XBRL Should Mean More than Compliance Pain

The reporting technology known as eXtensible Business Reporting Language (XBRL) is gaining acceptance by regulators the world over. As this electronic reporting platform expands, it will enhance financial analysis by opening access to more and more data that was previously locked inside text-based regulatory filings. In the U.S., one group is asking the Securities and Exchange Commission (SEC) to make changes to XBRL requirements that could negatively impact the investor community.

In early November, Financial Executive International (FEI), citing complaints and issues voiced by its members, submitted an unsolicited request to the SEC proposing changes in four key areas:

• Limit the amount of tagging of footnote details
• Exempt wholly-owned subsidiaries from any detailed tagging requirements
• Allow XBRL-tagged information to be submitted after the standard financial filing
• Begin a project to develop a single filing that incorporates XBRL-tagged data

XBRL Improves Investor Communication
Clearly the cost of implementing XBRL to date has fallen to the reporting companies. Unfortunately, the FEI letter confirms our suspicion that the majority of firms only see XBRL as a necessary compliance practice and cost. Most rely on outside firms to tag their financial data after the creation of the primary report. This practice leave little to no opportunity for the reporting company to expand how it can utilize XBRL as a communication tool.

At the 2011 XBRL U.S. annual conference, a representative from Microsoft discussed ways in which the computer company was leveraging the tagged information within its organization. Microsoft is effectively using the internally tagged data to populate portions of its website, which provides relevant information to the investment community at the same time it is delivered to the SEC.

As more companies look beyond the compliance aspect of XBRL, they too may recognize both internal and external opportunities for the XBRL data. This will require firms to bring the tagging process in-house, moving away from current tagging practices, in order to maximize the simultaneous use of the information by different audiences.

Missing Critical Mass
FEI estimates that 75 percent of the detailed tagged data is not being used, and that the tagging process negatively affects reporting overall. We believe it is too early in the timeline to determine what level of data will ultimately be meaningful to investment analytics. Clearly, the data in a company’s footnote disclosures adds value and perspective when evaluating the investment potential of a specific company. To date, that information typically is manually entered into the analytical models.

This valuation process hasn’t likely changed for the majority of analysts for a couple of different reasons. First, only the largest 500 firms have produced a single 10K filing that includes the detail tagging of all footnotes. All non-accelerated filers have delivered no more than two quarterly filings. The limited amount of data, for both companies and periods, has not created an incentive for changing most data collection processes. Once the necessary volume of data becomes reported, the investment industry, including the data aggregators, can assess how this information can best be used.

Additionally, the development of resources around XBRL consumption has been limited for the past few years, as firms in that area have developed capacity to create the required XBRL regulatory reports. Now that all firms have begun filing in the U.S., the time is ripe for these firms to shift their focus to products that assist in consuming XBRL-tagged data.

The XBRL U.S. Challenge, of which CFA Institute is a sponsor, is one activity that looks to spur the development of such products. As resources are developed, the investment community will be better prepared to benefit from this new data source.

Timing of Data Release Is Important
The call to delay the release of XBRL-tagged data might as well be a call to cancel the program entirely. Information released by companies is used as soon as it becomes available. Today, much of the tagged financial statement data is released days or weeks earlier through press releases and other supplemental reports on a company’s website. Delaying the tagged data beyond the standard text filing further diminishes its value to the valuation process. However, that may be FEI’s intent in making this request.

If the SEC wants to positively impact the tagging timeline, then we hope it looks to remove any limitations on reporting companies’ tagging of press releases. The current rules limit the scope of when XBRL tags can be submitted, which is keeping press releases from being tagged. By removing these limitations, firms can provide tagged data with all releases of financial data and thereby increase its usefulness to the valuation process.

Clearly Common Ground
The idea of a single regulatory filing proposed by FEI aligns with the development path we included in the 2009 CFA Institute publication, eXtensible Business Reporting Language: A Guide for Investors. By moving to a single report, the debate over when to tag, what is audited, and how deep to tag would end, as there are no differences between text and XBRL sections. Given the current full plate of projects in front of the SEC, we do not foresee any near-term movement on this area of rulemaking activity.

We recognize FEI is sharing members’ concerns with the SEC. We hope that such discussions can lead to improvements to all aspects of the XBRL reporting process. But we disagree that there has been sufficient time to properly judge the current requirements. XBRL must be viewed as a marathon, and not a sprint. If one is not in the race to the end, it’s difficult to experience the benefits of the journey.