July 14, 2017
Extensible Business Reporting Language is starting to become more widely used, thanks to the SEC’s rules requiring the use of XBRL in financial filings in recent years and a new rule requiring XBRL for foreign issuers.
The Securities and Exchange Commission began requiring the largest public companies to file their financial statements using XBRL in 2009 and phased in the requirements for smaller issuers over the next two years. XBRL technology uses a data-tagging format that is supposed to make it easier for investors and analysts to compare financial information across companies and industries. Problems with the technology and the inconsistency of the tags used by companies have limited XBRL’s usefulness to many investors, however.
The rules now go beyond U.S. companies that file their financials in U.S. GAAP. In March the SEC mandated that foreign private issuers that prepare financials in accordance with International Financial Reporting Standards must submit the financials in XBRL format for financial periods ending on or after Dec. 15, 2017. Also in March, the SEC proposed a rule to require companies and mutual funds to use Inline XBRL, a more usable version of XBRL in their operating company financial statement information and mutual fund risk/return summaries (see SEC proposes switch to Inline XBRL).
XBRL technology providers are working on making the technology more widespread and consistent. Lou Rohman, vice president of XBRL services at Merrill Corporation, was appointed last month to serve as chairman of the XBRL US Data Quality Committee with the goal of improving the filings.
“The group has issued three sets of rules now and approved them,” he said. “Now our focus is going to go into topical areas of disclosures, such as the cash flow statement and stock-based compensation disclosures. We’re focusing on how we can get people to tag those consistently and do it error free. We’ll provide rules and guidance. Then the big challenge is to get every filer in the SEC to run the rules and use the guidance. Because the rules are free of charge, we expect that isn’t going to be that difficult.”
He believes the quality of the XBRL filings has been improving but still isn’t ideal.
“There are still errors,” said Rohman. “Our data quality rules that we’ve issued so far have significantly improved the quality of XBRL, but it’s still not where it could or should be. When you mix that with the fact that there’s increasing use of XBRL by consumers, which has increased quite a bit in the last two years, you can see that there is definitely a need for the Data Quality Committee because filers themselves are going to be getting in trouble if they’re filing bad quality now that consumers are using XBRL. The other side of that is consumers aren’t going to get what they need if the quality isn’t there.”
The SEC’s new IFRS requirements are expected to widen the usage of XBRL. The mandate requires all IFRS companies to tag not only the primary financial statements but also the detailed amounts in the notes to the financial statements. There’s no phase-in by company size or by what needs to be tagged. The SEC’s 2009 XBRL mandate originally required foreign companies that use IFRS and trade on U.S. markets to submit XBRL filings, but only after an IFRS Taxonomy was approved by the SEC. The approval of the taxonomy was considered by many in the XBRL community to be long overdue. When the SEC finally announced approval of the taxonomy this past March, that move set the mandate in motion. IFRS companies that file with the SEC can do much of the XBRL tagging work prior to year-end, which will relieve the amount of work they need to do during the hectic filing period.
“The foreign private issuers that use IFRS will have to now submit XBRL when they submit their financial statements,” said Rohman. “So far they haven’t been required to, but now the SEC is mandating it.”
XBRL usage has also been advancing in Europe. At the XBRL Europe conference in Frankfurt, Germany, last month, the European Securities and Markets Authority provided further details on the European Union’s upcoming XBRL mandate for EU-listed companies. The mandate, which begins in 2020, initially requires XBRL for consolidated annual reports prepared in accordance with IFRS. The requirement is expected to affect approximately 5,300 companies.
“On June 6 of this year they had a big meeting in Europe that I was at, and they laid out all their details on the EU’s upcoming XBRL update,” said Rohman. “That’s for any EU-listed company that does their financials in IFRS. XBRL is here to stay. It’s advancing, and therefore the quality of the XBRL has to meet that advancement.”
The Financial Accounting Standards Board issued an Invitation to Comment on improving the efficiency and effectiveness of the U.S. GAAP Taxonomy. The public comment period ended last month and FASB is holding a roundtable meeting this month to discuss the feedback it received.
“In order to increase the effectiveness of the taxonomy, they issued an Invitation to Comment and that period expired on June 15, but now they’re holding a roundtable on July 18 for certain active members to come in and talk to them about how they can better and more efficiently and effectively provide the taxonomy to the filers,” said Rohman.
The SEC’s proposal for Inline XBRL could potentially expand the usability of XBRL for auditors and investors. “It’s not a final rule,” Rohman cautioned. “It’s still being discussed. The interesting part about that is the audit requirement. The paper-based financial statements and the XBRL-based ones were separate, so the auditors audited the traditional HTML paper-based financials and they would say we have not touched the XBRL. Now the two are combined into one document, so the auditors in some respect have to say, ‘I audited this piece but not that piece of the same financial statement document,’ which is kind of odd to see. We’re watching that to see if there will ever be an audit requirement for XBRL tagging. Technically the legal liability for XBRL is the same as the legal liability for traditional paper-based financial statements that are issued.”
Inline XBRL promises to provide more flexibility for users of financial statements if it’s approved. “It’s a little bit easier to review the XBRL because you’re looking directly at the financial statements that you’re used to seeing,” said Rohman. “That is the potential because it’s now one combined document, but it’s still a proposed rule. It hasn’t been passed by the SEC.”