Neal Hannon, who writes regularly for Data Interactive, is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.
 
This is the first installment of a three-part interview.
 
(1) The SEC has yet to publish its final rule for interactive data. But just on the basis of the December 17 meeting, did any of the announced revisions to the proposed rule surprise you? Are there any revisions you’d like to comment on?
 
First, I was not surprised by the six-month delay in the implementation of the rule.  The June 15, 2009, start will give both filers and XBRL software companies time to understand the details of the rule and have a smooth implementation. Second, I was surprised that the SEC chose to delay liability on XBRL filings for two years after a company’s first filing. Correct XBRL filing is not that challenging.  Most companies will get the tagging right the very first time. As always, additional surprises wait in the final rule. I will be particularly interested in what the final rule has to say about company-unique element extensions.
 
(2) On the liability issue, CFO.com reported that “Commissioner Luis Aguilar, a Democrat who joined the SEC earlier this year, criticized the XBRL proposal for sheltering companies when they first begin using the technology from some liability. He called the safeguards "unacceptable."” Do you think Commissioner Aguilar’s fears are legitimate?
 
The roadmap to full XBRL acceptance into the IDEA system is clear. In two years or slightly more, an XBRL filing directly into IDEA will be the most used method to file with the SEC. Companies will quickly adjust to putting every effort, including an audit review, into accurate and timely XBRL filings. The limited liability afforded by the rule will not significantly alter the safeguards surrounding SEC filings, mainly because the present system of EDGAR filings remains, for now, firmly in place.  The same can be said for financial information displayed on Yahoo Finance or MSN Money. Although the data aggregation decisions leading to condensed financial statements can be somewhat suspect, investors have mostly benefited from access to this information.  XBRL filings will be able to expose much more to the investors and should lead to interesting questions concerning the underlying accounting. This is a trade-off I’m willing to live with while we await “prime-time” as filed XBRL.
 
(3) Besides the SEC’s XBRL rule, what other developments in 2008 in the XBRL field do you believe were particularly noteworthy? Was there anything important you believe was not reported or underreported?
 
The biggest underreported story about XBRL in the US is the FDIC. During the recent financial crisis, the almost two years’ worth of quarterly data collected in the XBRL format has given the Treasury Department valuable insight into which financial institutions have suspect holdings. Secretary Paulson is in a much stronger position to make correct bailout allocation decisions because of the landmark work accomplished at the FDIC.  I understand that since the crisis began, the FDIC has expanded the number of questions asked of over 10,000 U.S. banks each quarter. Kudos to the FDIC!
 
Additionally, the worldwide growth of XBRL has been remarkable. The example the Netherlands is setting for the world is not only historic but visionary. Governments all over the world will soon be following their lead by asking how they too can reduce the regulatory burden on corporations by consolidating their requests for data to one coordinated request based in XBRL. The Australian government is attempting the same type of program right now. Anyone serious about reducing the size of our US government should take a hard look at these outstanding examples of win-win.
 
(4) In your presentations, you continually emphasize that, while XBRL can be very technical, it’s really all about the accounting.  Could you explain what you mean by that?
 
Back in late 2001, just after the Enron scandal, I was giving a lecture at the Northern Colorado University about adding XBRL to accounting courses. Mid-lecture, Lynn Turner, former SEC chief accountant under Chairman Arthur Levitt, stopped me cold.  He said that he was a big supporter of XBRL, but I had to promise him one thing. He asked me to never let the technology get ahead of the accounting. In other words, the accounting must be correct or the tagging is worthless. That theme has stuck with me.
 
The underlying accounting in XBRL consists of the standard label, the accounting definition in the label linkbase, and the authoritative literature in the reference linkbase.  I call these items the XBRL accounting triad. This is why the initial mapping from a company’s financial statements to the correct XBRL element is so crucial to getting the accounting right. If a label is chosen to represent management’s accounting intent, but the metadata associated with the element gives investors and the SEC a different signal, the accounting is not correct. In other words, a company can introduce an accounting error into their filings by making a bad choice of XBRL elements.
 
Software programs today will check for compliance to rules such as XML syntax, XBRL structure rules, and the like, but management is responsible for the accounting that goes into the tagging of their financial statements. With limited liability protection in place for two years after the first XBRL filing, this matter will not be super-critical. However, if the accounting in the XBRL filing is not right, it could be misleading. As much as the new XBRL US GAAP 2009 taxonomy has been checked, accounting problems will surface once 500 filers queue up to the EDGAR filing of interactive data.  XBRL US will need to stay on its toes and correct errors on a timely basis.

Written by Bob Schneider     Posted on December 24, 2008

“I think this decision today is much bigger than most people realise” wrote John Turner on CoreFiling’s Insight blog.  Many reveled with Gary Purnhagen (“We will all be better for it”), while others commiserated with Dan Roberts (“It is sad to see such a missed opportunity”).  But everyone seems to agree that the SEC’s 4-1 vote last Wednesday to mandate XBRL for financial reporting marks a major milestone for interactive data.   

Tagging of Notes

One point on which there remains some uncertainty is the tagging of the notes to the financial statements. Rob Blake, who live-blogged the webcast on Bowne’s blog, made these entries:

11:27am  BIG CHANGE #1: DETAIL NOTES TAGGING:  Appears the final rule will back off the detail tagging of the Notes…sounds like only tables in Notes have to be tagged in detail, but not the narratives…very interesting but not unexpected.  Have to see the detail…

11:42am:  Chairman Cox asks for clarity on the detailed notes tagging; refers to it in the entirety as "optional".  I’ll have to go back and read the minutes as I could have sworn there’s still something "more"/different about the Year 2 Notes tagging versus Year 1 Notes tagging.  

Here’s what Mark Green, Senior Special Counsel (RegulatoryPolicy) said in his opening remarks:

The face of the financial statements would be tagged in each filer’s first year of interactive data reporting. The financial statement footnotes and financial statement schedules also would be tagged in each filer’s first year, but in block text only. After the first year of such tagging, a filer also would be required to tag the detailed disclosures within the footnotes and schedules. In a change from the proposal, tagging of narrative disclosures would be permitted but not required.

I think some of the confusion stems from the term “narrative disclosure,” which sounds a lot like “narrative reporting” (which itself means different things to different people). In this context, and given how the SEC used the term in the proposed rule, it would appear that Mr. Green was referring to the text of the notes.

I asked Neal Hannon – who has written on note tagging in depth — what he thought the SEC has in mind. He replied by email:

The SEC has made tagging disclosures "optional.” What I think this means is that block tagging will continue and most of the numbers will be tagged, but that individual lines of narrative in a note because of disclosure requirements will not have to be tagged.  Toothless tiger.   

I think the term “footnotes” itself is unfortunate:  it consigns the critical information they contain to the world of ibid., op.cit., and the unpublished diaries of sixteenth century Venetian noblemen. Maybe if, instead of footnotes, we called them “Vitally important facts that belong on the face of the financial statements, except it would be really, really messy to do that,” then these Rodney Dangerfields of the accounting world would get the respect they deserve.

At any rate, let’s hope publication of the final rule provides clarity on the issue.

Resources  

In case you are doing research on the meeting or just want to read more about it, I’ve put together the following collection of primary and secondary resources. If I missed anybody’s story worth mentioning, I apologize. Please let me know in a Comment and I will add it the list.

In my view, the best coverage was that of Compliance Week (subscription may be required), the FEI Financial Reporting Blog, and the IR Web Report. (Full disclosure: Compliance Week’s Matt Kelly regularly writes guest posts for us and Dominic Jones of IR Web Report has given us an interview; both the FEI FR Blog and IR Web Report have generously sent traffic our way.)

SEC

Chairman Cox’s Statement (Windows Media Player, QuickTime)

Commissioner Aguilar’s Statement

Meeting Announcement

Press Release

Proposed Rule (May 30)

Senior Special Counsel Mark Green’s Opening Remarks

Webcast of Meeting

General Media

AP (Denver Post, Boston Globe, CIO Today, Sci-Tech Today, many others)

The News Tribune This newspaper from Tacoma,Washington – where Charlie Hoffman began working on XBRL — has some of his public reactions to the meeting 

Reuters (InformationWeek,  Advanced Trading, etc.)

Wall Street Journal Coverage was slight and disappointing

Washington Post, Forbes (PaidContent.org)  It’s interesting – and disheartening – that the coverage of these two key media outlets mostly came from a third-party news provider.

I searched the New York Times’s index but did not find a story.

IT and IT/Financial Media

CIO, IT World (IDG News Service) 

IT Business Edge

Mondaq

Nextgov

PC Magazine

SDTimes

Wall Street & Technology

Financial Media

Accounting Web Has info on January 12 webcast for CPAs

Compliance Week (12/18), Compliance Week (12/23) (subscription may be required) The latter article is better.

CFO.com

Journal of Accountancy

PRWeek

Securities Industry News

Web CPA

Financial and Law Blogs

TheCorporateCounsel.net

CPASuccess

FEI Financial Reporting Blog

IR Magazine

IR Web Report 

Shopyield

ValuePlays

XBRL Blogs

CoreFiling’s Insight Blog

Data Interactive (Hitachi’x XBRL Blog) Gary Purnhagen (12/17), Dan Roberts (12/21)

Financial Reporting Using XBRL (Charlie Hoffman’s blog)  BTW, like a lot of blogs (including ours), not every post Charlie writes gets indexed by Google. That’s a shame, because he posts often and, as might be expected, everything he writes is worth reading twice. Check out his recent posts on taxonomies and the SEC’s XBRL Previewer, or, better yet, go to the blog’s home page and keep scrolling. And in honor of the SEC’s adoption of the final rule, it’s well worth (re-)reading Charlie’s “In the beginning…” piece.

JustSystems Dominic Jones called this “a breathless blog post that seemed to drool in anticipation of the new business [the company] will be getting,” but I don’t think it’s nearly that bad.   

Out of the Clouds and into Reality: XBRL for the Business User (Bowne’s blog)

Written by Daniel Roberts     Posted on December 22, 2008

Daniel Roberts is the past Chairman of the XBRL US Steering Committee and a Director of RAAS Consulting Ltd.. Mr. Roberts can be reached by email.

On December 17, the SEC voted 4-1 to implement a final rule for the introduction of XBRL for reporting to the SEC. After a decade of hard work by hundreds, it is sad to see such a missed opportunity at this juncture.

There are four glaring problems with the new rule:

• Litigation relief
• No requirement to have the XBRL version of the financial statement audited
• Voluntary tagging of text in footnotes
• The roll-out schedule

How can this be? It seems sadly lacking, given that Chairman Cox, as recently as November 17, said:

For the SEC as well as for financial regulatory agencies around the world, corporate reporting is not an end in itself, but a means to achieving our missions. Those missions include protecting investors,encouraging capital formation, and promoting healthy markets. Every one of those missions will be better achieved with the widespread adoption and use of interactive data. Interactive data will also make disclosures more useful to investors, and to every market participant.

Only Commissioner Aguilar had the courage to vote against the rule, declaring that this was the first time in history he has seen the SEC weaken protections for investors:

I am not prepared to reduce the level of protection that I believe investors are entitled to. Using new technology to improve disclosure is a good thing — but not when it dilutes investor protection. In these times of market turmoil, investors need to know the SEC is looking out for them.

Let me quickly say that I have always been, and remain, deeply convinced that XBRL can and will revolutionize business reporting, both internal and external, and that XBRL has the ability to deliver incredible efficiencies across the business reporting supply chain. And let me add that, in the long run, the SEC’s action last Wednesday represents a major step forward toward the full implementation of XBRL for financial reporting in the United States.

But for now, the specific inclusion of litigation relief, coupled with identifying the XBRL document as supplementary information and therefore not requiring an audit, makes a mockery of the dream of interactive data. What a boon for analysts and investors: an unaudited subset of a company’s financial information, with no recourse should the company provide erroneous content. In order for the analysts and investors to actually place any confidence in the XBRL, they will still need to refer back to the original, audited, and filed financial information and footnotes.

Those familiar with the technical issues of XBRL — and that is a very small number of people — can list a number of situations that could "in good faith" result in errors in the XBRL that is produced. The SEC’s rule will result in faster, cheaper, more detailed data — and a virtually risk-free environment for the corporate executive who, in these particularly troubled times, decides to engage in financial statement fraud to attempt to influence investors to support the share price. The defense will always be that "a good faith attempt" was made to produce an error-free XBRL version of the financial statements.

Of course, the vast majority of CFOs and CEOs act in good faith to ensure that accurate information is provided to markets and regulators. Sometimes even acting in good faith errors will occur, and the audit process serves as an additional protection for the investor. So while the SEC might not require an audit for interactive data, it is my expectation that the majority of filers will seek assurance over their XBRL-tagged information. I can only say shame on any company that provides such information to the analyst and investor community unaudited.

Next, there is the issue of optional tagging of the textual content of disclosures. So often it is the text of the disclosure that discloses, not the numbers in subsidiary tables. Allowing filers to elect not to tag this text leaves analysts and investors right where they are today, having to sift through HTML or text documents to find the information buried in the text of the disclosures.

Finally, the schedule for implementation is slow enough to mean that all companies will not be providing XBRL-tagged information for analysts and investors until 2012. Peter Wallison, a member of the CIFR (Committee for Improvements to Financial Reporting), said in his dissent to the recommendations of the CIFR that:

…the Committee adopted an extended phase-in that will delay the widespread use of XBRL for financial reporting well into the next decade. I dissented from the Committee’s vote — and am filing this separate statement — because I believe the Committee’s proposed timetable is (i) based on an erroneous assessment of the potential costs of auditor assurance, (ii) applies restrictions on reporting that will be harmful to XBRL and to users, and (iii) unnecessarily delays the date on which XBRL will be available to investors and analysts.

I am confident that the SEC will review and revise the rule, and to be fair, the litigation relief does have a two-year window. But those two years represent a critical time period in which investor trust will need to be re-established for the markets to recover.

Unfortunately,Commissioner Aguilar’s summary statement says it most eloquently:  "It departs from our best traditions,and shackles investors with the risks and costs arising from errors and misstatements in interactive data, even though issuers control the process of preparing the disclosure and are in the best position to ensure its accuracy and reliability."

So Chairman Cox gets the credit for “bringing the system of financial reporting into the 21^st century.” But someone else will have to make it happen.

Written by Gary Purnhagen    Published on December 17, 2008

Gary Purnhagen has more than 20 years’ experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His past experience has included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently the evolving use of XBRL for financial reporting. He is an independent consultant assisting firms in embracing innovation and responding to the SEC’s XBRL mandate..

With just ten business days left in the year, the SEC’s commissioners have finally voted to require XBRL exhibits by a margin of 4 to 1. Even stalwarts like myself were beginning to worry. [Editor’s note: See Gary’s discerning November 4 prediction.] The pundits speculated that, with the recent criticism leveled at the SEC, Chairman Cox would drop his pet project and slip out of town quietly. He has been curiously quiet about XBRL lately, but that was the best approach for a politician working behind the scenes to see this initiative through to rulemaking.

Congratulations Chairman Cox! I have said it before and I will say it one more time: you have been brilliant in championing this global standard in the U.S. We will all be better off for it.

The SEC adopted the rules for both public companies and investment management companies as proposed. There are a few exceptions, most notably the phase-in schedule:

• The first group — large accelerated filers with more than $5 billion in common equity float and filing under U.S. GAAP — must comply for the first fiscal period on or after June 15, 2009. This effectively means that calendar year-end companies will be required to submit interactive exhibits with their June 30, 2009, 10-Q. This is a change from the proposed rule of an effective date of December 15, 2008.

• All other large accelerated filers will have to comply starting one year later, and the remaining filers will have to comply starting one year after that.

• For investment management firms, the effective date for filing the risk/return summaries for prospectuses was pushed back to January 1, 2011.

For public companies, the Voluntary Filing Program (VFP) will end 60 days after the final rule is published. After that, XBRL filings will fall under the final rule requirements. For investment management firms, the VFP will continue past the effective date of January 1, 2011, for the risk/return portion of prospectuses, with financial statements continuing to be allowed and now expanded to include the portfolio holdings for funds.

Another change from the proposed rule is that a company can choose, but is not required, to tag narrative disclosures.

Most watchers of the SEC’s proposed XBRL rules have focused on the impact on 10-Qs, 10-Ks, and 20-Fs. However, the rules state that any time a company is issuing new or updated financials, an interactive exhibit using XBRL is required. This includes transition reports, 8-Ks and 6-Ks with updated financials, and registration statements providing such financials.

XBRL-formatted data will have the same liability as in the VFP, which excludes officer certification and does not require auditor assurance; however, limited liability will be phased out over two years.

Rules regarding Web site posting of the XBRL exhibits, the fact that XBRL exhibits are supplemental to the HTML or ASCII filing, the phase-in approach to tagging footnotes, and the grace periods for first filings remain as proposed.

The provision for limited liability for the first two years was the reason for the one dissenting vote by Commissioner Aguilar. He felt strongly that the SEC should in no way be loosening the liability provisions for filings in the current climate.

Chairman Cox addressed the current financial crisis by stating that XBRL will allow for better transparency to all disclosure filings and specifically cited testing of tagging Asset Backed Securities with XBRL. It was the opinion of a number of SEC commissioners and staff that XBRL could assist in restoring investor confidence. If XBRL had not been in existence before now, this financial crisis would have demanded its invention.

Written by Hugh Wallis     Posted on December 10, 2008

Hugh Wallis has overall technical responsibility for standards development at XBRL International. He became involved with the XBRL Consortium in January 2000 while a software architect at Hyperion Solutions. Mr. Wallis was formerly Chair of the XBRL Specification Working Group, Chair of the XBRL-GL Working Group,and Chair of the XBRL Canada Domain/Taxonomy Working Group. He is a co-editor of the XBRL 2.1 Specification and other XBRL International technical products. Mr. Wallis can be reached by email.

The process of creating technical standards is one that is typically misunderstood by almost everyone — even many of those deeply involved in it. The development of XBRL is no exception to this phenomenon. I hope this post sheds some light on how XBRL gets developed and helps dispel some of the misconceptions about this process.

There are a number of factors at play generating these misconceptions, and probably the most influential is one’s experience with software products. When a commercial company decides to produce and sell a piece of software, they need to bring it to market as fast as possible in order to start generating revenue; they then continue to develop and improve it based upon customer experience and feedback. This means that, following the alpha and beta stages (which are generally incomplete versions that are distributed to early adopters), a first version – Version 1.0 — gets shipped that generally has some of the planned features not implemented. More important, there will usually be a number of known bugs – known to the developer, that is, but not necessarily publicly acknowledged. Then, with some money coming in the door that can be used to fund further development, coupled with actual implementation experience from customers, new versions are created and released on a regular basis.

So the marketplace is told that the 1.0 version is a “finished product” and is generally prepared to accept that at face value. Although the company usually continues to ship versions 1.1, 1.34, 2.0, 3.0 and so on, possibly for many years to come, the act of shipping the 1.0 version was a signal to the market that the product was “ready for prime time” (even if it wasn’t – which, regrettably, is sometimes the case).

Now, let’s contrast this with the process of developing a standard such as XBRL. A critical difference between a piece of software and a standard is that it should be very difficult, if not impossible, to change a standard once it has been RECOMMENDED by the body that promulgates it. The whole idea of a RECOMMENDED standard is to establish a stable environment that all stakeholders can rely on for a long time to come and which software developers can use to go and develop their products. Everyone involved can thus have a reasonable amount of confidence that those products will be able to talk to each other.

As an example, imagine a standard for light bulb fittings had been released (ignore the regional differences among continents with respect to screw thread, voltage, and so on). With this standard in mind, companies had gone out and created lamps, bulbs, and so on, and then it was decided that it should be changed to address some issue that arose during deployment. The huge investment made by many companies and consumers would be wasted and confusion would abound. So the key difference here is that the development of a standard actually comes to an end when it is RECOMMENDED, whereas the development of a piece of software could theoretically continue indefinitely.

It is precisely to avoid this kind of confusion and waste that the standards development process is what it is, even though that may appear slow and bureaucratic to the casual observer. There are, however, a number of parallels to the software development process described earlier that I’ll discuss.

The first time a standard under development is exposed to the public is in what is called a Public Working Draft (PWD). This may be an incomplete draft that might only satisfy some of the requirements and have some features which could be changed or removed altogether. There are generally a series of PWDs as the work proceeds.This is roughly equivalent to the alpha and beta stages in software development. As the PWD process draws to its conclusion, a last call is issued for any comments preparatory to promoting the work to Candidate Recommendation (CR) status.

A CR is the equivalent to a 1.0 version of a software product. It is complete (in respect to addressing all the requirements except those specifically listed as being “at risk”) and should be capable of being implemented by software vendors. This is really the point at which the marketplace should be thinking of adopting it, just as they would probably buy and deploy version 1.0 of new, cool software. Of course, a standards body such as XBRL International is nonprofit and does not generate its revenue from selling the standard; that aspect of the similarity — and the motivation to “ship ASAP, preferably before quarter-end”– does not hold.

At about this time, a call for implementations is made to get actual practical experience with the CR and weed out any issues that could affect stability of the final standard. This is roughly equivalent to getting user feedback on a 1.0 version of software. Additional CRs are generally published to address such feedback (akin to versions 1.2, 1.3, 2.0 etc. of software) and when at least two interoperable implementations are available and proved, it is time to move forward to the last step. This CR process could last quite a long time because it is only by actually implementing the standard, testing it in real life situations, and making necessary adjustments that one can be confident that it can be frozen as a RECOMMENDATION. Software is usually not considered to be “mature” until it has gone through a number of releases; the same applies to a standard, with the key difference being that once you have frozen a standard, it really is frozen.

Finally, the standard achieves RECOMMENDATION status; the only changes that should happen after that are minor errata corrections. If there is much that is more serious than that, then the consortium has not done its job properly.

I hope this has shed some light on how a standard such as XBRL gets created. If you want the detailed rules about the process, feel free to ask me, or, if you are feeling brave, you could even read the process document.

Written by Bob Schneider     Posted on December 6, 2008

Like any other constituency, it’s only natural for the XBRL community to wonder how its mission will be viewed by the incoming Administration and Congress. With that in mind, I have been Googling XBRL with various members of the Obama team, Democratic politicians, and left-of-center think tanks, trying to find names in the new political realm that have expressed an opinion on interactive data.

Thus far the results have been underwhelming. One notable exception is Robert Pozen, the head of the eponymous Pozen Committee and an important Democratic contributor, who has been mentioned as a possible Chairman of the SEC. As demonstrated by his Committee’s work, the discussion paper he drafted, and the interviews he’s given, Mr. Pozen is a solid proponent of XBRL (although  perhaps not as aggressive as some would like).

Besides Mr. Pozen, however, I have found few Democratic names. I did note one analyst at Brookings who, in Congressional testimony back in 2002, said some nice things about XBRL, but that’s been about it.

I didn’t expect to find much. Viewed from a political perspective, the enthusiasm I’ve seen for XBRL has come from the Right (if I can use that very inadequate shorthand). Prominent names include, of course, SEC Chairman Chris Cox; Newt Gingrich; and Peter Wallison at the AEI.

Some of the imbalance simply reflects Republican rule for the past eight years, when XBRL has come of age. An SEC Chairman appointed by a President Gore or Kerry might well have pursued a similar course for interactive data as Mr. Cox, with or without the same high level of enthusiasm.

There are indications of XBRL support among the SEC’s Democratic commissioners. (In an effort to maintain nonpartisanship, no more than three of the SEC’s five Commissioners can belong to the same political party.) When the proposed rule on interactive data was passed 3-0 on May 14, the Democratic seats were vacant. In 2007, however, former (Democratic)  Commissioner Roel Campos — in voting to disclose mutual fund risk/return data in XBRL format — expressed his support for interactive data in this Reuters article.  And new (Democratic) Commissioner Elisse Walter made positive, if slight, reference to XBRL in this speech given in 2007 when she was Senior Executive VP at FINRA.

Still, that’s small beer compared with the enthusiasm  shown by (Republican) Commissioner Kathleen Casey in her keynote address at the 15th XBRL conference, or the work done on XBRL by new (Republican) Commissioner Troy Paredes.

I do think interactive data might be more appealing to Republicans in one respect: its ability to help retail investors do their own research. With stock prices savaged and Democrats cool to privatizing Social Security, that doesn’t seem like a theme that would resonate within the Obama Administration.

Empowering individual investors, however, is just one of the positives of XBRL adoption.  An advantage that Messrs. Cox, Gingrich, and Wallison have continually emphasized is that implementing XBRL will help keep America’s capital markets competitive with overseas rivals. At a time when the financial services sector has been battered, maintaining its international competitiveness will be important to the powerful, largely Democratic New York delegation.

Moreover, there have been implementations of XBRL that should have special appeal to a left-of-center government, notably sustainability reporting, executive compensation, and microfinance (which, you’ll recall, was an area in which Mr. Obama’s mother was very active).

Furthermore, many of the same institutional needs of government are in place regardless whether Democrats or Republicans are in power. Specifically, if an important motivation for the SEC to pursue XBRL has been the need for its own analysts to review company financial reports more cheaply and easily, that will be just as true in an Obama Administration. And the GAO report the other day that the Treasury Department hasn’t developed sufficient controls to monitor the $700 billion bank bailout highlights the challenges faced by government of whatever party in trying to come to grip with the current financial crisis.

Just on the level of simple-minded political caricature, if we think of GOPers mindlessly screaming USA! USA! USA! as the Dems happily relinquish our national sovereignty to the U.N., then certainly a one-world reporting regime of XBRL/IFRS seems more suitable for the donkey than the elephant.

More usefully, it would be exciting if the new Administration saw XBRL as a means of changing the way government operates (pace the Dutch Taxonomy Project) and normalizing Federal government data. XBRL isn’t, of course, the entire answer. But the ability for agencies to communicate easily with one another using the XBRL data format would help enormously in improving the way government works.

Kurt Ramin recently submitted a Comment on the SEC Study of Mark to Market Accounting, which urges a rethinking of the current financial reporting regime and discusses the potential of XBRL in creating transparent and understandable financial statements. Readers who enjoyed the posts on XBRL and Financial Reform that Kurt wrote for us last year will want to be sure to read his essay.

Written by Neal Hannon     Posted on November 21, 2008

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.

The US GAAP taxonomy as published on April 28, 2008, is 13,000-plus elements deep.  The reason the taxonomy is so detailed and deep, according to the SEC’s proposed rule 33-8924, is to promote the uniform use of a common set of tags.  Here is a passage from the proposed rule:

"One of the principal benefits of interactive data is its extensibility—that is, the ability to add to the standard list of tags in order to accommodate unique circumstances in a filer’s particular disclosures. The use of customized tags, however, may also serve to reduce the ability of users to compare similar information across companies. In order to promote comparability across companies, our proposed rules would limit the use of extensions to circumstances where the appropriate financial statement element does not exist in the standard list of tags. We are also proposing that wherever possible, preparers change the label for a financial statement element that exists in the standard list of tags, instead of creating a new customized tag."   (Emphasis added)     

The XBRL US GAAP Preparer’s Guide, published by XBRL US, is very neutral on the subject of extensions.  It recognizes that extensions are likely to be created and gives several methods of extension creation, but also offers this note of caution:

Rule: Use elements from the XBRL US GAAP Taxonomy whenever possible.

Needless to say, companies who are focused on expressing the accounting intent of the management team in XBRL will find a compelling desire to create their own extensions to the taxonomy. To illustrate, let’s look at a company that has been an active supporter of the SEC’s Voluntary Filing Program, EDGAR-Online.  EDGAR-Online’s recent form 10-K and 10-Q filings had the following item on the bottom of the statement of income:

The numbers represent quarterly ending numbers for 2007 and 2008.  According to the way EDGAR-Online presented the information, finding the proper XBRL element was a challenge.  Two possible candidates exist in the US GAAP taxonomy:

1. WeightedAverageNumberOfSharesOutstandingBasic  and
2. WeightedAverageNumberOfDilutedSharesOutstanding

Neither standard XBRL element by itself fit the unique presentation of terms shown on the EDGAR-Online form 10-K and 10-Q.  The EDGAR-Online team decided they had to create an extension to the taxonomy.  The result was:  

edgr:WeightedAverageNumberBasicDilutedSharesOutstanding

This new element combined the Basic and Diluted shares outstanding concepts into one element that matched their financial statement presentation.

A brief search of the authoritative literature associated with weighted average shares outstanding, Financial Accounting Standards (FAS) 128 paragraphs 8 and 40, found that if companies have a capital structure which dilutes shares outstanding for the purpose of calculating earning per share, the amounts would have to be separately reported on in a footnote disclosure. EDGAR-Online indicated that the number of weighted average shares outstanding basic and diluted were the same on their financial statements. 

The US GAAP taxonomy offers two choices, either basic shares outstanding or diluted shares outstanding.  The wording used in the EDGAR-Online’s financial statements indicates that for EDGAR-Online, the number of basic shares outstanding and the number of diluted shares outstanding is exactly the same.  Therefore, EDGAR-Online chose to create an extension element to report the combination of the two elements into one. 

EDGAR-Online could have chosen one of the US GAAP elements and changed the label.  For example, they could have chosen to alter the label for the following:

If they changed the standard label to read, “Weighted Average Number Basic and Diluted Shares Outstanding” while keeping the presentation linkbase, the reference linkbase, and the calculation linkbase the same as before, the adjusted standard label would have matched the way the company presented the item on their face financial statements.

A quick look at the authoritative references for the “basic” and the “diluted” weighted average shares outstanding indicates that a changed label in this circumstance should not cause any questions to the accounting treatment of the label adjusted element.  

According to the folks at XBRL US, the current stream of XBRL filings in the extension of the SEC’s voluntary filing program will be reviewed for possible inclusion in the next major release of the US GAAP taxonomy, which is due out early next year.  Perhaps we will see the EDGAR-online extension for weighted average shares outstanding make the updated taxonomy in 2009.

Second Thoughts

The people at EDGAR-Online decided to make a change in how this item is presented in their latest quarterly filing.  The November 11, 2008, 10-Q EDGAR-Online filing includes a separate line item for Weighted Average Number of Shares Outstanding, Basic and Weighted Average Number Of Diluted Shares Outstanding.  According to the company, the new presentation will be a clearer representation of the XBRL to analysts. 

Clearly, the choice of XBRL tags is an important decision driven by a multitude of considerations beginning with the accounting treatment and ending with the analyst’s or investor’s view of the chosen tags.  In any case, companies should first choose the correct accounting treatment of an item in their financial statements and accompanying footnotes and then choose the XBRL element that best represents management’s accounting intent.

Christian Dreyer, CFA, kindly agreed to the following interview. Chris is a past president of the Swiss CFA Society, a 1,700-member-strong association of finance professionals in Switzerland. He is Managing Partner of Tertium datur AG, an advisor specializing in pan-European pension funds. Previously he was CFO of an IT outsourcing firm and head of investment research at a Swiss state bank. He is also on the IASB’s Strategic Advisory Council for XBRL and publishes the European Pensions//iorp.eu blog.

1. In your article Cheaper, Smarter, Faster: Benefits to Analysts from XBRL, published in September 2006, you noted that analysts were still largely unaware of XBRL. Do you think the level of recognition is now much higher? Do you think the level of awareness differs between US and European analysts?

In essence, that assessment is still true. The CFA Institute conducted an extensive member survey about XBRL in summer 2007. The change in awareness among its membership is insignificant. Some 59% of over 850 respondents consider themselves unaware of XBRL. The lack of awareness is highest in Latin America at 71%, and lowest (but still too high) in the USA with 53%; Europe, Middle East, and Africa (EMEA) was at 66%. I am reasonably confident that awareness will pick up quickly when XBRL disclosure becomes mandatory and, at the very latest, when up-to-date fundamental information of a comprehensive investment universe become available. Before that, there is hardly enough return on invested time for an investment professional, especially in these times of financial crisis.

UPDATE from Chris on 11/22/08: The CFA Institute has just published the results of its latest Monthly Question survey for October. These results indicate that, if anything, awareness has become worse, with 75% of 1346 respondents saying that they were not familiar with XBRL. Note that in this survey, the CFA Institute asked about familiarity rather than awareness, which may be more easily denied, but I doubt that this explains fully the decrease in awareness of no less than 16 percentage points.

2. In expressing their skepticism of XBRL for financial reporting, some CFOs have said “The analysts aren’t asking us for this.” Assuming that statement is true, why aren’t more analysts asking for XBRL statements?  Do you think it’s a good argument against XBRL mandates?

It’s a classic chicken-and-egg problem: analysts are not aware of XBRL, therefore they do not ask for it. They will not pay much attention to it as long as there is no clear perspective about an impending, large-scale availability of XBRL formatted information. XBRL has to become part of the infrastructure of financial markets, just like the payment system. This requires coordinated, if not mandated, action with a lot of sustained, visible momentum. Analysts will not design and maintain a parallel research process for a subset of XBRL formatted information.  It’s all or nothing, really. That’s why scope and momentum behind the movement to XBRL are critical.

3. Some XBRL supporters have said that having XBRL statements would have helped prevent the current financial crisis. Others note that call reports of US banks have been in XBRL format for a few years now, without any apparent benefits for discerning weaknesses of the financial system. Do you believe that publishing XBRL statements for all financial institutions might have helped avert the current financial crisis? Or do the skeptics, in pointing to the availability of XBRL call reports, have a powerful argument?

IMHO, the answers are No and No. The credit crisis has causes that are outside of the domain of financial reporting and reported numbers as per today’s reporting standards. XBRL is "just" an efficient vector for such data. I’d be very reluctant to use the crisis as an argument to promote XBRL, because the linkage is marginal at best. We’ll hopefully see improved reporting standards with more transparency, less Held-To-Maturity trickery, and a lot more fair value as a consequence of the crisis. At that point, we’ll see all that information using XBRL.

4. Which investment professionals – quantitative analysts, buy side analysts, sell side analysts, or portfolio managers — do you think will benefit most from the introduction of XBRL statements? Which will benefit least?

Tough call. I’d have a go at Homi Byramji’s excellent presentation at the recent London conference (the slides are now available, and we hope to have a podcast as well). At this point, finance professionals are reasonably satisfied with the information and tools they can buy from suppliers like Thomson Reuters and others, despite of all the known shortcomings (i.e., delay, errors, normalization).

That said, there are some intriguing results from the CFA Institute survey I mentioned before: across all respondents (including portfolio managers, investment advisors, academics), the split between "most to all" manual extraction of information from company sources as opposed to purchases from third-party suppliers is almost even at 52:48. Looking at more specialized investment analysts, however, there is a remarkable shift towards manual extraction. It seems paradoxical, but automation is lowest for those respondents who perform analysis on a regular and recurring basis. The only reason I can think of for that is that the data supplied by third parties is insufficient for the information requirements of those specialists. They will probably be better served by XBRL information "as reported,” assuming that disclosure neutrality holds.

But then, third-party suppliers will not sleep. They’ll improve their offering by building XBRL data into the plumbing of their systems. Through this, finance professionals will get access to XBRL-grade information through the known and tested user interface of the suppliers’ toolboxes without having to bother about XBRL — for a price. Those incumbents will be quite formidable and deep-pocketed competitors for newcomers to beat.

But that’s not the end of story. The really interesting, potentially disruptive innovation (for investment research) might happen when a large universe of XBRL instances resides in the cloud and is accessible to semantic Web services, driven by the cognitive surplus of "amateur" investors outside of traditional finance firms. But before that can happen, a number of challenges need to be overcome. I’m watching closely.

5. There’s been much discussion about how XBRL will change the nature of financial reporting by facilitating EBR, real-time delivery of KPIs, and enhanced narrative reporting. How do you see the impact of XBRL on innovative methods in financial reporting?

It’s a prerequisite. Financial reporting today is too much about presentation, too little about substance. That can only change when presentation becomes virtually irrelevant in XBRL instances. There is a risk, however, that XBRL introduces additional complexity into the reporting process that is not warranted by supply chain needs. One case in point is the use of extensions, which needs to be severely curtailed in order to retain comparability. Also, innovation has about as bad a name in finance today as creative accounting had in post-Enron days — our heartfelt thanks go to the crisis, again. But once the crisis has blown over, we can get back to the business of innovating its reporting, as described in the CFA Institute’s Comprehensive Business Reporting Model, for instance.

6. Can you perceive any differences between Europe and the US in the speed and nature of XBRL implementation that arise from different business cultures and different attitudes toward government?

Generally, business cultures and attitude towards government vary widely between countries in Europe, so it’s virtually impossible to identify a single European culture or attitude that could be contrasted with its US counterpart. But those influences will be at work in individual countries, of course.

7. You have been a keen observer of XBRL and the financial community for many years. Have there been any surprises for you in the speed and nature of XBRL implementation, or has it proceeded about as you had expected?

Does it sound conceited if I say “no surprises?” My first exposure to XBRL was about six years ago. At that point, XBRL was just another wannabe standard arising from the technology domain. There was little reason to believe it might grow to the role it has today, because it was a technical specification that was not complemented by a commensurate business standard. All that changed when the IASB adopted XBRL as its reporting medium of choice to stop killing trees. That’s when I changed my mind. It has been exciting to watch the momentum of XBRL grow since then, and I’m looking forward to its fruition.

Written by Lane Leskela     Posted on November 13, 2008

Lane Leskela, PCM, MIA, is the Vice President of Technology Programs at The Open Compliance & Ethics Group (OCEG). Lane is responsible for managing OCEG’s Technology Council Programs, including the GRC Blueprint®, GRC Roadmap®, and GRC-XML® Provisional Jurisdiction of XBRL International. OCEG is a 15,000-member global nonprofit focused on guidance, standards, benchmarks, and tools for integrating governance, risk, and compliance (GRC) processes.

The current economic environment is crying out for sustainable technology standards at the core of information governance. Profound losses in the financial markets were the result of weak governance, failing risk management, and little regard for the consequences. The time has come for the methods needed to identify and manage risks, ensure oversight, and enforce corporate policies and procedures to exploit XBRL. In this extremely challenging economic climate, OCEG foresees increased demand to leverage the expanding taxonomy for financial reporting purposes to meeting the challenges of operational risk and compliance management as part of the natural evolution of XBRL.

OCEG sees the inevitable combination of people skills, business practices, and information technology necessary to improve governance, risk, and compliance management, not as ends in themselves, but as serving the organizational necessity of Principled Performance®. Principled Performance centers on bringing the mandated requirements (regulatory, legal, and contractual) for an organization’s operations together with the voluntary commitments (business practices, customer expectations, service levels) that help focus the organization on internally and externally directed improvement.

The complete portfolio of processes directly related to GRC include organizational and IT governance, business strategy, all levels of risk management, quality management, financial and IT audit, legal obligations, security, compliance monitoring and reporting, social responsibility, and ethical culture. Synchronized planning and communication between multiple business departments, decision-makers, business partners, suppliers, and customers is the key to successfully leveraging GRC across an extended enterprise of any size and shape.

To this end, diverse organizations with broad international experience and constituents are building the basic definitions and structure that will comprise a comprehensive taxonomy for GRC XBRL. Critical work on aspects of the emerging taxonomy and messaging standards for GRC have been undertaken by organizations that include the Fujitsu Research Institute, AIIM’s StratML Work Group, and the International Standards of Accounting and Reporting (ISAR) group of the United Nations’s Council on Trade and Development (UNCTAD).  Moreover, OCEG’s GRC-XML Work Group is now the Provisional Jurisdiction for this area in XBRL International.

Along with bringing together the major contributors to the emerging XBRL taxonomy for GRC, OCEG envisions stewardship for this new GRC-XML Jurisdiction over five defining domains:

1.    Common Financial and Operational Risk Controls
2.    Corporate Social Responsibility and Transparency Metrics
3.    Issue and Incident Management Taxonomy
4.    Performance Management Reporting
5.    Corporate Policy and Organizational Strategy Taxonomy

The construction of XBRL standards in each domain will address information standards based on Authorities with respect to:

1.    Policies and processes modeling regulatory authority guidelines for laws, rules, and regulations
2.    References and translation procedures based on authority documents
3.    Object definitions, elements, and specifications derived from authority documents
4.    Metrics that define standardized process performance and risk indicators

As painful as the current economic environment is for most businesses and markets, the opportunity for a deeper commitment to developing GRC components for XBRL has emerged. Over the next few years, as business performance improves and economic value ultimately rises, long-term efficiencies will be supported by a more coordinated set of information standards that inherently integrate risk and compliance processes. Advancing compliance and risk management capability across markets and industries is a deeply important and global role that is now assigned to XBRL.

Written by Gary Purnhagen     Posted on November 4, 2008

Gary Purnhagen has more than 20 years’ experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His engagements have included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently XBRL. He is an independent consultant assisting firms in embracing innovation and responding to the SEC’s pending mandate of XBRL.

In his recent post, Matt Kelly of Compliance Week argued that nobody believes the final XBRL rule will come out before SEC Chairman Chris Cox leaves office. While I respect Matt’s insight, and he does bring up many legitimate concerns, I disagree completely with his conclusions. I believe there is a high probability that the SEC will adopt a final XBRL rule this year, and the first mandated group will be required to begin submitting XBRL exhibits beginning early next year. Furthermore, I do not think I am the only one who believes that.

The fact that Chairman Cox cancelled his appearance at the XBRL International Conference in Washington D.C. in October does not diminish my confidence in the successful adoption of XBRL under his direction. Many observers had pegged the conference as the forum for the Chairman to make some announcement regarding the final rule, and they believe his canceling his appearance could only mean adoption of XBRL was in peril. I for one was not expecting Mr. Cox to make that announcement at the conference, primarily because that is not how rulemaking takes place at the SEC. The process is underway; there really is no need for Mr. Cox to continue to cheerlead this initiative.

A Voluntary Filing Program (VFP) has been conducted, rules have been proposed, and a new SEC system called IDEA has been announced that is based on XBRL. The proposed rule has been available for review, the SEC has received over 80 comment letters, and I suspect the SEC is currently finalizing the rule. Delays are the norm with SEC rulemaking. I agree with Matt that we are getting to the eleventh hour, but there still is time. Any day now, we will see a quiet announcement from the SEC that a meeting of the Commissioners is scheduled to consider the recommendations from the Division of Corporate Finance to adopt XBRL rules. Those rules will be adopted.

The recommendations should largely follow the proposed rule. Possible modifications could include delaying the first mandated filing from the 10-K to the first 10-Q. In addition, I hope they do not end the VFP, so that companies can begin to submit tagged financials without the liability associated with “official filings.”

Since Senator McCain called for Cox’s head when the financial crisis took off, there have been those who have felt that Cox could be fired, thereby putting XBRL into a limbo state. If Cox were fired, I could see where XBRL could fall into such a limbo state. I do not believe that Cox has to worry about that though. If McCain had the power to get Cox fired, it would have happened already. The fact is Cox is a bright young star in the GOP. He has a future at a state- or maybe even national-level elected position. Moreover, having championed XBRL will be an asset to him.

Consider this scenario: Senator Obama, who has said that he will include Republicans in his administration, wins the election and asks Christopher Cox to stay on to help XBRL become a reality. Stranger things have happened.

Written by Matt Kelly     Posted on October 28, 2008

Matt Kelly is editor-in-chief of Compliance Week, a magazine and online newsletter on corporate governance, risk, and compliance. Prior to his role at Compliance Week, Kelly was a reporter and contributor on corporate compliance and technology issues for magazines such as Time, Boston Business Journal, eWeek, and numerous other publications.

Occasionally the technology of XBRL gets a giant boost forward. The recent XBRL International conference in Washington, D.C., was not one of those times.

For months, XBRL officials had promoted the conference as the denouement of a great movement, when XBRL enthusiasts who had wandered corporate corridors for years would finally arrive in the promised land. Christopher Cox, chairman of the U.S. Securities and Exchange Commission, was to be the keynote speaker on the first day of the conference — and there, everyone knew and nobody spoke publicly — he would unveil a final rule to mandate XBRL reporting in the United States.

Then Cox canceled. No final rule came forth. And I, like so many others at the conference, went back to wander the corridors. Mostly to bug the vendors for some free pens.

It’s hard to describe exactly how much of a letdown the XBRL conference was. Without Cox, the collective conversation meandered back to the same old topics hashed over since I started attending XBRL International events three years ago: the great untapped potential of XBRL technology, and Corporate America’s utter lack of interest in tapping it until the SEC requires companies to do so. The same old faces were singing the same old songs, and that’s about all.

Of course, you can’t fault Cox for canceling and putting XBRL on the back burner. With the U.S. financial system in shambles, the SEC chairman has more important demands on his time (mainly, getting called on the carpet by Congress almost every week). Either Cox and his staff need more time to develop a full final rule, or they can’t devote enough time to a final rule — because critics in Congress and elsewhere will immediately crucify Cox for fiddling with XBRL while Wall Street burns.

Either way, the end result is no rule. And without that mandated motivation, XBRL will go nowhere in the United States.

Now speculation is turning to whether the SEC will enact a final rule at all, and the answer may well be “no.” The XBRL rule originally proposed five months ago called for the 500 largest public U.S. companies to start filing XBRL-tagged financial statements in the spring of 2009. At the time, most financial reporting folks familiar with XBRL thought that deadline was at least theoretically possible — if the SEC’s final rule explained all the details about validation, auditor assurance, errors, grace periods, and so forth. If the SEC could deliver that final rule by, say, an international XBRL conference in mid-October, the schedule would be tight but still feasible.

Now we’re staring at November, the end of the fiscal year for most large companies, and the end of the White House administration that happened to put Chairman Cox in office. Cox’s own tenure will probably end on January 20, 2009. And we have no rule.

Cox has now become the bureaucrat who cried XBRL once too often. Quite simply, nobody believes the final rule will come before he leaves office, and nobody is particularly worried about it. One school of thought is that the SEC will pass a final rule that requires compliance starting with quarterly reports sometime in fiscal 2009, rather than the annual report for 2008. Another theory is that Cox will unveil a roadmap for XBRL adoption and let his successor decide specifically when to put it into force. Some do still believe the SEC will stick with its promised timetable to mandate compliance with fiscal years that end on or after Dec. 15, 2008 — but those folks are quickly becoming the crackpot fringe.

Me? Like lots of other SEC watchers, I’m starting to wonder whom a President-elect Obama will name as the next SEC chairman, and what that person’s priorities will be. I don’t know that XBRL will be one of them.

Written by Lily Bi     Posted on October 23, 2008

Lily Bi, CIA, CISA, is Director, Technology Practices at The Institute of Internal Auditors (The IIA).  Bi is responsible for developing the Global Technology Audit Guides (GTAG®) series and spearheading other initiatives to position The IIA as a leading provider of IT audit guidance for internal auditors.

Financial statements, IFRS, XBRL…it has been a lot for internal auditors to catch up with. Being responsible for providing assurance service, the internal audit profession is pushed forward to face the challenges of both technology and regulation. The mandate of filing financial reports in interactive data format, specifically XBRL, is not only an emerging trend, but a reality that companies throughout the world have to face today. And it raises some important questions: What is the current status of XBRL adoption? What is internal auditors’ involvement in the XBRL implementation process, if any? Is there a need for guidance developed by internal audit professionals?

As the globally recognized, guidance-setting body for the profession, The Institute of Internal Auditors (The IIA) conducted an XBRL survey in early September to find out the answers to these questions. More than 200 chief audit executives worldwide, such as audit generals and directors, participated in the survey. Here are some of the key results:

Familiarity  The survey tells us that 51% of internal auditors don’t have any XBRL knowledge at all; 42% only know the very basics.

Adoption   Only 8% of respondents say that their companies are currently filing financial reports in XBRL format, but more than 37% say that this will happen in the coming three years.

Internal auditor’s involvement   Among those companies who file financial statements in XBRL format today, only four respondents say they play some role.

Adoption approaches   The survey results indicate that 52% of respondents’ companies chose an in-house approach, and 48% chose a co-sourcing or outsourcing approach when implementing and creating financial reports in XBRL format. No respondents say XBRL is used in the company’s internal process other than financial reporting.

Financial reporting standards    The majority of the respondents state that they use country-specific accounting standards, such as US-GAAP; only 17% currently use IFRS.

Need for guidance Almost 90% of respondents say The IIA’s coming XBRL paper is needed to provide knowledge and guidance for the internal audit profession.

From a technology perspective, XBRL is a ten-year-old computer language for business reporting. But the survey states that internal auditors currently have not been engaged in helping their companies to convert financial reports in XBRL format. By definition, internal auditing is an independent and objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. With mandatory mandates either in place or under review in countries like US, Canada, Australia, Belgium, China, Denmark, Japan, France, Netherlands, Singapore, and United Kingdom, and more to come, there will be an inevitable impact on the internal audit profession.

Management in an organization has overall responsibility for ensuring accurate and complete financial statements in XBRL format.  Internal auditors can help management implement XBRL and provide objective assurance on the implementation process. To do so, internal auditors should first understand the new interactive reporting format, the mandate requirements, and pros and cons of various implementation approaches.

In addition, the business reporting supply chain starts from initial transactions, internal consolidation and reporting, to external financial reporting.  Many organizations use XBRL at the end point of this supply chain because of the urgency of compliance with a regulator’s mandate. But XBRL as an interactive business reporting language can be used to serve throughout various stages in organizations’ business reporting supply chains. This will potentially give internal auditors great opportunities to access deeper business data, perform data analysis more easily, improve profiling and risk assessments, and identify potential issues. As an audit tool, interactive data will ultimately accelerate continuous auditing and monitoring.

The IIA’s forthcoming XBRL guidance paper, which will be released in January 2009, will address these topics.

Written by Neal Hannon     Posted on October 15, 2008

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.

Neal wishes to thank Walter Hamscher for his assistance in preparing this post.

What is the difference between level 1 block tags and level 4 tags as defined in the SEC’s proposed rule for XBRL financial reporting? The answer lies in the details of the footnote itself. Footnotes and disclosures contained within footnotes are an essential part of financial statements adding more detail and understanding to the financial condition of a company.

What are the footnote tagging requirements according to the SEC’s proposed rule? The SEC’s proposed rule identifies four levels of tagging:

1. Each complete footnote tagged as a single block of text;
2. Each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;
3. Each table within each footnote tagged as a separate block of text; and
4. Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged, and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.

The image below shows when each type of tagging will be required as proposed in the SEC rule. (As with all the thumbnails in this post, click it to open the image in a new tab or window.)

What is Block Tagging (Level 1)?

According to the SEC proposed rule, Level 1 tagging means tagging each complete footnote as a single block of text. Block tagging may also include the embedding of HTML tags for formatting purposes.

Using block tagging, XBRL tags are placed around an entire block of text and numbers. The simple process of block tagging a note to a financial statement would involve the following steps:

1. Select the block of text you wish to tag. This could be the note explaining a company’s application of fair value or their disclosure of investment securities.
2. Select the text block tag from the XBRL taxonomy and create your text block in your XBRL tagging tool of choice. Most companies will choose: FairValueDisclosuresTextBlock

Here is an abbreviated example of block tagged note number 2 from the Bank of Hawaii’s recent form 10-K:

The actual text of the tag is considerably longer than the above sample but illustrative of how a block tag works, including HTML for formatting purposes.

Level 2 Tagging

Level 2 tagging requires that each significant accounting policy within the significant accounting policies footnote be tagged as a single block of text. The tagging methodology for level 2 will be the same as level 1.

Level 3 Tagging

Level 3 tagging should be considered as part of level 4. As written in the proposed rule, each table within each footnote will be tagged as a separate block of text and be combined with all Level 4 requirements as detailed below.

Level 4 Tagging

At level 4, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote. Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied; however, it is not necessary for that level of tagging to exactly preserve the original formatting or layout, because it is assumed that if the level 4 tags are available then the level 1 tags are too.

Here again is what the SEC’s proposed rule says about level 4 tagging:

(4) Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.”

If the company is following IFRS, as issued by the IASB, the IFRS disclosures will also need to be tagged. Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements.

So level 4 tagging means preparing an XBRL tag for:

1. Each and every number, monetary value, percentage, etc. contained within a footnote;

2. All GAAP required disclosures; and

3. Company-specific disclosures that go beyond GAAP requirements

The third item hasn’t been specifically asked for in the proposed rule but preparers may want to include them in their XBRL exhibits.

XBRL Implications for Level 4 Tagging

To capture each and every numerical disclosure included in a footnote, companies will need to use the dimensions capability of XBRL. XBRL software tools with dimension capability such as Fujitsu XWand, Rivet Dragon Tag and UBMatrix Report Writer have the capability to produce the correct XBRL. Clarity FSR also has dimension capability.

To address the need to separately tag each narrative disclosure, accountants will need to identify which lines within the footnote are being driven by US GAAP and Commission regulations. The accountant will need to dissect the narrative to discover the correspondence between what is disclosed and US GAAP. Level 4 tagging requires each narrative GAAP disclosure to be separately tagged.

The US GAAP taxonomy contains thousands of elements specifically created to capture required narrative disclosures. The task of the accountant will be to match the accounting intent in the required disclosure to the correct element in the US GAAP taxonomy. If management’s accounting intent as represented by a particular disclosure within a footnote cannot be matched to an existing XBRL element, the company will have to create an extension to the taxonomy.

Here are the steps required for level 4 tagging:

1. Identify and tag each amount of all numerical disclosures (i.e., monetary value, percentage, and number). Multi-dimensional data often found in tables is tagged using the dimension capability of XBRL.

2. Identify and tag all narrative disclosures that are present in the note due to disclosure requirements in US GAAP or SEC regulations.

3. Block tag all remaining textual disclosures that are not driven by US GAAP requirements.

It’s likely that companies will want to extend the taxonomy to capture required disclosures that are not currently represented by elements in the US GAAP taxonomy. This need will be driven by the many different interpretations allowable under US GAAP that meet the test of complying with GAAP disclosure requirements. Accountants will make the judgment call concerning whether management’s accounting intent in the disclosure under XBRL review is correctly represented by an existing US GAAP taxonomy element or there is a need to create a new extension.

Bank of Hawaii Level 4

Let’s take a look at a portion of a footnote tagged to level 4 requirements for Bank of Hawaii.

Here is the table for Gross Gains and Losses from the Sales of Investment Securities as presented in the 10-K. The raw XBRL appears below the table:

Here is a pivot table created by the US GAAP taxonomy team at XBRL US to demonstrate how the above XBRL (tagged with dimensions) data could be displayed in Excel:

Level 4 Required Disclosures

The second type of level 4 tag is for required US GAAP disclosures. Here is an example of a required US GAAP disclosure embedded in the text of a note for Bank of Hawaii from a recent form 10-K:

Investment Securities

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. Trading securities, comprised primarily of mortgage-backed securities, are carried at fair value, with realized and unrealized gains and losses recorded in noninterest income. Held-to-maturity investment securities comprised of debt and mortgage-backed securities, that management has the positive intent and ability to hold to maturity are reported at amortized cost. Available-for-sale investment securities, comprised of debt and mortgage-backed securities are those that may not be held-to-maturity and are reported at fair value, with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. The estimated fair value of a security is determined based on current market quotations. A decline in the fair value of investment securities that is considered other than temporary is recorded as a reduction in noninterest income. Realized gains and losses are recorded in noninterest income using the specific identification method. Interest and dividends on investment securities, including amortization of premiums and accretion of discounts, using the effective interest method over the period to maturity, are included in interest income.

The underlined text is a required US GAAP disclosure. The financial reporting accounting team will be able to identify the sections of text inside a note that are driven by US GAAP requirements and those that are not. It is likely that some companies will elect to separately tag each and every line of text as printed in the footnotes.

Looking at the US GAAP taxonomy, the following element was identified as a proper accounting fit with the above disclosure:

From the US GAAP taxonomy:

AvailableForSaleSecuritiesBasisForValuationOtherThanEquitySecurities

Once identified as the proper tag, the next step is to marry the appropriate text to the taxonomy element. The results (without HTML formatting tags) look like this:

The XBRL in the image would be added to the instance document submitted to the SEC to comply with level 4 requirements.

Summary

Block tagging simply takes the text and numerical displays from a note to a financial statement and adds a block text tag to the information. The resulting XBRL will be compliant with the SEC’s first year notes tagging requirements but will yield little or not additional information. Level 3 tagging, required in the second year of participation, places each table occurring in a Note into a separate element. Level 4 tagging, also required in the second year of participation in the new SEC program, requires detailed tagging of the notes including each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.

The financial reporting team will be called upon to not only tag each amount but to also extract from the language inside a note to provide required narrative disclosures driven by US GAAP. The first time this task is completed, the accounting team will need to be deeply involved in the XBRL creation. Only members of the team that created the disclosure will understand the intent of the item and therefore know how to properly match it to the US GAAP taxonomy.

Written by Bob Schneider     Posted on October 12, 2008

A few months ago, Toshinori Kobayashi of Japa