THE US Securities and Exchange Commission’s plan to make eXtensible Business Reporting Language (XBRL) mandatory starting next year will have few immediate benefits for companies and investors, the body charged with promoting the technology has said.
XBRL US says in a sobering white paper published on Friday that while companies won’t have much difficulty meeting the mandate, neither they nor investors will see any major benefits from the financial tagging language in the short term.
“XBRL US believes that the market is ready for wider adoption of XBRL. Current software providers stand ready to meet higher demand and preparers anticipate minimal added costs, although it should be noted that there are few real immediate benefits to preparers and the cost is all incremental. While the benefits to end-users will also not be immediately recognized, further out the gains in the form of greater accuracy, integrity and immediacy of data will be substantial,” says the white paper.
That assessment echos my own analysis in a post on Wednesday, shortly after the commission proposed a three-year transition to mandatory XBRL filings of annual and quarterly reports.
The full white paper is embedded below or you can download it (PDF 414KB, 6 pages) from the XBRL US website.
d do it in-house. Either method is not expensive; the “do-it-yourself” method is particularly inexpensive, with the cost of some software tools running less than $1,000. Either way, XBRL formatting will be performed as an “add on” at the end of the financial reporting process, and will therefore result in added cost to a company. As an immediate benefit, companies will know that their financial data when provided in XBRL – is delivered in a manner that best ensures consistency, accuracy and comparability for the users of that financial data. Longer-term, preparers can expect to see significant benefits through the integration of XBRL tags into their ERP/financial management systems. When data within an organization is first created in XBRL format, it can improve the efficiency of internal reporting as well as external. Establishing a single source system eliminates manual entry and improves consistency, reliability, accuracy and speed of reporting. Data that is created once within an entity can be retrieved for multiple reporting situations – for internal reporting to management, for the creation of reports to the SEC, as well as the creation of reports to other regulatory agencies such as the Bureau of Economic Analysis (BEA) and the Federal Deposit Insurance Corporation (FDIC). Today, when a request for information is made by upper management or even an external organization or agency, financial executives must often funnel the request to multiple departments and subsidiaries. The reporting units submit their reports, which then must be compiled and consolidated. Inconsistency of the source data, inaccuracies in the compilation process and substantial processing time and work are 3 http://usgaap.xbrl.us the result. Establishing a single source of information through XBRL will go a long way towards resolving these issues. Specifics of the Rule The SEC’s proposed rule would require a phased-in approach where companies submit XBRL-formatted financials in addition to their traditional filing. This approach will give preparers time to get comfortable with the process while providing a legal safe harbor. For those companies that opt to tag the financial statements themselves rather than outsource to a service provider, they will quickly discover that the effort is not overly time-consuming or resource-intensive, especially given the availability and userfriendly nature of the tagging tools that are currently available on the market. Some concerns have been expressed about the impact on small public companies. We do not believe that this will be problematic. While small companies may not have the resources of a larger company, most have less complex financials, few have large, complicated ERP systems to adapt and the ultimate cost of creating XBRL financials can be as low as $1,000 for the software tool. Over time, integration will free up resources within organizations. Further and perhaps more important, as analysts (end users) of XBRL data are able to analyze more companies more easily and faster, small companies may gain greater exposure and experience reduced cost of capital. To facilitate the initial adoption and efforts required by companies, only the face of the financial statements and a block-tagging of the footnotes (providing a single identifier for an entire footnote) will be required in the early phases. Only in year two of a company’s XBRL submission will they be required to provide identifiers or “tags” for content within the footnotes themselves. In addition, the 30-day grace period for initial submissions will provide companies more time to feel comfortable with the process. This will substantially minimize the effort required while also expediting the learning curve. Impact on Investors and Analysts The proposed rule will have minor impact on investors in the near-term but significant advantages over the current process in the long-term. The biggest benefits of XBRL will come to analysts 1) in the ability to accurately and easily compare multiple companies over an historical timeframe and 2) when detailed tagging of footnotes makes data more granular and more extractable. While tagged content from the primary financial statements makes it easier through “machine-to-machine” extraction than the current process, the end game for analysts and investors is a higher level of granularity and an easier way to analyze multiple companies. The ability to draw out information from the footnotes drastically improves the ability to value corporations; the ability to quickly and accurately analyze multiple companies within an industry improves efficiency dramatically. Improved accuracy, integrity and immediacy of data are the key drivers for investors and this is where XBRL will help the most. 4 http://usgaap.xbrl.us Under the current proposal, it could take up to three years before multiple years of content are available for the first wave of companies. And as the rule is currently written, companies are able to block tag footnotes in the first year of their XBRL-formatted submissions but will be required to provide detailed tagging of elements within their footnotes in their second year of XBRL submission. This serves the purpose of giving public companies some time to get up the learning curve but means that down the road investors will be guaranteed easier access to rich, valuable information on companies that today is often buried in the footnotes. While all investors, both buy- and sell-side, large and small, will ultimately benefit, some will gain faster than others. Large investment firms have the resources and funds to purchase databases and hire staff to database content directly from public company filings. Intermediate-sized investment houses do not have the same resources and would immediately benefit from the ready access of reliable, accurate asreported data. Large investment firms stand to reduce costs when they can enable machine-to-machine extraction of information without the need for translation or manual checking. By going direct to the source of the data, rather than through an intermediary, they can save time and money. But the most significant gain for large firms will come through greater granularity, which is further down the road. Individual investors will benefit when online data providers serve up information in XBRL format that can be easily rendered and used in Excel format with the click of a button. Where are analysts today on XBRL and what’s ahead? Interest in XBRL among the investor community is mixed. While for some there is a high level of curiosity about what this can do, there is limited ability today to use XBRL given the dearth of data, and even if they are using it through one of the XBRL-enabled analytical tools available, many do not even realize they’re accessing XBRL-created data. For the most part, analysts will embrace XBRL when it’s widely available and they can actively recognize the benefits. As with the EDGAR database, analysts may not have actively advocated for it, but once they used it, they were loathe to give it up. XBRL can be seen as the next evolution of the SEC EDGAR database, helping analysts to perform their jobs better and gain more insights into corporate valuation. XBRL will gain traction among the investment community when more content is available and XBRL is transparent within the tools analysts already use. Data intermediaries have an opportunity to ignite demand for better information by embracing XBRL. Intermediaries, like the big financial data aggregators have a prime opportunity (and with a transition into XBRL, it becomes an imperative) to move out of the simple, labor-intensive and low-value-add business of data collection and into the truly beneficial service of higher-order analytics. Aggregators today provide their own proprietary tagging of footnotes as a value to customers; in a world with XBRL, they could add even more granularity. 5 http://usgaap.xbrl.us The opportunities for analytical software providers are significant in offering richer, broader analytics. Ultimately, what is today just a snowflake can quickly turn into a
snowball gathering speed, changing the way analysts work and opening up new markets for analytical tools. Impact on Software Providers Today’s providers of XBRL-creation solutions have readied themselves to accommodate the significantly higher demand anticipated with the new rule proposal, in terms of customer support, quality of tools and user training. Among the current voluntary filers, there is a split between those that create their XBRL-formatted financials themselves and those that outsource it to a service provider. Service providers are typically consultants, financial printers and other intermediaries that “tag” or assign identifiers to the line items themselves, then send them back to the company for review and revision. They are about evenly split between service providers and those that create the XBRL-formatted version themselves. New filers will be able to rely on the XBRL US GAAP Preparers Guide that was developed as part of the taxonomy project and will use it in conjunction with the software and service providers own documentation. The use of service providers will likely be a permanent part of the XBRL creation landscape. Given that the current proposal requires companies to initially submit XBRL data in addition to their traditional filing, there may be limited incentive for companies to perform the tagging themselves. When XBRL becomes the primary format for filing to the SEC, companies are more likely to get more involved in the process. There are a number of factors however, that could move companies to get involved in the tagging themselves today, which we expect to see in the near-term: 1) the development of “automated tagging tools”, that make it substantially easier to build XBRL-formatted data, and 2) ERP/financial management companies that will develop their own tools to build XBRL financials, starting in the general ledger which then funnels through to external reporting. How will the market for tools change? The rule proposal will make the market more attractive to software providers and we can expect to see a broadening of ancillary markets for products like benchmarking tools, business intelligence products, etc. with an XBRL-enabled component. ERP/financial management system software providers are all investing in XBRL but have been waiting for demand to kick in. The rule proposal may be the impetus they have been awaiting. Conclusion XBRL US believes that the market is ready for XBRL adoption on a wider scale. Our members stand ready with tools and services. We applaud the efforts of the SEC to improve the efficiency of the markets with corporate information that is faster to market and higher in accuracy and integrity. 6