XBRL Compliance: Round Two

With the 500 largest U.S. public companies almost a year into compliance with the Security and Exchange Commission’s (SEC) mandate to file financial information using eXtensible Business Reporting Language (XBRL), the many benefits and challenges that come with the transition to the new interactive data filing system are beginning to emerge.

This knowledge can be beneficial for the large accelerated filers that use U.S. generally accepted accounting principles (GAAP), who have been assigned a June 15, 2010 compliance date, as their larger counterparts may be able to offer some much needed guidance and advice to push them in the right direction when it comes XBRL conversions.  Remaining public companies and foreign private issuers using U.S. GAAP and International Financial Reporting Standards (IFRS) will be required to transition to XBRL by June 15, 2011.

According to SEC rules, affected companies are required to submit two versions of their financial statements, one formatted in HTML or ASCII and one using only XBRL interactive data tagging.  These tags contain descriptive labels, definitions and authoritative references to U.S. GAAP and SEC regulations that enable easier data recognition.

As the SEC sees it, when all public companies and foreign private issuers are using XBRL, it will enable investors, analysts and others to retrieve financial data directly from the company’s SEC filing using these data tags.  They will then be better able to analyze a company’s performance from period to period in comparison to other companies.

“The major reason for the SEC to mandate XBRL was to bring transparency and trust back to capital markets and to protect investors,” said Liv Watson, second vice-chair of the Institute of Management Accountants (IMA) XBRL Committee, whose mission is to promote the development of the XBRL standard.  “XBRL offers investors better, faster, and cheaper access to information while it also offers regulators opportunities to facilitate trust, improve verification, and use a combination of market incentives and legal hammers to deter attack.”

Watson, who is also on the board of IRIS Business Services, believes that without this transparency, companies could easily fall off investors’ radar screens.  This, in turn, would cause prices to fall and capital costs to rise.

“Any capital markets that want to fulfill their mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitate capital formation should adopt XBRL as part of their filing requirements to boost investor’s confidence,” she adds.  “The bottom line is that with XBRL, all companies have one common benefit; their data becomes reusable, discoverable and available to the marketplace.”

Advocates of XBRL also believe that the technology has the potential to streamline the SEC’s handling of annual reports, provide more flexibility in reporting, and simplify the filing of 10-Qs and 10-Ks.  Substantial savings in terms of resources and manpower will also be realized once current processes are replaced with XBRL. 

Growing Pains

For those companies that were required to comply with the SEC mandate in 2009, it has been a year of both rewards and growing pains.  Though seemingly beneficial to investors and their corporations, the transition to XBRL has not been entirely smooth for many who have spent the past year learning the ins and outs of XBRL.

“It’s an ongoing process,” said Matthew Birney, IFRS policy and implementation manager, United Technologies Corporation (UTC), which was required to comply with the XBRL mandate last June.  “Many benefits won’t be realized until full adoption by the SEC and we’re able to look across all public companies and draw upon information submitted to SEC.”

For UTC, one obstacle has been the additional work that is required to file in both XBRL and HTML formats, though Birney believes that a significant reduction in hours spent preparing documents will be realized – and a significant headache will be removed once HTML filing is no longer required.

“A large headache has also revolved around the tools we are required to use when filing in XBRL,” he adds. “It is a new technology and like anything that’s new, if you’re on the bleeding edge you’re going to face challenges.”

With this new technology, a well trained in-house staff is also required, an important component that IMA’s Watson believes that many companies do not currently have. 

“I think, overall, the companies themselves that have not prepared an XBRL-instance document might be surprised that it will take quite a bit of education before they will be able to efficiently produce XBRL documents, especially now that detailed footnote tagging takes effect in June,” she adds. 

The addition of the detailed footnote tagging will without a doubt add another burden to an already struggling staff, since it substantially expands the number of XBRL-tagged elements.  It also adds significant complexity and an increased potential for errors to the process for those companies that do not have adequate systems in place to handle the requirement. 

Despite the struggles, Birney is optimistic about the future. 

“I’ve seen a steady and significant improvement over the past five years.  It’s not perfect.  There is still room for improvement, but I’ve been very happy with what I’ve seen,” he said.

Advice for future compliance

Whether or not companies who have not yet complied with the mandate are ready for next month’s deadline is a toss-up, one that very well could impact how smoothly their company transitions to the new standard.  Regardless, there is much to learn from the 500 companies who have spent the past year ironing out the wrinkles in their own transition. 

“My advice is for companies who have not yet complied is to reach out to their printers and get the process started,” said IMA’s Watson.  “If they plan to take XBRL in-house, start now.  Learning XBRL takes time, start the process early and assign someone in the company to lead the initiative and learn more about XBRL well in advance of filing and consider becoming a member of the XBRL Consortium, where knowledge sharing and experts are available.”

Outsourcing to printers with a large pool of XBRL experts is another strong idea, and will greatly help with the burden placed on under-trained staff members overwhelmed with the amount of information they must tag.  This will also relieve the burden of selecting a software solution to work with and hiring any additional manpower that may be needed to push the company through the initial transition. 

Beginning preparations early is definitely the key to success.  UTC’s Birney suggests that if companies are not required to file for the first time in June, they should consider planning now anyway – and they should manage the process internally.  This will give them more control over documentation, more freedom in the process and they won’t be tied to the filing agent’s schedule and needs. 

“Don’t be afraid of it,” he adds.  “The fear of something new is always worse than the reality, and that’s certainly true of XBRL.  Once you get in, it’s not nearly as daunting as it may seem at first.”

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