Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi Consulting Corporation The SEC’s XBRL Proposed Rule: Fear of the Deep
Written by Neal Hannon Posted on September 9, 2008
Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.
An initial review of the public responses from large company preparers to the SEC’s proposed rule on interactive data indicates a hint of fear surrounding the detailed or deep tagging of notes to the financial statements. The current proposed rule calls for “block” tagging in year one. However, in year two the SEC is asking companies to provide detailed tagging for the notes to financial statements.
Here’s the relevant text from the proposed rule:
We are therefore proposing that the footnote disclosures in the traditional format filing be the same as in the interactive data format. This would be accomplished by tagging the footnotes using four different levels of detail:
(i) each complete footnote tagged as a single block of text;
(ii) each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;
(iii) each table within each footnote tagged as a separate block of text; and
(iv) within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.
At Level IV, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote. Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied.
Additionally, whenever authoritative GAAP literature or Commission regulations require a company to disclose something, that item will need to be separately tagged. If the company is following IFRS, as issued by the IASB, those disclosures will also need to be tagged. Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements.
So going deep into tagging means preparing an XBRL tag for:
1. Each and every number, monetary value, percentage, etc. normally contained within a footnote;
2. All GAAP required disclosures; and
3. Company-specific disclosures that go beyond GAAP requirements
XBRL US has several examples of Level IV tagging. The notes for the 3M Company and Bank of Hawaii are particularly useful in demonstrating Level IV tagging.
The Problem with Going Deep
To get an idea of the perceived magnitude of the problem, here are a few selected quotes from the comments in response to the proposed rule:
(a) “We believe that the detailed footnote tagging requirement will require an order-of-magnitude increase in the effort required to comply with this aspect of the proposed rule.”
(b) “If the Proposed Rule is adopted, a permanent, not a temporary, exception for detailed tagging of financial statement footnotes should be allowed due to the volume of information in the footnotes, the complexity of the information, and the required time it would take to properly tag that information.”
(c) “In addition, each amount (i.e., monetary value, percentage, and number) within each footnote would be required to be separately tagged (level (iv)). At this proposed level of detail, we estimate that approximately 5,400 data elements would be required to be tagged in the Annual Report on Form 10-K for FirstEnergy and its registrant subsidiaries when the proposed rule takes full effect.”
(d) “When the rule takes full effect under the current proposal, we estimate that Southern Company and its five subsidiary registrants would be required to tag approximately 6,800 data elements on the Form 10-K, many of which are company-specific items requiring taxonomy extensions.”
(e) “The company has observed from its VFP participation that the most detailed level of tagging results in a high number of company-specific extensions and the need to create a large extended taxonomy file along with related linkbase files. A number of footnote disclosures (i.e. Share-Based Payments, Postemployment Benefits, Business Combinations and Segment Reporting), often containing multi-dimensional tables, lend themselves to a higher degree of company customization.”
(f) “However, we observed from our experience in the VFP with detail tagging of footnotes, that the SEC’s 100 hour estimate to detail tag the first filing in year two could be understated by as much as three to four times. Selected disclosures (multi-dimensional in nature) require significant effort in creating custom extended link roles and related presentation, calculation and definition linkbases.”
(g) “We estimate that performing detailed footnote tagging of our annual financial statements as authored in the Proposed Rule would result in approximately 2,500 tagged elements compared to approximately 500 tags required to meet the year one requirements.”
Clearly, there is plenty of angst when it comes to Level IV tagging. The activity may take huge amounts of coordination between legal teams, accounting experts, and preparers of financial statements, all taking place during the time-constrained closing process. The question we need to examine is, What is the best way for a company to comply with Level IV tagging?
Completing the Deep Route
As a new US professional football season gets under way, many teams are concerned with the threat of the deep pass. What is the best defense? When it comes to deep tagging, a good compliance approach will work as well as any NFL defense coordinator’s game plan.
Here’s where to start. First and foremost, to successfully carry out deep tagging will require an accounting team with skills in XBRL tagging, accounting know-how, and plenty of collaboration with the legal department as well as both the internal and external auditors. If a team starts with an XBRL software tool that permits the tagging to be accomplished as a normal part of the closing process, the entire effort will be significantly reduced. Remember, getting the tagging right is a matter of properly matching management’s accounting intent to the likely accounting interpretation of the chosen XBRL tags. This is best done during the normal closing cycle, not as an additional task tacked on at the end.
Although most of the information contained within a detailed note to a financial statement remains the same, accounting rules and interpretations can frequently change. Each disclosure is carefully reviewed for each new 10-Q and 10-K report. With the SEC requesting Level IV tagging, slight changes to the wording of a disclosure require a re-tagging of the note in XBRL.
Features to look for in an XBRL tool for Level IV tagging include:
(1) The ability to handle dimensions (multi-axis displays of data such as sales by region and/or by product line)
(2) The ability to customize the entry points into the US GAAP taxonomy, which reduces the processing load of handling 15,000-plus element relationships in the taxonomy
(3) A compliance suite environment that includes audit trails, collaboration, importation of accounting check lists, work flow management and automatic roll forward to the next reporting period
(4) In-line XBRL so that the entire management team can see how the footnotes are tagged and how they look in context with the actual SEC filing.
(5) Easy access to authoritative references and definitions located inside the US GAAP taxonomy’s reference linkbase.
Preparation Is Key
There is no need to fear the deep tagging process of Level IV. Tagging detailed disclosures to Level IV is a process that will consume significant time and energy from the entire financial reporting team. Great preparation, selection of the right tool, and great execution will result, as it often does in the NFL, in a winning deep-tagging effort.