skills/full-company-analysis/references/modules/M007-10-k-deep-read-procedure.md

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<!-- Module: 007 | Title: 10-K Deep Read Procedure -->

## PART II - SOURCE INTELLIGENCE AND FILINGS | MODULE 007

# 10-K Deep Read Procedure

> Mission. Extract business economics, accounting policies, risks, obligations, segment data, and footnote detail from annual reports.

## Decision output

Objective: Extract business economics, accounting policies, risks, obligations, segment data, and footnote detail from annual reports. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. First pass: map the business, segments, customers, geography, seasonality, competition, regulation, material properties, and stated risks without updating the model.

1. Second pass: reconstruct accounting policies and footnotes for revenue, segment reporting, leases, debt, taxes, stock compensation, pensions, acquisitions, goodwill/intangibles, contingencies, fair value, and related parties.

1. Reconcile MD&A explanations to actual statement and footnote movements. Quantify price/volume/mix, margin drivers, working capital, capex, liquidity, and known commitments.

1. Read the auditor report, critical audit matters where applicable, internal-control disclosures, and any material weaknesses or restatements.

1. Compare the 10-K with the prior year line by line for disclosure drift and with prior guidance/promises for accountability.

1. Produce a 10-K delta memo listing new facts, changed definitions, model changes, unresolved questions, and thesis implications.

## Required evidence and model bridge

- Primary-source set: EDGAR filings, exhibits, prior-period filings, debt documents, ownership forms. Preserve exact document/version, date, period, and source location for every material factual input used in 10-k deep read procedure.

- For each key concept - business sections, segment note, accounting policies, commitments, auditor report, CAMs - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as 10-k deep read procedure may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| footnote coverage | % of material balance-sheet, income-statement, cash-flow, segment, commitment, tax, and accounting-policy areas traced to their supporting footnotes. | footnote coverage: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |
| disclosure drift | Count and severity of substantive wording, definition, scope, or omission changes versus the prior comparable filing, classified by likely economic significance. | disclosure drift: Reperform the count from the defined population, inspect every material exception, and confirm the denominator/universe did not change between periods. |
| obligation coverage | Present value or undiscounted amount of debt, leases, purchase commitments, guarantees, pensions, and other fixed obligations captured in the model divided by disclosed obligations. | obligation coverage: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |



## Worked application

> Case: inventory rises 35% while sales rise 8% and new risk language appears.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For 10-k deep read procedure, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through business sections, segment note, accounting policies, commitments, then identify which link is directly observed and which link remains an assumption.

- Calculate footnote coverage, disclosure drift, obligation coverage from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for 10-k deep read procedure: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: read transaction and debt exhibits when they define economics that summarized MD&A omits.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the 10-k deep read procedure conclusion.

## Failure tests

- FAIL if business sections cannot be defined and reproduced from the source pack.

- FAIL if the annual review omits a material accounting policy, segment change, contractual obligation, risk change, or footnote needed to reconcile the model.

- FAIL if the 10-k deep read procedure conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the 10-k deep read procedure conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the 10-k deep read procedure conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.