Written by Glenn Doggett Posted on March 12, 2008
Glenn Doggett, CFA, is a policy analyst with the CFA Institute Centre for Financial Market Integrity. The Centre is the research and advocacy division of CFA Institute, the global, not-for-profit professional association of more than 94,000 investment analysts, portfolio managers, investment advisors, and other investment professional in 133 countries, of whom 82,000 hold the Chartered Financial Analyst (CFA) designation. Doggett is the staff advocate for XBRL and liaison to the member volunteer XBRL Working Group.
While finalizing the key principles document developed by the CFA Institute Centre's XBRL Working Group, it became clear that a phased process for implementing an XBRL reporting mandate is the preferred path. The phases concept goes beyond just the scheduling of which companies begin filing with XBRL and when, or if they file a secondary or integrated XBRL document. No, to reach the end goal of all business items being tagged efficiently and effectively, both the development and introduction of XBRL reporting has to move forward in carefully orchestrated steps so as to avoid alienating any stakeholder in the reporting process.
I'd address the taxonomy first, as the core of any reporting framework is in the accounting and regulatory requirements. Yet as investors well know, this represents only part of the information delivered. So once companies become comfortable tagging the basic level of data, the next phase will be the development of expanded taxonomies for operational and non-GAAP data. Asking companies to engage step-by-step will make for a smoother and more functional transition than will simply jumping in and tagging everything from the start.
It makes sense to move forward with a first phase that requires a select set of companies to tag base financial information and then address any issues they encounter in that test process before proceeding to subsequent phases. One such issue under current discussion has to do with the impact of extensions on company comparability. Investors concerns about the degree of company-specific extensions used in SEC reports can only be addressed through practical application of the pending U.S. GAAP taxonomy in creating instance documents. As the number of companies providing XBRL filings expands over the number currently involved in the SEC voluntary program, investors are better able to determine the level of peer-company comparability from the base level of tagged information. This will set a baseline for the use of extensions as the tagging process drives deeper into the disclosure notes of the filings.
Another benefit of careful timing of this rollout is that, done correctly, it will ease the move toward an earlier integration of XBRL into a company's reporting process. The current practice of dual filing as seen in the SEC's voluntary program should not be viewed as the long-term process for XBRL; instead, we should continue moving toward a defined goal of additional companies adopting XBRL as their primary reporting mechanism. With use, hopefully, those companies will recognize the internal benefits of better integration of XBRL tags. The potential improvements in financial reporting from computer readable business data are applicable to multiple levels of information consumers.
Though not as large an issue for the SEC as it is for other global securities regulators, a gradual move to XBRL filings will also allow time to develop the proper tools that provide access to company reports. The EDGAR and SEDAR systems of the U.S. and Canada currently allow investors to download all annual and interim filings, as well as the XBRL instance documents and related files. Other regulators and commissions do not have such a facility for investors. XBRL report viewers provided by the SEC are giving investors a glimpse of the possibilities of XBRL tagged information, and the fully updated EDGAR system is being finalized. Again, more time to analyze the early adopters and trial use by more companies should allow for a better system in the long run. Solely relying on the limited, voluntary program or a brief review and rollout period won't provide the breadth or depth of robust data for developers to provide the best product possible.
Ultimately, the profits of a phased approach significantly outweigh the potential losses of either asking for everything now or waiting for everything before beginning. As securities regulators and commissions adopt XBRL they should first develop a clear goal for their mandate. The phases along the path toward that goal should address the concerns of all participants in the business information reporting and consumption process.