When reporting financials in XBRL, companies need to take responsibility by documenting the reasons items are tagged the way they are and allocating ample time for management review—even if they outsource the data tagging to a third party, according to panelists at the 2009 XBRL US National Conference that took place in New York this week.
Approximately 470 companies have filed their financial reports in XBRL (eXtensible Business Reporting Language)—a standards-based way to communicate business and financial information to investors and other stakeholders. Mandatory filing began for the largest U.S. public companies and foreign private issuers listed with the SEC with fiscal periods ending on or after June 15, 2009, and, as expected during any transition period, some common errors emerged in preliminary submissions.
Representatives from XBRL US at the conference said they plan to release a set of approximately 3,000 “checks” that public company preparers can use to identify common errors that occur in XBRL-formatted financial statements such as incorrect signs and line items that shouldn’t be included together. This set of data consistency checks, which is expected to ultimately help make XBRL data more consistent and better quality for downstream users, will be made available in the first quarter of 2010.
Many of the XBRL filing companies outsourced the work on the first and second round of filings, which panelists said could be useful for helping them get their arms around the data. Where some of them went wrong was in their failure to plan and document their processes so they could be consistent and accurate when filing in the future, panelists said, adding that one of the biggest problems they saw was a disconnect between the filing team and the people who had to give the final stamp of approval.
“No matter whether they were insourcing or outsourcing, the review function got missed along the way. It didn’t get blessed up the chain early enough and got reviewed a day or so before filing. That is a problem with the process,” said Lou Rohman, director of XBRL services for Merrill Corp. “If you’re the financial analyst or manager of financial reporting, not only should you make sure it’s prepared, but schedule someone to approve it before the 11th hour.”
Moving forward, companies must concentrate on documenting their processes, said Yossef Newman, an audit director and global project leader for XBRL at Deloitte LLP. They should make checklists of things they need to do before hitting “Submit” and why, he said.
“Documentation is the job and the role of the company that’s filing—don’t leave it to your filing agent or your auditors,” Rohman said. He saw people battle internally on the second round of filing about how to tag certain items because they didn’t recall why they had done it the way they did the first time. Had they written down their reasons initially, that wouldn’t have happened, he said.
Preparation and Training Time
Typically, companies take between 30 and 50 hours to complete their first-year submissions in XBRL, with about 10% of companies taking less than 10 hours and 10% taking more than 80 hours, according to Paul Penler, executive director of assurance services for Ernst & Young. In year two, when companies will be required to detail tag footnotes, they might expect the process to take between 200 and 250 hours if the company does it itself or with a filing agent, he said.
“Plan, plan, plan. That’s what’s most important throughout the process,” Penler said. “Allocate the roles of people internally and realize you’re modifying your financial reporting process.”
Even when companies decide to continue outsourcing, the most critical thing to do up front is to lay out the responsibilities of the company and the filer, said Eric E. Cohen, XBRL global technical leader for PricewaterhouseCoopers.
“Inquire about the different steps (outsourcers) take. Those are all internal controls,” Cohen said.
Training time should be planned regardless of whether companies are insourcing or outsourcing XBRL tagging to determine how those companies will perform quality checks, said Michael Ohata, managing director of advisory services for KPMG.
“Think of tagging as a mapping exercise. It’s the association of the facts in your Q and K with the appropriate tag in the (XBRL) taxonomy,” Ohata said. “It’s understanding what’s the process, set of controls and support documents the company puts in place as they create the XBRL instance document.”
Companies need to focus on “judgment,” Newman added.
“Make sure you take the time to understand the taxonomy and establish and line it up with your financial statements,” he said. “When you start splitting hairs, there may be two answers people may differ on. Document reasons for your decisions.”
Companies shouldn’t think of reporting in XBRL as a complete shift from what they are accustomed to, Newman said.
“If you put your arms around it, it’s not that different than what you’re already doing,” he said. “The basics are still the basics—you want to make sure all the numbers in point A get to point B. You can do that in XBRL.”
That being said, if preparers want to improve the quality of submissions, they need to take ownership and understand the process, which doesn’t necessarily equate to in-depth technological requirements, Newman added.
Quality is key, but companies shouldn’t focus exclusively on how their reports will render for visual purposes, panelists said.
“So many companies got hung up on it and it became a glitch in the system. XBRL is about capturing data,” Rohman said.
Some clients have asked him whether they could change things in XBRL for rendering purposes, which he said is definitely not the way to go: “Don’t pollute your XBRL to make the rendering look pretty,” he said.
To help with this issue, Penler suggests that companies developing a first draft of a filing document load it to the SEC’s private previewer tool to see what it looks like and avoid any surprises once it’s made public.
Still, that should not be the focal point, Newman said.
“Don’t get hung up on the way it looks,” he said. “Focus on the data and getting it right.”