An XBRL Starter Guide

By Haven S. Pope, CPA, CFE, and James P. Davis, CPA, CITP

We are now well into the first year of the phased-in roll out of the new XBRL financial reporting requirement. At this point, you have probably heard about XBRL, but may be unsure about what it is and how it will affect your organization or clients.

For entities that did not meet the requirements for year-one compliance, this is familiar territory; the deadline may still seem to be in the distant future. It’s time to wake up and make a plan, because the deadline is now rapidly approaching! For calendar year-end companies, the deadline for phase-two compliance will be the second quarter filing on Form 10-Q, or the quarter ending June 30, 2010.

 

So, if your company or clients are looking to benefit from XBRL or will be required to use it, it’s time to get started. Read on for an overview of the steps you’ll need to take.

 

What is XBRL?

XBRL stands for “eXtensible Business Reporting Language” and is a web-based code designed for companies to share business and financial reporting in a standardized format independent of an organization’s current technology or software. This standardized format makes it easier to compare financial information across various organizations and allows users to perform more efficient data mining.

 

Instead of financial information being reported in a static format, such as in a printed document, XBRL allows each item of data to be tagged. These tags are computer readable and allow the data to be used interactively. XBRL can improve an organization’s financial reporting accuracy, reliability and efficiency because the data can be tagged at its source, while also increasing comparability across organizations due to the standardization of tags and reporting format.

 

Who is required to comply?

Essentially all public companies and foreign private issuers are required to comply with the new XBRL filing requirements. However, the specific deadlines for compliance depend on the size of the organization.

 

The first phase was applicable for large accelerated filers with a public float in excess of $5 billion and applied to their first quarter ending after June 15, 2009, which would be the second quarter for calendar year-end filers. The second phase is applicable to all remaining large accelerated filers and applies to their first quarter ending after June 15, 2010. Phase three applies to all remaining public companies for their first quarter ending after June 15, 2011.

 

What is required for compliance?

For all companies, compliance will be in two phases. In year one, each company will be required to tag each line of their financial statements and will “block tag” the notes to the financial statements. Block tagging consists of labeling an entire note (i.e. Accounting Policies) with a single tag, without tagging individual items within the note.

 

In year two, all numbers, including tables, in the notes and schedules must be individually tagged. For the initial filing in years one and two, the XBRL submission can be filed up to 30 days following the submission of the EDGAR filing. All subsequent XBRL filings must be submitted with the EDGAR filing.

First XBRL filing: Key steps

Knowledge assessment

 

XBRL implementation should begin with a company-wide discussion to assess the current level of XBRL knowledge within the organization. Then, the implementation plan can be customized to the needs of the company. It is important to gain a clear understanding of the knowledge base within the organization to determine which critical knowledge gaps exist; there are likely to be many if only a few people are familiar with the XBRL requirements.

 

Project team

Establishing a project team and team leader may go hand-in-hand with the knowledge assessment process or will follow closely afterward. The project team should consist of the key individuals who will be involved in the implementation, such as the controller or financial reporting manager, investor relations representative, Securities and Exchange Commission (SEC) counsel and other persons involved in the preparation of the SEC filings.

 

Training and information gathering

After the critical knowledge gaps are identified, it is important to take the time to get everyone up-to-speed on what XBRL is and the compliance requirements applicable to the organization. This training could be accomplished by bringing in an outside expert or internal staff with sufficient knowledge about XBRL and who may have been discovered during the preliminary discussions.

 

There are also various webcasts and continuing profession education (CPE) sessions offered on the subject that may be effective in establishing the appropriate baseline knowledge among the project team and company management.

 

XBRL US (www.xbrl.us) is the organization established to support the implementation of XBRL in the United States. Among other things, its website offers a variety of information about XBRL, compliance requirements and even a list of software vendors and consultants who can assist with the implementation process. Some of the “Big Four” accounting firms also offer information and implementation guides on their websites.

 

Implementation approach

Picking one of two approaches to implementation, either self-service or full-service, is probably one of the most critical decisions because it will dictate most of the remaining steps in the process.

 

The self-service option consists of purchasing a software package and performing all implementation steps internally. The company should first consult the vendor of its current accounting and reporting software to see if it is capable of generating XBRL reports, as this may produce some unanticipated savings from the outset. The full-service option consists of outsourcing some or all of the XBRL implementation responsibilities to a third-party service provider, while the company mainly reviews and approves the outputs. 

 

There are benefits and drawbacks to both alternatives. The self-service option may provide significant monetary savings and allows for more control over the process. However, this option will require more in-depth training on the XBRL requirements and the software applications, and much more time will be devoted by internal staff during the upfront implementation procedures and as part of the quarterly filing process.

 

With the full-service option, companies can benefit from relying on the expertise of the service providers because they have much more experience in this arena and they can significantly reduce internal labor costs by freeing up staff members to do other tasks. There are still internal labor costs associated with reviewing information at certain milestones during the implementation process and reviewing the XBRL documents prior to submission, but there is a significant reduction compared to the self-service option.

 

When relying on a third party, though, the company will lose a certain amount of control over the overall process. For example, some service providers will require companies to provide their final document for filing up to five business days before their expected filing date in order to prepare the XBRL submission document. For companies that typically submit their filings close to the deadline, squeezing five business days into an already compressed timeline may not be feasible, which may force them to rely on the self-service option or sacrifice valuable preparation and review time.

 

If internal resources are limited and the timeline required by the available service providers is feasible, the full-service option may be the desired approach. However, if monetary savings and retaining full control over the process are significant considerations, then the self-service option may be ideal. As most organizations have limited resources, it is possible that the full-service approach will be the most widely used during the first few years of compliance.

 

Although, the initial implementation process (and costs) will likely need to be repeated if a company decides to switch to the self-service approach in future years as the work already performed by the third party will likely not be transferrable due to software compatibility issues.

 

XBRL taxonomy

Taxonomies are electronic classification systems, often referred to as “dictionaries,” used by the XBRL language, which contain the tags that define the financial and other information (i.e. cash and cash equivalents). Each taxonomy has several thousand tags from which to choose, as each element within the financial statements must have an individual tag.

 

Customizing the XBRL taxonomy will likely be included in the implementation costs associated with using a third party. This may also be a service offered by certain software vendors, but could be an additional charge.

 

The appropriate tags must be selected for a company’s financial statements and notes, or extension tags, can be created if the appropriate tag does not exist. If an item is labeled with a specific tag, the company is saying that the tag properly defines the information that is being reported by that item. For example, if an item is tagged as “cash and cash equivalents,” that item meets the definition of “cash and cash equivalents” within the taxonomy. Therefore, if several companies use this same tag on their financial statements, this is essentially saying that this line item is equivalent across all of these companies, thus increasing the comparability among seemingly diverse sets of financial statements.

 

Although the first required XBRL submission will be based on a quarterly filing, it is recommended that the taxonomy be customized based on the requirements for the annual report, as there may be additional elements required for this filing. It is easier to include these additional elements now and simply exclude them from the quarterly filings.

 

Mapping and validation

Once the taxonomy is customized to meet the company’s specific requirements, the next step is to create the mapping template based on an existing set of financial statements. Tags are then mapped to the specific financial statement items. This template will be the basis for future XBRL filings, so the goal is to develop a comprehensive template that will require only minimal modifications in future periods. For this reason, it may be beneficial to use the company’s annual report to develop the mapping template, as there may be additional elements required for this report that are easier to incorporate during the implementation process.

 

After the financial statements are mapped, the next step is validation, in which the XBRL financial statements are validated to ensure no errors exist. Depending on the software being used, part of this process is automated and any errors are quickly identified, such as verifying that the XBRL balance sheet is in balance and that all items are tagged. Other validations must be done manually, such as verifying the appropriate tags were selected for each line item. If this part of the process is outsourced, the company may only need to validate that all of the appropriate tags were selected after the third party has completed the mapping template.

 

XBRL submission

After the mapping template is prepared and all of the validation checks are completed, the company should be ready when the first submission deadline approaches. To avoid inconsistencies, the XBRL document typically would be generated after or at the same time as the EDGAR filing. The SEC has provided a 30-day grace period for the initial filing, though many organizations in the first phase did not rely on the grace period and submitted the XBRL document simultaneously with their EDGAR filing.

What comes after the initial filing?

After the initial filing is successfully submitted, the company should discuss the overall process to determine if they can gain any efficiency in future periods. The company should also begin preparing for the upcoming milestones.

 

The first milestone will be the annual report filing, which may require some modifications to the existing mapping template. The second milestone will be first filing in year two of compliance, which will require detailed tagging in the notes to the financial statements. If the company is doing the work itself, this will significantly increase internal labor costs as compared to year one because the number of required tags is much greater and several extension tags may need to be added.

 

With the full-service approach, there will be an increase in internal labor associated with reviewing and customizing the taxonomy and reviewing the document prior to submission. However, the largest cost increase will likely be in the fees charged by the service providers to cover the increase in their labor costs.

Pitfalls to avoid

Insufficient education or training

Be sure to invest the time needed to properly understand the XBRL requirements and deadlines and how they impact your organization. There are several resources available that can provide the information required and/or you can partner with your external auditor or another third party to help close any knowledge gaps.

 

Poor planning

Properly implementing the XBRL reporting requirements will take several months of planning and preparation. It is recommended that you prepare and test file your XBRL submission document at least one quarter prior to the deadline for your organization to ensure that you will be ready on time.

 

Also, it is important to properly consider the alternatives: full-service versus self-service. Failing to properly account for the internal labor hours could result in significant delays due to lack of resources, and data quality could also suffer. Switching to a full-service option at the last minute will likely result in a significant increase in costs, well beyond what may have been originally budgeted.

 

Failing to plan for the long term

Be sure to look beyond initial compliance and consider the long-term implications of decisions made during the implementation process. Look forward to the compliance requirements for year two and beyond, and consider which option (full-service or self-service) is consistent with the company’s long-term goals for XBRL compliance.

Start it up

It’s clear — XBRL is here, and it’s time to get on board. These tips should help you get started, and don’t forget to visit www.xbrl.us for in-depth information on implementation. With a clear understanding of the purpose and uses for XBRL, proper planning and a comprehensible, workable plan, you should be on the road to XBRL success.

 

 

James P. Davis Jr., CPA, CITP, is a senior accountant with Colby and Company, PLC, in Chesapeake. In addition to specializing in IT consulting at Colby, he has many years of experience in traditional accounting services for various industries. He was voted as a Super CPA in 2007 and also sits on the VSCPA Editorial Task Force. Contact him at jdavis@colbycpa.com.

 

Haven S. Pope, CPA, CFE, is the manager of financial reporting at CarMax, Inc. (www.carmax.com), in Richmond. He has more than nine years of accounting and auditing experience, including seven years in public accounting. He was voted as a Super CPA in 2008 and also sits on the VSCPA Editorial Task Force. Contact him at haven@hjpope.com or visit his profile on LinkedIn at www.linkedin.com/in/havenpope.

 

Note: The opinions expressed are those of the authors and not of the authors’ employers.