SEC's iXBRL requirements met with optimism -- and trepidation
Compliance with the SEC's new Inline XBRL requirements will change financial reporting processes. The benefits are there, but not everyone is optimistic about the change.
New U.S. Securities and Exchange Commission requirements mandate large, accelerated filers combine already required XBRL data and financial reports into a single file, a move the SEC maintains will improve data quality, efficiency and accessibility.
EXtensible Business Reporting Language, a framework for the global exchange of business information, has been in use in the U.S. since 2011.
Other XBRL-enabled global capital markets beyond the SEC include the Financial Services Agency in Japan and the Accounting and Corporate Regulatory Authority in Singapore, as well public and some private companies in the U.K. and South Africa. The European Single Electronic Format, which goes into effect on Jan. 1, 2020, is an electronic reporting format mandating issuers in EU-regulated markets prepare annual financial reports in Inline XBRL (iXBRL).
The SEC's iXBRL requirements, which went into effect in June 2019 for large, accelerated filers and will be phased in for other accelerated filing businesses and smaller companies over the next two years, necessitate companies submit financial statement data and funds' risk and return summary information in a single iXBRL file, making it both human- and machine-readable.
Proponents say the new requirements will improve efficiency and accuracy, as well as eventually lower costs, while opponents question those benefits and their ability to improve data quality.
From XBRL to Inline XBRL
The new SEC iXBRL requirements are good news for CFOs and CIOs, said Anna Kwok, vice president of professional services at Workiva.
"XBRL was arguably the biggest thing to come along to enable machine-readable financial data, and Inline XBRL is how we advance toward the common goal of providing better data," Kwok said.
Inline XBRL improves upon traditional XBRL by placing previously unavailable context at a viewer's fingertips. For example, when a user conducts a keyword search in XBRL for a particular disclosure item, the completeness of the results is limited by label consistency. IXBRL makes it easier to enhance the search from within the financial report via XBRL attributes, such as codification references, to get a better understanding of interrelated disclosures. This is crucial in financial and XBRL review.
IXBRL also provides a more explicit link from digital data back to its original source, making it easier to integrate time series and company comparable data within Inline XBRL data without having to access that information separately.
Moving to iXBRL should be an easy switch for companies using the same tagging environment to prepare financial filings as XBRL files. However, companies using a separate tagging document from the primary document may require more work to create a process for moving to iXBRL. Most major financial reporting vendors are launching these capabilities in their products.
"The biggest transition for most people may be getting over the initial learning curve on viewing Inline XBRL information and using other Inline features to benefit the reporting and review process," Kwok said.
The technical changes required to file Inline XBRL are performed by financial printers' software -- disclosure management systems such as Workiva's Wdesk, Donnelley Financial Solutions' ActiveDisclosure and Toppan Merrill's Bridge -- and then tested by issuers, such as Western Union.
"Issuers have been able to file in Inline XBRL for about a year now, but adoption has been limited under the voluntary program," said Justin Culp, vice president of financial and regulatory reporting, consolidations and governance at Western Union Holdings Inc.
While the underlying data itself will not change under the new rules, the transition may require more work, Culp said, especially for issuers. For example, Western Union has invested additional time and effort into iXBRL review. The company already meets with and tests iXBRL outputs with its financial printer in advance of filing its first iXBRL 10-Q filing.
Benefits of the new iXBRL requirements
One sign of the magnitude of change currently underway is that humans are no longer the primary consumers of regulatory data. The SEC reported that about 85% of the inquiries on the Electronic Data Gathering, Analysis and Retrieval, or EDGAR, filing database are from bots.
"Nearly every CIO and CFO is looking to automate and streamline the compliance reporting process. The adoption of iXBRL will help achieve greater efficiency, deliver higher quality and pave the way for growing use of AI and machine learning solutions," said Craig Clay, president of global capital markets at Donnelley Financial Solutions.
Improved data and data use
The eventual goal of mandating iXBRL financial statement submissions is so that data provided by public companies will be higher-quality and therefore more widely used by regulators, investors and analysts.
IXBRL is the foundation for clean, organized financial data. With that foundation, CIOs and CTOs can use automation, modern machine learning and AI algorithms to create interesting applications their companies need -- a move Emily Huang, CEO at securities filing research service Idaciti Inc., said opens many doors.
"Not only does this decrease the risk of errors in reporting and increase the efficiency of a company's existing reporting process, but it also provides the opportunity to bring the data alive for consumption," Huang said.
The migration to iXBRL could also lead to greater simplicity, Donnelley Financial Solutions' Clay said, because companies will eventually only need to create one iXBRL report. "This change will be especially beneficial for smaller companies that rely heavily on manual data input, because it will remove the need to create and update both an XBRL and HTML version," he said.
The migration to iXBRL will mostly take place behind the scenes since disclosure management systems will evolve to give users the ability to create a variety of different documents from centralized data, including reports in iXBRL.
"For CFOs, inline filings will bring the XBRL data front and center to investors. Quality matters, consistency matters and CFOs need to decide how they want their financial data to be viewed and consumed," Clay added.
Financial analysis improvements
Craig ClayPresident of global capital markets, Donnelley Financial Solutions
XBRL has been widely used to streamline various types of financial analysis, Idaciti's Huang said. The new iXBRL requirements should make it easier to perform simple analysis from within a web browser.
For example, Huang said, Idaciti customers use XBRL analytics to conduct financial analysis, perform disclosure research and improve financial communications. XBRL also makes it easier to integrate filings into financial data and financial review workflows can be automatically updated when new reports come in. One Idaciti customer, Huang noted, was able to eliminate the need to pay $10,000 every time it needed a peer group valuation report for merger or acquisition consideration or competitive analysis.
Challenges moving forward: Data quality remains an issue
Standards organization XBRL U.S. recently created a data quality committee to craft better rules for data consistency and quality. Western Unions' Culp said that while these rules to validate more filings have helped increase filing quality, they are not mandatory.
Another problem he sees is a lack of automation to correct all or even a majority of structured data errors. This means that issuers need to commit significant effort to compliance even if the iXBRL doesn't receive the same emphasis as the traditional HTML filing.
Four questions to ask about your iXBRL deployment
Joshua Swartz, digital transformation principal at A.T. Kearney, offered key questions CFO and CIOs should ask about the greater use of iXBRL:
- With increased data visibility and transparency, should some data be treated with more sensitivity? If yes, which data and how?
- With an iXBRL structured output, how can more of the content generation process be automated?
- With increased velocity of data transactions and communications, what controls must be in place to quality check and prevent errors or accidentally overexposing?
- Does an iXBRL submission introduce new cybersecurity threats which ought to be considered and proactively addressed and monitored?
The perception among the filers that no one is using XBRL has caused companies to sometimes blindly trust their disclosure management service providers to manage the overall quality of their filings, Idaciti's Huang said. However, the accounting taxonomy in the U.S. is complex to navigate. In addition, the accounting standards change constantly, which complicates how companies should properly and accurately tag their financial statements and footnotes. The SEC has not done enough to ensure the quality of XBRL data, Huang said.
As a result, consumption tools like Idaciti spend tremendous effort to identify and fix quality issues using industry rules and proprietary algorithms. With the massive data set available, it's possible to detect outliers, normalize data based on industry standards and create organized data sets for consumption.
The biggest challenge to improving XBRL and iXBRL data quality is ensuring consistency between the digital data and the original data source, Workiva's Kwok said. This may include the value, sign, scale, unit, time context and, most importantly, the element that best represents the reporting requirement underlying the disclosure item.
"Inline XBRL doesn't necessarily automate these tasks, but it is a big step forward in helping professionals make the right judgments," Kwok said.