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XBRL Trends and Challenges

Robert Herz | December 31, 2013

A new report finds some interesting trends on how companies are incorporating and using XBRL, the interactive digital tagging system for financial reporting. According to the survey, companies are bringing more of their XBRL process in house, although they continue to face several challenges with preparing XBRL filings and remain concerned about its usefulness compared to its cost. 

The Financial Executives Research Foundation released the results of its 2013 survey, SEC Reporting Practices and the Impact of XBRL, in November. This third installment of the annual FERF survey, which includes responses from 442 different companies of various sizes, provides a number of interesting findings on the trends, challenges, issues, and opportunities that Securities and Exchange Commission registrants are experiencing with XBRL and other aspects of their SEC reporting processes.

Perhaps one of the most significant trends is the continuing movement of companies away from the use of “stand-alone” outsourcing services to “disclosure management solutions” that enable companies to bring all aspects of the SEC document preparation and filing process in house by integrating collaborative document drafting, XBRL tagging, “EDGARizing,” and direct filing of both the EDGAR and XBRL documents with the SEC.

According to the 2013 survey, 71 percent of the companies reported using a disclosure management solution compared to 54 percent that said they did in the 2012 survey. Not surprisingly, the use of disclosure management solutions is even more pronounced for large accelerated filers, with 78 percent of the 2013 respondents now using such solutions compared to 63 percent in the prior year survey. It seems that this trend is likely to continue as a full 82 percent of the companies that currently use stand-alone solutions to create their XBRL filings say they plan to switch in the coming year to an integrated disclosure management solution.

The survey provides some interesting insights on some of the reasons behind this move to disclosure management solutions. For example, 90 percent of the survey companies that use a disclosure management solution reported not having to abide by a “pencils down” policy (meaning they must submit a final version of documents days before a planned filing), compared to only 20 percent of the survey companies using stand-alone solutions. This is not surprising as outsourced XBRL solution providers normally require one or more days lead time to render a final version of a document, while disclosure management solutions enable companies to directly and quickly incorporate the effects of last-minute changes to their filings. As such, they add control and flexibility to the filing process and can reduce overall costs and cycle time. Document management solutions can also help companies maintain greater security over the information in SEC documents prior to filing than may be the case with companies that need to transmit data via e-mails internally and to external service providers. As in prior years, the 2013 survey reports much higher levels of satisfaction by SEC filers with disclosure management solutions than with stand-alone solutions.

XBRL Challenges Continue

Companies continue to experience challenges, however, with the preparation of their XBRL filings. Common difficulties reported in the 2013 survey relate to the final review process and validation, tag selection and XBRL exhibit preparation, handling of negative values, and internal education and competency with XBRL.

Companies using stand-alone XBRL solutions also reported a significant level of problems working with their outside service provider. In addressing these challenges, survey companies reported turning to various resources, including the tools provided by their service providers, the XBRL U.S. GAAP taxonomies, outside training courses and Webinars, review of competitor or industry filings, the XBRL U.S. FAQs and Preparer's Guide, and the EDGAR Filer Manual and other SEC resources.

The 2013 survey also reports that companies continue to have several concerns about XBRL. These questions center on whether there is sufficient demand by investors and other users of financial information for XBRL-tagged financial data to justify the cost and effort incurred by companies in providing it.

The 2013 survey also reports that companies continue to have several concerns about XBRL. Chief among these are continuing questions about the overall cost-benefit proposition of the SEC's XBRL mandate. These questions center on whether there is sufficient demand by investors and other users of financial information for XBRL-tagged financial data to justify the cost and effort incurred by companies in providing it.

Some of my own conversations with financial analysts and investment professionals, as well as the December 2012 study An Evaluation of the Current State and Future of XBRL and Interactive Data for Investors and Analysts by the Columbia Business School Center for Excellence in Accounting and Security Analysis, suggest that while there is clear demand for timely, reliable, machine-readable structured data provided by XBRL, users have significant concerns over the reliability of the XBRL information currently being provided. These include concerns over the accuracy of the tagging and comparability resulting from the continued use of company-specific “extensions.” This has led to calls for auditor assurance on the XBRL-tagged financial statements and ongoing SEC staff review and enforcement of the accuracy of such information.

In September Congressman Darrell Issa (R-Calif.), chairman of the House of Representatives Committee on Oversight and Government Reform, sent a letter to SEC Chairman Mary Jo White strongly criticizing the agency for not moving quickly enough to use the XBRL data it collects and for not taking adequate steps to improve the quality of this data.

While it remains to be seen exactly what actions the SEC will take on these fronts, greater review and, where deemed appropriate, enforcement actions against companies filing inaccurate XBRL-tagged financial statements may be in the offing. Moreover, the SEC has recently begun to consider the use of “inline XBRL” technology that would enable companies to embed the XBRL tagging into their traditional SEC filings, thereby eliminating the need for a separate XBRL document.  Such an approach, which is already used for certain filings in other countries, might improve the accuracy and usability of the tagged data while also potentially reducing the overall cost to companies of preparing SEC filings.

Concerns About Liability

With the transition period for limited liability over the accuracy of their XBRL filings expiring for many companies, it is not surprising that two other top concerns expressed by companies in the 2013 FERF survey are the potential for receiving XBRL-related questions in SEC comment letters and the attendant exposure to legal liability.

According to the survey, some companies have begun to respond to these concerns by, for example, adding process documentation or through more involvement by senior management in the process for preparing and filing the XBRL-tagged financial statements. Additionally, a number of companies reported making changes to their financial statements or footnotes as a result of the XBRL filing requirements. A third of the companies in the 2103 survey, for example, said they had converted text disclosures to tables and 30 percent of the companies reported removing certain disclosures not required by GAAP or other regulations from their footnotes.

Interestingly, however, and consistent with the results of last year's study, very few companies seem to be engaging their independent auditors to review their XBRL filings. For example, less than 5 percent of the 2013 survey companies indicated that they had engaged their auditor to review their most recent annual and quarterly filings, with only a very slight increase in the level of auditor engagement expected in the coming year.

 While much of the FERF survey focuses on the process, challenges, concerns, and issues regarding XBRL, it also contains some interesting overall findings on SEC reporting practices, including such matters as the number of working days to close the books at the end of each quarter and year, the number of calendar days after quarter end to file 10-Qs and after year end to file 10-Ks, common bottlenecks in the SEC reporting process, and the number of employees directly involved in the SEC reporting process. On this latter point, the survey reports that companies with annual revenues of more than $10 billion have an average of seven employees directly involved in SEC reporting; those with revenues under $500 million have an average of three employees.

 The full survey can be accessed on the Financial Executives International and SEC Professionals Group Websites. For those involved in the SEC reporting process, it provides useful source information on the current issues and trends related to XBRL and other SEC reporting practices. I also encourage companies to continue to improve the accuracy, consistency, and comparability of their XBRL filings through their own efforts and by participating in workshops and in industry-based initiatives such as the XBRL Industry Resource Groups that FASB has established in collaboration with industry associations.