For public companies, XBRL has arrived. For other financial organizations, the journey may just be beginning. Every...
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once in a while an XML sibling hits the public scene in a dramatic fashion - XBRL is one such case. SearchSOA contributor Alan Earls recently spoke with an expert on the ways and means of XBRL. Gary Purnhagen is director of compliance services at BusinessWire.com. He offers context and advice for those who need to embrace XBRL.
SearchSOA.com: How and why was XBRL created?
Gary Purnhagen: XBRL came about through discussions in the late 1990s between some accountants and technologists looking at what they referred to as the business reporting supply chain. If you think about that supply chain, it is like any other, with multiple processes and a variety of participants.
So, if you think about a major retailer, they generate financial information at the cash register, it goes through a series of internal financial reporting and gets aggregated and eventually makes its way into reports being submitted to the SEC. All along the way, not only are there various departments in the company, there are partners like auditors and banks and so on. So there are a lot of different software packages being used in the movement and analysis and adding information.
At the current state, there are a lot of different software packages each with their own data format, which requires constant reformatting. That is a speed bump, if you will, in terms of moving information. Now, the SEC is receiving 10K and 10Q forms electronically through the EDGAR system. But what they are getting is in freeform HTML, and it doesn’t allow any technology to be applied in the analysis of the contents. Looking at this problem it was decided that it should be possible to apply a form of tagging similar to XML. And, in fact, XBRL is just a derivative of XML for business reporting.
Since financials are submitted in US Generally Accepted Accounting Principles (GAAP) format, the idea was that they would create accounting-specific features (with comparable efforts for standards in Europe and Japan.
Another driver is the fact that markets are demanding more and more real time information. The SEC is acting as a champion and is pushing for fast-paced adoption. It began in 2009. And this year, all remaining companies, including smaller reporting companies and even foreign private issuers, will be required to submit XBRL exhibits so that by the end of the year all will be submitting.
For each company there is a two-year phase in. In a financial statement you have income, balance sheet, cash flow, shareholder equity – those are the things that need to be consolidated and tagged. Then there are footnotes. For the first 12 months, they only need to identify the foot notes. Later, the SEC requires that the details within the footnotes be tagged, which can increase the amount of information being tagged by 600 percent.
There are rumors that the SEC will back off of that requirement, especially for smaller companies. But for now it is only a rumor.
How do you use XBRL at BusinessWire?
Purnhagen: Businesswire is a disseminator of business information – disclosure information for companies submitting press releases and earnings releases through the Web, and also regulators. So, our primary role in XBRL today is to assist public companies in preparing for and fulfilling SEC mandates. For companies this is an enormous effort.
I speak to executives everyday – probably 600 in the last 12 months. A consistent message I get with smaller companies is that this is increasing the cost of doing business and being public. There is no short-term benefit for those companies.
I can say that down the road it will make it easier for analysts to cover those companies. At present, analysts are only covering about 20 percent of the companies out there. The rest are under-covered. So, if I am the head of a company that wants to attract investment, this is a positive development.
Unfortunately, the tools don’t exist today but they will be the first steps toward creating a compelling enough database. There will be plenty of smart developers and others in this space that will take advantage of this [way of structuring] data and will make the tools to allow small investors to cast a wider net in terms of finding companies that fit their personal criteria. Short term, no one is seeing that.
A North Carolina State University study looked at a pilot SEC filing program and found a high level of errors. It seemed worrisome, is XBRL really ready for prime time?
Purnhagen: The errors were in failing to adhere to the XBRL language structure in terms of formatting and other things. Unfortunately, XBRL is complicated and what we were finding is the SEC has lowered the bar in terms of the quality of the filings coming in because they want to get the filing community comfortable with the process. It is difficult but they would have had a PR nightmare if they had actually enforced the published quality standard. Many of the filings would have been rejected. There are errors and right now ensuring quality is a manual process.