Financial Reporting

SEC’s Latest XBRL Action Explained

Calculation relationship reporting in XBRL filings -- the subject of the SEC’s ‘Dear CFO’ reminder letter issued earlier this week -- is an important component for issuers, investors and the SEC.

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As we reported earlier this week, the the U.S. Securities and Exchange Commission recently issued a  ‘Dear CFO’ Letter in July, 2014 “to certain public companies regarding their reports on Form 10-Q and the XBRL requirement to include calculation relationships.”

Campbell Pryde, president of XBRL-US, an organization that has spearheaded the standardized translation, transition and reporting of data in an electronic format, was helpful in translating the SEC’s ‘calculation relationship’ requirements into plain English, and putting those requirements into context.

Campbell Pryde: Today, if you’re looking at a financial statement, just the regular, good old, paper-based, or HTML financial statement, the way that the data’s presented in it, it presents a number of calculations. For example, in a paper presentation, let’s say you have cash, accounts receivable, inventory and you have a line under the last one, a total of all three, and you have total current assets.

Once you take this data, and then you put it into XBRL, it becomes atomized, so you’re going to have four distinct pieces of data there: total current assets, inventory, accounts receivable, and cash. But once you’ve tagged that data for purposes of XBRL, the information is lost to indicate that the first three things add up to current assets, unless you include, what is referred to in XBRL, as the ‘calculation relationship.’

In the paper filing, the calculation of the three items adding to the fourth, is implied in the paper filing by the manner of presentation, i.e. by a single line after the bottom item, or a double underline under a total.

To capture that in XBRL, e.g., to explain that cash, plus accounts receivable, plus inventory, is equal to total current assets, or that ‘this plus this plus this plus this equals that,’ is called the calculation relationship.

FEI Daily: Why do you believe the SEC may be focusing on this now? How prevalent do you think this problem of companies failing to provide calculation relationship information is in their XBRL filings?

Pryde: The problem has been, someone has reported these full facts in their HTML filing, it’s kind of clear the way it’s presented, that those three things add to this total. But when the file was filed, they just haven’t put in the fact that those three things add to the total current assets. So that’s what they’re talking about there.

FEI Daily: Is there a way to almost force the total in a sense just like you can on, say on an Excel spreadsheet, if you can force the total in, rather than thru a formula?
Campbell Pryde: Yes.  The problem is that companies just do not define what the calculation is. The existing SEC rules are here: you need to put this formula, or in more general terms, calculations relationships, in your XBRL filings.

FEI Daily: And is this one of the errors that you find using the consistency suite?

Pryde: Yes. We check for things that we would expect a calculation to exist for. For example, If you have current assets, we’d expect you to define a calculation for it. If you have net income, you should be putting a formula in for how you got to net income. Then there are going to be other elements that you are not going to have a formula for, one-off things, that you are not going to have a calculation or formula for, like your discount rate on pensions.

The other thing we see is where the calculation doesn’t work, the total is inconsistent with the formula, so they leave the calculation out. And that usually happens when companies have entered the value incorrectly.

That’s why the SEC wants people to put the calculation relationship in, because it helps to double check the filing.

Fewer Missing Calculations Can Help Resolve Other Errors

Pryde: A lot of people have been commenting to the SEC on the quality of the data , I think Corp Fin wrote about this, and I believe the SEC is starting to look at this; this is probably a sign they’ll be looking at it more closely than in the past.

I know they’ve been talking about it, and while I would have expected them to get something out on Dimensions, invalid member things, such as breaking things down or disaggregations that are not appropriate, such as business segments, I believe they are beginning with the calculation relationship requirement as a starting point.

According to XBRL-US table: http://csuite.xbrl.us/php/dispatch.php?Task=CC_PieChart, although 2.17% of XBRL errors are due to calculation relationship errors (missing calculation relationships), fixing those errors could lead to fixing other XBRL errors, which , on a cumulative basis, have totaled over 3 million errors, according to XBRL-US’ Consistency Suite

FEI Daily: What are your thoughts on the use and usefulness of XBRL information today, by investors, regulators and others?

Pryde: At XBRL-US, we are taking all this data and help promote tools so we can put this information in the hands of some small companies that started up becoming redistributors of data, Capital IQ, or a Thomson Reuters subscription.

On the investors’ side, hedge funds are going to take this data and use it for filtering or screening analysis, investment banks going to take this,  banks with derivative exposure.

A lot of folks are interested in, how can I get detailed data, facilitate selling products to companies, academic instances as well.

Today, there are not many instances of individual retail investors pulling it down using it for detailed analysis, the amount of knowledge necessary is why that isn’t happening that much; we are trying to get free available tools out there.

On the other side, as to the ability to enhance data quality, and our role in that, of the 3 million XBRL errors, there are also paper or HTML errors, such as people reporting more shares than issued, or expected benefit payments, or negative additional paid in capital, we have rules that look for problems in XBRL, and look for problems that aren’t economically possible , we send that information back to filers.

Upon request, we get a lot of random requests from people like research houses, asking us if we can tell them of companies that meet certain conditions.

We put out something called the Pension analyzer, we look for issues to fix, if you have pension administration expense, you’re not supposed to deduct pension admin expense from obligation you have to your workers but some co’s do, that’s a case where if the company made a mistake, it is wrong in html filing as well.

It is rare that a retail investor would go directly to the SEC site and download XBRL, they would go thru a third party intermediary. One thing we try to do is promote the establishment of intermediaries.

FEI Daily: What are your thoughts on the SEC’s use of XBRL data for their Accounting Quality Model (AQM) or Robocop?

Pryde: I haven’t seen anything out of the Accounting Quality Model, I would imagine they’ve got a bunch of researchers, obviously they have a bunch of data, they are pulling data out all the time for different queries, the SEC is not the only place in the world where XBRL is being used; UK customs service uses it, and many other agencies.

Additional Insights 

Separately, FEI Daily spoke with Alex Rapp, Co-Founder of Calcbench.

FEI Daily: What are your thoughts on the use and usefulness of the calculation relationship information, and XBRL in general, today?

Alex Rapp: Calculation relationships are among the most powerful pieces of an XBRL interactive filing. They provide insight into what each number means, and are especially important in helping us standardize information from the very wide variety of styles of disclosures that we see.

When companies provide incorrect calculation information, or exclude this information entirely, it becomes much harder to use a computer to automatically read filings and analyze the numbers, thus taking away the great benefit of XBRL.

I believe that the vast majority of filers are dedicated to providing the best filings they can. But having said that, these kind of quality problems still exist. At Calcbench every month we are seeing more people using XBRL data for investment decisions, competitive benchmarking, economic analysis, and more. The quickness, interactivity, and rich detail that XBRL data provides has become too powerful to overlook. But for XBRL to really reach its potential, it’s imperative for companies to make sure that they continue to raise their quality standards.

Investor comment invited 

NOTE: FEI Daily invited comment from two of the top ten hedge funds in the U.S., a large institutaionl investor, two national industry associations for hedge funds and a major industry association for institutional investors, to obtain “the investor’s perspective” on the use of XBRL in today’s world; no comments were received as of the deadline for publication for this column, aside from one referral to a state organization.

FEI Daily staff appreciates the participation of Leena Roselli, Senior Manager of Research, Financial Executives Research Foundation, in these interviews, and we encourage you to check out her recent reports on XBRL in FERF’s online bookstore at www.ferf.org