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    FINANCIAL FINANCIAL Document Transcript

    • FINANCIAL REPORTING THE XBRL WAY: LESSONS FROM THE VOLUNTARY FILERS A Study of the Securities and Exchange Commission (SEC)’s XBRL Voluntary Filers Based on an Extensive Survey M E R R I L L C O R P O R A T I O N
    • A Study of the Securities and Exchange Commission (SEC)’s XBRL Voluntary Filers1 Based on an Extensive Survey XBRL, or eXtensible Business Reporting Language, is moving forward to become the finan- cial reporting standard, with more SEC encouragement, or even a mandate, likely in 2008. A review of the U.S. Securities Exchange Commissions’ Interactive Financial Report Viewer (IFRV) Web site finds a total of 219 filings by 53 companies2 representing over $2 trillion in combined market capitalization3. This is a significant leap forward from the initial 17 companies who joined the SEC’s test group in 2006.4 Shortly, the number of filers could increase exponentially. All public companies now need to prepare for XBRL. A good start- This report was devel- ing point is to learn from the 53 companies now filing XBRL-tagged financials. Not only oped from responses are they innovators providing the necessary breeding ground for eventual universal adop- to a recent survey tion, but their experiences are an important resource for any company beginning the path completed by select to XBRL financial reporting. participants in the This report, the second in a series on Financial Reporting the XBRL Way5, was developed from SEC’s XBRL Voluntary responses to a recent survey completed by select participants in the SEC’s XBRL Voluntary Filing Program (VFP), Filing Program (VFP). They are a cross-section of filers including numerous Fortune 100 com- including numerous panies with complex financial reporting requirements. Our survey provides a window into the Fortune 100 companies inner workings of their XBRL programs covering an array of questions, including: why they with complex financial joined the VFP; how they got started; what options are available and what’s involved, to name reporting requirements. a few. Their answers are essential to all newcomers as they examine the realities of implement- ing an XBRL program. XBRL and the SEC: A background The SEC announced its entry into the world of interactive data on July 22, 2004 to determine the benefits and costs of establishing XBRL as a financial reporting standard6. Following on the heels of this announcement was the creation of the XBRL VFP in March 2005. Although only a handful of companies signed up initially, the SEC bolstered support for XBRL and enticed companies with targeted incentives, including: “expedited reviews of registration statements under the Securities Act of 1933 that the staff has selected for review. For well- known seasoned issuers, the Division of Corporation Finance staff… will notify each well- known seasoned issuer volunteer whether it will select the volunteer’s Form 10-K for review 1 The Survey was conducted between June 8 and August 22, 2007 via e-mail and telephone interview by Sandpiper Partners LLC and was sponsored by Merrill Corporation. As of October 17, 2007 the survey respondents had a market cap of $1.8 trillion. 2 As reported on September 26, 2007. The SEC’s IFRV can be found at: http://216.241.101.197/viewer. 3 U.S. Securities & Exchange Commission, Market Cap of ‘Interactive Data’ Filers Tops $2 Trillion, 20 September 2007, www.sec.gov/news/press/2007/2007-191.htm. 4 U.S. Securities & Exchange Commission, 17 Companies Join SEC Pilot Program to Use ‘Interactive Data’ in Financial Reports, 29 March 2006, www.sec.gov/news/press/2006-43.htm. 5 The inaugural white paper, Financial Reporting the XBRL Way: Top Ten Action Steps, New Ways to Enhance Your Financial Reporting, issued by Merrill Corporation, provides a roadmap to understanding and imple- menting an XBRL filing program. 6 U.S. Securities & Exchange Commission, SEC Announces Initiative to Assess Benefits of Tagged Data in Commission Filing, 22 July 2004, www.sec.gov/news/press/2004-97.htm.
    • FINANCIAL REPORTING THE XBRL WAY within 30 days after filing and will undertake to provide any comments on that filing within 45-60 days of filing.”7 Acknowledging that incentives alone would not build critical mass, the SEC offered other enticements including the IFRV, a Web application which allows analysts and investors the opportunity to view, analyze and compare a company’s XBRL filings. The SEC is now taking even greater action, moving forward with a mandate program. At a Figure 1: September 25, 20078 news conference, Chairman Christopher Cox outlined a new agenda XBRL Filers for XBRL’s implementation. He has asked the staff of seven different offices at the SEC to finalize a recommendation to the Commission on how to deliver maximum benefits of Below is a sampling of the tagged data to investors. They are to focus on making financial reporting better and more scores of current companies useful to investors and improve the capital markets, key elements of the SEC’s mission. filing XBRL-tagged financials Their recommendation will then be formally considered in the spring of 2008. If it follows with the SEC: traditional rulemaking timelines, a final rule providing for the implementation of XBRL 3M Company could be available by fall 2008. Adobe Systems Incorporated Anadarko Petroleum Corporation Why get involved Bristol-Myers Squibb Survey results show that VFP participants embraced XBRL-tagging in an early stage of its Company development for a variety of reasons. Their insight into participation is useful to companies Comcast Corp. who remain undecided. Some companies noted that incentives offered by the SEC were The Dow Chemical Company important in choosing to join the VFP. Many more were propelled by the possibility of Dupont E. I. de Nemours and Company an SEC mandate, concluding that it was easier to institute an XBRL program without the EMC Corporation pressures and time constraints created by such a mandate. Voluntary participation allowed Ford Motor Company them to learn and test interactive data in their own time frame and in their own way. One General Electric Company responder commented, “Based on the SEC discussions, it appears that it is a matter of when, International Business not if, the SEC will require companies to file financial statements using XBRL... companies Machines Corp. certainly benefit from being at the front end of this new technology and fully understanding Lockheed Martin Corp. its capabilities.” Based on this and other responses, it is clear that the impending SEC Microsoft Corporation mandate had a powerful effect. NYSE Euronext Companies also recognized the inherent benefits of supporting the SEC in its endeavors. One PepsiCo, Inc. participant noted, “It made good business sense to help regulators like the SEC accomplish Pfizer, Inc. their mission.” They also saw participation as access to the proverbial ear of the SEC – by Qualcomm Inc. offering their opinions, they might have greater influence over the policies and practices South Financial Group, Inc. that would one day dictate financial reporting. Lastly, companies believed in the benefits of United Technologies Corporation this new technology and its ability to bring financial reporting into the new century. One Xerox Corporation responder commented that making documents smarter went to the heart of its mission as a technology and information company. Source: http://216.241.101.197/viewer 7 U.S. Securities & Exchange Commission, SEC Offers Incentives for Companies to File Financial Reports with Interactive Data, 11 Jan 2006, http://www.sec.gov/news/press/2006-7.htm. 8 The SEC’s September 25, 2007 News Conference can be found on their site at http://www.sec.gov/news/otherwebcasts.shtml. 1
    • How they started When venturing into new technology, the first step for a company is familiarizing itself with the basics. All survey participants began by educating themselves on XBRL through research on the Internet, attendance at conferences and seminars, and demonstrations by vendor companies. Directors and managers in the financial reporting department or the controller’s division conducted and oversaw the information gathering. These knowledge-building activi- ties provided answers to important “first-step” questions such as what to tag, who will tag, what to use when tagging or when to submit tagged financials. Important resources also included the SEC’s Spotlight on Interactive Data, www.sec.gov/spotlight/xbrl.htm, XBRL International’s site, www.xbrl.org, and XBRL US, Inc.’s site, www.xbrl.org/us/. The question of “who will tag” was critical. The survey reveals Figure 2: benefits and drawbacks to both in-house and outsourced Who is Responsible for Implementing XBRL? solutions, depending on the company and its resources. The following is a list of some of the departments and personnel According to the responders, 60% of companies outsourced that have worked on and instituted XBRL projects on behalf of the all or part of their XBRL tagging (47% outsourced their XBRL voluntary filers. tagging while 40% handled it in-house and 13% used a Departments Personnel combination of the two). Participants who outsourced the Office of Chief Accounting Director of Accounting Policy XBRL-tagging process listed the following decision-making Controller’s Division Manager of External Reporting factors: cost, resource concerns, difficulty with in-house Information Technology Group SEC Reporting Manager solutions, current use of outsourcing in financial reporting External Reporting Controller and special offers made by external reporting vendors. One Financial Reporting Director of Special Projects responder who eventually relied on outsourcing explained: Finance Department Information Technology Manager “The technology available for an in-house solution did not Corporate Accounting Vice President of seem easy to use. Most of the offerings were geared towards Corporate Governance technical (IT) type people versus accountants. I looked at Global Platforms and Operations Manager of Financial Reporting various offerings while at an XBRL conference and narrowed Financial Statements Senior Accounting Analyst down the choices to two solutions, ultimately deciding on Accounting Policy Manager of Financial Statements the [outsourced option] that was the easiest to use from an and Consolidation accountant’s perspective.” Investor Relations Senior Assistant General Counsel and Assistant Secretary Corporate Secretary Financial Reporting Specialist While survey participants cited numerous and varied reasons Office of Chief Information Officer Information Technology Architect for choosing outsourced solutions, the driving force behind an in-house solution was the value of acquiring hands-on XBRL knowledge. Most companies in this category already had the technological resources to institute effectively an in-house approach. For example, one technology company already had skills in XML (a parent language to XBRL called eXtensible Markup Language) and saw the XBRL voluntary program as a unique opportunity to develop an emerging technology and evaluate new marketplace possibilities. Interestingly, only one company pointed to cost concerns as a reason to in-house XBRL-tagging. If outsourcing were necessary, it would not have been interested in an XBRL program. 2
    • FINANCIAL REPORTING THE XBRL WAY The in-house option Companies that chose in-house approaches were faced with selecting the right software for taxonomy creation, instance document creation and XBRL validation. Survey results show that the most popular XBRL software programs were Rivet’s DragonTag and Fujitsu’s Interstage XWand. DragonTag and Interstage XWand users reported an average learning period of about 4 to 8 hours with a user friendly score of 2 on a scale of 1-5, with 1 being easy and 5 being difficult. One responder used UBmatrix and reported a one week learning period with a user-friendly score of 3. With their choice of software, they began the tagging process by comparing consolidated statements (income, cash flow, balance sheet and shareholder equity) to the appropriate industry GAAP taxonomy and mapping each line item in those financials to the individual taxonomy definitions. Once the mapping process was reviewed, companies could determine whether extension definitions were necessary. All participants identified line items in their financials that did not have an exact equivalent in the corresponding XBRL industry taxono- my (a term used to describe the system or dictionary which contains and organizes all of the tags used to mark up a financial statement). The extensibility of XBRL allows for company- specific definitions to be created, in effect extending the taxonomy. Survey respondents reported creating from 15 to 50 extensions. Current consensus among the marketplace sets the average at 20 extensions. Drilling down into the XBRL-tagging process steps captured in Figure 3, it is interesting to note that on average they were rated equal in terms of difficulty. However, three steps required the most time: a) mapping consolidated statements to the appropriate taxonomy; b) creation and review of the required extension definitions; and c) validation. While the majority felt that no improvements were needed in these processes, a minority were looking for better and more refined taxonomies, automation of the Figure 3: mapping process, search capability within the taxonomy and Breaking Down the In-house Experience more guidance on when to create extension definitions. Rankings are based on a scale of 1 to 5, where 1 is easy and 5 is difficult Survey respondents echoed a popular theme in XBRL imple- Difficulty Hours for mentation: most of the effort occurs in the initial mapping in Ranking Completion the first year. For subsequent filings, companies only have to Understanding XBRL 3 37 update the XBRL mapping process if there are changes to the Mapping consolidated statements chart of accounts associated with the tagged statements. to the appropriate taxonomy 3 59 Review of the mapping process 3 34 Creation and review of the required extension definitions 3 38 Validation 3 51 (The numbers reported are rounded averages based on rankings and hours provided by participants in Merrill’s XBRL Survey) 3
    • The outsourcing option Most polled filers decided to outsource XBRL-tagging. The hallmark of the outsourced experi- ence was ease of use, lower costs and reduced company man hours. Companies who worked with vendors to set-up tagging programs spent an average of 60 hours, compared to 220+ hours for the average in-house approach. Once set-up was complete, outsourcing further reduced a company’s time commitment. Respondents noted that subsequent filings require an average 10 hours per quarter, another indication of the relative ease of outsourcing an XBRL program. Figure 4: While most companies touted the benefits of outsourcing, they also recognized that difficul- Outsourcing: What ties can occur in any learning process. At times, their accountants and finance personnel are Filers Learning? found it challenging to understand the intricacies of XBRL. One reporting manager noted that it was difficult for accountants to understand what XBRL was about and their role in The following are some of its development. In addition, many vendors were experimenting with new solutions. the overall assessments we One survey participant noted that its vendor had difficulty when it came to tagging the received from survey partici- company’s stockholder equity section. While minor problems did occur, the survey showed pants with regard to their that 12.5% of the companies that outsourced XBRL services were very satisfied, 75% were outsourcing experiences: satisfied, and 12.5% were reasonably satisfied. These high marks are encouraging for an industry solution in its infancy. “Everyone was very helpful whether it was our vendor Validation process or the SEC.” XBRL-tagged financials must be validated to ensure the quality of data – without this step, “Very satisfied. The vendor filers cannot be sure that their financial data is being presented accurately and reliably to the spent time walking through SEC or the investing community. Yet until recently, validation was not given requisite atten- how the process worked and tion. At the 14th XBRL International Conference held December 2006, a presentation alerted had a finance background the XBRL community to this potential Pandora’s Box. The presenter, Kuo-hua Chou, found himself, so he could commu- fifty-two inconsistent XBRL instances out of ninety-three.9 The inconsistencies originated nicate effectively regarding from calculation errors and brought significant attention to the issue of validation. the tagging of financials.” Conversely, our results show that 75% of companies surveyed do not consider validation a problem. This revelation is based on a common perception among survey respondents that “It was a learning experience XBRL is still in its developmental stages. Companies acknowledge that vendors and software for the vendor and our designers are continually improving the services and products they provide. One noted, company.” “We don’t have many validation issues. We had a few in the beginning as the version of the software being used was a beta version. However, after the first, perhaps second filing, we have not had any more validation issues.” Another surveyed company that appeared in the presentation and article addressed its validation concerns with its vendor. However, it was satisfied with the explanation provided and no longer views this as an alarming issue. Interestingly, Chou’s academic paper did find numerous prominent companies that have consistently submitted XBRL-tagged financials without validation errors or inconsistencies. 9 Kuo-hua Chou, How Valid are They? –An Examination of XBRL Filing Documents with the SEC EDGAR system, Presented at the 14th XBRL International Conference, 4 December 2006, Philadelphia PA, pres- entation and paper can be found at the following web addresses: www.xbrl.org/philadelphia%20presentations/ACD03%20How%20Valid%20Are%20They_20061205.ppt www.xbrl.org/philadelphia%20presentations/ACD03%20HowValidAreThey_final_20061129.pdf 4
    • FINANCIAL REPORTING THE XBRL WAY Internal reporting with XBRL The SEC has spotlighted XBRL’s role in the external reporting process, however, it also has the potential to bring greater efficiency and consistency to a company’s internal reporting systems. These benefits are less well known and are viewed skeptically by many companies. When questioned, 54% of survey participants were aware of the benefits of tagging financials further upstream, yet the overwhelming majority saw XBRL as just an external tagging process. Only one company is currently creating a new group responsible for institutionalizing XBRL in its finance and corporate departments. Respondents explained their lack of interest in internal XBRL reporting in several ways: the technology hasn’t progressed enough; costs and difficul- ties are too high; value of tagging upstream has yet to be proven; and management is not easi- ly convinced of its justification. Over the next few years as companies become increasingly comfortable with the technology and financial management system vendors begin to offer expanded XBRL capabilities, the internal benefits of XBRL will get more attention. Marketplace reactions The SEC has tried to muster shareholders, investors and analysts in support of XBRL provid- ing Web-based tools such as IFRV and other initiatives to spotlight the possibilities and bene- fits of XBRL-tagged data. However, the investment community has been slow to take notice. Many VFP participants have highlighted their XBRL programs in press releases and on their Web sites. However, polled companies noted limited response, with 64% reporting no reac- tion and 22% receiving very little attention. Only one company noted concrete feedback. Their investors and shareholders commended the company’s mission to be innovative and at the forefront of technology. This apparent disinterest could be a natural reaction to new tech- nology, which is often viewed skeptically until proven. Additionally, the benefits of XBRL tagging may not have trickled down to the user level. As adoption becomes widespread, investors and analysts will better understand the effect it can have on their daily operations. Conclusions The voluntary filers provide a “first look” perspective into the realities of implementing XBRL in the corporate setting. All survey respondents were satisfied with the financial and time commitments required by their programs regardless of whether they used an in-house or out- sourced solution. They did not encounter exceptionally high costs or strains on resources. These filers have shown that XBRL-tagged financials can be filed with relative ease. This survey feedback confirms the views of the SEC and other supporters that enhanced data can be provided to the financial sector without significant burdens for filers. Chairman Cox has suggested in numerous speeches that XBRL will revolutionize the way financial informa- tion is reported. With his support and the power of the SEC behind him, XBRL will continue its slow but forward progression as a financial reporting standard offering greater efficiency and consistency to finance and accounting departments as well as a platform for extracting comparative data. 5
    • XBRL Glossary XBRL (eXtensible Business Reporting Language) is a form of XML designed specifically for the financial industry to increase efficiency, productivity and transparency in finan- cial reporting. Tags (markup language) are like bar codes used to markup and define data. In XBRL these tags can identify, describe and provide contextual information for each piece of information. These tags can be understood by a range of software applications allowing data to interface with databases, financial reporting systems and spreadsheets. Taxonomy is a system or dictionary of all the tags used to mark up a financial state- ment. Currently XBRL International, the SEC and other organizations are funding the building of standardized taxonomies for the different industries and categories in the United States. They are organized under the broad title of U.S.-GAAP/FRIS (U.S. Generally Accepted Accounting Principles/Financial Reporting Instance Standards). Instance Document is a document where financial data has been tagged using XBRL taxonomies. Mapping Process is the process whereby line items from consolidated financial state- ments are matched up to their individual taxonomy definitions. Extensions are XBRL tags created during the mapping process to accommodate company specific definitions that do not appear in the standard taxonomy. Validation is an important step in the production of XBRL tagged financials where the instance document is reconciled against its respective taxonomy and all calculations are verified for accuracy. Interactive Financial Report Viewer (IFRV) is a Web application developed by the SEC which allows investors to analyze company’s XBRL filings. About Merrill Corporation Founded in 1968 and headquartered in St. Paul, Minn., Merrill Corporation (www.merrillcorp.com) is a leading provider of outsourcing solutions for complex business communication and informa- tion management. Merrill’s services include document and data management, litigation support, branded communication programs, fulfillment, imaging and printing. Merrill’s target markets include the legal, financial services, insurance and real estate industries. With more than 6,300 people in over 70 domestic and 15 international locations, Merrill empowers the communica- tions of the world’s leading companies. About T ransaction and Compliance Services Through a broad range of tools and services, Merrill Corporation streamlines document composition, filing, printing, distribution and electronic access services to support the transaction and regulatory compliance activities of our clients such as securities offerings, reorganizations, mergers and acquisitions, Securities and Exchange Commission filings and other regulatory filings. Merrill is a registered, third-party service provider that offers public companies expert Corporate Headquarters EDGARization and XBRL filing services. We compose, edit, electronically file, manage and One Merrill Circle distribute data in printed or electronic format. Merrill DataSite is an online virtual deal room St. Paul, MN 55108 solution eliminating the need for paper data rooms. DataSite is accessible from any Web-browser, 866.399.3770 and offers electronic document integration, robust audits and enhanced reporting, dedicated inquiries@merrillcorp.com professional service 24/7/365 and rapid implementation of the deal room within 72 hours. www.merrillcorp.com © Merrill Corporation. All rights reserved. MC0115_1 M E R R I L L C O R P O R A T I O N