XBRL System Showing Progress

As the smallest public companies complete the final phase of the multi-year XBRL rollout, the digital tagging system for corporate financial reports is starting to show signs of progress.

“With experience comes improvement,” says Virginia Meany, an assistant director with the Securities and Exchange Commission's Division of Economic and Risk Analysis. “We've observed that this is an iterative process. The experience over time has certainly helped the process.”

The largest companies, or those with a public float of $5 billion or greater, began their first wave of XBRL-tagged filings in late 2009. XBRL, or eXtensible Business Reporting Language, is a format that allows financial statement information to be downloaded directly into spreadsheets and analyzed in a variety of ways using off-the-shelf software. The rest of the accelerated filers entered the system in 2010, and the final wave of smaller companies—an estimated 7,000 of them—began tagging for the first time in 2010.

After June 30, 2012, the smallest companies faced their first detailed tagging exercise, where they were required to tag each piece of financial data in their footnote disclosures. That means those detailed numbers for even the smallest public companies are finally flowing into the XBRL repository, making a full year's worth of financial data accessible through XBRL for those who are using the system.

The SEC staff has spent several years through the implementation pointing out common problem areas and calling on companies and third-party service providers to correct them. The SEC's biggest gripe has been the excessive use of “extensions,” or the use of custom-tags, to explain numbers even when the taxonomy—the data classification blueprint—contains a tag that would be appropriate to explain the number. Another common error: Preparers have trouble determining where to add negative signs, especially when many elements in the taxonomy contain the concept of negativity in the definition.

So far, the SEC is using XBRL internally for its own research purposes, such as to perform risk analytics or to support other offices or divisions within the SEC. Craig Lewis, SEC chief economist and director of the Division of Economic and Risk Analysis, also is using XBRL to develop the “accounting quality model,” or a system of spotting outliers in financial statement filings that deserve scrutiny.

Many XBRL experts say they see a broad range of responses to the SEC's call for improvements. “Some companies are doing things to correct errors, and some are not,” says Campbell Pryde of XBRL U.S., a not-for-profit consortium helping drive XBRL development. “Some are relying on their filing agents, so we are doing a lot of outreach to the filing agents.” The consortium is partnering with the accounting profession to roll out a new certification program, the training for which will focus heavily on issues that have been problematic in implementation, he says.

As the final wave of small companies complete their first year of detailed footnote tagging, SEC staff is expecting to see an overall uptick in the use of extensions or other routine errors from smaller reporting companies that the staff has focused on throughout the implementation. “As filers become better acquainted with the taxonomy, the software, policies and procedures, the results are improving,” Meany says.

More Guidance Needed?

Phil Moyer, managing director of technology at Safeguard Scientifics and a board member for XBRL U.S., says capital markets could benefit from clearer standards. “We need clearer rules around quality and around data,” he says. “Making those rules easier to comply with is at the core of this.” While he applauds the SEC for giving companies time to get up to speed, he believes companies need better guidance to reduce the use of extensions. “If anyone is allowed to make any tag choice they want, and they can do it from quarter to year, year to year, ultimately you build a data environment that is too complex for anyone to consume,” he says.

“Some companies don't believe the SEC is going to do anything about errors so they're maybe a little less diligent than they might be if they knew the SEC is going to do something.”

—Mike Starr,

Director of Strategic Initiatives,

WebFilings

Mike Starr, director of strategic initiatives at technology firm WebFilings and a former XBRL staffer at the SEC, says he's a bit perplexed the SEC hasn't been more proactive on issuing more guidance or taking other measures to bring about more accurate XBRL submissions. The limited liability protection that was put into place to facilitate a learning period is expiring for all companies, yet the SEC has not taken any punitive or enforcement action against companies whose errors persist to signal it is serious about seeing improvement. “Some companies don't believe the SEC is going to do anything about errors so they're maybe a little less diligent than they might be if they knew the SEC was going to do something,” he says.

The SEC is still exploring whether it should permit companies to submit their financial statements using in-line XBRL, which is a process where the XBRL submission is integrated with the traditional electronic submission of a static document containing the financial statements. Companies could produce a single document in which the tags are embedded, rather than submitting a separate attachment as is now required. “There is the potential that this could help drive quality,” says Matthew Slavin, technical program manager also with the SEC's Division of Economic and Risk Analysis. “That would have a positive impact on filers as well as the results. We are looking at whether that's an option we should consider.”

Now that SEC staff is using XBRL data internally and to identify outliers, companies can be sure the SEC is serious about expecting accuracy, Starr says. “Anyone who thinks the SEC is uninterested is making a mistake,” he says. According to Starr, companies would be wise to consider getting their XBRL submissions reviewed, either by their audit firm or another service provider, to spot-check for problems.

Starr believes there is plenty that the Financial Accounting Standards Board, which maintains the taxonomy, and the SEC could consider doing to improve the process and the quality of the information. “Technology is supposed to make things simpler for everyone involved, not more complicated,” he says.

XBRL GUIDANCE

Below are some links to the SEC's XBRL resources:

Office of Interactive Data Interpretations and FAQs: Staff answers to frequently asked questions.

Staff Observations From Interactive Data Submissions: Read the Office of Interactive Data staff's evaluation of interactive data submissions.

Division of Corporation Finance Interpretations: Read the Division of Corporation Finance's staff interpretations of the interactive data rules for operating companies.

Risk/Return Summary Filing Information: Read the staff guidance on best practices for preparing and rendering Risk/Return Summary XBRL filings.

Interactive Data Presentations: Watch webcasts and read related material from public seminars on interactive data reporting requirements.

Small-Business Filing Information: Read the compliance guide summarizing and explaining the interactive data rules adopted by the SEC.

Source: SEC.

Meany says companies would be wise to do their homework and assure they understand how to submit their financial information in XBRL while taking care to avoid making the kinds of mistakes that have been called out for correction in recent years. “There is a lot of information out there,” she says. She also cautions companies to assure they understand what their third-party service providers or filing agents are doing on their behalf. “Even if you are outsourcing XBRL, you need to really understand the tags that are being selected and have a good knowledge of what's being done,” she said. “Because companies understand their financial information, they need to have a good look at their XBRL submission. You need to understand that you're accountable.”

Investors and other users of financial statement data are taking an increasing interest in data formatted in XBRL. Matthew says the SEC's XBRL online viewer has experienced a significant increase in Web traffic during the past year. In March 2013, for example, the SEC received about 620,000 hits on its XBRL viewer compared with about half that number in March 2012.

Some say, however, the XBRL system has not generated the kind of interest from investors and analysts that the SEC had hoped for when it decided to adopt the system. Glenn Doggett, a director at the CFA Institute, says investors are still holding out primarily because they are still waiting for a complete data set that will produce greater comparability across capital markets. “We can't get all fields for all companies so we still have to go back to the 10Ks and 10Qs,” he says. The problem with extensions also reduces comparability, he says. “Companies are using different tags, so there's not a lot of consistency,” he says.

Mike Willis, a partner with PwC who has helped pioneer XBRL adoption, says there's still some resistance among companies and some hope XBRL will eventually disappear. “There's a bell curve there,” he says. “A small percentage probably see the value.”

Given movements in other countries to adopt XBRL reporting requirements and continued focus in Congress about whether to require XBRL use in other areas of government reporting, it's not likely to go away, he says. “There's a lot of distortion in the financial reporting supply chain right now,” he says. “Early on people go through this stage of ‘you've got to be kidding me.' It's very common in supply chain standardization.”