Running head: THE IMPACT OF XBRL ON FINANCIAL REPORTING 1. The Impact of XBRL on Financial Reporting. Rikki George Kennesaw State University

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1 Running head: THE IMPACT OF XBRL ON FINANCIAL REPORTING 1 The Impact of XBRL on Financial Reporting Rikki George Kennesaw State University

2 THE IMPACT OF XBRL ON FINANCIAL REPORTING 2 The Impact of XBRL on Financial Reporting ABSTRACT The SEC has mandated a phase-in of XBRL filings beginning June 15, 2009 for large accelerated filers. The change has been met with acclaim and criticism. The purpose of this research paper is to discuss the potential and evident impacts that the mandated change to XBRL will have on those involved with financial reporting, and the users of financial statements. There will be a brief introduction to XBRL, then discussions about various implications of its adoption. Investors and accountants alike should know what consequences to expect as more and more companies start filing XBRL documents, so as to make informed choices and opinions.

3 THE IMPACT OF XBRL ON FINANCIAL REPORTING 3 Introduction For decades, the requirements of financial reporting have adjusted to satisfy disparate stakeholder needs as the economy evolves. The adoption of using extensible Business Reporting Language (XBRL) for all corporate filings in the U.S. is a drastic change, but not the first or the last. Indeed it almost pales in comparison to the upcoming convergence of International Financial Reporting Standards (IFRS) and US GAAP. Responses to and consequences of this change will likely vary by company and be dependent on many factors. First, public companies will have to consider the cost to either outsource or train their accounting staff to prepare XBRL financial statements. Second, the role of auditors in assuring XBRL related processes and documents is still unclear. Third, the accounting profession and oversight boards will have to adapt to the needs of their clients and the investing public. Finally, the upcoming convergence of U.S. GAAP and IFRS creates another layer of complexity to the change to XBRL, maybe unnecessarily. Human Resource Cost Considerations Developments in technology mandated by regulators means an increase in costs of training employees. Companies have the option to train employees or simply outsource XBRL document preparation. Currently, the majority of companies are outsourcing (CoreFiling, 2009). Despite the fact that students can learn the basics of XBRL software within a few weeks at Kennesaw State University, most companies find it easier to have the XBRL function performed externally than to spend the resources to train their staff. Perhaps companies are intimidated by the number of errors and inconsistencies already exposed in many submitted XBRL documents (CoreFiling, 2009).

4 THE IMPACT OF XBRL ON FINANCIAL REPORTING 4 Public companies are hiring experts like Edgar Online, Inc., the leader in the creation of XBRL financial reports. A third quarter report recently published about Edgar Online, Inc suggests that they are doing quite well with respect to their XBRL filings revenues: $1.5 million for the quarter ended September 30, 2009 a 219% increase from the same quarter last year (Edgar, 2009). No doubt this is due to the June 2009 deadline for large accelerated filers. Revenues will only increase as long as Edgar Online can maintain its large market share as more companies are required to file interactive data reports. Auditing XBRL There is currently no requirement for an auditor's independent attestation on companies implementation of XBRL, or on the interactive data version of the official financial statements. During the transitional period where both official and XBRL versions of statements will be available, it will be important for investors to know that the interactive data is a complete reflection of the originals. Of course if there are more documents and processes to be examined, the added complexity will add cost to the audit process. Mike Willis, PricewaterhouseCoopers partner and chairman of XBRL International said in Accountancy Magazine, By standardizing the business reporting supply chain through XBRL, the process will eventually become more efficient, not more complicated (Dzinkowski, 2008). Perhaps then the additional audit costs related to XBRL documents would be initially large, but ultimately taper off. While audit firms are preparing to provide assurance and other XBRL services, they will not likely campaign for XBRL assurance in order to avoid seeming greedy (Bartley, Chen, & Taylor, 2009). There may not be any requirements yet for attesting to XBRL-related documents, but there is some guidance available. The AICPA's Auditing Standards Board issued an interpretive

5 THE IMPACT OF XBRL ON FINANCIAL REPORTING 5 Statement of Position (SOP) 09-1 in 2009 providing guidance regarding engagements in which a practitioner performs and reports on agreed-upon procedures related to the completeness, accuracy or consistency of XBRL-tagged data (News Digest, 2009). Also, the AICPA recommends that management engage a CPA to assist in reviewing documents, though it is not required (AICPA, 2009). The success of the XBRL change largely depends on whether or not the statements will be accurate and reliable enough to satisfy the SEC and earn investor confidence. Creating an assurance requirement to XBRL documents is one way to earn confidence through enhancing accuracy and reliability. Problems Encountered with XBRL during Voluntary Filing The NCSU 2009 study of the voluntary filing program of 2005 revealed a large number of errors and inconsistencies with submissions. Although there have been modifications and improvements to the XBRL taxonomies and tagging software since that time, the authors warn that their research gives evidence that the tagging process is difficult and that unacceptable error rates may occur in the future. From a survey of 22 companies VFP filings, the errors consisted of missing elements and amounts (142), sign flips (121), duplicate items (112), incorrect amounts (26), incorrect classifications (11), and incorrect labeling (17). There were many examples of companies extending the U.S. GAAP taxonomy by creating new elements, although the official taxonomy already contained an element for the financial reporting concept in question (Bartley, et al., 2009). At the time of the of VFP filings however, there was not software available to view documents before submission to the SEC. Also, editing software has improved since 2005 so it is likely that many of the problems that existed during the trial will not be as prevalent the first year of mandated XBRL filings.

6 THE IMPACT OF XBRL ON FINANCIAL REPORTING 6 If companies use their own taxonomy extensions, how are investors supposed to compare financial data better than they are doing now? Extensions enable companies to both avoid using inappropriate elements in the available taxonomy and choose elements that best reflect their business facts. The best that could be hoped for then is that with each following year, the taxonomies will become richer to encompass as many reporting elements as necessary to reflect accurately all business reporting needs. However, that process may prove to be pointless as GAAP converges with IFRS in five years. IFRS and XBRL In 2008, the Financial Executives International placed the convergence of U.S. GAAP and IFRS as the second most important challenge to executives; XBRL was number five (Deloitte, 2008). For 2009, XBRL moved up to number four and IFRS to number five, behind the global economic crisis, fair value measurements, and business taxation (Heffes, 2009). I don t see how these two issues don t go hand in hand. Once the U.S. adopts IFRS as the standard, whether as it is described by the IASB or as some GAAP-adapted version, it is possible that many of the taxonomy elements that people are working so hard to include and define will be useless. What is the point of creating something that you know will be obsolete in a few years? There are IFRS taxonomies that many different countries are already using. Perhaps it would make sense then to either build upon those, or focus more on the elements requiring convergence. For countries like Canada who are now converting to IFRS, public companies are focusing on the challenges of adopting a new accounting standard. Will these countries be left behind in the XBRL world or benefit from the learning curve that America is about to climb? (Dzinkowski, 2008) So which should come first?

7 THE IMPACT OF XBRL ON FINANCIAL REPORTING 7 An example of wasted effort on building U.S. GAAP is found within the management discussion and analysis MD&A section of 10-K reports. The SEC said that it is not requiring XBRL tagging of MD&A at this time but it will consider additional interactive data disclosure in the future (Brashear, 2009). That means more time spent on developing elements related to MD&A, which are not part of IFRS. Why go through the trouble? Conclusion The implementation of XBRL is a step in the right direction towards transparency, timeliness, and relevance of financial reporting information. I believe the change comes too soon, with regard to the convergence of IFRS with U.S. GAAP. There is enough evidence to support that companies have difficulties with XBRL. One can only assume that these will only be exacerbated when IFRS comes in full force. It is better for the SEC to focus efforts now where they will be the most useful, like fair value and derivatives measurements not requiring GAAP-taxonomy XBRL filings. Perhaps they could keep it in strictly voluntary mode, until the convergence takes place. This way filers will get experience with XBRL software and become more knowledgeable about the conversion process, without the liability and other negative repercussions of error-inundated filings. Making the XBRL filing mandatory means investors will be relying on and comparing the available data. If those statements aren t fair representations of the businesses, how have we helped the investing community? IFRS first, XBRL second.

8 THE IMPACT OF XBRL ON FINANCIAL REPORTING 8 References American Institute of Certified Public Accountants (AICPA). (2009). SOP for Performing Agreed-Upon Procedures Related to XBRL. Retrieved from: est+standards/practice+aids+and+tools/statement+of+position+09-1.htm Bartley, J., Chen, A.Y.S., & Taylor, E.Z. (2009). A comparison of XBRL filings to corporate 10- ks -evidence from the voluntary filing program. Brashear, Jim. (2009). The SEC mandates interactive data financial reporting. The corporate governance advisor, 17, CoreFiling's Touchstone, a new XBRL review tool, reduces risk, puts SEC filers in control. (2009, June 25). Business wire. Deloitte. (2008). FEI: Top challenges for financial executives in Special edition of the audit committee brief, 2-3. Dzinkowski, Ramona. (2008, July). Preparing for take-off. Accountancy magazine, Edgar Online, Inc.; EDGAR online reports third quarter 2009 results. (2009, November). Investment weekly news, 791. Heffes, E. M. (2009, February) FEI CEO's 2009 top challenges for financial executives. Financial executive, 25, 1, News Digest. (2009, August). Journal of accountancy, 208(2), Retrieved from: ABI/INFORM Global. (Document ID: ).

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