Predictions for the future and the story so far
Even if your external reporting team has adopted a wait-and-see attitude toward implementing XBRL tagging of your company’s financial statements, some analysts and traders have already been making XBRL-based decisions about your stock. How can that be?
Data providers such as EDGAR Online and Bloomberg have been translating their data into XBRL format for some time. In fact, EDGAR Online has created a repository of restated data for thousands of companies reaching back a decade, according to the firm’s vice president of product marketing, Deborah Doane.
XBRL standardizes financial reports by tagging each element in a financial statement, making for easier comparability, eliminating rekeying of data, and promising greater transparency. But investors still face obstacles in trying to use XBRL data in their research, Doane says. ‘A company can still create its own unique tags until the cows come home, leaving us in a similar situation to the past,’ she explains.
New developments
In response, the company created its own standardized XBRL dataset that ‘allows instantaneous comparison across companies.’ EDGAR Online’s I-Metrix tools provide analysts with XBRL readers through Excel add-ins. Analysts can create their own models with new views of the data built on the detail of the content, Doane says. ‘Clients are having a lot of fun doing things they haven’t been able to do before,’ she adds.
She recalls one client who looked back through an XBRL lens and saw Lehman Brothers’ sale of $70 bn worth of securities under repurchase agreements prior to its bankruptcy filing. While the quarter-to-quarter change ‘was quite large, in comparison with the total category of cash it was negligible,’ Doane notes. It certainly did not raise red flags at the time.
EDGAR Online will use a recent $12 mn investment from Bain Capital to continue to develop a rich set of tools for investors, Doane says, as well as preparing for additional datasets when footnotes start getting tagged and mutual funds are required to file in XBRL format in a couple of years.
She points out that investors and traders who have gotten on board are continuing to develop new tools, though they are tight-lipped about specific strategies. For example, the incorporation of tagged footnotes, which follows the tagging of financial statements, will mean ‘tremendous amounts of additional data will be available,’ she notes. ‘One client has more than 800 concepts under development in how it will use tagged footnotes.’
Doane says adoption of tools and models using XBRL data to make investment and trading decisions is a slow process. ‘People who use XBRL data get it, but in the analyst community at large, there hasn’t been a big uptake,’ she concedes.
That slow uptake is reflected in the most recent CFA Institute member survey, which finds only 45 percent of respondents globally are aware of XBRL at all and an even slimmer 11 percent are aware of its use in financial reporting. Even among those aware of XBRL, fewer than one in five report using XBRL-tagged data in their research.
Watching and waiting
Glenn Doggett, director of standards of practice at the CFA Institute Centre for Financial Market Integrity, had hoped to see greater awareness among his members, but describes the adoption of XBRL-tagged data as ‘on the horizon’ for several reasons. Currently, there is a limited dataset because only the 500 largest US companies are required to tag their financial reports. The analyst community is also awaiting tagged footnotes. ‘That’s where the promise is,’ Doggett says.
Although a larger XBRL dataset beyond the 500 filers is available through data providers such as EDGAR Online, Thomson Reuters, Bloomberg and FactSet, ‘it doesn’t hit the universe of most investment professionals,’ Doggett adds. He expects awareness and usage to pick up over the next two years.
The implementation of XBRL in the US ‘lets every company tell its own unique story’ by allowing company-specific extensions to standard tags, Doggett says, noting that the greater the number of extensions, the less useful the tagged data will be. Instead of working with a dataset comprising a thousand comparables, analysts may find themselves left with just a handful of meaningful comparables. ‘Nobody wants to be the guy who got it wrong on a flawed investment or trading decision,’ Doggett observes.
He also says the lack of a mandatory audit for XBRL-tagged data is a concern. He prefers a single filing, with an XBRL audit incorporated into the standard audit. He doesn’t necessarily believe the advent of XBRL will reduce financial fraud, however. Even with greater transparency, ‘we’ll still have accounting fraud,’ Doggett predicts. ‘They’ll just get caught sooner.’
Doggett ticks off several benefits for the IRO in adopting XBRL. ‘By giving investors your story in an easy-to-access format, you eliminate questions and try to accommodate professionals,’ he says. Tagged data should also increase the accuracy of and reduce questions about a company’s data in third-party databases, reducing noise and unnecessary volatility.
Doggett points out that widespread adoption of XBRL reporting standards in China and other emerging markets has opened those economies to global capital flows much faster than would otherwise have been the case. He also sees the SEC push for interactive reporting as a positive trend, citing the commission’s proposed requirement that assets backing securitized instruments be reported in XML as providing transparency, not just for rating agencies and underwriters, but also for institutional investors.
Even with the slow uptake, Doggett is optimistic that XBRL adoption will benefit the investment community as promised. ‘Hopefully, we’ll get there,’ he says. ‘We’re moving in the right direction.’
Incorporating XBRL into research
While EDGAR Online standardizes XBRL data for investors, SavaNet focuses on exchanging XBRL-informed research within the investment community.
With a library of more than 20,000 research reports contributed by more than 100 firms, Eric Linder, founder and president of the financial analysis software company, is clear about where he sees the benefits of XBRL-tagged data. ‘Don’t focus on accuracy or speed,’ he suggests. ‘Focus on the level of detail. You’re going to see people making investment and trading decisions based on much more detailed data than ever before. It’s already being done.’
As an example, he points to pension accounting, with dozens of line items and very little facility for investors to easily evaluate pension exposure either across companies or within one company over time. With more of the footnote data falling under XBRL tagging in the future, Linder predicts that analysts will be able to make far more meaningful comparisons.
He also firmly believes ‘a lot of financial shenanigans could have been caught if information was more standardized.’ He cites the example of MCI Communications, which boosted its income statement by capitalizing period expenses. It was ‘impossible for analysts to track cash flow’ because of the ‘flexibility’ MCI employed in categorizing different line items in its financial statements. With XBRL-tagged data, Linder says analysts will more easily be able to build statistical models and track actual movement of cash to find holes like MCI’s empty income statements.
Ultimately, Linder sees XBRL as a ‘huge friend of the common man, putting him on equal footing with institutional investors.’ Critical of the current implementation, which allows for too much complexity and individualized company-specific tagging, he urges companies to minimize or eliminate non-standard tagging and ‘embrace XBRL rather than trying to continue to hide’ information.
Companies should consider the benefits XBRL adoption will bring, Linder says. ‘Increased transparency will increase the value of your stock by decreasing perceived risk,’ he explains. ‘The more confidence investors have, the more value they place on the company.’
