What is Form 10-Q?
The Form 10-Q is the quarterly report required to be filed with the SEC that, compared to the 10-K, is far less comprehensive as the financials are prioritized.
Form 10-Q Filing: SEC Report Overview
The 10-Q must be filed three times each fiscal year, with the fourth quarter converging with the annual filing (10-K), per guidance from the SEC. In other words, a company files a 10-K as opposed to another 10-Q in Q4.
The purpose of the 10-Q is to provide a public update on the ongoing performance of public companies throughout the year.
Within the 10-Q, public companies in the U.S. must disclose their quarterly financials along with brief sections on:
- Management Discussion & Analysis (MD&A)
- Supplementary Disclosures
Like all financial reports under U.S. GAAP, the 10-Q must contain all material information pertaining to the company’s stakeholders (e.g. shareholders, lenders, customers), as required under the full disclosure principle of accrual accounting.
Despite the 10-Q representing a “condensed” variation of the 10-K, all relevant information regarding the company and any risks to its continuance as a “going concern” must still be shown.
10-Q vs. 10-K: What is Difference?
The 10-Q SEC filing is filed quarterly and contains fewer sections and commentary than 10-K filings.
For both the quarterly reports (10-Qs) and annual filings (10-K), the files can be found within the SEC EDGAR database.
Compared to the 10-K, the main distinction is that the 10-Q contains far less information and commentary, even though the obligation to disclose all material concerns remain.
The 10-K delves much deeper into the granular financial information of a company, whereas the 10-Q represents a quick check-up on the company’s financial standing.
Another difference is that most 10-Qs are generally unaudited, with the company having to file separate reports regarding audit adjustments later on.
Additionally, the 10-Q provides investors with more financial data than previous periods in the same time horizon – for example, the 2021 Q3 performance compared to the prior 2020 Q3 performance.
Form 10-Q Filing Deadlines
- Large Accelerated Filer: Public Float >$700 million → 40 days post fiscal year-end
- Accelerated Filer: Public Float Between $75 million and $700 million → 40 days post fiscal year-end
- Non-Accelerated Filer: Public Float < $75 million → 45 days post fiscal year-end
Consequences of Missed 10-Q Filing Deadline
If a company misses a 10-Q filing deadline and cannot submit the required materials within the specified time, the SEC Form NT 10-Q must be filed.
The NT 10-Q filing can be related to sudden material events, such as a merger/acquisition, as well as auditors holding up the process due to accounting updates that disproportionally impact companies.
When reviewing the application that explains the delay in processing, such explanations can potentially be viewed as “suitable” (i.e. within reason) to the SEC.
However, other cases like if a company’s accountants face difficulty in completing the audit from the company facing financial distress (e.g. complex situation, disputes) are more likely to be viewed negatively.
The delay would not only concern the SEC but the public markets, as well – as delayed quarterly report filings have been shown to coincide with a negative reaction from the market in the form of share price declines.
Criticism of the Quarterly Reporting Standard
In recent years, numerous prominent investors have raised questions regarding the impact that quarterly reporting has on long-term performance.
Warren Buffett on Quarterly Reporting
For instance, Warren Buffett criticized the quarterly filing requirement in his 2018 shareholder letter, as shown below.
Berkshire Hathaway Chairman’s Letter (Source: 2018 Annual Report)
Buffett argues that quarterly reporting puts too much of a burden on management to meet quarterly EPS and earnings expectations, which have considerable implications on a company’s share price.
But as a counterargument, more extended gaps between reporting periods could conceal poor financial performance.
Most acknowledge that quarterly reports increase the pressure for short-term-oriented decision-making at the expense of long-term growth.
- Yet, sufficiently meeting short-term targets is often proof that a long-term strategy is working.
- Likewise, missed short-term targets can be a wake-up call for management that the current strategy requires adjustments.
Finally, shareholders are owners of the company and not requiring quarterly filings can create further distance between the insiders (i.e. CEO, CFO, Board of Directors) and shareholders.
Even if the stake is marginal compared to the equity ownership of insiders and institutional investors with close relations to management, retail shareholders are nevertheless partial owners with the right to be updated on recent financial performance and material risks.
Reducing the amount of company-specific information publicly available in the markets can cause the equities asset class to be less attractive, particularly to risk-averse investors.
If longer filing gaps were implemented, the market may become less efficient from the reduction in publicly available information and there’ll be increased market volatility during earnings seasons as a result of the longer gaps (i.e. more pricing instability in the markets).
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