Written by Neal Hannon and Mike Willis Posted on August 8, 2008
Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Mike Willis was Founding Chairman of XBRL International and is a partner with PricewaterhouseCoopers.
The SEC has been moving steadily toward the day when the EDGAR filing format is completely replaced by XBRL formats. Interactive data gives regulators like the SEC the ability to process complex information contained in filings quickly and efficiently. With the overhaul of the EDGAR system nearing completion, the day when companies will be sending “as filed” XBRL file formats will be soon upon us.
On May 14, 2008, the SEC voted to release for public comment a proposed rule for public companies to file certain data with the SEC using XBRL. The proposed rule is expected to become final sometime this fall. Domestic and foreign large accelerated filers who file using US GAAP and have a worldwide public float above $5 billion will be subject to the new rule beginning with companies whose fiscal year ends after December 15, 2008. This means that CFOs in the largest companies are putting XBRL on their agendas right now.
Ladies and Gentlemen, Start Your XBRL!
Chances are most companies are holding their first XBRL meetings right now. Designated people within the finance function are gathering information and getting ready to make a decision that seems easy, but can be fraught with added cost and risk depending upon which way they elect to create their XBRL exhibits. The XBRL decision should reflect a proper balance of risk, control, and cost that reflects individual company preferences.
Let’s assume you are the Director of Financial Reporting for a very large company and you just received the phone call from the CFO about XBRL. Tag, you’re it. Your first meeting with staff confirms that the team needs to begin with the basics before the decision is made. The first stop should be the SEC website where you can find information about the proposed rule, feedback from the Voluntary Filing Program, and various interviews with people who have experience in creating and using the US GAAP taxonomy (listen to the webcast of the March 19, 2007, SEC roundtable from 0:56 to 1:24).
Next stop: the XBRL US website, where more specific information on the proposed rule, relevant tools, and implementation case studies can be found. After gathering the proposed rule requirements, the users guide, and information gleaned from industry association websites (AICPA XBRL Resources, FEI XBRL Page, IMA Technology Excerpts) and large accounting firms (PwC XBRL Resources, Deloitte XBRL, E&Y XBRL Business Reporting, KPMG Knowledge Base), your background-gathering exercise is nearly complete. Recent financial press articles (see CFO.com and Business Finance Magazine) and public webinars (see XBRL US) should round out your team’s basic knowledge.
Next your team will need to decide how to prepare the required XBRL exhibits.
Three Ways to Tag
There are three ways a company can satisfy the SEC’s filing mandate. These are:
(1) Outsource the XBRL to a financial printer or other EDGAR filing agent
(2) Use a bolt-on XBRL software package to create XBRL exhibits internally
(3) Integrate the XBRL mapping inside your normal financial reporting process
Outsourcing may at first seem to be the logical choice for most companies. If a financial printer is already engaged with a company for SEC filing, adding the XBRL filing to the normal SEC filing will in some cases make sense. However, companies should take a good look at the pluses and minuses of this option.
The advantages of outsourcing XBRL include:
1. XBRL tagging process is outsourced. There is no need to learn about the internal process implications.
2. If you are currently using a financial printer for filing SEC reports, they most likely will have already invested in how to file the proper XBRL.
The disadvantages of outsourcing XBRL include:
1. Most companies will not want to defer accounting decisions inherent in choosing XBRL tags to people outside the organization. Creating an XBRL filing is really all about making a series of accounting reporting decisions. Your CFO and the investing public will hold your team accountable for any XBRL mistakes.
2. Outsourced tagging will take place after your external reporting cycle is complete, adding incremental time and cost to the process.
3. Outsourced XBRL will require an internal staff review, which has implications both in time to file and accounting staff time to recheck the XBRL formatted report.
4. Company specific extensions are likely and internal experts will be required to make these assessments even in an outsourcing scenario.
5. The current SEC proposal year-two requirements involve tagging the financial statements notes in detail and may provide a challenge to outsourcing solution providers.
6. Outsourcing is not likely to enhance a company’s compliance efforts.
7. Specifically, how does the third party service impact/enhance corporate reporting processes so that compliance with the year-two requirement to tag the notes to the financial statements in detail is accomplished in an effective manner?
Many companies will no doubt choose the outsource approach for their first round of filings. If the SEC clarifies its proposed rule regarding liability [see Neal’s June 10 post] and clearly waives any liability associated with XBRL tagging, the outsourced approach will be a short-term path of low resistance.
The Bolt-On Solution
Using a bolt-on tool, the process of creating XBRL is accomplished after the financial reporting process is complete. Company financial disclosures are typically loaded into desktop applications and then mapped to the US GAAP taxonomy. The software facilitates mapping of company data with the taxonomy, then creates the required XBRL formatted report. This process is known as bolt-on because it is a separate process that happens after the financial reporting process is complete.
The advantages of the bolt-on approach include:
1. Brings the accounting decisions in-house. When tagging financial reporting data in XBRL, many accounting decisions are made when choosing the proper elements. The internal accounting team reviews the chosen taxonomy element immediately after the SEC filings are prepared.
2. Develops in-house expertise in matching company accounting with XBRL taxonomy concepts.
3. Engages company personnel in the topic, enabling them to more directly apply it to a range of their internal compliance processes.
The disadvantages of the bolt-on approach include:
1. The process is inefficient.
a. A bolt-on process requires your internal team to perform extra steps beyond the normal financial closing process to create and verify the XBRL.
b. The process is disconnected with the normal process, opening the door for human error.
c. The XBRL exhibits may be hard to match the “as filed’ SEC reports, creating a possible out-of-compliance situation.
The process of creating XBRL tags cannot begin until after the closing process is concluded. This creates additional risk of filing late. The process of importing financial data into the bolt-on tool is typically a manual process which increases the potential for error.
The bolt-on approach is typically used by companies which decide to keep the process of tagging their financials in-house. An entire, separate process needs to be developed around the import of financial data, the mapping of the company data to the taxonomy, and the verification that the output is the same as the filed SEC schedules. The extra cost to the external financial reporting team in both time and additional risk leaves some companies wondering about a better solution.
The Integrated Solution
XBRL is simply a way to express the accounting decisions of a company in an electronic format. The decisions made during the closing process should be seamlessly and directly reflected in all output from the closing process, including XBRL. The natural evolution of XBRL inside the corporate environment will find companies seeking out solutions that are fully integrated with their normal closing process. Creating XBRL tags that are automatically in alignment with SEC requirements without extra effort will save time and money, and improve accuracy.
The advantages of the integrated approach include:
1. Brings the accounting decisions in-house and embeds them within the normal closing processes.
2. Develops in-house expertise for matching accounting decisions with appropriate XBRL taxonomy concepts.
3. Increases efficiencies.
a. Seamless integration within closing cycle
b. Internal audit trail that provides tracking for all events including XBRL
c. XBRL tags applied to actual filings for exact matching to SEC schedules
d. XBRL files generated simultaneously with standard SEC filings
e. Auto-post to corporate investor relations website is possible
f. In-house XBRL expertise facilitated
g. Improved timing of closing cycle identifies company as a leader
h. Verification of SEC filing and XBRL tags is accomplished before closing cycle is complete; no extra time or manpower required
i. Installation time and training low
4. Lowers total cost of ownership -- no additional steps required to produce XBRL means no additional internal labor expended.
5. Reduces risk.
a. SEC normal filing and XBRL exhibits are automatically the same, lowering the risk of tagging outside of the normal close.
b. Risk due to delays in filing XBRL schedules are eliminated.
c. Accounting decisions are immediately reflected in the XBRL.
The disadvantages of the integrated approach include:
1. Initial investment may be higher.
a. The software fees associated with an integrated solution are often higher as compared with a bolt-on solution.
b. The accounting staff will need to know enough XBRL to make the correct choices during the normal closing process. This disadvantage will disappear once XBRL becomes routine.
Domestic and foreign large accelerated filers whose first fiscal period begins after December 15, 2008, are finding that the time for choosing the best method to comply with XBRL submission is now. Soon after, all accelerated filers will be required to file in XBRL. The three choices available to companies are outsourcing the activity, licensing bolt-on software, and integrating the XBRL inside the normal business close cycle. Any of the alternatives will help companies get the job done.
The alternatives present certain trade-offs when examined through the lens of corporate risk, efficiency, cost, and speed. Knowing the likely outcomes of each alternative will help companies choose the path that is right for them today and in the future.