Should a regulator such as SEC permit extension of taxonomy while preparing financial statements in XBRL format? Should they not?
Before deciding on which is better, let us go back to basics to throw some light on the debate.
If a regulator permits no extension of taxonomy, easy comparison could be achieved at the cost of oversimplifying financial data and not recognizing the unique elements of a business enterprise. On the other hand if a regulator permits extensions, companies can extend taxonomy without reason or limit and render the financial statements incomparable with that of peers and competitors.
A regulator would have to strike a fine balance between permitting extensions to recognize unique information about a company; and yet not permit a very large number of extensions to defeat the purpose of comparability with benchmarks and peer performance.
In the United States, though the US GAAP has more than 35,000 elements in the accounting taxonomies, companies find them rather insufficient and are quite liberal in extending the taxonomy to include company specific line items. To an extent, this defeats the purpose of XBRL itself by rendering the numbers incomparable.
In the United Kingdom, though the UK GAAP has around 4,000 elements in the accounting taxonomy, companies are strictly prohibited by HMRC from extending the taxonomy. To an extent, this also defeats the very purpose of XBRL by rending the statements on occasions inaccurate (since companies tend to choose an inappropriate taxonomy element).
The right approach lies somewhere in between.
When one has to make a choice between choosing no extensions and too many extensions, choosing the former is better. Though this is would result in short term pains, it is sure to provide gains in the long run since there would be a pressure to amend the taxonomy at a global level, which would achieve both accuracy and comparability.
DataTracks converts thousands of financial statements in the US and in the UK for companies filing with SEC and HMRC. Our approach has been to avoid extending the taxonomy unless it is absolutely necessary. Most of our clients encourage us to pursue this approach (though the clients remain firmly in control in how financial data get associated with taxonomies).