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Tuesday, November 1, 2016

Is XBRL Reporting the Wave of the Future?


Public companies are required to submit regulatory filings using eXtensible Business Reporting Language (XBRL). XBRL is a machine-readable reporting format intended to make financial statements more useful to researchers, regulators and investors. It has the potential to increase the speed, accuracy and usability of financial disclosure—and eventually reduce costs. But the U.S. market has been slow to adopt the use of this type of interactive data.

In recent years, the Financial Accounting Standards Board (FASB) has updated its financial reporting taxonomy under U.S. Generally Accepted Accounting Principles (GAAP) to make XBRL more user-friendly. In addition, Congress is considering a bill that would require U.S. financial regulatory agencies to collect financial regulatory filings electronically, using only standardized data. If the bill becomes law, it could mark a historic turning point in U.S. financial reporting.

Understanding XBRL
XBRL is an interactive data format that allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. The use of standardized interactive data makes financial information easier for investors to analyze and assists in automating regulatory filings and business information processing.  

Public companies were required to submit regulatory filings tagged in XBRL by the SEC’s adoption of Release No. 33-9002, Interactive Data to Improve Financial Reporting, in 2009. But they’re also required to continue reporting with PDF documents. PDFs are more familiar to financial statement users and, therefore, tend to be regarded as the official version that most analysts and investors use.

Updating the XBRL Taxonomy
Following the SEC’s decision to mandate the use of XBRL tags by public companies, the FASB used its annual updates to respond to the financial reporting practices companies employed as they adopted XBRL. More recently, in 2014, the FASB began focusing its efforts on simplifying the XBRL taxonomy.

This taxonomy is a list of computer-readable tags in XBRL that allows companies to format the data in their financial statements and footnote disclosures. The tags allow computers to search for and process data so that it’s more easily analyzed. The 2014 project focused on cutting tags that were lightly used or redundant and removing inconsistencies within the taxonomy.

In addition to continuing to make tags as meaningful and consistent as possible, the 2016 version of the taxonomy made revisions to reflect the adoption of the 17 Accounting Standards Updates (ASUs) published in 2015. In September, the FASB released the proposed 2017 version of its financial reporting taxonomy for public comment. The 2017 version includes changes from recent amendments to U.S. GAAP, such as ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), and ASU No. 2016-02, Leases (Topic 842).

The FASB plans to hold a webinar on October 4 led by the FASB’s chief of taxonomy development and other staff members to review the proposed taxonomy. Comments on the proposal are due by October 31. The FASB wants public companies, software suppliers and technology providers to use the comment period to familiarize themselves with the proposed changes.

Following Recent Proposals
In addition, Congress is considering legislation, currently known as the Financial Transparency Act, that would require all regulatory bodies to replace document-based reporting with interactive-data reporting. Proponents of the bill say it will bring transparency, consistency and accountability to the public markets.

Currently, XBRL is the only choice in the marketplace for interactive data. The bill would essentially require the eight major U.S. financial regulatory agencies to adopt consistent data fields and formats for information they already collect under existing securities, commodities and banking laws.

Moreover, in August, SEC Chair Mary Jo White announced that the SEC will consider mandating “inline XBRL,” which embeds interactive data directly into financial statements. Currently, most public companies submit separate exhibits with regulatory filings called “XBRL Instance Documents.” The SEC said the two-stage financial statement process contributes to tagging errors and other data quality problems. In June 2016, the SEC began allowing companies to voluntarily use inline XBRL, but voluntary use of inline XBRL expires in March 2020.

“Inline XBRL could decrease filing preparation costs, improve the quality of structured data, and by improving data quality, increase the use of XBRL data by investors and other market participants,” White wrote in response to a letter from Senator Mark Warner, who sits on the Senate Banking Committee.

If the SEC requires the use of inline XBRL, the effective date of the changes may not be for several years. In the meantime, the voluntary period of inline XBRL filing gives the SEC time to evaluate its usefulness, consider exceptions, and resolve technological and practical issues before mandating its use—or abandoning the concept.

Finding Outside Help
The use of XBRL is slowly gaining traction, but the guidance is constantly evolving with changes in financial reporting and technology. For help understanding and complying with the latest requirements, consult with your CPA advisors.

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