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Proposed Rule Would Make Filing in XBRL Mandatory for All by 2010
By Melissa Hoffmann Lajara
Posted on 9/4/08
WASHINGTON -- Kilobytes and megabytes could soon be called the filing cabinets of the Internet age. The days of paper-filed tax returns, document-heavy folders and graphite-smeared ledgers as the tools needed to assess a company’s finances are increasingly being replaced by computer applications and languages that require nothing more than a computer and some software.
Most companies use computers to handle these and other record-keeping tasks. Now, with the use of a new computer language, the way those businesses report transactions to investors and the government is also about to change.
Securities and Exchange Commission (SEC) Chairman Christopher Cox announced on Aug. 19 that EDGAR, the SEC’s decades-old document-based system used to archive and distribute company filings, will be gradually replaced by the Interactive Data Electronic Applications (IDEA) system -- a database formatted with interactive computer tags in the eXtensible business reporting language (XBRL).
Cox characterized IDEA’s launch on Aug. 19 as a “fundamental change” in the way the agency collects, manages and distributes financial reporting data. He said IDEA would replace the 1980s-era EDGAR to give investors “far faster and easier access to key financial information about public companies and mutual funds.”
Currently, investors looking for information must sift through one form at a time making research what the SEC called a “painstaking task.” With IDEA, investors will be able to instantly collate information from thousands of companies and forms.
“All the information will be searchable on the Internet,” Cox said at a press conference. Financial statement users will be able to find financial statement information “just the same way you search for news today.”
IDEA will support RSS feeds and other real time alerts, Cox said.
EDGAR vs. IDEA
Many countries already require public companies to provide their financial reports in interactive data, while others, including the United States, have either proposed to require it or are considering it.
The move from EDGAR to IDEA will not be a sudden change, and EDGAR will likely have a purpose in research long after IDEA becomes the standard. For an undetermined period of time, the two databases will run parallel, allowing investors to continue to use EDGAR but also utilize IDEA-like features that will be grafted onto EDGAR in the short run.
The SEC said the new database is “based on a completely new architecture being built from the ground up” and will at first supplement, then replace, the EDGAR system.
“You should look at the EDGAR system as a place for documents, almost like a file folder,” said EDGAR Online President Philip D. Moyer. “Those documents will be necessary for a long time. There are close to 200 different form types submitted into the EDGAR system.”
IDEA’s XBRL tags, on the other hand, will store records that are pure data. While it may be a more efficient way to store and search for specific information, the database does not currently store the original forms and documents. Eventually, Moyer said, IDEA will be able to accept and incorporate EDGAR documents as well.
Moyer, whose company creates XBRL tags for corporations, related the process to taking a Microsoft Word document and pasting the information into Excel.
“You can take that data and start manipulating it,” he said. “There’s going to be a transition from the document world to a data and spreadsheet world.”
Yigal Rechtman, immediate past chair of the Society’s Technology Assurance Committee, already sees that happening—both products and users are far more technologically sophisticated than they were in the past.
“It’s a good confluence of factors and patterns to make something like this work,” he said.
Learning the New Language of Business
XBRL is a standards-based way to communicate business and financial information, defined by metadata set out in taxonomies. Taxonomies, which are codes from standard lists used as identifiers, capture the definition of individual reporting concepts as well as the relationships between concepts and other semantic meaning.
The SEC, which is promoting XBRL as a way to increase transparency, issued in May a proposed rule requiring U.S. companies to provide financial information using interactive data as early as next year.
Domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion at the end of their most recently completed second fiscal quarter would provide to the Commission a new exhibit, which would contain their financial statements, and any applicable financial statement schedules in interactive data format. The requirement would apply beginning with fiscal periods ending on or after Dec. 15, 2008, according to the proposed rule.
All other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the same interactive data reporting requirements the following year, beginning with fiscal periods ending on or after Dec. 15, 2009; all remaining filers would be subjected to XBRL filing requirements beginning with fiscal periods ending on or after Dec. 15, 2010, according to the SEC.
The SEC has also proposed requiring mutual funds to submit their public filings using interactive data.
“With every number individually labeled, investors, analysts, financial journalists and others can easily use the information within spreadsheets and analytical software,” the SEC said in a press release. “The ease of producing analysis is expected to generate many free and low-cost new services to investors on the Internet once most companies’ financial information is reported this way.”
The first phase of the switch to IDEA, Moyer noted, will only require that large companies submit a small amount of data in XBRL. During the second phase of the project, footnote tagging will be required.
For some CPAs, the move to XBRL may seem daunting.
“Most of us are worried” about the transition, said Jianing Fang, a member of the Society’s Information Technology Committee. “However, since the SEC has already issued the mandate, we just have to deal with it.”
Moyer described learning the XBRL language used by IDEA as similar to learning to program in HTML or Java, and said it’s likely to be easier than many expect.
But in the beginning, as with any new technology, there will be a learning curve.
“Every time we upgrade to a new technology, there [are] always costs involved,” Fang said. “Once everyone is convinced that the change is unavoidable, the necessary resources -- monetary and manpower -- will be allocated to the project.”
Members of the Society’s SEC Practice Committee have expressed concerns that the learning curve could place an undue burden on smaller filers, who wouldn’t have a support staff available to handle the tagging requirements.
“We agree that the 500 largest filers who are required to provide interactive data for filings on or after Dec. 15, 2008 should be able to do so,” the Society wrote to the SEC in a July comment letter, primarily drafted by Robert E. Sohr, a member of the Society’s SEC Practice Committee and prior Society director.
“The required mapping, the definition of ‘extension’ taxonomies, the tagging of data and the reviewing and submitting processes should be within the typical skill set of the staff of the largest filers.
“We are concerned, however, about the capabilities of the staffs of other, smaller filers to deal with the XBRL requirements,” the letter continued. “We encourage the Commission to monitor the initial filing process for the largest filers to identify any problems or concerns that may indicate that either the Dec. 15, 2009 or 2010 deadlines may not be realistic,” stated the comment letter, drafted in response to the SEC’s proposed rule.
The Society recommended that the SEC allow small filers with less than a combined $50 million of public float and public debt outstanding be permitted to opt out, making the use of XBRL voluntary for that group of filers.
“The Commission expects that software and third-party services will emerge to meet the needs to smaller filers; we also expect such a market to develop,” according to the Society’s comment letter, adding that the SEC should monitor those developments to ensure that smaller filers are able to obtain help at a reasonable cost.
One of the biggest controversies surrounding interactive data tags, Moyer said, is the potential that someone could alter small pieces of information to change the overall result of a financial report.
He said XBRL should make that less, not more, likely. The key, he said, is automation. Instead of focusing on every detail, he said only “exceptions” will need scrutiny. He said the audit process for financials will be similar to audit testing for internal controls.
“Ultimately, this is going to eliminate 80 percent of the need for assurance,” Moyer said.
Fang said he believes the biggest XBRL hurdle may be the mindset of management at some companies.
“If the CEO understands that this project is important, enough, efforts will be [made] to achieve the goals,” Fang said.
Some, including Deepak Doshi, a member of the Society’s Financial Accounting Standards Committee, are less concerned.
“I don’t think any new database would be that challenging in terms of learning,” he said, especially for those already familiar with the complicated structure of U.S. generally accepted accounting Principles (GAAP). Doshi said he is excited by the research possibilities of interactive data tags.
Parallel Lines
The transition to filing in XBRL is almost running in tandem with the SEC’s efforts to replace U.S. GAAP with international financial reporting standards (IFRS) with the U.S. generally accepted accounting principles (GAAP).
The SEC on Wednesday
voted unanimously to a proposed ‘roadmap’ that could lead
to all U.S. companies being required to file in IFRS by 2016. The SEC
also proposed to allow approximately 110 United States companies that
met a certain criteria, to be eligible to file in IFRS by the end of
next year for their 2010 filings.
At the Wednesday SEC meeting, Cox framed a possible switch to IFRS and
to XBRL as creating a global business language that anyone can have
access to.
“The same way IFRS might make financial statements” easier to compare and understand for investors, Cox said “data tags could allow any investor to read financial statements in IFRS in their own language.”
With all of these changes in the works, “what we’re doing right now is not going to be recognizable five years from now,” said William M. Stocker III, chair of the International Accounting and Auditing Committee. "[The learning curve] is a concern, but like anything new, it will eventually be digested and enough people will know it."
Cox announced last September that the work on U.S. GAAP data tags had been completed. But since the SEC also seems confident that U.S. GAAP will be replaced with IFRS, why bother spending so much time and money on tagging data that will become obsolete?
“There is talk of international convergence, but that is five or six years down the line,” Rechtman said. “There’s still a lot of opportunity to use XBRL for GAAP. XBRL will be able to map one type of GAAP to another. It’s fairly seamless.”
And, said Howard Glassman, a member of the Society’s Information Technology Committee, the SEC has to ensure everyone will be able to file properly during the transition.
“Given the time needed to move to IFRS, and given that certain firms may not abandon GAAP, the SEC must make some provision reporting GAAP to the new IDEA system,” he said.
“There’s
nothing saying that the labels for IFRS and U.S. GAAP can’t be
the same,” noted Moyer. “I do expect there will be additional
information reported in the United States though—it’s one
of the only countries in the world with an EDGAR system.”
Moyer added that the U.S. is home to the world’s most transparent
marketplace and that investors have come to depend on the U.S.’s
filing system for additional financial information.
“I believe the changes are both right and necessary,” said Fang. “Until we reach the final stage, we need to harmonize with IFRS.”
Melissa Hoffmann Lajara, Associate Editor, can be reached at mlajara@nysscpa.org.
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