XBRL Enters the Final Phase

It's crunch time for the smallest public companies, which are facing their first-ever submissions of financial statement data using the evolving, data-interactive XBRL filing system—and apparently some companies may be more prepared to meet the challenge than others.

More than 7,000 public companies are expected to complete their second-quarter filings in the coming two weeks, and most of them will be required to submit those reports in eXtensible Business Reporting Language to comply with the Securities and Exchange Commission's transition to XBRL. XBRL is an interactive data format intended to make financial data easier to sort, analyze, and compare. The SEC expects the system to increase the speed, accuracy, and usability of financial statement data, and eventually to reduce costs.

Large filers began submitting their financial statements using XBRL in 2009; a second tier of big companies began their XBRL journey in 2010. Non-accelerated have been on notice since early 2009 that they would face their first XBRL deadline with the first periodic filings after June 15, 2011. For many calendar-year companies, that means their second-quarter results are the first set of statements due in XBRL.

Anxiety has been building, says Paul Penler, head of XBRL services at Ernst & Young, but it's too early to say whether many companies that are struggling with XBRL will miss the Aug. 15 cutoff to submit information for periods that ended on June 30. As of late July, about 200 of the smallest companies had already completed their submissions, he says. “So far, all is quiet on the Western front—but there are still about 7,300 to go in the next few weeks.”

Financial reporting departments and their service providers are putting in long hours to tag their financial statement data for entry into the XBRL system, says Campbell Pryde, president and CEO of XBRL U.S., a nonprofit consortium helping to drive XBRL adoption in the United States, but he doesn't sense any panic. “No one has said to me we're totally hacking through it,” he says. “We haven't heard anyone saying there's no way we can get this done.”

Dan Roberts, CEO of consulting firm Raas-XBRL, says he fears the next few weeks may be marked by chaos and potentially even price-gouging as corporate procrastinators run to overbooked service providers for help. He says the scene is a bit like the early days of Sarbanes-Oxley adoption in 2005, when companies scrambled to meet deadlines for submitting information on their internal controls over financial reporting after hoping for deferrals. “We worried for a long time that this would be another SOX,” he says. “There will be a huge number that will say: ‘Is that all it was?' But there will also be plenty who will be rattled by this.”

The staggered implementation has reduced the burden and allowed for more of a learning curve, says Sean Denham, a partner at Grant Thornton. There are some similarities to the Sarbanes-Oxley experience, he says, but as the XBRL experience is nowhere near as extensive or as costly.

“We worried for a long time that this would be another SOX. There will be a huge number that will say: ‘Is that all it was?' But there will also be plenty who will be rattled by this.”

—Dan Roberts,

CEO,

Raas-XBRL

The majority of Grant Thornton's public-company clients are filing in XBRL for the first time, Denham says, and he senses they are generally well prepared. “We've been talking to them about this—18 months ago, 12 months ago, 6 months ago— telling then to get in front of this,” he says. “We told them there's going to be a demand for third-party service providers. I don't see a lot of scrambling.”

Procrastinator's Lament

Still, some vendors say plenty of companies will get caught flat-footed on XBRL., “I'd say a lot of the smaller, 'Wave 3' companies are still pushing this off as much as possible,” says Raul Varela, vice president at Rivet Software. He's expecting last-minute calls from companies that will need help to get the filing done, and the firm has planned extra capacity to answer those calls. He suspects companies that put off XBRL tagging until the last minute will face some unpleasant residual effects—whether that might be steep pricing, poor quality, or missed deadlines.

Mike Willis, a partner with PwC, is also concerned that a good portion of smaller companies have procrastinated, and worries that they generally don't have the resources internally to get the job done. Willis is also a technical adviser on XBRL to Financial Executives International and interim chairman of XBRL International. He expects a bottleneck in the final days leading up to the deadline, and he expects plenty of companies to exercise the 30-day grace period that the SEC is allowing for the first XBRL filing. “There will be a lot more grace period submissions in group three companies than in group one,” he says.

COMMON XBRL ERRORS

In the following excerpt from an Ernst & Young newsletter, the Securities and Exchange Commission outlines common pitfalls in XBRL submissions:

The SEC staff offered the following observations:

Format of the statements: Filers should concentrate on the quality of tagging rather than try to match the rendering (i.e., human-readable view) of the XBRL exactly to the HTML filing. The rendered version of the XBRL financial statements is not expected to exactly match the format of the HTML statements.

Negative values: A common error filers make is to incorrectly enter an amount with a negative value. Most XBRL-tagged numbers should be entered as positive even if the original value is represented as a credit or a negative on the printed financial statements (e.g., the bracketed amount for Allowance for Doubtful Accounts would be entered as a positive value, as its natural balance is a credit). The SEC staff provided a table of common keywords and phrases that can help companies make the determination for amounts on the face of the financial statements. The SEC staff noted that companies should check the sign value of all amounts, including those in the notes to the financial statements, because incorrectly entered amounts are not limited to the face of the financial statements.

Extended tags: Companies should not extend a tag if an existing US GAAP taxonomy element is available. They should extend only when there is a material difference between the standard US GAAP element and the filer's financial statement line item. Companies should not create extensions solely for formatting purposes.

Completeness of tagging: Filers should ensure that all parenthetical amounts on the financial statements, monetary amounts and amounts found in subscripted text are tagged.

Source: Ernst & Young, June 23, 2011.

Smaller companies generally have not taken advantage of the time the SEC has allowed for them to learn XBRL or the experience that's been gained by larger companies that went through the process earlier, Willis says. “They are replicating the same errors and pains that group one went through,” he says. Most notably, Willis says, smaller companies could have done more to integrate XBRL into their reporting processes rather than adding the XBRL submission as an extra step at the end of the process.

Larger companies that have been reporting in XBRL for a few years are beginning to bring more of the process in-house, he adds. Willis estimates 60 percent of companies in the first wave of XBRL submissions have purchased licensing to built-in applications that allows them to develop their financial statements in an XBRL format or convert them internally rather than relying on third-party service providers to do the work. He suspects smaller companies may ultimately expend more resources when outsourcing the submission than they might have spent if they'd purchased software up front and gotten up to speed internally.

Willis cautions smaller companies to consult guidance the SEC issued last November and again in June, telling companies to use more care in selecting tags and to pay closer attention to how they tag negative numbers. Companies in earlier waves generally created more custom tags than the SEC wants to see, which makes comparability more difficult. The SEC also said many companies misread tag definitions for negative values, causing negative numbers to appear as positive and vice versa.