Numbers Carry Weight: Why this is Important for a Quality SEC Filing

by Anuradha | August 18, 2016

Quality SEC Filing,data quality, quality XBRL filing

The US Securities and Exchange Commission (SEC) is paying a lot of attention to data quality in company filings these days. And one of the most common mistakes found in SEC filings is the use of incorrect signs.  The SEC in one of its recent announcements provided guidance to filers on the appropriate usage of signs. In an endeavour to help filers, the DQC rule 0015 also specifies a list of concepts which can never have negative values.

Let us understand what is this all about and why you should be paying close attention as a filer.

Numbers in a Financial Statement: An Accountant’s Perspective

A financial statement is made of facts/numbers that are interrelated. While some numbers are reported as is by the filer, some others are derived using the base numbers. In the process of deriving the sub-totals and totals, these base facts are sometimes added or subtracted (assuming we keep aside other more complex operations for now).

For example:

Now, we all know that Revenue - Cost of Sales = Gross Profit

Here, even though 750 is displayed without a – (minus) sign in front of it, accounting logic implies that cost has to be subtracted from revenue to arrive at the correct gross profit.

In order to make this obvious even to the lay person, numbers that are to be subtracted are often displayed within parenthesis as shown below.

The real challenge arises when we want to present the number visually as a negative number but treat it as a positive one and subtract it in the actual calculation.

One of the advantages of a data standard like XBRL is its ability to separate the presentation from the calculation.

With XBRL, accounting relationships like these are taken care of at the taxonomy level itself using the calculation linkbase.

Let’s take a look how relationships get defined in XBRL.

Defining Accounting Relationships within the XBRL Taxonomy

Accounting relationships are pre-defined within the XBRL taxonomy through calculation linkbase using an attribute called ‘weight’. The weight attribute of a concept determines whether the value reported under the concept has a negative or positive value.
 

Here is an extract from the US GAAP Taxonomy - Calculation view:

This clearly shows that cost of revenue has a weight of -1. As per accounting logic, cost of revenue is to be subtracted from revenue. This relationship is already built into the taxonomy so that filers need not put a negative sign each time they report concepts such as cost.

How can filers then present information differently from how it is meant to be used for calculation?
For this, filers can in their company taxonomy can assign a negated label which helps the XBRL software identify whether the data is to be displayed differently from how it was used for calculation.

Incorrect Sign is still a Common Issue

The US GAAP taxonomy has aptly defined calculation relationships and negated labels. The SEC rendering application is also designed to read and process these negated labels. Despite this, companies tend to provide a negative value for concepts such as cost of sales. As a result, the taxonomy design directs the software to subtract the negative value from the related concept and if you remember elementary math – two negatives make a positive, thus giving a wrong result in this case.

This type of error is highly prevalent and hence, even 7 years after XBRL implementation, the SEC has felt the need to provide guidance on negative values. You can read our blog on the impact of capturing data with wrong sign in XBRL.

Will Inline XBRL Solve the Issue of Wrong Signage?

We hope so.

With inline XBRL, the rendering aspect is taken care of by the source HTML. For XBRL, the user just needs to select the number and tag it. However, if the number is selected along with its sign for tagging, then filers will have the same problem we highlighted above.

Hence, as a filer you need to be attentive to these details and report the numbers and their signs correctly using weight attributes.

The positive news is that the DQC rules will filter out these issues and prevent incorrect signs. But do remember that the quality of your SEC filing is in your hands and you need to incorporate some basic checks and balances to ensure high quality data. Refer to our quality checklist which can help you improve the quality of your SEC filing.

Given our experience of analyzing more than 7000 SEC filings, we have developed our own business rules to help you produce a high quality XBRL report. Write to me at anuradha.rk@irisbusiness.com to get a quality report for your SEC filing.