XBRL Filing: Going from Compliance Cost to Strategic Aide

by Shilpa Dhobale | September 26, 2016

Cost Benefit Analysis of XBRL for Small Companies

The high perceived cost of preparing XBRL filings to the U.S. Securities and Exchange Commission (SEC) has caused a stir yet again. The Small Company Disclosure Simplification Act was referred to the subcommittee on regulatory reform, commercial and antitrust law on September 15, 2016 whereby the House Financial Services Committee of the US Government continued its stand on exempting small companies from filing their financial data in XBRL to the SEC.

When the SEC introduced voluntary XBRL filing in 2005, there were just a handful of regulators globally that had adopted XBRL as their information standard. Today, more than 100 regulators across 60 countries have adopted XBRL as their preferred standard for structured data reporting due to the various benefits it offers and this number is only rising. This is not surprising given that regulators happen to be direct beneficiaries in any XBRL implementation.

But what do the filing companies feel about XBRL?

In the U.S., despite being around for more than 7 years, XBRL hasn’t achieved its true potential in the CFO’s office.  It continues to be pinned down as a ‘compliance cost’ instead of being considered as strategic aide to the CFO. Most of the filers therefore have been treating it as nothing more than a tick in the box for compliance.

XBRL is about more than just cost and has a lot to offer even to filers.

How Filing Companies Can Benefit with XBRL Data

XBRL is here to stay and for all the right reasons. And while the regulator benefits are obvious, XBRL is also beneficial to the filer in internal reporting and strategic decision-making. The success stories of Wacoal, the Japanese apparel manufacturer, prove the benefits of XBRL for internal reporting. In fact, even by simply meeting the compliance requirement laid down by the regulator, companies stand to benefit by the inter-operability, standardization and readability XBRL offers. Here are a few ways in which all small companies stand to gain with XBRL: 

1. More coverage by analysts

Today, most analysts focus only on the big companies and shy away from analysing smaller ones, largely due to the hassle of aggregating data. Instead, if data is made available in a structured format that can feed directly into the analysts’ models, it would free up considerable data aggregation time and allow them to analyse and cover a greater number of smaller companies. The CFA Institute’s paper on data and technology elaborates the perspectives of investors and analysts and the importance they place on having structured data.

2. Greater reliability of data

 Validation rules defined in a standard and transparent manner, ensure that the filer remains informed about the regulatory requirements since the beginning. Additionally, XBRL is equipped to handle a variety of business rules, be it checking the correctness of sub-totals/ totals or consistency of data across the report. The layers of business rules such as those on the use of negative signage, or applying correct contexts to data etc. laid down by the Data Quality Committee of XBRL US further enhance the XBRL report quality. This feature of XBRL for data validation ensures accurate and reliable data is always available for use.

3. One data set for many purposes

For a small company where resources might be a constraint, preparing and sharing the same data with different user groups can be a bother. With XBRL, the data prepared by the companies for one user type can easily be shared with other data consumers, eliminating the need to recreate the same data in multiple formats.
For example, in addition to providing the structured data as part of the Investor Relations portal, it can also be enhanced with business intelligence tools to provide meaningful analytics and visualisations for investors.  

There have been cases globally of other benefits that companies have gained due to their adoption of XBRL, such as monetary benefits being passed on to providers of structured data and another where structured data submitted to one regulator was used by another to frame benchmarks and scores for company performance.

Incurred Cost vs Benefit of XBRL Filing

In the initial days of adoption, the cost of preparing XBRL reports was higher largely due to companies resorting to outsourced conversion services. This has changed in recent years.  More companies are now opting to create their XBRL reports in-house with the help of several products available in the market today.

These products usually provide large productivity gains, right from report preparation, through to editing, reviews and even filing with the SEC. Filers no longer have to pay for multiple rounds of edits and the entire team is able to collaborate off the application at all times. When you compare this with the amount of time spent in the traditional outsourced mode of working, the actual payoff more than covers the cost of the product.

An AICPA and XBRL US study also reveals that the cost of compliance is far lower than the ‘perceived’ cost that is being used as the basis to exempt companies from filing structured data. In fact, the filing experience of United Technologies Corporation, one of the early filers of XBRL to the SEC, suggests that the cost of compliance is not high especially when you consider the ROI on XBRL.

Additionally, the SEC’s announcement to accept Inline XBRL documents should also result in cost efficiencies for filers. With inline XBRL, there will be single filing format instead of the current two: XBRL and HTML, thus reducing the cost of compliance.

inline XBRL filing for SEC

XBRL is Here to Stay

Data consumers and non-profit consortiums such as AICPA and XBRL US are advocating the need to bring in more information under structured data disclosure requirements including the business and financial disclosures in Regulation S-K. XBRL is no longer limited to financial disclosures alone. Several other domains such as Solar Data and Surety Reporting are also in the explorative or early stages of adoption. With the U.S Data Act coming into effect, all federal agencies have to report their spending information using the structured data format.

Globally, countries like Netherlands and Australia have designed their Standard Business Reporting (SBR) programs with XBRL as the underlying standard. With SBR, the compliance burden on reporting entities reduces significantly thereby yielding cost savings as well. The world is moving towards open data and a structured data regime. But this can be truly effective only if the data sets from all the entities are received in the same structured format. Any exceptions and exemptions will result in disparate data formats and make the process of collecting and consuming data inefficient, both from a time and cost perspective.

The exemption order in the U.S is yet to be effective which is temporary respite for all the supporters of open and structured data. Having said that, companies also need to realise how XBRL or structured data can benefit them in creating a progressive future for data usability.

We have been consulting with various regulators for their XBRL implementations for the last 11 years and we believe the real benefits of XBRL are yet to be reaped. Till such time there is a final announcement on the bill, we suggest that companies do their analysis to figure out the ROI on XBRL when compared with the associated costs. It’s only then that the true picture will emerge.

For any queries, please write to shilpa.dhobale@irisbusiness.com