US GAAP, the SEC and the 10-K

Managers do not need to know every paragraph of the accounting standards, but they do need to know which rules their own company and its competitors follow, where those rules leave room for judgment, and where to find the information that matters in a public filing. This lesson maps the US reporting landscape: US GAAP as set by the FASB, the SEC's authority and its filing system, the annual report on Form 10-K and its main parts, and the frameworks private companies and not-for-profits use. It then compares US GAAP with IFRS, because many US companies compete with, borrow from or buy foreign firms that report under international standards.

Who uses which framework

US GAAP is the Accounting Standards Codification maintained by the FASB, an independent private body overseen by the Financial Accounting Foundation. The SEC recognizes the FASB's standards as authoritative for public companies, but it has the legal power to set reporting requirements itself, which it exercises through Regulation S-X (the form and content of financial statements) and Regulation S-K (non-financial disclosure). Private companies generally also follow US GAAP because lenders and investors require it, and the Private Company Council can approve simpler alternatives for them, such as amortizing goodwill. State and local governments follow the Governmental Accounting Standards Board, and foreign companies listed in the US may file IFRS statements on Form 20-F.

Northfield Components is private and follows US GAAP, using some of the private company alternatives, such as amortizing goodwill over ten years. Prairie Ridge Energy is listed on the New York Stock Exchange and files with the SEC. Fairway Grocers is privately owned but has bonds held by institutional investors, so it provides audited GAAP statements to them. Lakeview Health follows the not-for-profit presentation rules within GAAP. Kestrel Analytics, a venture-funded start-up, prepares GAAP statements for its investors and is already thinking about the controls it would need as a public company.

ASPE and IFRS compared

Private companies in the United States do not use a separate framework like Canada's ASPE, but the Private Company Council has approved several simplifications within GAAP. A private company may elect to amortize goodwill, usually over ten years, and to test it for impairment only when triggering events occur; it may subsume certain intangible assets into goodwill in an acquisition; it may use simpler approaches to some hedge accounting; and it may use a risk-free rate to discount lease liabilities. Private companies also do not report earnings per share or segment information. Lenders sometimes accept reviewed rather than audited statements from smaller private borrowers.

For a manager, the practical effect is that private company statements can differ from public company statements for reasons that have nothing to do with performance. A private company that amortizes goodwill shows lower earnings and assets than an otherwise identical public company that only tests goodwill for impairment. When Fairway compared itself with a private competitor, Grace's team checked which alternatives each had elected before comparing returns on assets.

The 10-K and other SEC filings

Public companies file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K for significant events such as acquisitions, executive changes and earnings releases. Filings are made on EDGAR. The 10-K deadline is 60 days after year-end for large accelerated filers, 75 days for accelerated filers and 90 days for others; the 10-Q deadline is 40 days for the first two groups and 45 for others. The annual proxy statement discloses executive compensation and board matters. Executives certify each 10-K and 10-Q under sections 302 and 906 of the Sarbanes-Oxley Act, and management reports on internal control under section 404.

Experienced readers rarely start with the income statement. They start with the MD&A, which explains what management thinks drove results and how it plans to fund the business, then read the notes on revenue, segments, debt and commitments, and only then study the statements themselves. The auditor's report is also worth reading: since the late 2010s, audit reports for listed companies have included key or critical audit matters, describing the areas the auditor found most difficult or judgmental, which point directly to where the risks of misstatement lie.

IFRS and US GAAP: the main differences

IFRS and US GAAP have converged substantially since the early 2000s, with near-identical standards on revenue and similar ones on leases and business combinations, but differences remain. Some matter mainly to specialists; a few make a large difference to reported numbers.

LIFO, last in, first out, is the most visible difference. A US company using LIFO in a period of rising prices charges the latest, higher costs to cost of goods sold, lowering profit and taxes and leaving older, lower costs in inventory. US companies using LIFO must disclose a LIFO reserve, the difference between LIFO and FIFO inventory, which allows analysts to restate to FIFO for comparison.

# Restating a LIFO company to FIFO for comparison (millions of dollars)
lifo_inventory = 410.0
lifo_reserve_start, lifo_reserve_end = 95.0, 118.0
cogs_lifo = 2860.0
tax_rate = 0.25
fifo_inventory = lifo_inventory + lifo_reserve_end
cogs_fifo = cogs_lifo - (lifo_reserve_end - lifo_reserve_start)
extra_pretax = cogs_lifo - cogs_fifo
print("Inventory restated to FIFO:", fifo_inventory)
print("Cost of goods sold restated to FIFO:", cogs_fifo)
print("Pre-tax profit would be higher by", extra_pretax, "and after tax by", round(extra_pretax * (1 - tax_rate), 2))

Inventory restated to FIFO: 528.0
Cost of goods sold restated to FIFO: 2837.0
Pre-tax profit would be higher by 23.0 and after tax by 17.25

An increase in the LIFO reserve of 23 million dollars means FIFO cost of goods sold would have been 23 million lower. Restating to FIFO makes the company comparable with a competitor reporting under IFRS, which cannot use LIFO.

Standards keep changing

Standard setters revise rules continually, and managers should know what is coming because changes can shift reported numbers, loan covenants and bonus targets. Recent and upcoming changes include IFRS 18, which reshapes the income statement from 2027; IFRS 19, which lets subsidiaries without public accountability use reduced disclosures; the FASB's expanded income tax disclosures under ASU 2023-09, which public business entities apply for annual periods beginning after 15 December 2024; and expense disaggregation under ASU 2024-03, which applies to annual periods beginning after 15 December 2026. Sustainability reporting is also developing quickly, through the International Sustainability Standards Board and national adaptations, a subject MBA-612 covers in depth.

Owen raised a practical question: when a standard changes the reported numbers, do loan covenants change too? Usually not automatically. Many loan agreements freeze the accounting rules at the date of signing or require the parties to negotiate in good faith, which is why finance teams review their covenants whenever a major standard is issued.

Non-GAAP and non-IFRS measures

When US public companies use non-GAAP measures such as adjusted EBITDA, free cash flow or same-store sales, Regulation G and the SEC's rules for filings require them to present the most directly comparable GAAP measure with equal or greater prominence, reconcile the two and explain why the measure is useful. The SEC staff has also challenged measures that exclude normal, recurring cash operating expenses or that use individually tailored accounting methods. Measures in earnings releases are not audited.

The auditor and the audit report

Financial statements are prepared by management, not by the auditor. The auditor's job is to obtain reasonable assurance that the statements are free of material misstatement and to express an opinion. Audits of US public companies follow the standards of the Public Company Accounting Oversight Board, which also inspects the audit firms. Private companies are audited under the generally accepted auditing standards of the AICPA, and owners and lenders choose the level of assurance they need: a full audit, a review, which gives limited assurance based mainly on inquiry and analysis, or a compilation, which gives no assurance at all.

An unmodified opinion says that the statements present fairly, in all material respects, the financial position and performance of the company in accordance with the applicable framework. A qualified opinion means there is a material problem confined to a specific area. An adverse opinion means the statements as a whole are misleading, and a disclaimer means the auditor could not obtain enough evidence to form an opinion. Managers should read beyond the opinion paragraph. A paragraph on material uncertainty related to going concern is a serious warning that the company may not be able to meet its obligations over the next year.

For large public companies, the report also describes critical audit matters: areas that involved especially challenging, subjective or complex auditor judgment, such as revenue recognition on long contracts, impairment of goodwill or the valuation of complex financial instruments. These paragraphs are a useful guide to where the judgment in the statements is concentrated, and therefore where an analyst should look first. Large public companies also receive an auditor's opinion on internal control over financial reporting under section 404 of the Sarbanes-Oxley Act.

Leo Brandt learned the practical side of this when Kestrel Analytics raised its first venture round. The lead investor had accepted reviewed statements at the seed stage but required audited statements for the larger round, and the first audit found that several multi-year contracts had been recognized too quickly. The restatement was small, but it delayed the closing by a month and taught the founders that revenue policies chosen casually in the early days are expensive to unwind later.