The Final SEC Clawback Rules: Insights, Best Practices, and More
XBRL Tagging: GPS to Navigate Your Financial Reporting and Data
If financial reporting is an endless horizon of line items and disclosures, XBRL is the lighthouse investors and stakeholders need to get to shore. That makes XBRL essential for CFOs, CAOs, and other leaders in a finance organization to understand.
However, that doesn't necessarily mean XBRL is either intuitive or straightforward. In fact, without someone who's been there and done that to lead the charge, XBRL can feel like scaling Everest to a newcomer. And CFOs rightfully don't like that sort of feeling.
But that's why we're taking an in-depth look at XBRL tagging, discussing key areas like:
- XBRL tagging fundamentals
- Taxonomies in XBRL
- Technology's role in reviewing XBRL data
- Benefits of implementing XBRL tagging
- Challenges associated with XBRL adoption
- Best practices for effective and accurate XBRL tagging
So let's jump right in.
What Is XBRL – Tagging Fundamentals
So, what exactly is XBRL, other than an acronym that sounds straight out of NASA? It stands for eXtensible Business Reporting Language, an XML-based markup language that – without hyperbole – has revolutionized financial reporting. Think of XBRL as a secret decoder ring for financial data, transforming it from boring and hard-to-read reports into standardized, machine-readable information.
Just as importantly, XBRL makes it easier to analyze, compare, and share business information across various platforms. By using this universal coding system, companies can ensure both computers and humans can easily understand their financial reporting and data. In other words, no more squinting at endless rows of numbers.
XBRL International, a global not-for-profit consortium of over 600 public and private organizations from 50 countries, manages the standard.
Key Components of XBRL Tagging
- Taxonomy: A taxonomy is like a dictionary for your company's finances, defining all the elements you must report on in your industry or sector. Each element represents specific concepts like revenue or assets.
- Concepts: If taxonomies are dictionaries, concepts are the definitions within them, organizing and presenting data so it is clear and consistent for financial statement users.
- Facts: These are individual pieces of reported data tagged with appropriate taxonomy
elements so people and machines can easily identify them within your document.
Taxonomies in XBRL
Since the often misunderstood taxonomies sit under an especially bright spotlight, we're giving them their very own subheader. At the most basic level, taxonomies are like a secret language regulators use to communicate with companies. In the case of XBRL filings, a taxonomy is a grouping of financial concepts defined by regulatory bodies such as:
- SEC: The most obvious example – the US Securities and Exchange Commission. They mandate public companies in the US to submit quarterly (10-Q), annual (10-K), and other periodic SEC filings tagged with XBRL using US GAAP taxonomy. And FYI – US GAAP alone features over 15,000 different elements.
- FERC: The Federal Energy Regulatory Commission requires energy utilities under its jurisdiction to meet specific XBRL tagging requirements using FERC-specific taxonomies - talk about being particular.
- FDIC: Last but not least, banks regulated by the Federal Deposit Insurance Corporation must file Call Reports containing standardized bank performance metrics tagged with - you guessed it - XBRL using the FDIC's own taxonomy.
These authorities – amongst others – require companies to use an XBRL format that tags submitted financial and business reports, utilizing specific taxonomies so they can efficiently process all of that data goodness.
As a result, the taxonomies act like an organized library for financial reporting concepts. And it's these libraries that provide the standard tags or labels for each concept, making it easier for financial statement users – human and otherwise – to understand what's going on in a company's financial reporting. Therefore, the primary purpose of XBRL taxonomies is to ensure consistency across different reports while making them easily accessible and comparable.
Who Is Required to Use XBRL?
At this point, the SEC requires nearly all registrants to use inline XBRL (iXBRL) for their filings. The original mandate had a three-year phase-in approach – wave one included requirements for large accelerated filers, wave two for accelerated filers, and the final wave included all other entities. That final wave required implementation of inline XBRL for those other entities beginning with fiscal years ending on or after June 15, 2021.
Note that private companies filing their Form S-1 as part of the IPO process do not currently have to comply with XBRL mandates. However, to state the obvious, they should be prepared to comply with the requirements once they become a registrant on their required filings.
What are the SEC Requirements for XBRL Filers?
Public companies filing financial statements with the SEC must tag the face financials – every number, table, accounting policy, and footnote. Filers must also tag the cover page of the filing and auditor information.
As for the actual tagging itself, the SEC requires four different levels:
- Level 1, text blocks - Tagging each footnote as a single block of text.
- Level 2, accounting policy text blocks - Tagging each accounting policy described in the company's footnotes
- Level 3, table text blocks - Every table or schedule within each footnote.
- Level 4, detail tags - Tagging all numerical values must be tagged.
Technology's Role in Reviewing XBRL Data
Now that we've covered the basics of XBRL and taxonomies, let's dive into how technology can help you review your tagged financial statements in no time flat. In this case, we're using Workiva as an example since it's the filing solution we use most often with our clients. However, as always, we recommend doing your own due diligence to see which solution suits your specific needs and objectives best.
HTML View vs. Interactive Data View
Workiva designed the HTML view to resemble traditional paper-based financial reports, just with added interactivity. It lets users click on individual facts within the report to see their corresponding tags and other related information. This makes it easier to quickly identify potential issues or inconsistencies in the tagging process.
The Interactive Data view, on the other hand, displays all tagged data points as an interactive table. As a result, users can efficiently filter, sort, and analyze this information. This format also integrates with various analytical tools used by investors or regulators.
Common Errors Detected by Workiva
- Duplicate facts: Sometimes, companies accidentally tag the same fact multiple times using different elements from the taxonomy. Workiva helps identify these duplicates so you can correct them before submitting your report.
- Accuracy issues: Incorrectly applied tags may lead to an inaccurate representation of your company's financials – which isn't great. Workiva flags such inaccuracies so they don't slip through the cracks.
- Calculation warnings: Calculation inconsistencies might occur when certain tagged values don't add up as expected. Workiva's platform detects these issues and alerts you to make necessary adjustments.
- Negative value warnings: Some financial concepts should never have negative values – revenue and assets come to mind. If your report contains such anomalies, Workiva will give you a heads-up so you can quickly fix them.
In short, with the help of Workiva and similar tools, reviewing XBRL documents becomes less daunting and more efficient. By ensuring error-free reporting, companies can remain compliant while providing accurate information to stakeholders who rely on it for their decision-making.
Benefits of Implementing XBRL Tagging
Now let's take a closer look at some of the advantages of adopting standardized reporting through implementing XBRL tagging on your company's financial statements.
Improved Transparency in Reporting
Once again, XBRL makes financial reports more transparent and easily understandable. Utilizing a consistent structure, filers can showcase their fiscal information in a way that is both machine-readable and easy to comprehend for people. Simply put, XBRL provides analysts, regulators, and investors with a better user experience, allowing them to quickly find and grasp essential details without looking for a line item needle in the EDGAR haystack.
The result? A clearer picture of an issuer's performance, ultimately leading to better-informed decisions.
Better Decision-Making for Stakeholders
Speaking of decision-making, XBRL drives:
- Faster access: By making it easier for users to search, analyze, and compare financial information across different companies or industries, XBRL speeds up the decision-making process when evaluating investment opportunities.
- Better comparability: XBRL's standardized format allows for apples-to-apples comparisons between companies, even those operating in different countries or under varying regulatory bodies. This lets investors confidently make decisions based on a comprehensive understanding of the relative performance between companies.
- Enhanced data accuracy: By automating the extraction and analysis of financial data, XBRL reduces the risk of human error – always a good thing when it comes to making sound investment choices. Plus, with real-time access to accurate information, stakeholders can stay ahead of market trends and react swiftly to new developments.
Challenges in Adopting XBRL Tagging
While the benefits of adopting XBRL tagging are undeniable, it's not all rainbows and unicorns. Companies also face some challenges when implementing this standardized reporting system.
Choosing the Right Tags from a Vast Taxonomy
The sheer number of tags available within a taxonomy can be overwhelming, especially for those new to XBRL. Thus, while choosing appropriate tags is crucial for accurate reporting, it can feel mission impossible without proper guidance or expertise.
But that's why engaging experts specializing in XBRL tagging can save you time and ensure accuracy in your submissions. Wink wink, nudge nudge.
Ensuring Consistency in Tagging Across Documents
Maintaining consistency when applying tags throughout a mountain of different documents can be another mighty challenge. But, as you probably guessed, we have some tips on that front:
- Create clear guidelines outlining how each tag should be applied across different sections of your financial reports.
- Again, leverage technology solutions like Workiva designed specifically for managing consistent application of taxonomies across multiple documents.
- Regularly review your tagging practices to ensure they remain aligned with the latest regulatory requirements and best practices.
Additional Best Practices for XBRL Tagging
Thought we were done with the best practices? Pfft. We're just getting warmed up.
Where Should You Start Tagging a Document?
First off, choose SEC filing software that fits your organization well. From there, it's often easier to start with the larger text blocks – Level 1 – then proceed to the detail tagging in Level 4. This process will help develop the proper structure for your XBRL outline labels.
Also, your outline should mirror the order of the sections of your report. For example, if you are tagging a 10-Q, you'll want to have your XBRL sections start with the cover, then the Financial Statements, then the footnotes in the order you presented them in the financials.
Staying Informed on Regulatory Changes
Regulatory requirements are always evolving. To stay ahead of the game, it's essential to keep yourself updated on any changes in taxonomies or reporting standards. You can do this by subscribing to newsletters from regulatory bodies, joining industry forums where professionals discuss updates, or attending webinars hosted by experts in the field.
Pro Tip: Set up Google Alerts for keywords related to XBRL regulations so you never miss an important update.
Seeking Expert Assistance for Accurate Tagging
Don't try to tackle it all by yourself – seek expert help. Enlisting expert guidance is always a good idea when navigating complex financial reporting processes like XBRL tagging. Or, depending on the circumstances, work with providers that offer comprehensive, tailored services for your organization's various needs.
For example, maybe XBRL tagging issues are a symptom of something bigger – slow and inaccurate reporting or a generally janky reporting function. The right specialists can help you address all of the above. And then some.
Finding Your Perfect Partner: Key Considerations
- Credentials: Look for partners with proven track records of success working with companies similar to yours.
- Tech-savviness: Select partners who leverage cutting-edge technology tools designed specifically around XBRL tagging workflows.
- Communication: Choose partners who are responsive, proactive, and easy to work with.
As we said, the regulatory environment – including XBRL tagging – is dynamic if it's anything. Thus, there are a few XBRL-related items we recommend paying attention to:
Pay vs. Performance Disclosures
All registrants required to present the new pay vs. performance disclosures in their proxy are also subject to iXBRL tagging requirements. Beginning with cover page tagging but now also including these Item 402(v) disclosures, registrants must separately tag the following in their proxy statements:
- Values in the pay vs. performance table
- Footnote text block tag
- Relationship disclosures
- Tabular List
BDCs and CEFs
Business development companies (BDCs) and closed-end funds (CEFs) must also now tag their quarterly, annual, and current reports with iXBRL. Specifically, they must use US GAAP taxonomy to tag their cover page, auditor information, and financial statement information. In addition, BDCs and CEFs can submit their N-2 cover page and other prospectus information using the new CEF taxonomy.
XBRL in ESG and Sustainability Reporting
The benefits of using XBRL for financial reporting will carry forward to sustainability reporting, especially as the needs and requirements grow. Although sustainability reports offer limited value to stakeholders when published in static formats, we've seen how XBRL benefits stakeholders for almost two decades now. And with sustainability reporting quickly becoming just as important as financial reporting, more regulators are sure to join the ranks.
In the end, information not captured in digital format is not comparable, transparent, or even reliable. Therefore, static information simply isn't the kind of information analysts and investors clamor for. To that point, just as we've discussed today, XBRL speeds up the reporting, information processing, and decision-making process.
In fact, we've already seen movement on this critical front:
- In September 2021, the Sustainability Accounting Standards Board (SASB) released an XBRL taxonomy for its 77 industry-specific disclosure standards.
- In 2022, the International Financial Reporting Standards (IFRS) issued a staff request for feedback on a proposed IFRS Sustainability Disclosure Taxonomy for the IFRS Sustainability Disclosure Standards. If that proposal isn't already finalized by the time you're reading this, it's imminent.
- In May 2022, the European Financial Reporting Advisory Group (EFRAG) published a limited first draft on an XBRL taxonomy for the European Sustainability Reporting Standards as part of the draft ESRS E1 standard on climate change.
Yes, this has been a lot to take in. But XBRL is a critical topic that will only grow in importance as its place in the reporting world gets bigger and brighter by the day. So, if all of this either gives you a headache or brings a bead of sweat to your forehead, our reporting gurus at Embark might just become your new best friends.