May 15, 2008

Mandatory XBRL: Gulp, Large Companies By Next Spring!

Yesterday, the SEC held an open Commission meeting to propose mandatory XBRL. As expected, the SEC proposed a phase-in period for mandatory XBRL – starting with approximately the largest 500 companies (specifically, those with a public float of over $5 billion) filing in XBRL for fiscal periods ending on or after December 15, 2008. So they would start making XBRL-tagged filings as early as the spring of 2009! Umm, that’s not even a year away; the latest April tags can’t even be used for testing yet. Did someone wet their diaper?

Moving on, smaller companies and foreign private issuers would phase-in over a three-year period, with all filing in XBRL by 2011. Year 2 would bring in large accelerated filers (about another 1700 companies) and Year 3 would capture all remaining filers using US GAAP, which includes FPIs that file in IFRS. Here is the SEC’s press release, the Chairman’s opening statement (which quotes “Women’s Wear Daily”) and Corp Fin’s opening statement.

A few more items:

1. “Limited” liability – During the meeting, the SEC was coy about what the proposed liability scheme will be (and who might be on the hook for the tagging). It was mentioned that there would be “limited” liability, but no one mentioned if XBRL data would be considered “furnished” rather than “filed,” as is currently the case under the SEC’s pilot program. This is an issue that likely will be intensely debated during the comment period, regardless of what the SEC actually proposes (and in my opinion, limited liability for the accuracy of the financials is a huge mistake – if investors can’t rely on the numbers tagged in XBRL, what’s the real value of them?).

2. Grace period for first times – XBRL will be considered late if not provided to the SEC – as well as posted on corporate websites! – at the same time as the related report. There are two exceptions: a 30-day grace period would be permitted for a company’s first XBRL filing – and also for the first time they are required to include the footnotes and schedules tagged in detail.

3. Consequences of late filing – If not provided timely, the penalty is that the company would be deemed not current with their ’34 Act reports (hence, not eligible for short form registration or the resale exemption safe harbor under Rule 144).

4. Transition – In the first year, footnotes and schedules would be allowed to be filed in “blocked tags,” which means each item has its own tag and is much easier than the alternative.

5. Costs – In his “IR Web Report,” Dominic Jones blogs some good stuff about the projected costs of XBRL for companies. Put me down as leery of the SEC’s estimate that the average price for an XBRL conversion will be under $30,000 and require less than 40 hours of work.

There is a 60-day comment period that commences once the proposing release is published in the Federal Registrar – meaning that the deadline will land about a week after our July 16th webcast: “XBRL: Understanding the New Frontier.”

It’s a good time to pick up your free book “XBRL for Dummies” from Hitachi – although I haven’t seen it myself, so I can’t vouch for its real-life usefulness…

XBRL and Third-Party Assurance

One issue that wasn’t discussed at the open meeting yesterday, but bound to be commented upon – and considered by the groups that are in the process of making reform recommendations like the SEC’s Advisory Committee on Improvements to Financial Reporting – is third-party assurance. Here is an article by two accounting professors (who were Academic Accounting Fellows at the SEC not long ago) discussing the challenges that XBRL presents for third-party assurance, raising interesting questions like: what to do about “bad” tagging that may be invisible when looked at through a viewer or other rendering tool, but can create errors when end-users try to slice and dice the data?

Although the article doesn’t really provide much in the way of answers – in sum, the authors suggest that software may be able to help automate the assurance process at some point and that academics have a lot to offer – it’s a good capsule of the state of XBRL and some of the conceptual difficulties that it presents for auditors (and lawyers).

The Myth: XBRL is Just Another Edgar

It’s a bummer that Chairman Cox kicked off his opening statement comparing XBRL to Edgar, as I think it will serve to perpetuate the myth that XBRL is essentially another Edgar project. He would have been better served dispelling the myth if he wants to keep us corporate types as part of his audience on this topic. Otherwise, most folks I know will simply roll their eyes and assume this is something that they can pass off to financial printers, etc. and not bother to understand what it’s about.

Simply put, Edgar is about tagging so that a document will be received by the SEC; XBRL is about tagging so that numbers have meaning. An Edgar tagging error is not a big deal compared to an XBRL tagging error, which might cause a company’s stock to drop 20% in the course of an hour.

I’m not saying that printers and others won’t be helpful; you will need them – it’s just that XBRL is much more than the conversion of documents. I’ve blogged about this myth before…

And no, I’m not being critical just because I haven’t been invited to one of the SEC’s “XBRL blogger lovefests.” Although it is a tad strange – plug “XBRL” and “blog” any-which-way into Google and this blog consistently comes up in the Top Ten. Compare the “hard-hitting” analytical reporting from some of the bloggers that did get an invite: and Cara Community.

FASB’s New House of GAAP

I haven’t mentioned Jack Ciesielski’s “AAO Weblog” much since he limited parts of his fine blog to paying subscribers (I do understand that the man has to make a living), but here is one available to the public:

Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” was issued last week. It’s not a standard that will drive investment decisions – but if you’re an investor who’s in a conversation with a CFO and the subject comes up, it might help to understand what the of “GAAP hierarchy” comes up, it might help to know a little bit about it.

Here’s the background. The American Institute of CPAs had long decided what constituted the strength in various “levels” of generally accepted accounting principles because their constituents – auditors – needed a consistent policy on how to handle conflicts in accounting literature when more than one standard might be found on a single topic. Hence, there were “levels” with in the “house of GAAP,” as it’s frequently called. When the AICPA dictated auditing standards, it mattered that they be the ones to establish the hierarchy – but that right was removed with the establishment of the Public Company Accounting Oversight Board in 2003. The right to set accounting principles was also removed from the AICPA by the Sarbanes-Oxley Act: it required the SEC to appoint a single accounting standard setter for the establishment of accounting standards. And it picked the FASB, not the AICPA.

The FASB has now revised the standards hierarchy; it’s absorbed many AICPA standards into its own domain. They didn’t simply vanish along with the AICPA’s authority. Here’s how the new hierarchy of generally accepted accounting principles shapes up, in descending order of authority:

– FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB

– FASB Technical Bulletins and, if cleared, by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position

– AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts

– Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

The hierarchy still needs to be approved by the PCAOB to be completely effective on the auditing community. When you look at how many sources of accounting principles still exist after the clean-up, you can appreciate the calls for simplicity and the arguments made in favor of International Financial Reporting Standards. Make no mistake however: the more popular they become, the more interpretation and guidance they’ll require. It wouldn’t be surprising to IFRS principles grow at a rapid clip over the next few years.

– Broc Romanek