Gerald Trites is Project Director of XBRL Canada and writes the XBRL Canada Blog. He is an information systems researcher and consultant who is a Research Fellow with the Center for Information Systems Assurance at the  University of Waterloo. Previously, he was a Professor at St Francis Xavier University and a partner of KPMG.

Mr. Trites is also principal author of Interactive Data — Building XBRL Into Accounting Information Systems, a book we strongly recommend and the focus of this first installment of our two-part interview.  

(1) Your book contains this comment about XBRL and XML: “Many enterprises already use XML to make data available across various disparate systems. XBRL, however, is a more efficient and meaningful system of tagging because it is specific to accounting reports and systems, and is acknowledged by XBRL International.” Could you elaborate further on the advantages of XBRL over XML, and why XML itself isn’t sufficient for business reporting?   

This is a rather basic question, but one I’m happy to answer because it is so important to an understanding of why XBRL should be adopted.

XML of course is a generic language and its use for any particular purpose requires that the definitions and special attributes need to be introduced into it (i.e., tagged) before it can be used for that purpose. So if XML is used for internal systems integration, which often happens, these tags need to be added. When it is used for internal purposes, this can be done because the same tags can be used across an organization. However, the tags, not being standard, will not be compatible with tags used by other organizations, so the usefulness of the information is limited.

With XBRL, since the tags are based on an international set of standards,  the usefulness of the information can be extended outside the organization. In addition it becomes easier with a standards set of tags to implement XBRL in various segments of the organization than with XML.

(2) Another quote from your book: “While extensions are necessary to enable XBRL to be used for the production of useful and relevant reports, too many can destroy comparability.” There seems to be a tension between the preparers, who see extensions as a way for companies to tell their own story, and the analysts, who seek uniformity and comparability. Do you believe that tension will be a major roadblock for implementation and use of XBRL for financial reporting?

This is a challenge for XBRL that is not going to go away and will need continuing management by the XBRL community. There are countervailing forces at work that aggravate the issue. In the first place, too many extensions by different companies contribute to noncomparability, because each company is likely to do an extension for basically the same problem in a different way. So the results become difficult to compare. One way to address this is to develop very robust taxonomies, such as those in the United States. However, the problem this creates is that the more robust the taxonomy, the more difficult it is to do the mapping required. So robust taxonomies can be an impediment to adoption.

Another approach to the extensions issue is to develop standard acknowledged extensions that would be used, say, for different industries. A modularized taxonomy can accomplish this aim as well. This way, extensions will take place, but at least they will be standardized and therefore comparable. We are facing this in Canada, both with our Canadian taxonomy, which is a bare-bones taxonomy, and with the new IFRS taxonomy when we adopt IFRS in 2011. Neither the Canadian GAAP taxonomy nor the IFRS taxonomy fully address the particular needs of Canadian companies, particularly in the areas of financial institutions and resource industries.

At this point, we favor an approach of developing standard extensions, rather than developing all-encompassing taxonomies. This seems to me to be the best balance between the “barriers to implementation” problem and the implementation complexity of extremely robust taxonomies.  At least this way, some control can be exercised over the extensions that are created and used.

(3) You write that XBRL can “reduce the cost of capital with its ability to place standards and context around information and improve data interchangeability and comparability.” Could you discuss how these qualities of XBRL will help companies reduce their cost of capital?  

The reduction in cost of capital comes from lower costs of providing information to the capital markets and from better, more mobile information being out there for the users. XBRL through the tagging process adds context to information like definitions, standards, presentation schemes, etc. This metadata moves along with the data wherever it goes, and so it can be reused by users, including regulators and investors with no additional cost to the company. Also, once initial tagging is done, the marginal cost of providing the information is very low relative to information provided in the conventional form.

(4) You note that “an XBRL project presents upfront costs that are easily measurable, while many of the benefits fall into future years and are difficult to measure.” Given this difficulty, do you have any suggestions for companies trying to determine the ROI for XBRL projects?

In many cases, specific ROI calculations are not really necessary, as the benefits can be ball parked and matched to the costs. The situation is no different than many large IT implementation projects, like ERP projects; the solutions can be found in the approach used for those other projects.

(5) In a chapter titled Deep Tagging and Its Implications, you discuss the implications of tagging data at different infrastructure level within the organization. “Transparency, improved quality, and reusability of data are the major benefits of XBRL tagging and all are realized more fully at the data [ie, lowest] level than at any other level.” According to some reports, however, most U.S. companies are simply looking at a bolt-on approach to compliance with an XBRL mandate and not considering tagging more deeply within the organization.  What will it take for companies to consider deep tagging within their IT infrastructures?  

The idea of deep tagging is fundamental to that particular research study. There is absolutely no doubt that, in most situations, deep tagging is superior to the bolt-on approach. With the bolt-on approach, the reusability of the data is severely limited.

What will it take to get there? First a realization of the benefits of deep tagging by CFOs, CIOs, and others. This will come as they begin to use XBRL and experience its benefits first hand. Second, the incorporation of XBRL capabilities into popular information systems applications, accounting software, ERP systems, database systems, and so on. I continue to be mystified as to why more accounting software developers have not included XBRL in their products. I understand there is a cost implication for them, but it seems clear that XBRL is only going to increase in usage, that there is a need and that that need should be filled.
 

Written by Neal Hannon     Posted on February 13, 2009    

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Prior to joining the FAF, Neal was a member of the accounting departments at the University of Hartford and Bryant University. 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.

When the final rule Interactive Data to Improve Financial Reporting was published in the Federal Register on February 10, 2009, it was pretty much in line with the proposed rule that was published on May 30, 2008. In Part I of this post, I covered many of the outstanding questions, such as how exactly to qualify a company for each of the three mandatory start periods, what levels of tagging are required in the rule, and more specifics on the liability issue. The final rule did, however, contain a few things that surprised me and may catch some companies off guard.

The Shortened Grace Period

The proposed rule asked the question, Would a 30 day grace period be useful to companies filing for the first time? The initial thought was that this grace period would extend for the filer’s entire first year in the program. When the final rule came out, page 6791 of the Federal Register contained the following:

We acknowledge all of these concerns and suggestions, and while we are adopting the grace periods substantially as proposed, we are deferring the start of the phase-in which we believe may help to alleviate potential burdens by giving more time to prepare the initial submission. We also believe that the eventual dropping of the grace period after the initial submissions will help to make the interactive data files more useful and relevant to investors by requiring the submissions at the same time as the related official filing. (emphasis added)

The surprise is that after the first filing of XBRL exhibits, the 30 day grace period goes away. For example, Ford Motor Company will be required to file their second quarter SEC reports with XBRL, assuming their second quarter in 2009 ends right after June 15, 2009. With the first submission, they will have a 30 day grace period in which to submit XBRL matching their 10-Q filing.  In the third quarter of 2009, the grace period will not apply and the XBRL will be due at the same time as the third quarter 10-Q filing. 

Companies that have elected to use an outsource model for creating XBRL exhibits will find themselves in a time crunch, unless the process is well thought out and well tested ahead of that second XBRL filing. With only one filing to practice the coordination between outside vendor and the inside accounting experts before the 30 day grace period evaporates, companies should pay special attention to getting a solid process in place that won't impact an on-time filing. Remember, late XBRL can cause a company to be considered “late".

I predict that many firms who initially outsourced their XBRL will now begin to take a second look at their decision and consider bringing the whole process back inside the company. 

The New Voluntary Program

Although the SEC is officially ending the Voluntary Filing Program on April 10, 2009, they have elected to accept any company’s XBRL filings associated with required filings ahead of any mandatory requirements. In other words, any company -- foreign or domestic, large or small -- that is not already mandated to begin filing XBRL after June 15, 2009, can experience the joy of tagging at any time before their mandated time begins. 

From the final rule:

Companies that are not required to provide interactive data until a later time will have the option to do so earlier and may provide interactive data at their discretion until required by the amendments. Such a company may also tag footnotes individually as a block of text until required to tag the detailed quantitative disclosures within the footnotes and schedules, but otherwise must follow the same requirements as those mandated and can only use a grace period for its initial submission and the initial detail-tagged-footnote submission, whether submitted voluntarily or as required by the amendments. Companies may cease voluntary submissions at any time and need not tag their financial data at a pace other than at which the rules otherwise would require. (emphasis added)

We will continue to consider, however, the advisability of permissible optional or required interactive data for disclosures made outside a set of financial statements prepared in accordance with U.S. GAAP or IFRS as issued by the IASB or related financial statement schedules required under Commission rules.

A new voluntary program with rules has been born. Companies can elect to file XBRL schedules early but need to follow all the rules set forth in the final rule, the EDGAR filing manual, and XBRL validations. No more VFP where just about anything filing would be accepted. This time if you elect to file XBRL before your mandatory date, you will be expected to comply with all the filing rules that would be in effect if your participation was mandatory.

This gives companies the ability to be early adopters and participate at the same time as the mandatory 500 first required filers. Companies that take advantage of this option will be able to back out prior to their mandated start time. On the positive side, they will gain both experience and market exposure for their XBRL filings. On the negative side, they will lose their 30 day grace period for filing XBRL schedules once they are required to file. The 30 day grace period for the first time they file detailed footnotes will still apply if, during the pre-mandatory period, they do not file detailed footnotes. Once a company begins to file detailed footnotes, they will only get one 30 day grace period, regardless if they are filing ahead of their mandatory time or not.

Market forces will determine how many of the second- and third-year mandatory participants will elect to begin their XBRL experience early. Bottom line is that every company who is required by law to file with the SEC should be preparing for XBRL submissions as soon as possible.

UPDATE 2/17/09   Neal writes "Several readers have asked for more information regarding the detailed tagging of notes.  This topic will be addressed in detail in a future column."

Written by Neal Hannon     Posted on February 1, 2009    

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Prior to joining the FAF, Neal was a member of the accounting departments at the University of Hartford and Bryant University. 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.

No doubt over the next few weeks you will hear and see quite a lot about the SEC’s release of the final rule on Interactive Data to Improve Financial Reporting (Release 33-9002). Although the rule will not be official until published in the Federal Register, there will be no additional substantive changes. Posted on the SEC’s website late Friday afternoon, the rule represents a significant milestone in the Commission’s five-year mission to boldly use XBRL as the preferred format for complying with disclosure regulations. While most of the rule remains unchanged from the preliminary rule published in May of 2008, there are certainly enough differences to warrant a close examination. 

Outstanding Questions Answered

The final rule provides guidance on several important issues including:

• Valuation Date for determining when companies will be affected by the rule
• Clarification of how notes will be tagged, with a twist
• Grace period for filing XBRL exhibits
• Postings to web sites of XBRL exhibits
• Clarification of liability issues
• SEC’s use of XBRL to discover filing anomalies

Valuation Date

There are three categories of qualification for required SEC filers. The first group includes large accelerated filers, domestic and foreign, whose total worldwide equity float exceeds $5 billion as of the end of the second quarter of the most recent year-end. For most companies, this means the company valuation as of June 30, 2008. The Dow Jones Industrial Average closed at 11,289 on June 30, 2008. By contrast, the Dow and other major stock indexes fell significantly in the second half of 2008. 

Using Ford Motor as an example, on June 30, 2008, Ford had 2,198 million shares outstanding with a NYSE closing price of $4.42. Ignoring other equity markets, this would give Ford an equity float of over $9.7 billion, well over the $5 billion hurdle. If the SEC had chosen the end of January 2009 as the valuation date, Ford’s $1.87 closing price yields a $4.1 billion common equity float, under the hurdle set for the first group. First group companies will begin to report XBRL in periods ending after June 15, 2009. 

Group two includes large accelerated filers with worldwide common equity float exceeding $75 million as of the end of the second quarter of the most recent year-end. The second group will begin filing XBRL schedules as of the end of the second quarter of the most recent year-end. All other SEC filing companies will begin in periods that end after June 15, 2011.

Tagging of Footnotes

From the rule:

Financial statement footnotes and financial statement schedules initially will be tagged individually as a block of text. After a year of such tagging, a filer also will be required to tag the detailed quantitative disclosures within the footnotes and schedules and will be permitted, but not required, to the extent they choose, to tag each narrative disclosure. (page 23)

Filers also will be required to include with their interactive data any financial statement schedules prescribed by Article 12 of Regulation S-X. These financial statement schedules will be tagged using two different levels of detail; only the first level will be required in the first year. Both levels will be required starting one year from the filer’s initial required submission in interactive data format. Similar in concept to the tagging approach adopted for the financial statement footnotes, the required levels of detail will be: (i) each complete financial statement schedule tagged as a block of text; and (ii) each amount (i.e., monetary value, percentage, and number) separately tagged. However, we will permit but not require each narrative disclosure in such schedule to be separately tagged to the extent desired by the filer. (page 64)

In essence, the final rule includes three levels of tagging, two of which phase in with the third level relegated to voluntary status. In year one, block tagging of individual footnotes will be required. In year two, all detailed quantitative disclosures and schedules within the footnotes will need to be tagged in XBRL. At any time during the phase-in period, companies will be permitted to tag each narrative disclosure as they see fit.

Will there be voluntary narrative disclosures? The answer to the question will hinge on two important points. First, is the taxonomy robust enough to support tagging each narrative disclosure without sending the system into custom tag proliferation?  Depending on how filers interpret “each narrative disclosure,” this additional voluntary additional disclosure could lead either to additional rich disclosures or confusion.

Second, are companies willing to tag at minute levels of detail?  The SEC is prepared to let market forces dictate the level of tagging of notes in XBRL filings. For example, companies who are already pushing the financial reporting envelope like United Technologies and Microsoft will most likely elect to tag at a very granular level. Will this result in other companies following suit?

The Grace Period

The initial grace period remains intact from the proposed rule. Filers will have 30 days to file XBRL exhibits. The exhibits may be filed as amendments to the required filings. Note the following from the SEC’s final rule:

The initial interactive data exhibit of a filer will be required within 30 days after the earlier of the due date or filing date of the related report or registration statement, as applicable. In year two, a filer will have a similar 30 day grace period for its first interactive data exhibit that includes detailed tagging of its footnotes and schedules. (page 24)

Additionally, the SEC provided this:

As noted above, interactive data will be required at the same time as the rest of the filing to which it relates. However, each company’s initial interactive data submission, regardless of filing type, will have a 30 day grace period, and therefore will be permitted as an amendment to a:

periodic report on Form 10-K, 20-F, 40-F or 10-Q within 30 days after the earlier of the due date or filing date of the related report;

Securities Act registration statement within 30 days after the filing date of the price or price range as part of the related registration statement;  or

report on Form 8-K or 6-K that contains revised or updated financial statements that have been revised to reflect a subsequent event rather than the correction of an error within 30 days after the filing date of the related report.

In addition, as noted above, in year two for the first filing that is required to have footnotes and schedules tagged using all levels of detail, the interactive data exhibit will be required within 30 days after the due date or filing date of the related registration statement or periodic, current or transition report or Form 6-K, as applicable. (pages 70-71)

So the choices are clear. File XBRL at the same time as your regular filing, or wait and file XBRL later as an amendment but only during your grace period eligibility. After the first 24 months, XBRL exhibits will be due at the same time as regular filings and will carry full liability. We shall see if the investing public will notice that a company’s amendment is simply an XBRL filing within the 30 day grace period.

Web Site Posting Rules

The final rule will require the posting of XBRL documents to company web sites.  From the SEC final rule:

New Rule 405 of Regulation S-T contains the Web site posting requirement. We also are providing, however, that Web site posting of the interactive data will not be required until the end of any applicable grace period that applies to the submission of the interactive data to the Commission. Similarly, we are providing that Web site posting of the interactive data will not be required before submission of the interactive data when submission of the data is delayed in accordance with and during the term of any applicable hardship exemption provided under Rule 201 or 202 as proposed to be revised. Revisions to Rules 201 and 202 are more fully discussed below in Part II.E. (page 75, footnote 206)  

This passage confirms that the web site posting requirement will be the same as the timing on the submission of XBRL documents with any applicable grace periods taken into consideration.  

The Liability Issue

The SEC is giving XBRL filers a 24 month window (from the time a filer is first required to submit interactive data files) for limited liability on filings, similar to the Voluntary Filing Program. 

Modified treatment of liability for the interactive data files under the federal securities laws only will be available for interactive data files that a filer submits within 24 months of the time the filer first is required to submit interactive data files and no later than October 31, 2014. (page 27)

Interactive data files will also be excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Exchange Act. Interactive data generally will be deemed not filed for purposes of specified liability provisions (Rule 402 under Regulation S-T provides these liability protections) during the first 24 months of any company’s required participation.

Using XBRL to Flag Problems

The SEC shows clear intention to use the XBRL filings themselves to highlight problems in XBRL filings. The final rule contains this passage on page 82:

Identify, count, and provide the staff with easy access to non-standard special labels and tags;227

227 For example, if a company uses the word “liabilities” as the caption for a value data tagged as “assets,” the software would flag the filing and bring it to the staff’s attention. In contrast, if the company used “Total Assets” or “Assets, Total,” the software would identify the use of these terms as a low risk discrepancy.  

This is a clear message to companies that might want to obscure information by using inappropriate XBRL tags.The SEC intends to flag all nonstandard special labels and tags for further scrutiny.  

In the next installment, I will explore how all companies can begin participating in XBRL filings starting with periods after June 15, 2009, regardless of size.