XBRL: One Step Forward, Two Steps Back

Data Act – One Step Forward

Over the past few months we have seen two very different bills get widespread support in the U.S. House of Representatives.  Earlier this year the Digital Accountability and Transparency Act (Data Act) passed both houses of congress and was signed into law. The Data Act is a huge step towards governmental transparency requiring each governmental department to report financial information in an electronic computer readable language.

While we are awaiting the announcement of the data standard that supports the Data Act, a very different bill, HR 5405 just passed the House of Representatives in a 320-102 vote.  The Promoting Job Creation and Reducing Small Business Burdens Act (H.R. 5405) unfortunately contains a provision in Title VII that represents a major step backward in the financial transparency of our capital markets.  HR 5405 Title VII is summarized as follows:

Title VII: Small Company Disclosure Simplification Act – Exempts emerging growth companies and issuers with total annual gross revenues of less than $250 million from the requirements to use Extensible Business Reporting Language (XBRL) for mandatory periodic reporting filed with the SEC. Allows such companies, however, to elect to use XBRL for such reporting. Directs the SEC to:

(1) analyze the costs and benefits to such issuers of the requirements to use XBRL for mandatory periodic reporting; and
(2) report to certain congressional committees on the results of such analysis as well as on progress in implementing XBRL reporting within the SEC, and the use of XBRL data by the SEC and by investors.

Title VII is now a part of a compilation of smaller bills with the following summary:

To make technical corrections to the Dodd-Frank Wall Street Reform and Consumer Protection Act, to enhance the ability of small and emerging growth companies to access capital through public and private markets, to reduce regulatory burdens …

The XBRL exemption provision of this bill (Title VII) came from an earlier bill that was approved by the House finance committee as HR 4164.  Introduced by Rep. Robert Hurt (R-Va.) and Terri Sewell (D-Ala), the original bill sought to remove barriers for small companies who are considering raising equity capital.  The initial thrust behind the bill were three flawed premises:

  1. The cost of compliance was stated at $10,000 while recent surveys conducted by the Financial Executives Research Foundation indicate a cost of $2000 as more accurate.
  2. HR 4164 was proposed at a time before the SEC began to issue comment letters targeting XBRL Improvements in submissions are already visible with publically available tools like XBRL Cloud’s EDGAR Dashboard.
  3. The usage of XBRL is modest if at all. Upon examination, several examples of XBRL usage can be cited including the SEC’s own Accounting Quality Model, usage by major companies such as in analysis of financial reporting as detailed here by Mike Willis, Partner at PriceWaterhouseCoopers.

Moving Backwards – iXBRL Reporting

The main premise –that lower governmental burden creates opportunity for growing businesses– does not apply here.  Companies that adopt XBRL reporting are finding that not only are the costs lower than expected for compliance but they are getting an added bonus, higher quality financial reporting coupled with higher visibility by financial analysts.  In the DataTracks blog on minimizing XBRL errors, XBRL Cloud’s CEO Cliff Binstock said “Around fifty percent of filing companies are finding errors or enhancements to their financial reporting prior to submitting their 10Q’s and 10K’s to the SEC.  At least one company found a significant enough error that required re-statement of earnings.”

It remains to be seen if lowering the bar for financial reporting will increase or decrease growing company’s desirability in the capital markets.  Columbia Business School’s Center for Excellence in Accounting and Security Analysis released a study concerning the impact of interactive data on companies and the SEC.  Although the authors pointed out several steps that the SEC, FASB and the developers of the underlying taxonomies could take to improve XBRL, they nevertheless concluded that XBRL data can become useful to investors and analysts.

DataTracks US is part of DataTracks Services Limited, leaders worldwide in preparation of financial statements in EDGAR HTML, XBRL and iXBRL formats for filing with regulators. DataTracks prepares more than 12,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland and MCA in India.

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