CONCERNS are being raised about the readiness of service providers to meet the needs of the more than 8,000 smaller companies that must begin filing reports in eXtensible Business Reporting Language (XBRL) for the first time this July.
Some in the industry expect the US Securities and Exchange Commission (SEC) will be forced to modify some of the more onerous detailed tagging requirements and extend the limited liability treatment of filings. However, some relief may also come as new technologies and service providers emerge.
The Committee on Corporate Reporting (CCR) of Financial Executives International (FEI) has written to SEC chair Mary Shapiro expressing concern that the XBRL filing requirements have led to delays in companies releasing reports to investors and compromised the accuracy of company filings.
The FEI committee wants the SEC to make changes to the requirements ahead of the July deadline for smaller companies to begin filing XBRL versions of their quarterly and annual reports. That is also when about 1,800 larger companies must expand their filings to include detailed tagging of their financial statement footnotes, a requirement that has already created reporting bottlenecks among the first 500 companies subject to the requirement.
“Onslaught of demand coming in 2011”
When the SEC approved the XBRL reporting requirements, it staggered implementation of the rules over three years based on company size and provided each company with a two-year implementation schedule. In the first year, companies are only required to “block tag” their financial statement footnotes, but in the second year they have to tag them in detail. It is the Year 2 detailed tagging requirements that have created a headache for companies and service providers.
In the letter to the SEC (PDF 437 KB), CCR chair Loretta Cangialosi said member companies had “voiced concerns over the readiness of service providers to handle the onslaught of demand coming in 2011 to meet Year-2 requirements for Tier 2 filers and Year-1 requirements for Tier 3 filers, as well as the demand coming in 2012 to meet the Year-2 requirements for Tier 3 filings.”
Service providers have implemented a “pencils down” period to the front end of the filing process and instituted a 48-hour window to finalize a change to a filing, leaving less time for companies to address inaccuracies in their filings. Almost half of FEI’s members indicated in a survey that they would have filed earlier if not for these requirements, said Cangialosi.
“As a result, member companies are concerned that changes that would have been made to clarify language for users or to make corrections for less material items will be foregone and not made, thereby decreasing the overall quality of filings,” she writes.
1-week grace period and limited liability extension
The committee is now asking the SEC to allow companies to file their XBRL files up to 1 week after filing their 10-Qs and 10-Ks without having to submit the files as amendments, which investors could misconstrue as a sign of reporting problems at the companies. It also wants the SEC to exempt certain footnotes from detailed tagging and allow wholly-owned subsidiaries that qualify for the abbreviated disclosure rules to be exempt from detailed tagging.
Another “major concern” is the lack of reliable tools to review the XBRL files to identify errors. This is especially worrying because the two-year grace period of limited liability for the filings will expire in the second quarter for the first group of XBRL filers. The committee wants the SEC to extend the limited liability period until better tools are available.
“It’s disconcerting that registrants will be liable for a tagged document that they have very little ability to validate is complete and accurate,” says the letter.
Meanwhile, there appears to be little interest from investors in using the XBRL files that companies are posting on their corporate websites. The committee said that companies which track usage reported only between “3 and 20 hits per quarter and some of those may have been either employees of the company or the service provider verifying the accuracy of the final XBRL data posted on the websites.”
New conversion software
XBRL vendors IR Web Report contacted this week expressed confidence in their ability to meet the coming demand for XBRL services. EDGAR Online said it “continues to anticipate the requirements of the market and invest in XBRL technology, processes, and expertise, and we are prepared to meet the needs of our partners and their customers.”
Patrick Quinlan, CEO of XBRL vendor Rivet Software, said smaller companies will benefit from the experiences of the large filers. Rivet has developed industry-specific best practice templates based on its experience working with a quarter of the first wave of 500 large companies. Smaller companies can use these as a starting point to create their detailed footnote filings more efficiently and with greater comparability to industry peers.
“We have received no indication from the SEC that there are any plans or even discussions about altering the mandate,” he said.
Meanwhile, further relief will come from new service providers and improved technologies. This week, for instance, a new service launched that aims to reduce the burden on smaller companies that must file for the first time.
Founded by XBRL industry veterans, raas-XBRL is using groundbreaking new XBRL conversion software developed by leading engineers who have extensive experience with XBRL to cut the time it takes for companies to produce XBRL files while substantially reducing the cost and minimizing errors.
“Thanks to our software choice, we are able to completely overturn the current cost-quality assumptions, delivering high quality at very attractive pricing,” said raas-XBRL CEO Daniel Roberts, who has previously served as Chairman of the XBRL US Steering Committee and chaired the XBRL International Accounting Supply Chain group.