Tag You're It! Getting Ready for the XBRL Mandate 

    by J. Louis Matherne, CPA 

    Getting Ready for the XBRL Mandate

    Calculator, pen and paper for XBRL MandateMost readers who are already familiar with XBRL (eXtensible Business Reporting Language) have, at the very least, a basic understanding of how it works and its purpose. Anyone more knowledgeable is aware of the SEC’s support for XBRL with the Commission’s creation of the XBRL voluntary filer program, funding of the current US GAAP taxonomy v1.0, and release of the proposed rule Interactive Data to Improve Financial Reporting on May 30, 2008.

    [FROM THE PROPOSED RULE]

    As proposed, “The rules would apply to domestic and foreign public companies that prepare their financial statements in accordance with generally accepted accounting principles as used in the United States (U.S. GAAP), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB). Companies would provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL).”  

    This requirement would apply beginning with fiscal periods ending on or after December 15, 2008 for public companies with a worldwide public common equity float above $5 billion. All other large accelerated filers would be subject to the same requirements one year later and all remaining filers one year further out. As proposed, all filers would be in the program in three years.

    There are two stages for each filer: 

    1. In the first year, all financial statement concepts will be tagged, and all disclosures and financial statement schedules would be tagged individually as “blocks of text.” This is a feature of the US GAAP Taxonomies v1.0 that allows the filer to use a single taxonomy element, called a Text Block, to tag an entire disclosure.
    2. After a year of such tagging, a filer would also be required to provide detail tagging for all disclosures and financial statement schedules. This includes, among other areas, tagging each significant accounting policy within the significant accounting policy’s footnote as a single block of text.
    If all of this is news, particularly if you work in, or consult with, public companies, a crash course in XBRL is recommended! For more information, visit the XBRL US Web site, as well as the SEC’s Web site for information on the proposed rule.

    The Time to Act is NOW
    For a public company with a market cap over $5 billion and a calendar-year filing, don’t walk, RUN, to furnish your 3 rd quarter 10-Q filing using XBRL in the voluntary filing program. Registrants with a lower market cap have a little more time, but should use that grace period to get started now.

    The annual 10-K or the first mandated XBRL filing is not an ideal candidate for a company’s first XBRL filing. Creating an XBRL-formatted financial statement requires some practice, and practicing on a large document or an official filing is inefficient at best. It runs the risk of delays and cost overruns. While using XBRL becomes much easier after the first time, there is a learning curve with the work done up front.

    One voluntary filing program participant reported it took 100 hours and more than 30 days to get the company’s first Q properly set up and furnished to the SEC by way of the voluntary filing program. About 18 months later, the entire process took the company less than two hours and the XBRL-formatted report was furnished within two hours of the official filing. This isn’t something a company would want to add on top of its current 10K filing requirements if it has not gone through this before.

    It’s not About the Technology: The Focus is on the Reporting
    Contrary to what some people think, XBRL isn’t really about technology. There certainly is a technology component, but it is just the enabler. Unfortunately, the technology can obscure the true nature of XBRL and lead to its quick dismissal as just “technology.” Instead, the most important part for the preparer is right up front in the process – and it is all about financial reporting.

    As such, the focus of this article isn’t on the technology, but the immediate considerations to get a company quickly up to speed while assuring an effective implementation that gets the reporting “correct” with XBRL formatting. XBRL US created a Preparers Guide that can answer the more detailed questions.   It is available online.   

    What Management Should do Now:

    Create an XBRL project cross-functional team.
    Appoint a project leader from the external reporting team, and make the external reporting function responsible for implementation. While the team should be cross-functional, including the IT function among others, this process is about financial reporting and should reside in accounting. Management should treat this just like any other SEC filing because management will most likely be required to sign off on the XBRL-formatted report.

    Create the financial statement to taxonomy mapping as soon as possible. A company’s financial statements can be mapped to the XBRL taxonomies regardless of the ultimate process or tools used for encoding the XBRL documents for filing. Given the overall size of the taxonomies (12,000+ elements), finding the correct elements for your financial statement line items can take a bit of time. However, this work can be done any time (the earlier the better) and is largely independent of the balance of the work.

    While it is possible to outsource much of the XBRL document creation work, it is usually more effective to keep the mapping step internal. This is where the reporting is determined and contains management’s accounting judgment. If management chooses to outsource the mapping, it will need to provide for a quality assurance review. Again, this isn’t time dependent. This mapping can be done now and used with subsequent filings, from quarter to quarter and year to year, only changing it for new or modified disclosures.

    Determine one of the More Critical Decision Points: To Keep the Work Internal or Outsource. As in any “build versus buy” decision, there are several questions to consider. Their importance will vary from company to company, but in general, more “no” answers mean the company is less ready to get this done on its own in a short period of time. The questions include:

    • Has the company previously used XBRL as part of the voluntary filing program or as an independent exercise?
    • What is the company’s timing? Will it have time to get up to speed or is it under pressure to get the process done now? 
    •  Does the company have the required skills in house to complete the XBRL formatted statements? Creating an XBRL-formatted document is largely about financial reporting, but there are specific XBRL skills required for several of the steps.
    • Has the addition of this new report been addressed in the company’s current reporting processes and controls? Will it be integrated or run in parallel?
    • Were XBRL software tools selected? What software will the company use to create the XBRL formatted documents?

    Contrary to what is sometimes reported, creating an XBRL-formatted report is not nearly so difficult and gets considerably easier with practice – and as the state of the art for XBRL tools improve. Portions of the XBRL process will be very familiar to CPAs because mapping the financial statements to taxonomy elements is similar to mapping a company’s trial balance to a workpaper or tax preparation application’s chart of accounts. However, the process of creating the company extension taxonomy and, to a lesser extent, the actual XBRL encoded document for filing, is much less familiar and may be a good candidate for outsourcing.

    If the company decides to outsource, there are many organizations and individuals prepared to assist. And, as soon as the SEC releases the final rule (expected to be before the end of 2008) there undoubtedly will be more service providers in the market. Likely candidates are financial publishers, filing agents, accounting firms and boutique firms/individuals who focus on these services. Visit the XBRL vendors page for a comprehensive listing of XBRL products and service providers.

    Considerations for Selecting an XBRL Service Provider

    In all cases, management should get satisfactory answers to the following questions:

    • Does the service provider have sufficient accounting knowledge and experience with the US GAAP taxonomies to make the initial mapping selections?
    • If mapping the financial statements is kept in house, the remainder of the effort is largely IT technical. On the other hand, if management expects the third party to “preselect” the tags and perform the mapping (remember, management is still responsible for this selection), the service provider will need sufficient accounting knowledge and experience with the US GAAP taxonomies to make these initial selections. 
    • How much experience does the service provider have creating XBRL-formatted financial statements?
      Expectations will need to be lowered a notch or two. The level of experience for most providers is relatively low compared to more traditional financial reporting services. Be cautious of service providers with little to no XBRL history.
    • What XBRL software does the service provider use and does it generate fully compliant XBRL-formatted reports?
      Given the youth of XBRL, software solutions are still developing and their results can be uneven. From an outsourcing perspective, the company will have less concern about the software used and more concern regarding whether the XBRL formatted report is fully XBRL compliant, and can be displayed and read in the same manner by multiple XBRL applications. After all, XBRL is a standard that should make this happen, but it is not always the case.

     


    The XBRL Document Creation Workflow

    Here are the high-level steps for creating a company’s XBRL-formatted financial statements regardless of who does what or the software application selected. With the exception of the validate step, these steps mirror the workflow. Validation should be done early and often to avoid compounding errors with more errors.
    Download XBRL Document Process Flowchart

    Map the company financials to the appropriate taxonomy element.
    From an accounting perspective, this is the most important step in the workflow; it includes the accounting judgment. At the same time, it is the least IT technical step, and will be the most familiar process to CPAs. This is the process of finding (or creating) the best match in the taxonomy for each concept in the financial statements using the accountant’s hammer – the spreadsheet. This step should not be delegated to someone outside of the accounting/external reporting team without proper quality assurance in place.

    Create the company extension taxonomy.
     The company extension taxonomy builds on the US GAAP taxonomies to meet the company’s specific reporting requirements. It is an XBRL myth that creating an XBRL extension is a bad thing. The reality is that all companies filing with the SEC will need to create an extension, if for no other reason then to include their company name. Of course, there are other critical reasons for creating extensions, from the least impactful – creating new labels or modifying the relationship of concepts in the taxonomy – to the more severe: adding new elements. When done, this custom taxonomy will accommodate the reporting requirements of the registrant while conforming as close as possible to the US GAAP Taxonomies v1.0.

    Tag the financial statements using the mapping and extension taxonomy.
    Once the extension is properly documented and created, the next step is tagging financial statement concepts with the matching taxonomy element. This step is relatively straightforward, the better job done creating the extension, the easier this step will be. There are several different ways provided by XBRL software vendors to perform the mapping, with some more automated then others. In all cases, the net result is tagging the financial statement fact value with the taxonomy element for each period included in the report. Once done, this association is in place as long as needed or when reporting requirements change for this concept.

    Validate – perform early, perform often.
    In general, XBRL applications provide facilities for making sure the extension taxonomy, tagging and final report conform to XBRL - established requirements. Validation provides some assurance that the XBRL-formatted document conforms to certain modeling and style guide rules. Validation can also perform mathematical validation checks that are available in the taxonomy. However, these validations can’t tell you if the accounting is correct or properly reported. This will continue to require the expert eye of the CPA.

    Generate the XBRL-formatted report.
    Once satisfied that the tagging is complete and validates successfully, the XBRL-formatted report can be generated. This also is referred to in the XBRL world as an “Instance Document.” The Instance Document is the XBRL-encoded document designed for computer-to-computer application exchange. At this point, the user should also generate a readable version for human consumption and review.

    File the report.

    The company is now ready to file with the SEC, following the Commission’s required processes as documented in the SEC EDGAR filer’s manual.

     

     

     

     

     

     




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