In 2009, the U.S. Securities and Exchange Commission (SEC) mandated that all public companies disclose their financial statements using eXtensible Business Reporting Language (XBRL), a standardized method for reporting financial and business data that allows for easier analysis and improved company comparisons. Beyond the compliance mandate, however, enterprises have been missing a huge opportunity to leveragethis rich data in areas of critical executive decision-making.
The value for doing so is clear. Financial disclosures are essentially platformsfromwhich information on a company’s operation can be mined as a source for in-depth analytics for governance, risk and compliance (GRC) purposes and investment decisions. However, the reams of data these disclosures generate present challenges that requirefurther analysis before they can be useful.
Prior to the SEC mandate, it was often a difficult and laborious process for analysts and business leaders to review, analyze and compare granular data points across various companies and markets. Yet this data is critical for proper risk management, governance and compliance within the enterprise. By applying analysis to specific XBRL data concepts or “tags” associated with the financial disclosure,companies may best use the information to their advantage.For example, a company can analyze how much investment is specifically being made in innovation, represented by the ‘Research and Development’ expense and compare its datato its competitors in that particular industry. Another example illustrates a company’s monitoring of corporate margins of a particular business line in comparison to peers. Are the company’s costs increasing faster than industry peers? Is revenue declining in comparison?
In order forXBRLdata to be useful, however, it is critical that companiesdevelop a disciplined strategyto how the data is collected and created within the organization; the data is only as valuable as the method used to collect it. Companies must not only understand how the data will be analyzed internallyin advance of applying XBRL tags, but how it can be used by external parties, including investors.Surprisingly few companies are doing this. The smart ones, however, empower their C-level executives and boards of directors by making the financial disclosure process a proactive resource in the GRC policy creation process.A strong approach incorporates the following process steps:
- Appoint a senior executive to own the top down data strategy for the firm. This is usually the chief financial officer, but can also be the chief marketing officer, investor relations officer or, increasingly, a new position called chief information officer. Once a firm develops an understanding of how they want the data they are creating to be used internally and externally, it can apply proper compliance procedures for disclosure creation and implement software applications to help facilitate the process of analyzing the data,
- As it pertains to the authoring of the financial disclosure, develop a formal XBRL policy using a third-party-created exhibit as a starting point.Properly developed, documented and formalized disclosure creation policies should have basic, repeatable steps, such as: plan, map, review, test and file. The SEC recommends incorporating this plan into existing disclosure controls and procedures.
- Select a XBRL creation tool that can help simplify and structure the tagging process. This allows the data to be consumed and analyzed in internal systems, retaining data integrity and centralization better than various spreadsheets that may contain data errors. RR Donnelley’s ActiveDisclosure is one of several of these disclosure authoring tools.
- Implement a sound quality control process, as incorrectly tagged data will lead to incorrect analysis.With this process errors are largely avoided since the element is tagged a single time with internal calculation and validation engines to check data integrity and are much less prone to error than manual input.
Once this quality XBRL data has been collected, submitted to the SEC and validated, companies and investors may apply analytical tools that will provide insight into the figures for use in market research, company comparisons, informed decision-making and clear communication with investors and stakeholders. It provides three primarybenefits to all stakeholders:
- Transparency: Investors want to truly understand the operations and drivers of the companiesin which they are investing. For example, investors can now access granular data regarding various revenue and expense items and not rely on commercial research sources to do so. This added layer of transparency allows the investor to evaluate recurring revenues and expenses and compare them to one-time or short-term revenues and expenses, a key factor in formulating a fair value assessment of the company.
- Comparability: executive managementand investors can use XBRL data to compare data points historically, across various firms or internally across departments, allowing for executives to identify trends and implement policies to take advantage of any market opportunities.While companies may change a line item label, the underlying element should remain consistent. An example of this can be represented with Segmented Revenue Data;if a company changes their United States revenue line item to be listed as ‘U.S.A revenue,’ the underlying XBRL identifier will remain consistent across time. Both tags are combined to retrieve a value for revenue from the United States, which is reported in the Business Segment section of the Notes to Financial Statements.
- Risk management: There is an increased focus by C-level executives and the board of directors on how to best manage external and internal risks to avoid scandals, increase company valuation and drive market growth. XBRL data provides a deeper analysis of operations within various departments and allows for better informed decision-making.For example, management can quickly track leverage ratios and profitability margins against a peer set. Firms with Defined Benefit Pension Plans can easily compare the expected return on the plans’ investments and determine if they are reasonable with respect to the mix of portfolio assets; oralternatively, if aggressive assumptions are used and a larger pension expense may be on the horizon.
Importance of proactive data strategy within the corporate executive suite has never been more critical than it is today. Business leaders are expected to be armed within-depthanalysis of their company’s operations and their competitive landscape in order to best propel growth and leadership. XBRL data provides executives and investors with the ability to easily compare and analyze the massive amount of data from financial disclosures for improved decision-making. The SEC got the ball rolling by mandating XBRL data collection; now it’s time for companies to start applying best practices and use it.
David A. Frankel currently presides over the data and analytics business for EDGAR® Online, an RR Donnelley company. Mr. Frankel brings 20 years of leadership in sales, marketing and business development at prominent financial information services firms. Prior to EDGAR®Online’s acquisition by RR Donnelley in August 2012, he served as its chief marketing officer, overseeing the firm’s sales, marketing and product strategy.
Source: Edgar Online