What red flags hide in the footnotes of a 10-K?
The main footnote red flags are changes in accounting estimates, unusual revenue terms, related party dealings, contingencies the company cannot estimate, going concern doubt, new valuation allowances, goodwill with no headroom, customer concentrations and late subsequent events. A material weakness is the tenth, but it sits in Item 9A, not in the notes.
Most of these flags are visible only if you know which note to open and which phrase to search for. Several also point at each other, so one finding usually leads to two or three more notes.
Which note does each red flag live in?
A red flag is rarely a sentence saying something is wrong. More often it is a number that moved or a phrase that changed from last year. The table maps ten of them to where they live, with a real example of each.
| Red flag | Which note | Wording or number to look for | Why it matters |
|---|---|---|---|
| Change in accounting policy or estimate | Note 1 (accounting policies) | "change in estimate", "effective January 1", a new useful life with a dollar effect | Profit moves with no change in the business. Meta: $2.92 billion less 2025 depreciation. |
| Revenue terms | Note 1 or the revenue note | payment terms, extended payment terms, concentration of credit risk | Generous terms can pull sales forward. 3M says it has none. |
| Related parties | Related party note | entities affiliated with the CEO or directors, dollar amounts, "arm's length" | Terms may differ from an outsider's. Tesla: $430 million of revenue from xAI. |
| Contingency wording | Commitments and contingencies or legal proceedings note | "probable", "reasonably possible", "unable to estimate", an award far above the accrual | Exposure can exceed the accrual. Walgreens: $79 million accrued, $988 million award. |
| Going concern | Note 1, or a liquidity note | "substantial doubt", "do not alleviate" | Doubt about paying bills for a year. Car-Mart, Note B. |
| Valuation allowance | Income tax note | "more likely than not ... will not be realized", "cumulative losses" | Less expected taxable income. Walgreens: up $2.3 billion. |
| Goodwill assumptions | Goodwill and intangibles note | "approximates its fair value", small headroom percentages, higher discount rates | No cushion before the next charge. Walgreens' VillageMD unit. |
| Concentrations | Segment note, receivables or balance sheet components note | one customer at 10% or more of revenue or receivables | One customer can move the company. NVIDIA: 22% and 14% of revenue. |
| Subsequent events | Subsequent events note, often the last one | events dated after the balance sheet, close to the filing date | The newest news in the filing. Walgreens: 900 to 1,000 store closures. |
| Material weakness | Not a note: Item 9A, Controls and Procedures | "material weakness", "not effective", "restatement", "remediated" | The process behind the numbers failed. Car-Mart and Microvast. |
Sources: Meta 10-K for 2025, Note 1; 3M 10-K for 2025, Note 1; Tesla 10-K for 2025, Note 15; Walgreens Boots Alliance 10-K for fiscal 2024, Notes 6, 10, 11 and 18; America's Car-Mart 10-K for fiscal 2026, Note B and Item 9A; NVIDIA 10-K for fiscal 2026, Note 16; Microvast 10-K for 2025, Item 9A.
None of these proves a problem. Each is a reason to read the note slowly and compare it with last year's.
What does a change in accounting estimate look like?
Estimate changes are quiet: usually a paragraph of Note 1 under "Use of Estimates." In 2025 two companies made the same judgment in opposite directions.
In its 10-K for 2025, Meta says it increased the estimated useful lives of most servers and network assets to 5.5 years, effective January 1, 2025. The stated effect: a reduction in depreciation expense of $2.92 billion and an increase in net income of $2.59 billion, or $1.00 per diluted share, for 2025.
Amazon went the other way. Its 10-K for 2025 says that effective January 1, 2025 it "changed our estimate of the useful lives of a subset of our servers and networking equipment from six years to five years," citing "the increased pace of technology development, particularly in the area of artificial intelligence and machine learning." That raised depreciation and amortization by $1.4 billion and cut net income by $1.0 billion, mostly in AWS.
Neither change is wrong on its face. The flag is the size of the effect next to earnings growth: if profit rose by less than the effect of an estimate change, the business improved by less than the headline says.
How do related parties and customer concentrations show up?
Related party transactions have academic research behind them as a warning sign. Kohlbeck and Mayhew hand-collected related party transactions for S&P 1500 firms in 2001, 2004 and 2007 and, in the words of their abstract (Contemporary Accounting Research, 2017), found "a positive correlation between these transactions and future restatements." The association, they write, "is concentrated among transactions that appear to reflect 'tone at the top' rather than arguably more necessary business transactions."
A clear current example is Note 15 of Tesla's 10-K for 2025. Tesla says it "periodically does business with certain entities with which its CEO and directors are affiliated, such as xAI, SpaceX, The Boring Company and Redwood Materials." In 2025 it recognized $430 million of revenue and $285 million of cost of revenues from xAI's purchases of Megapack products "in the ordinary course of business." The same note reports a January 2026 agreement to invest about $2 billion in xAI preferred stock. The note says the dealings follow Tesla's Related Person Transactions Policy; what matters to a reader is the size and direction of the money.
Concentrations are the mirror image: not who the counterparty is, but how much depends on it. NVIDIA's Note 16 says that for fiscal 2026 "sales to one direct customer represented 22% of total revenue and sales to another direct customer represented 14% of total revenue." Its Note 9 adds that three direct customers accounted for 25%, 18% and 13% of accounts receivable at January 25, 2026. Receivables are money not yet collected.
Which contingency wording should make you slow down?
Under ASC 450-20, a loss is accrued when it is probable that a liability has been incurred and the amount "can be reasonably estimated," as Deloitte's roadmap quotes the standard. A loss that is only reasonably possible is disclosed, with "an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made" (ASC 450-20-50-4).
That last option is the phrase to watch, especially next to a much larger number in the same note. Walgreens' fiscal 2024 Note 10 describes an arbitration in which the arbitrator issued "a Final Award in the amount of $988 million including interest." Walgreens disputes the award, partly because it believes a contractual cap "limits damages to $79 million," has petitioned a federal court to vacate it, and has accrued $79 million.
3M's Note 17 shows the other common pattern. It reports accrued "other environmental liabilities" of $7.7 billion at December 31, 2025, then adds: "The Company is not able to estimate a possible loss or range of possible loss in excess of the established accruals at this time."
In our count of numbered cross-references in the latest 10-Ks of 28 Dow companies, commitments and contingencies notes drew more references than any other kind, 288 in all; the method and full table are on the cross-references per 10-K data page.
What does one filing with several red flags look like?
Flags cluster, and they point at each other. Walgreens Boots Alliance's 10-K for the fiscal year ended August 31, 2024, filed October 15, 2024, shows five of the ten in one set of notes.
| Note | What it says | Figure |
|---|---|---|
| Note 6, Goodwill | VillageMD goodwill impairment; carrying value "approximates its fair value" | $12.4 billion charge; $1.5 billion goodwill left |
| Note 10, Commitments and contingencies | Opioid settlements and claims accrued | $6.6 billion |
| Note 10 | Arbitration award vs amount accrued | $988 million vs $79 million |
| Note 11, Income taxes | Valuation allowance at year end | $9.6 billion |
| Note 11 | Increase in the allowance "as a result of cumulative losses in the U.S." | $2.3 billion |
| Note 17, Related parties | Purchases from Cencora, an equity method investee | $73,918 million |
| Note 18, Subsequent events | Footprint Optimization Program approved October 14, 2024 | 900 to 1,000 stores |
Source: Walgreens Boots Alliance, Inc. Form 10-K for the fiscal year ended August 31, 2024, Notes 6, 10, 11, 17 and 18, and MD&A.
Read them as a chain. Note 11 says $2.2 billion of the $2.3 billion increase in the valuation allowance relates to deferred tax assets "primarily related to opioid settlements reached in fiscal 2023," and refers you to Note 10. So a contingency accrued in an earlier year created a tax asset, and this year the allowance against those assets grew by $2.2 billion.
Note 6 rewards reading to the end. After the $12.4 billion VillageMD charge, the company "believes the carrying value of the VillageMD reporting unit approximates its fair value." A unit carried at fair value has no headroom, so any further cut to its forecast flows straight to another impairment. For how to read headroom, see our guide to the goodwill impairment note; for the tax side, the valuation allowance note.
Cencora appears in Note 17 as an equity method investee: Walgreens owned about 10.2% of it. And Note 18's store closure plan was approved on October 14, 2024, one day before the 10-K was filed.
Where do going concern and material weakness warnings appear?
A going concern doubt lives in the notes, usually Note 1 or a liquidity note. America's Car-Mart put it in Note B, Liquidity and Going Concern, of its 10-K for the fiscal year ended April 30, 2026: management's plans "do not alleviate the substantial doubt." The words differ when doubt is raised and then alleviated, and our guide to the going concern note walks through all three versions.
A material weakness is different. It is not in any note. Item 9A of the 10-K calls for the information required by Items 307 and 308 of Regulation S-K, and Item 308 says management "is not permitted to conclude that the registrant's internal control over financial reporting is effective if there are one or more material weaknesses." The Rule 12b-2 definition, quoted in Car-Mart's Item 9A, turns on "a reasonable possibility that a material misstatement" will not be prevented or detected on a timely basis.
Read Item 9A next to the notes it concerns. Car-Mart's weakness, identified in fiscal 2025, related to controls over GAAP disclosure and "resulted in the restatement of previously issued financial statements" to add missing disclosures about loan modifications; management concluded it was remediated as of April 30, 2026. Microvast's 10-K for 2025 says its quarterly statements for June 30 and September 30, 2024 required restatement "primarily to correct an error" relating to a previously recorded impairment of its Clarksville, Tennessee facility, and that the weakness was remediated as of December 31, 2025. A remediated weakness still tells you which notes to read with care.
Going concern doubt can also appear first in a 10-Q, because management repeats the evaluation every quarter; see how 10-Q notes differ from a 10-K.
In what order should you check the notes for red flags?
An order that lets each note set up the next:
- Read Item 9A first: look for the words "material weakness" and "not effective," and note any restatement.
- Open Note 1 and search for "change in estimate," "effective" and any going concern discussion.
- Read the commitments and contingencies note: compare each accrual with any award, demand or range mentioned in the same paragraph.
- Read the income tax note: find the valuation allowance and the sentence explaining any change in it.
- Read the goodwill note: look for "approximates its fair value" and the headroom percentages for each reporting unit.
- Read the related party note and the segment note: write down every counterparty above 10% and every entity tied to an officer or director.
- Read the subsequent events note last, and check its dates against the filing date.
Then repeat the pass on last year's 10-K. Most red flags are changes.
Questions
Is a red flag in the footnotes proof of fraud?
No. Each item in the table is a reason to read more closely, not a finding. A change in estimate, a related party sale or a large contingency can all be ordinary. The research link is narrower: Kohlbeck and Mayhew found related party transactions correlated with future restatements, concentrated in tone-at-the-top transactions.
Where is a material weakness disclosed in a 10-K?
In Item 9A, Controls and Procedures, not in the notes. Under Item 308 of Regulation S-K, management is not permitted to conclude that internal control over financial reporting is effective if there are one or more material weaknesses. Car-Mart and Microvast both reported remediating a weakness in their latest 10-Ks.
What contingency wording is a warning sign?
A statement that the company cannot estimate the possible loss beyond its accrual, especially next to a much larger number in the same note. Walgreens accrued $79 million against a $988 million arbitration award it disputes, and 3M says it cannot estimate a loss in excess of its $7.7 billion environmental accrual.
Following a red flag across notes without losing your place
Red flags rarely stay in one note: Walgreens' tax note sends you to its contingencies note, and America's Car-Mart's going concern note (Note B) sends you to its debt note (Note G). SeeNote is a Chrome extension that turns "see Note 10" style references in EDGAR 10-Ks and 10-Qs into links that open the referenced note verbatim in a popup where you are reading, and you can highlight a phrase and add your own note, kept on your device. Your first three filings are free, with no card and no expiry; pricing is on seenote.co.