The Securities and Exchange Commission (SEC) adopted a rule in June 2018 to require public companies to embed interactive data tags directly into their financial statements using a process called the inline eXtensible Business Reporting Language (XBRL). Here are some benefits on inline XBRL and impending implementation deadlines for public companies of various sizes.
Automating financial analysis with XBRL
The SEC adopted inline XBRL in Release No. 33-10514, Inline XBRL Filing of Tagged Data, in part to solve the problem of tagging errors stemming from the current two-step process requirement to submit XBRL data as separate exhibits to financial statements. The rule expands the use of XBRL financial information that the SEC caused in 2009 when it adopted Release No. 33-9002, Interactive Data to Improve Financial Reporting.
In a nutshell, financial statements tagged in XBRL can be read by computers, allowing investors and regulators to more easily analyze and compare companies’ financial information. Investment companies are also required to provide risk-and-return summaries using inline XBRL.
The SEC has said that Internet bots view as much as 85% of the documents viewed on the Electronic Data Gathering and Retrieval (EDGAR) system. “The idea behind inline XBRL was to take advantage of the fact that, ‘ok, you got this embedded understanding in the users of documents of where things are going to be and how they relate to each other. Let’s make that accessible to machines who are increasingly actually the ones reading the documents and making use of the information,’” said Walter Hamscher, Senior IT Program Manager in the Office of Structured Disclosure of the SEC’s Division of Economic and Risk Analysis (DERA).
While it’s difficult to gauge exactly how beneficial the inline XBRL rule has been, Hamscher said it improves efficiency for data users. At a recent technology conference for the financial services industry, he told attendees, “We’ve gotten really nothing but positive responses both from the users of that type of technology within the SEC, but certainly from the filer community and the vendors once they understand what it is they are doing. Having a single document with both data and presentation is really a win from an efficiency standpoint.”
The SEC doesn’t have a way to measure the level of efficiency that interactive data has brought about. But Hamscher says people are spending less time reviewing filings because the data in the document is “literally floating above it.”
Large accelerated filers (companies with public floats of more than $700 million) are required to use inline XBRL for fiscal periods ending on or after June 15, 2019. Accelerated filers (companies with public floats between $75 million to $700 million) are required to implement the changes for financial reporting periods that end June 15, 2020, or later.
Smaller companies with public floats of less than $75 million receive an extra year to comply, to June 15, 2021. Companies must comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
Operating companies are permitted to adopt the rule ahead of the effective date. But they weren’t able to use inline XBRL until March 2019, because the SEC needed to modify the EDGAR system to accommodate the change.
Today’s paper-based financial reporting system is designed for human consumption of financial information, not machine consumption. But investors commonly use financial information in digital format and computer-based earning models. Inline XBRL is part of a larger trend of using digital technology to make financial reporting more reader friendly and to lower the cost of preparing financial statements and adapting to changes in accounting standards.