some extent with disclosures required in the footnotes. But the fact that there is some overlap shouldn’t result in the same discussion appearing twice.

The purpose of these mandated disclosures is different from the purpose of the financial statement disclosures that cover a similar topic. Just repeating what’s in the financial statements isn’t going to fulfill those purposes. Instead, save space by cross-referencing to the financial statement disclosures as needed, and use the real estate currently taken up by repeating what’s already in the footnotes to cover additional information that isn’t required by GAAP.

Of course, there are many other things that are repeated multiple times in a filing. Much of the repetition can be eliminated because there is no need to discuss the same topic in different parts of the filing. Where the topic does need to be addressed twice, a cross-reference is often sufficient, instead of repeating a paragraph or two.

Help Is Coming, but Don’t Wait

To their credit, FASB and the SEC are trying to address disclosure overload directly, through projects focused specifically on disclosure effectiveness. We should all encourage these efforts.

But there is plenty that companies can do to address the situation themselves. The things I’ve discussed here are pretty easy to do and could be used by a large number of companies. There are many other ways to make filings shorter as well, like using tables to replace repetitive narrative discussions in MD&A, and removing disclosures that are no longer material. Spend a few minutes thinking about it, and I have no doubt just about everybody can shorten their 10-K without violating the rules.

And in case you are worried about taking out disclosures, read the speeches from the SEC Staff and recent publications from big audit firms, and you’ll see that they are all encouraging this. The opportunity to streamline things is there, if you are confident enough to take a crack at it.