If the Securities and Exchange Commission seeks a poster child for the positive effect XBRL technology can have on a company’s financial reporting system, John Stantial stands ready to volunteer United Technologies Corp.
Stantial, UTC’s director of financial reporting, has completed 10 regulatory filings using XBRL since first implementing the system under the SEC’s voluntary pilot program in 2005. The program encouraged companies to file reports “tagged” in eXtensible Business Reporting Language, in exchange for expedited review of their reports (see related documents and coverage in the box at right).
“We’ve gotten a fair amount of attention from the SEC because one of those filings was a complete 10-Q, and they were anxious to see how people were finding it,” says Stantial.
In theory, filings made in XBRL will provide financial statement users—whether regulators or investors—with more sophisticated analytical capabilities, including automated comparisons of data by company and sector. That alone has led SEC Chairman Christopher Cox to endorse XBRL whenever he can, although Cox has always been careful not to say that his agency might one day mandate that filings be XBRL-compliant.
Skeptics have long said XBRL is too complex and inflexible to be universally valuable, and have argued that—while regulators and investors might find the language useful—businesses will be inconvenienced by the technology, without seeing any benefit.
The SEC launched its first pilot program in 2005 and a larger one last year. It now hopes XBRL will take on a life of its own as financial statement users test XBRL “reader” applications and see just how useful tagged data can be.
An Incremental Exercise
At UTC, a $47.8 billion aerospace and building-systems manufacturer, installation of the system needed to accomodate the "tagged data" couldn’t have been more simple, Stantial says. He decided to experiment with XBRL in the first-quarter of 2005, and conducted online research of available tagging tools. He settled on an application from Rivet Software called Dragon Tag; according to Stantial, the software from Rivet—a privately held company based in Englewood, Colo.—was generating much attention at the time (the company was recently brought in by Keane to help maintain and modernize the SEC's EDGAR system, and executives at Rivet include founding members of the XBRL community).
Stantial paid $300 for Dragon Tag and loaded it onto his computer himself. The low cost and simple installation enabled him to experiment without impacting the financial reporting process at UTC, and without draining IT resources. “We worked through the learning curve and established an internal process efficient enough to allow for regular filings,” he says. Stantial and one other manager at United Technologies have handled all the filings themselves with little outside assistance, he says.
“In our situation, as we already file faster than any Fortune 100 company, [XBRL] will free up time to do more value-added analysis for senior management.”
— John Stantial, Director of Financial Reporting, United Technologies Corp.
However, UTC's initial implementation of the technology requires that XBRL be employed after most other financial reporting processes are completed. That means that the technology is simply an add-to to existing processes, rather than a means to achieve simplification; the key to driving down costs and adding value, says Stantial, is pushing XBRL up the process chain.
For example, the creation of United Technologies’ quarterly regulatory filings involves about 850 hours of manual labor. Currently, Stantial explains, effectively all of UTC’s locations worldwide have their general ledger information loaded into Hyperion Financial Management automatically. However, UTC has about 100 different general ledger systems used throughout the world, partially due to the fact that the company conducts its business through numerous entities, such as Otis Elevator, Pratt & Whitney, UTC Fire & Security, and Sikorsky Aircraft. All of those HFM files are then automatically consolidated at each of UTC’s six major business units.
Those six HFM files, in turn, are automatically uploaded to Stantial’s office, where he consolidates the information for the entire company in HFM. Stantial then runs several reports needed to generate a periodic filing, transferring the data into Microsoft Word in the process. When the Word document is completed—after being checked and approved by appropriate executives and directors—Stantial emails it to financial printer R.R. Donnelly in New York, which converts it to HTML. That document is emailed back to Stantial for final proofreading, checking of footnotes, and necessary corporate approval, and is then filed with the SEC's EDGAR system.
Only after the document is filed with EDGAR are the XBRL tagging tools applied to the original document. Those tagged files are then submitted to the SEC in an 8-K shell document (currently, the SEC only allows companies to file XBRL-tagged periodic reports as addenda to their regular reports; they cannot file the XBRL-tagged document alone.)
Source:UTC Presentation On XBRL Conclusions (Reprinted For Compliance Week Subscribers With Permission)
“Right now the whole tagging is an incremental exercise,” Stantial says. “There’s actually no savings—it’s costing us time. You can’t file efficiently an XBRL document.”
Simplification And Standardization
However, Stantial sees the potential for using XBRL to simplify the laborious processes he currently uses to generate all EDGAR filings. That's because he calls his current process “manually intensive.”
“[Y]ou’re constantly checking data back to the source and proofing it,” says Stantial. “There’s a high possibility for error.” (See related PowerPoint slides from a presentation delivered by Stantial on XBRL, at right.)
However, implementing XBRL earlier in the process could eliminate much of the complexity and cost. “If we create the 10-Q in our reporting system and tag in that same system,” says Stantial, “all the effort of checking, proofing, reading, footing and so forth will not be required.”
Stantial figures that if fully implemented into United Technologies’ reporting system, XBRL would eliminate about 160 hours, or almost 20 percent, of the report-preparation process. In general, time savings would come from eliminating the manual handling of information. UTC can now file its 10-Q in an average 21 days, and its 10-K in an average 40 days, according to Stantial.
“I can fully understand why SEC Chairman Cox is pushing to have this implemented,” Stantial says. “For users I think this would be a phenomenal advancement, and the benefit instantaneous with minimal effort.”
XBRL “can be a real cost savings,” he says. “In our situation, as we already file faster than any Fortune 100 company, this will free up time to do more value-added analysis for senior management.”
Moving Upward And Forward
A year after implementing XBRL, Stantial upgraded UTC’s tagging software to an application made by Fujitsu, a system that cost $10,000 because it had more functionality than the Dragon Tag tool he was using at the time. The Fujitsu system, for example, allows for easier editing of taxonomies and the correcting of mistakes, Stantial says.
One frequent complaint about XBRL is that the taxonomies aren’t yet complete, requiring companies to create customized extensions to tag some specific points of data. Stantial says he has “no concerns” about that. “The taxonomies aren’t 100 percent complete and companies may have to add some extensions; we’ve done it,” Stantial says. “But actually we’ve found that in our statements we were able to tag about 95 percent with the standard taxonomy that was out there.”
UTC did create its own XBRL extensions for accounts that were combined on the financial statements, Stantial explains. For example, on the company’s quarterly cash flow statement, depreciation and amortization is a single line item, not two. Also, some of the footnotes had not yet been fully developed, such as pensions and post-retirement plans, so a number of tags were created there, he says.
In addition to saving time and money on financial reports, Stantial plugs XBRL as a way to strengthen a company’s internal controls. Data is never removed from the IT system, so auditing processes can run more efficiently and incur less expense, he says. Stantial also envisions more savings if other regulators, such as the Department of Labor or the Bureau of Economic Affairs, start accepting filings that are tagged with XBRL.
“Right now, every time you do reports and have to manually pull data out, you never know if you’re pulling the same definitional data as last time, or if you’re being consistent with the standards of each regulator like the SEC or the IRS,” Stantial said. XBRL allows companies to “standardize everything with tags and create the individual reports.”
Stantial expects to upgrade to the next version of Hyperion Financial Manager, which will have XBRL capability built into it, he says. That will allow UTC to load its results into HFM to create a report, and then tag it and file it with the SEC by exporting the document and sending it to EDGAR.
He also argues that “it’s foolish to wait” for the SEC to mandate XBRL usage. “With the changes being made to EDGAR and the work being done on the taxonomies, the SEC could be well positioned to establish a requirement by the middle of this year,” he says. “So why lose the opportunity being provided today? Play around with it, and get the learning curve out of the way before it’s mandated.”
Extensive coverage of XBRL and the SEC's volunteer program can be found in the box above, right.
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