why xbrl - preparing for the future of your business

Why XBRL: Preparing for the Future of Your Business

XBRL for Today and Beyond

2

Two business trends have contributed to the development of Extensible Business Reporting Language (XBRL) requirements: an ever growing amount of data produced in operations and the evolution of technology. However, the two are not mutually exclusive. As companies have adopted more technology solutions to solve business issues, the result has been a growing amount of data to collect, store, analyze and drive business decisions. Much of this has been laid out as a case for the internal use of business intelligence, but it has also gained traction for external and statutory reporting. So much so that all public companies are required to file their financial data with XBRL tagging by 2011.

XBRL Filing Requirements While other countries have required XBRL filings for years, the Security Exchange Commission (SEC) in the United States delivered a final rule in April 2009 based on its May 2008 initial release requiring XBRL reporting from three groups beginning in 2009.

1) Public Company Reporting SEC rulings require all public companies with worldwide public float greater than $5 billion to comply for the first reporting period ending after June 15th 2009; all other large accelerated filers to comply for the first reporting period ending after June 15th 2010; and all other public companies must comply for reporting periods ending after June 15th 2011.

In year one of compliance, the income statement, cash flow statement and balance sheet are required to be tagged in the appropriate XBRL format along with “block” footnote tagging (not the data specific details, but rather the whole footnote). In the following years, footnotes must be tagged in detail.

June 2009 June 2010 June 2011 June 2012 2013+

>$5B float Financials

Footnote block tagging

Detailed footnote tagging

All other large accelerated

filers

Financials



All other public companies

Financials



2) Risk Return Summary Portion of Mutual Fund Prospectus Mutual funds are required to publish the risk return summary portion of their prospectuses in XBRL

format beginning January 1st 2011.

3) Credit Rating Agencies All ratings actions must be reported in XBRL format beginning in August 2009 by credit rating agencies.


3

In addition, the SEC requires any “company required to provide financial statements in interactive data format to the Commission also will be required to post those financial statements in interactive data format on its corporate web site not later than the end of the calendar day it filed or was required to file the related report or registration statement with the Commission, whichever is earlier, unless a grace period is available. The company must keep the interactive data posted for at least twelve months and cannot comply with the posting requirement [simply] by including a hyperlink to the SEC’s web site.”

What is XBRL? XBRL is based on Extensible Markup Language (XML) and was developed as a tool for standardizing financial reporting information across countries, industries and companies. Instead of treating financial data as single unit of text, XBRL creates a unique identifier for each data point which is in turn able to be read and interpreted by software. Further, XBRL streamlines the data collection process by removing much of the human element from gathering, identifying, consolidating and rekeying financial information and transfers by uploading and consolidating financial data through software applications. Additionally, because XBRL uses a standard format and structure, it enables faster financial data comparison and consolidation for stakeholders.

To realize these benefits, an XBRL document “tags” each financial data point within a report with a unique naming convention which can be collected and interpreted by software. By “tagging” we mean that each financial data point is coded with unique identifying tags (like a bar code) that further explain what the data means—this is also known as metadata, or data about the data. The box below shows how a data point might be labeled with XBRL and what the stakeholder would see.

Sample XBRL Code

Code that exists behind the scenes:

<ci:Cash contextRef=’Context 2010’ unitRef=’units – usd’ decimals=’2’> 123456789 <ci:Cash> <ci:Cash contextRef=’Context 2009’ unitRef=’units – usd’ decimals=’2’> 112233445 <ci:Cash>

What the stakeholder sees:

2009 2010 Cash $112,233,445 $123,456,789

In the previous example, the taxonomy for commercial and industrial (CI) companies is being used as denoted by the first two letters (ci) of the “ci:Cash” tag for the cash values, the years are 2010 and 2009, the units are in US dollars, the decimals are accurate to two places, and then the actual cash values are shown. Taxonomies further define the tags for individual data items (such as “operating revenues” or “cash” as in our example above). The taxonomy also defines that cash is a debit balance, is part of the sub-set “current assets” on the balance sheet, and is part of the larger set “total assets.” Luckily, the

It is likely that XBRL use will

only grow from the initial SEC

ruling. As an example, a bill

introduced to Congress by

Rep. Darrell Issa (R-CA) in

May 2009 required the use of

a “standard electronic

database” for Troubled Asset

Relief Program (TARP) funds.


4

XBRL code is not normally viewed, unless desired, and what the stakeholder sees is what one would expect in a standard financial report. The XBRL code behind the scenes ensures that each data point’s context can be reused and is consistent from report to report, increasing report accuracy with minimal confusion.

If the reporting benefits above sound familiar, they should. XBRL’s internal reporting benefits echo many of the benefits associated with business intelligence (BI) and data warehousing (DW)—meaning that the tagged data can be used to augment a company’s internal reporting, consolidations or strategic planning needs. In fact, data submitted to the SEC may only be a small piece of the total data collected and processed with a XBRL tool.

With all its data tagged in XBRL, a company can perform detailed analysis and reporting through multi-dimensional, slicing-and-dicing the data to manage its business at a more granular level. To accomplish this, a company would create its own taxonomy or modify an existing one and integrate its operational data with its financial data to enhance strategic planning and analysis.

Taxonomies: What the Metadata Tags Represent Taxonomies are the dictionaries used by XBRL. Typically, the taxonomy structures are developed by regulatory bodies, such as the SEC, that require financial or data filings electronically. They are then posted on the internet for anyone to use or modify. As might be expected, there are several unique taxonomies depending on the required financial reporting purpose—such as external SEC filing requirements, a quarterly bank loan covenant report or, alternatively, they can be developed for a company’s internal needs.

Importantly, a company is expected to develop its own taxonomy for SEC external reporting requirements. This allows the company to file reports as required by the SEC, but also integrate operational data with its financial data for more consistent and reliable internal reporting and consolidations.

XBRL Activities to Produce a Final Report There are three main activities which are performed to create the end report. Each activity is important and requires greater initial effort than for subsequent report creations.

Document Tagging Tagging the document first requires the appropriate XBRL taxonomy. The initial data tagging is usually a manual drag-and-drop software function connecting data points to defined taxonomy tags. However, future report development can automatically pick up the same tags and, therefore, expedite the reporting process.

Data Validation Once data is tagged, and as with any report creation, there is a function to check and validate the numbers being submitted (i.e., does Assets = Liabilities + Equity?). XBRL software tools can automate these calculations and verify report data quickly and accurately. This validation step is often times a manual, laborious aspect of the report creation process, but highly important. Executives rely on this validation stage to ensure report data is accurate before they affirm and sign off as to their validity.


5

Report Creation (Instance Document) With the data fully tagged and the information validated, the final publishable report can be created in the required format, such as Excel, PDF, HTML or Word. The report is called an instance document.

Why the Need for XBRL? With the overwhelming amount of data available to investors and the challenge to convert that data into useful and actionable information, regulating authorities took it upon themselves to fix the problem. XBRL was designed to address several concerns that create apprehension with financial reporting. By coding financial data with XBRL tags, internal reporting has potential for better controls similar to the effect Sarbanes-Oxley or SOX, particularly sections 302 and 404, had on internal controls and increasing company transparency. Another benefit of XBRL is that companies filing their XBRL financial data create a repeatable report structure which can be leveraged for future reporting needs.

Inefficient, non-repeatable reporting structures cause challenges for stakeholders. The same XBRL source data can be used to populate various report outlets, such as internal, HTML, Electronic Data Gathering (EDGAR), tax, regulatory and investment analyst reporting. Stakeholders gain from the standard XBRL format filing which enables them to extract the data quickly into a consistent, structured file which can then be leveraged for further analysis. This should also reduce the number of errors in statements and boost executive confidence in signing financial statements.

In addition, the XBRL structure provides greater transparency across international borders given that all companies will be required to file financial reports in the XBRL format. XBRL will enhance consumers’ (i.e., investment analysts) ability to pull, consolidate and compare financial data across the organization on a consistent basis.

What Can a Company Use to File in XBRL? Not surprisingly, with XBRL on the table for almost a decade now, there are several software solutions available to facilitate XBRL filing compliance. However there are, essentially, three ways to create XBRL instance documents.

1) Outsource the function In this scenario, the company can send the data to a third party for tagging—many times to its

financial report print house. This may be an appropriate strategy for those companies that currently outsource printing or EDGAR filings activities. However, this approach is repeated from start to finish each time, can be costly (currently about $25,000 per year for simple block footnote tagging and $80,000 per year with detailed footnote tagging), and is still time consuming for a

company’s employees as they work with the outsourcer to ensure the tagging is correct. With this

process, there is also little to no internal knowledge gained because the majority of XBRL tagging aspects are performed outside of the company.

2) Independent software application

This process is similar to option one, but managed internally. Data is collected and tagged later with a third party software but with little change or enhancement to the reporting process. With a low direct cost (about $5,000 - $10,000 for the software), this process may actually prove to be


6

riskier and more costly than other options due to the repeated time commitment required for each filing and more manual, error-prone processes.

3) Integrated software solution

With this solution, the tagging process and application is integrated into either the financial data environment or the reporting tool currently in use. Pricing varies greatly with the size and complexity of the project and should be in the $30,000 - $500,000 range. The tagging can be initiated early in the process so that there is a better link between the tags and the source data. This process reduces the time required for filings. In fact, the Gartner Group estimates that leveraging an integrated XBRL tool can save 30% from the total process time. This type of solution also facilitates better consolidation of data from disparate systems across multiple entities for consistency and repeatability. Other potential solution advantages include the ability to create and modify taxonomies as required, audit the process and data coding, incorporate workflow into the process, build in data validation, and create a more dynamic and robust data compilation.


7

Further Considerations • What are the areas your company is able to leverage XBRL for business reporting?

Internal / external / managerial Additional reporting mediums (paper, web, electronic, etc.)

• What is the capability of your company’s existing technology to meet the desired reporting

capabilities?

• What does the business case justify for up-front and on-going costs and level of effort?

• Beyond the statutory reporting, what are the other areas which may benefit, such as: Management reporting News flashes, public relations pieces GAAP to IFRS Governance risk & compliance (GRC) External & internal audit FERC & eTarrif (effective April 2010) FDA Corporate social responsibility (CSR) Account reconciliation management Internal controls

Summary From our analysis, an integrated solution provides significant cost, time and peace-of-mind advantages over the other two solutions. In addition to creating a more dynamic and efficient reporting environment that meets today’s mandates, integrated XBRL solutions can be designed to scale and adapt more easily with your company’s growing needs while providing greater confidence and ability for executives to manage the business.

For information regarding our performance management capabilities or additional services provided by our consulting team, contact: Jim Cashin Vice President [email protected] 617.241.4694 Dan Wheadon Director [email protected] 617.241.4691 Brian Hill Senior Consultant [email protected] 617.241.4663

Caturano and Company is New England’s largest regional full-service CPA, consulting, and wealth management firm and one of the top 50 CPA firms in the country. The firm is an active member of Baker Tilly International, one of the world’s top ten accounting and business advisory services networks, focused on serving the global needs of growing multi-national enterprises; comprised of 147 independent member firms with 572 offices in 114 countries. Wealth Management services are provided by Caturano Wealth Management LLC, a Registered Investment Advisor wholly owned by Caturano and Company, P.C.

This analysis was authored by Brian Hill. Brian works in Caturano’s Management Consulting practice and leverages his 10 years of expertise in technology and finance to assist Caturano and Company clients with their performance needs. Brian earned his MBA and MS in Corporate Finance from McCallum Graduate School of Business at Bentley University and a BA from Connecticut College.

why xbrl - preparing for the future of your business

Documents