Investors and accounting professionals have warned the Securities and Exchange Commission (SEC) against exempting small companies from the requirement to add interactive data to their financial statements using eXtensible Business Reporting Language (XBRL). They believe that using XBRL in financial reporting helps investors analyze performance more efficiently and compare results across industries.
XBRL timeline
XBRL is an interactive data format that allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. The use of standardized interactive data makes financial information easier for investors to analyze and assists in automating regulatory filings and business information processing.
The U.S. market has gradually adopted the use of interactive data. In January 2009, the SEC published Release No. 33-9002, Interactive Data to Improve Financial Reporting. This rule required public companies to submit XBRL statements as separate exhibits to their financial statements. It also required companies to post interactive data files on their websites. Then, in May 2009, SEC Release No. 33-9006, Interactive Data for Mutual Fund Risk/Return Summary, required investment companies to use XBRL tags in a separate exhibit.
In March 2017, the SEC followed up with another rule, Release No. 33-10322, Exhibit Hyperlinks and HTML Format. It requires hyperlinks to be incorporated into registration statements and financial reports submitted through the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) filing system. The data must be formatted in the Hypertext Markup Language (HTML), not the American Standard Code for Information Interchange (ASCII) text format. The latter has been in use by some companies, but it doesn’t support hyperlinks.
More recently, in June 2018, the SEC finalized a rule that requires public companies to embed interactive data tags directly into their financial statements using a process called inline XBRL (iXBRL). The rule, SEC Release No. 33-10514, Inline XBRL Filing of Tagged Data, aims to improve the quality, timeliness and accessibility of financial information prepared in XBRL. Investment companies are also required to provide risk-and-return summaries using iXBRL.
Cost concerns for smaller companies
The Regulatory Flexibility Act (RFA) requires the SEC and other federal agencies to review rules that affect small companies within a decade of their publication. Pursuant to the RFA, the SEC is considering the effect 43 rules issued from 2006 to 2009 have had on small public companies. The SEC has asked the public to comment on whether the rules on this list — including the rules that require the use of XBRL in financial reporting — should be continued without change or amended to minimize any significant economic impact.
Over the last decade, smaller public companies have complained about the costs of complying with the XBRL requirements. But the Council of Institutional Investors (CII) said XBRL can be especially beneficial to smaller companies. “The automation afforded through XBRL allows small entities to be considered as investment opportunities at the same time as large companies,” CII General Counsel Jeffrey Mahoney wrote in a comment letter to the SEC. “This is a significant step forward in leveling the playing field for small entities when seeking funding in the capital markets.”
Sandra Peters, head of the CFA Institute’s global financial reporting policy, agrees with CII’s Mahoney. She believes that structured data could bring more opportunities for small and mid-cap companies by making it easier and less costly to potential investors to assess their performance.
The CFA Institute also emphasized the usefulness of machine-readable data. “With the availability of technology to sift through structured data and crunch numbers, investors today are well positioned to perform faster and better analyses,” wrote Peters in an SEC comment letter. “When some of their finite resources are freed up, analysts can not only research a greater number of companies but can also take a closer look at the companies they already follow, which supports better-informed investment decisions.”
The American Institute of Certified Public Accountants (AICPA) told the SEC that increased use of XBRL has promoted transparency and improved efficiency by helping analysts find relevant facts with a few mouse clicks. Moreover, the AICPA noted that the cost of compliance for small public companies has dropped 45% from 2014 to 2017, with the average annual cost decreasing from $10,000 to $5,476. The AICPA believes that the use of iXBRL will further bring down costs.
Need help?
Based on positive feedback from financial statement users in SEC comment letters, XBRL is likely here to stay. But the SEC will need to continue updating its rules to keep pace with the evolving technology that supports XBRL. For help understanding and complying with the latest rules, consult with your local Armanino expert.
March 07, 2019
