XBRL News and Commentary from the Hitachi XBRL Business Unit
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XBRL: Walter Hamscher’s Speech at the Rome XII Conference

Written by Bob Schneider
Posted on May 28, 2010 Comments
May 28, 2010 | General | Bob Schneider

Written by Bob Schneider     Posted on May 28, 2010

When Walter Hamscher talks, people listen – or at least they should. The presentations by the Manager, Technology and Taxonomies in the SEC’s Office of Interactive Disclosure (OID) are uniformly informative, entertaining, and, not infrequently, eye-opening.

His speech last month at the Rome XII conference was no exception. Standing in for OID Director David Blaszkowsky -- who, like many others, was unable to attend because of Europe’s (literally) ashen skies -- Walter made the following useful observations. (Let me add his caveat that the opinions he expressed are his own and not those of the SEC or his colleagues at the agency.)    

(1) The vast majority of questions the SEC receives from companies on the interactive data mandate have “absolutely nothing to do with XBRL…it’s not about tags, line items, presentation linkbases, etc…”  Instead, because of the mandate’s complicated phase-in schedule and its nuanced rules on when and what companies must file, managers are mostly asking “How does this affect us?” To reduce the confusion, he recommends that regulators adopting XBRL produce simpler phase-in rules and publish them well in advance of implementation.

(2) About 1,400 XBRL filings have been received, including annual reports (about 500 thus far), quarterly statements, “a few” registration statements, and an “increasing number” by foreign companies using US GAAP.  Altogether, the filings represent about 500,000 data points, a “tremendous explosion” in the amount of data available to SEC analysts.

(3) Walter noted that, while most of the attention has focused on company filings, major parts of the XBRL mandate affecting investment companies (mutual funds) and Nationally Recognized Statistical Rating Organizations (NRSROs) have yet to go into effect. So while there is a feeling among some that the SEC’s XBRL implementation efforts have “quieted down,” in reality, they continue in full gear. (Interestingly, XBRL filings done by NRSROs won’t be received by the SEC; they will only be posted on their websites.)

(4) The OID is no longer part of the SEC’s accounting area, but rather a section of the new Division of Risk, Strategy, and Financial Innovation. As such, it is now within the broader scope of the SEC’s data collection activities, providing information to the agency’s economists, analysts, statisticians, etc.  Walter observed that, while during the Bush years the emphasis was on the market, in the new Administration, there’s much greater stress on “what can the agency itself do with the data.” Overall, he thought the OID’s new position in the SEC’s organization chart, with the information customers it now serves, was “a very good idea.”

(5) At several points, Walter indicated that the SEC mandate was proceeding smoothly, and that it’s absolutely possible to have a data repository system that accepts XBRL data with extensions. He said that when people are disdainful of the SEC’s XBRL data, it’s because there’s only three quarters’ worth, which would satisfy no financial analyst.

(6) About 20% of companies are now doing their own tagging, as opposed to using a service provider. This move toward in-house processing has been “faster and earlier than expected.”

(7) In Walter’s view, the first filing of a company of XBRL data is hard. It’s a novel experience and an awful lot of tagging decisions have to be made on a taxonomy that is very large and very granular.

(8) XBRL filing is changing traditional financial statements. Data that may have originally appeared in a few tables in the traditional financials can sometimes be consolidated and better represented in XBRL by using a single table.  In turn, the company may decide to use that single table next time for the traditional financials. Overall, XBRL is helping to reduce text and narrative in the traditional statements.

(9) The quality of thought going into XBRL statements is high. Walter finds it encouraging that, informally, early filers are mentoring later filers. In addition, working groups are expanding the number of tags for certain industries, like oil and gas.

(10) The voluntary filing program (VFP) was of tremendous benefit, allowing the agency to get feedback throughout the information supply chain. Within government, the VFP helped to smooth the path of implementation.

(11)  Walter is “very excited” about Inline XBRL and the promise it holds for improving presentation of financial information. He is “very heartened” by its acceptance by HMRS, the UK taxing authority.

(12) Great strides are being made by the International Taxonomy Architecture Working Group, comprising Japanese (EDINET), American, (US GAAP) and European (IFRS) members, in coming up with a common architecture.

Walter’s speech, along with those of the other keynote speakers, can be found at the XBRL website. At least for me, the files worked erratically, and I had difficulty in moving to specific parts of his presentation (thus the absence of time stamps in the above points, for which I apologize). But try to listen to Walter’s talk (preferably in IE, which seemed to be a better browser option than Firefox). It will be an extremely well spent half hour.

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XBRL Should Be Adopted for the Solvency II Insurance Framework

Written by Bob Schneider
Posted on May 20, 2010 Comments
May 20, 2010 | General | Bob Schneider

Written by Bob Schneider     Posted on May 20, 2010

Solvency II is a new regulatory structure for Europe’s insurance industry being developed under the direction of CEIOPS. The framework’s primary goals are (1) to facilitate the development of a single European market in insurance services, and (2) provide an adequate level of consumer protection. Among other objectives, it seeks to improve product development and pricing, increase the transparency of risk reporting, raise industry standards of risk management, and upgrade companies’ internal controls. Toward these ends, Solvency II comprises three so-called pillars:

  • Pillar 1 consists of quantitative requirements (including rules relating to the calculations of capital requirements)
  • Pillar 2 sets out qualitative requirements for governance, risk management, and effective supervision, including internal controls
  • Pillar 3 focuses on disclosure and transparency requirements

Europe’s insurers, supervisory agencies, and other industry stakeholders are now gearing up for adoption of Solvency II, which is scheduled to go into effect in October 2012. Discussions are under way concerning the implementation of information systems, including the harmonization of reporting standards and formats. Among the possible candidates for a data standard are a flat-file format, such as comma-separated value (CSV); XML; and XBRL. A basic flat-file format has substantial shortcomings, however, for data of some complexity; for example, it would not permit syntactical validation. The more realistic choice is therefore between XML and XBRL.

In his Financial Reporting Using XBRL (pp. 56-65) and XBRL for Dummies (pp.33-34), Charlie Hoffman contrasts XML with XBRL and enumerates the latter’s advantages. He points out that:

  • While XML articulates only syntax, XBRL expresses meaning XBRL can express business meaning or rules, called semantics, such as Assets = Liabilities + Owners' Equity. (Charlie recently wrote a great post about this topic.)
  • XBRL allows content validation against the expressed meaning “With XBRL, you can exchange [across business systems] both the information itself and the business rules that support creating accurate information, allowing you to effectively communicate business information.” Business rules enforce the integrity of information, which is key for ensuring its usefulness along the business reporting supply chain.
  • XBRL separates concept definitions from the content model, which allows you to express multiple hierarchies of explicit relations This feature increases XBRL’s flexibility and allows it to better express complex dimensional disclosures often contained within business reports.
  • XBRL provides organized, prescriptive extensibility, whereas XML is endlessly extensible “XBRL provides flexibility where you need it, whereas XML provides too much flexibility where you don’t.”
  • XBRL provides a multidimensional model “Online analytical processing (OLAP)-type systems can use XBRL’s multidimensional model to provide flexible information presentation and the ability to ‘slice and dice’ information.”  
  • XBRL enables intelligent, meta-driven connections to information “With XBRL, business users can connect information by adjusting metadata rather than by requiring technical people to write code. As such, rather than build multiple-point solutions, XBRL enables the creation of effective and efficient solutions that allow extensibility and that don’t require programming modifications to connect to new information or new information models.”

Taken together, these advantages provide valuable benefits for the business information supply chain:

  • Semantic meaning from existing taxonomies that enhance comparisons, benchmarking, and analysis
  • Standardized formulas that increase data and validation quality
  • Standardized references that allow explicit relationships between regulated disclosure elements and the relevant regulations, laws, instructions, or solvency rules

The upshot is that XBRL improves company reporting processes, helps regulators enhance analytical processes, and permits both to share references to relevant regulations and rules in ways that XML cannot.

In his paper Solvency II and XBRL: New Rules and Technologies in Insurance Supervision, Professor Enrique Bonson notes that the EU has already supported the XBRL standard in having the Committee of European Banking Supervisors (CEBS) adopt it for both financial reporting (FINREP) and common reporting (COREP), which includes capital requirements. Summarizing his analysis, Professor Bonson has three arguments for implementing XBRL for Solvency II:

  • The standard possesses proven technological quality;
  • The organizational qualities of the XBRL consortium have been demonstrated to be of great help in the implementation of analogous regulatory frameworks (eg, FINREP/COREP);
  • Previous experience represents a background of inestimable value, with a substantial number of persons and entities ready to give support in this venture, from the XBRL consortium itself at the European and international levels, to the myriad entities that comprise the consortium in their individual capacities.

Importantly, Professor Bonson notes that it is IFRS that “…will  really provide the financial information support to enable the effective application of Solvency II; of particular relevance is IFRS 4, which specifically addresses contracts of insurance.” The XBRL taxonomy framework for IFRS is designed to implement each of its standards, and thus there is an XBRL taxonomy specific to the reporting needs of insurers.

This XBRL taxonomy will no doubt be extended for IFRS Phase II, which will modernize the insurance accounting reporting framework. In a paper prepared by Deloitte titled IFRS Phase II and Solvency II: Heading in the Same Direction, the authors state:

Although there is still uncertainty around the final outcomes of SII [Solvency II] and Phase II, we believe that the calculation of the core components of an insurance liability can be used carrying out similar bases and models, with the possibility to develop adjustments that reflect the differences as they emerge from the parallel refinement of the detailed requirements…We believe, regardless of the differences between the two regimes, there are already tangible opportunities for synergies and companies should consider the requirements of Solvency II  and Phase II in an integrated way to minimize implementation costs and maximize benefits.

It would certainly seem that if companies will be tackling Solvency II and Phase II together, then adopting a common data standard of XBRL would make sense for both the insurers and their regulators.

Some benefits for XML over XBRL could be suggested, such as initial start-up cost and the availability of both human and nonhuman resources.  But XBRL has been adopted extensively by business registrars throughout Europe, and the pool of available XBRL talent and software products is continually increasing.

Indeed, as XBRL Planet’s World Wide Adoption Survey documents,  the key trend of all business reporting in Europe is toward XBRL. Standard Business Reporting (SBR), which incorporates XBRL, is being adopted in the Netherlands for the electronic filing of financial, tax, and statistical statements for all companies. XBRL is being implemented in Spain for banking, local governments, financial reporting, and other reporting needs. In the UK, both Companies House and HMRC is working toward implementations for company accounts and tax information.

If XBRL is becoming the data standard in Europe for company registrars, banking, tax, and statistics – and is also gaining favor in areas like sustainability reporting and government budgeting --  wouldn’t it make sense to harmonize all forms of  reporting, including insurance, on XBRL as well?  

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Can XBRL Help Reduce Earnings Management and Stock Price Volatility?

Written by Bob Schneider
Posted on May 8, 2010 Comments
May 8, 2010 | General | Bob Schneider

Written by Bob Schneider     Posted on May 8, 2010

A few days ago, Jeff Henson of the XBRL USA blog published a highly useful post on the pluses and minuses of the data standard. Listing the disadvantages, he writes:

XBRL facilitates near real-time disclosure. The potential to quickly report information in automated ways is a double edged sword. On the one hand, near real-time disclosure improves transparency and sharing of information for a variety of beneficial purposes. On the other hand, near real-time disclosure may emphasize short-term results at the expense of long-term objectives. Some argue that financial information shared in a real-time way may cause undue volatility in stock prices and impulsive decisions by investors, suppliers, customers and business managers.

A few years ago, the audit chiefs of the big accounting firms published a paper that offered their vision of the future of financial reporting. In discussing a new paradigm of real-time reporting that includes nonfinancial indicators, they offer a different view than the one Jeff describes:

Finally, and perhaps counter-intuitively, more frequently reported information may reverse some or much of the “short-termism” about which corporate managers and others have long complained. Once investors have almost real-time access to financial and other information about companies, forecasting “quarterly” profit numbers will no longer be relevant, while forecasts of daily or weekly profits will be pointless. As a result, by having more frequent information, investors and their companies may begin looking over longer time horizons. The disclosure of more useful, non-financial forward-looking information should reinforce this outcome, along with continued compensation reforms by public companies themselves that reward long-term performance.

Note the “perhaps counter-intuitively” in the first sentence. American companies have long been accused of “short-termism,” which includes a focus on managing earnings to meet quarterly targets (and hence analyst expectations) at the expense of long-term goals and the overall good of the firm. If, as some have argued, reporting quarterly is an important reason for the “short-termism” of American managers compared with their counterparts in Europe (who still typically report semi-annually), won’t continuous reporting merely exacerbate this tendency?

It is conceivable that reporting a continuous stream of information will give some managers the perspective of day traders, and they will give all their energies to polishing whatever bit of data will next be made public.

But it seems much more likely that, as the audit chiefs imply, the sheer futility of this exercise will make managers unconcerned about individual data releases. Because investors are being constantly updated on company performance, quarterly reports won’t be the headline events they are today, and they will contain far fewer upside or downside surprises. Managing quarterly earnings will be not only less necessary but more difficult: reporting stellar net income will raise suspicion if you’ve been giving the market mediocre numbers on a host of indicators for the past twelve weeks.

This new world of financial reporting was envisioned in a CFO.com article Back to the Future: What the SEC should really do about earnings management that was published more than ten years ago, before the first international XBRL conference:

…There are those who say the only way to stop earnings management is to render the quarterly earnings release obsolete. In fact, these forward-thinking accounting experts argue that most current rules and reporting practices have outlived their usefulness, especially with the emergence of new knowledge-based industries. They contend that layering on new guidelines and new disclosures only further encumbers a system whose artificiality encourages earnings management… Instead, they envisage something completely different -- a real-time financial reporting system in which analysts and investors have continuous, networked access to a wealth of disaggregated corporate data.

What about the charge that continuous reporting will increase the volatility in stock prices, which occurs when new, relevant information is released to markets that surprises investors? Here’s what KPMG partner Bob Elliott said about volatility in the CFO.com article I cited earlier:

To the extent that you disclose more corporate information on a more-frequent basis, it seems to me that uninformed volatility would be reduced. You'd still have volatility when exogenous events occur that change the real value of the company, but you'd have less volatility from lack of information or misinformation in the marketplace.

It does seem possible to me that continuous reporting could increase intraday volatility slightly, as some trading becomes geared toward that particular day’s release. But as Mr. Elliott expresses, the substantial volatility often associated with quarterly reports would decline significantly. 

Quarterly reporting for US companies has been around for many decades, and it is part and parcel of the investing environment. But there is nothing sacrosanct about it, and if new technology makes better alternatives feasible, they should be adopted. That XBRL can be the facilitator for this new era of financial reporting should be counted among its advantages, not one of its minuses.

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The Kids Are All Right: XBRL and the Next Generation of Investors

Written by Bob Schneider
Posted on May 1, 2010 Comments
May 1, 2010 | General | Bob Schneider

Written by Bob Schneider     Posted on May 1, 2010

About three years ago, I wrote a post on why retail investors are entitled to XBRL-enabled statements. At that time, the S&P 500 stood at 1,474; a few months later, it peaked at 1,562. By the time the index bottomed in March 2009, it had fallen more than half to 683. The index currently stands at 1,186, up 73% from the trough, but still down about a quarter from its top.

Former Chairman of the SEC Chrisopher Cox often extolled the virtues of XBRL for the individual investor, making these comments in early 2006:

The retail market is where the SEC also has high hopes, because we’re focused on the average investor. We’d like to see the democratization of financial information and analysis, and the empowerment of individual investors. Software that consumers can use to help make wise investment choices, designed either for their personal use or integrated into websites, will run the gamut from RSS feeds about companies and funds to analysis tools built into personal financial software.

Given the extraordinary gyrations of stock markets in the past few years and the heavy losses individual investors have incurred, their response to Mr. Cox’s offer of democratized data (at least with respect to equities) may well be “Uh… let’s wait.” 

Investment data for 2009 reflect this attitude. Last year, individual investors poured money into bonds and international equities, while avoiding US stocks, despite their impressive gains later in the year. People are seeking safety: according to Investment News, first-quarter 2010 sales of life insurance policies at major independent broker-dealers (including whole term policies, which have a significant investment component) were up by at least a third. 

Nevertheless, there may be some signs that small investors are finally showing some interest in domestic equities: in recent weeks, some money has begun to flow into US stock funds and investor sentiment has turned up.

It is not the purpose of this blog to dispense investment advice. Riding better economic news and rising investor confidence, stocks may push higher...or, as bearish forecasters argue, future inflation from accommodative monetary policy, persistent high unemployment, and precarious finances at all governmental levels will, separately or in combination, limit any stock market gains for years to come.

With respect to the SEC’s effort to make XBRL-enabled data available to the general public, however, I still see significant trends that support that decision – even if current investment conditions do not.

The first is the healthy – and, given the experience of the past years, surprising – optimism of the so-called Millennials, young Americans 18 to 29 years of age. Pew Research has found that:

Millennials are actually slightly more optimistic about their future earning potential than they were in 2006, before the recession. What's more, the portion of young people who are satisfied with the way things are going in this country increased from 30 percent in 2008 to 41 percent in 2010. In the aggregate, Pew concluded that Millennials are "confident, connected and open to change.”  

Some of that optimism may simply reflect the change in Administrations and the political tendencies of that cohort. But it’s still remarkable and encouraging that young people should be so optimistic about themselves and the country’s future, given the economic headlines and the job market they have faced in recent years. 

Equally significant, almost a quarter of young people see technology use as their generation’s distinguishing characteristic. One particularly stunning statistic: some 75% of this age group now use social networking sites, compared with just 7% in 2005.

Of course, right now much of this cohort is just trying to pay the bills, not invest for the future. But as these investors move into their 30s and 40s, they will be quick to adopt new online technologies for managing their portfolios; in fact, they will expect technologies to be available to meet their needs. As evidenced by the meteoric rise of Twitter, which wasn’t even around in 2005, we don’t know what those technologies will be. But whatever form they take, young people, in both their outlook and capabilities, are well positioned to take full advantage of the democratization of data that Mr. Cox talked about, specifically the XBRL infrastructure for data delivery and analysis of US equities.   

In conjunction with a new generation of optimistic, technologically savvy investors, we’re also seeing rising interest in international investing. As I indicated earlier, overseas equities have become popular with investors discouraged with the US market, and financial firms are making it easier and cheaper to trade them. Country allocations will always fluctuate with investment conditions; but it’s likely that, as US investors become more comfortable trading internationally, participation levels will rise. The main avenues for overseas investing should continue to be funds and ADRs; however, investors will also be better able and more willing to buy individual foreign stocks denominated in local currencies.

Anthony Fragnito, CEO of XBRL International, recently stated that “Markets representing two-thirds of the world’s total market capitalization have mandatory or voluntary XBRL filing programs in place.” It is only natural to forecast that younger investors -- who have come of age in a “smaller” world of increasingly faster and cheaper international communications; who are technologically savvy; and who will be seeking returns they cannot achieve in domestic markets -- will be eager consumers of this data.