Structured Data: Benefits to Small Companies
US House of Representatives Bill HR 5054, Small Company Disclosure Simplification Act of 2018, is being debated at a House Financial Services Committee hearing on 23 May 2018. The bill addresses requirements concerning the use of eXtensible Business Reporting Language (XBRL) for US Securities and Exchange Commission (SEC) filings. If enacted, it would exempt from the requirements (1) emerging growth companies (in general, newly public companies with revenues below a specified threshold); and (2) on a temporary basis, certain other smaller companies.
When originally proposed in 2013, the bill raised concerns about how many investors actually used XBRL-formatted financial company data. Other concerns and misperceptions focused on the cost to issuers of preparing XBRL.
With the availability of technology to sift through structured data and crunch numbers, investors today are well positioned to perform faster and better analyses. When some of their finite resources are freed up, analysts can not only research a greater number of companies but can also take a closer look at the companies they already follow, which supports better-informed investment decisions. Greater efficiency with higher-quality investment decisions is a win for capital markets.
The availability of structured data could also bring bigger and better opportunities in small- to mid-cap companies by making it easier and less costly for potential investors to assess these companies.
Is the Information Being Used?
Those opposing an XBRL standard argue that small companies should be exempt from reporting in XBRL because their XBRL files are not used by investors. Thus, opponents contend that small companies should not have to bear the compliance burden of preparing such files.
The report “Are XBRL Files Being Accessed? Evidence from the SEC EDGAR Log File Data Set” explores whether the XBRL files of small companies are being used. The authors
provide evidence of whether users of financial reports are accessing XBRL files, the XBRL component of an SEC filing. The possibility of exempting small companies from the XBRL mandate was raised in a legislative debate in which some argued that XBRL files are not being used by small company investors. Using data from the EDGAR log file data set, we counted the exact number of user accesses to the XBRL files and their corresponding conventional files in HTML PDF, or text when users access financial disclosures for SEC filings.
- During the sample period of the third quarter of 2012 through the first quarter of 2015, the study obtained 12,483,699 valid user accesses to 5,016 unique XBRL filings made by 880 small companies that are subject to the legislation.
- Among the user accesses, 61% are to access XBRL files while 39% are to access conventional (non-XBRL) files.
- Small company investors not only access XBRL files but also prefer them to the non-XBRL files when both are available to download for a filing.
The study provides a direct measure of user access and serves as evidence of the use of small company XBRL files by investors and others.
Misconceptions about Cost
Misconceptions regarding the compliance costs of XBRL are widespread. CFA Institute believes the HR 5054 debate should not focus on the cost increase of an outsourced, or “bolt-on,” service for producing XBRL-formatted reports. Instead, it should consider that the way a company implements XBRL reporting will directly affect its costs.
- When facing regulatory XBRL mandates, some financial executives opt to outsource the XBRL tagging and creation process (often viewing it only as a compliance requirement). This outsourcing approach is often perceived as bringing minimal disruption, but it also provides minimal potential benefit to the company.
- Other financial executives have taken a different implementation approach and realized net cost/time reductions by integrating and pushing the standardization earlier in their report assembly and review process.
The costs (or savings) and benefits realized are largely dependent on how financial executives view XBRL mandates: narrowly, as a simple compliance requirement, or more broadly, as a business reporting supply chain standardization opportunity to streamline and cost effectively enhance a broad range of compliance processes.
Benefits will ensue when financial information tagging takes place within companies at the beginning of the report-assembly process and when companies treat the machine-readable XBRL document as their financials. In the future, when such benefits are actualized, perhaps tags may be developed for nonfinancial items as well.
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