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Insource, Outsource, or In-between? How to Choose the Optimal Approach to XBRL Preparation for Your Company – and Why It Matters

Merrill Disclosure Solutions | July 08, 2014

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To file accurate, SEC-compliant financial statements in XBRL, your company needs to be in the right place on the XBRL-preparation continuum. The approach to the preparation of SEC filings must be realistic and appropriate for the company's XBRL abilities and resources; and if external resources are required, they must come from the right provider.

Many corporate filers are currently evaluating the best approach to preparing their SEC disclosures in HTML and XBRL. A common misperception is that a company must prepare XBRL files either wholly in-house (with a web-based solution) or completely outsourced to a service provider. This view oversimplifies what is really a continuum of choices between those two extremes. The key is to find the optimal balance between internal and external XBRL resources.

Find your company's best approach

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When the SEC first required companies to submit XBRL exhibits with their periodic financial reports, filers generally relied on outside expertise from service providers such as Merrill Corporation to prepare their XBRL documents. Now in 2014, some companies can prepare their XBRL filings Precise use of XBRL is essential for your company's communications with the financial markets. themselves, although others choose to continue engaging outside parties to produce their XBRL documents or at least to help with the XBRL preparation. Although the movement toward in-house XBRL preparation was anticipated, the easy availability of disclosure management software - which lets a filer produce traditional EDGAR HTML and XBRL documents from the same platform - has accelerated the trend toward do-it-yourself XBRL.

For every filer, finding the optimal approach to the preparation of XBRL disclosures is absolutely crucial. Why does the choice of preparation approach matter? The safe harbors are gone: most filers now bear full liability for mistakes in their XBRL disclosures. Moreover, producing high-quality XBRL data is not just a compliance exercise. Ensuring accurate financial disclosures in XBRL is a matter of pragmatic, market-driven importance for any company that makes SEC filings - as vital as the accuracy of traditional EDGAR filings. Precise use of XBRL is essential for your company's communications with the financial markets.

Yet filers continue to make XBRL mistakes, which may not only expose them to scrutiny from the SEC and Congress but also may mislead investors or alienate analysts because of inaccurate financial data. In many cases, these errors persist because the companies that are making the mistakes have not found the optimal approach to preparing their XBRL documents.

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The continuum of XBRL preparation: Insource, Outsource, and Hybridize

The corporate approach to XBRL preparation ranges along a continuum of differing levels of involvement. Filers generally are one of three basic types: insourcers, outsourcers, or hybridizers.

Insourcers
At one end of the XBRL-preparation continuum are the insourcers: companies that use their own staff and resources to map, tag, and review their XBRL disclosures. The staff gains technical XBRL knowledge from various sources, including seminars and research. These companies do not seek outside help for XBRL preparation, review, or advice.

Outsourcers
At the opposite end of the continuum are the outsourcers: companies that rely solely on external experts to prepare their XBRL documents. The outside service provider prepares the XBRL files and explains the XBRL preparation to the outsourcer's accounting team. The technical details summarized for the outsourcer will include information about the proper mapping and structuring, the current best practices, and the applicability of changes in the US GAAP taxonomy and the SEC's XBRL rules. The outsourcer's staff reviews the XBRL-tagged disclosures, provides feedback to the outside preparer, and asks questions about the XBRL preparation.

Hybridizers
Between these extremes are the hybridizers: companies that apply a combination of internal and external resources to prepare XBRL filings. There are many possible permutations in the allocation of work between the internal and the external preparers. At a hybridizer, selected parts of the XBRL preparation are handled by in-house staff while the remaining portions are completed by an outside service provider. Alternatively, the filer prepares all of the XBRL filing and seeks advice from the outside party when issues arise. In that case, the outside party reviews the XBRL files after their completion.

How does (or should) your company prepare its XBRL filings?

Where is your company on the XBRL-preparation continuum? Does its position match its ability to prepare XBRL filings that are accurate and in compliance with SEC rules? Most importantly, where should it be? Each company has distinct, observable attributes that help determine whether it should be preparing XBRL documents on its own or whether it needs outside expertise to ensure that its XBRL disclosures comply with SEC rules.

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When insourcing XBRL preparation is the best choice At the company that is well-suited for insourcing, selected members of the accounting staff have a deep understanding of the US GAAP taxonomy and its annual updates, the EDGAR Filer Manual, the SEC rules for interactive data, the structure and specifications of XBRL files, and the proper way to apply XBRL to financial statements. These team members are up to date and aware of modifications in the US GAAP taxonomy and FASB implementation guides, and the proper application of these changes to the company's XBRL filings. They stay current on best practices for XBRL, as recommended by the FASB and XBRL US. The insourcing filer also has a well-designed transition plan in case the staff members with XBRL expertise leave the company or transfer to other roles.

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When outsourcing is the best choice
At the company that should outsource, the accounting staffers are familiar enough with XBRL to understand and interpret the output from the XBRL files, but they also respect the level of expertise and judgment that outside service providers bring to the process of creating XBRLinstance documents. These in-house team members can determine whether the XBRL version of a financial statement is disclosing the same information as its traditional HTML counterpart. However, the typical outsourcing filer is comfortable with its current processes and wants to focus staff time and attention on the company's core business and not on XBRL preparation (beyond what is necessary to review XBRL filings each quarter). It may have limited resources, and its accounting department may undergo frequent staff turnover because of promotions or transfers.

When a hybrid approach is the best choice
At the company for which a hybrid approach is the best choice, members of the accounting staff have at least some of the knowledge needed for accurate XBRL preparation that complies with SEC rules. These staffers understand what it takes to have error-free, SEC-compliant filings in XBRL format. Crucially, they know enough to determine that some of the filer's XBRL challenges are beyond the expertise and experience level of the in-house staff, whose time and resources may be consumed by other responsibilities. In other words, the company has employees who can ask the right questions about XBRL mapping and tagging but need help with the technical execution and with matters requiring human judgment - especially in the more complex areas of XBRL structures, new disclosures, annual taxonomy changes, and the EDGAR Filer Manual's instructions on XBRL.

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Errors in XBRL filings reveal that many companies are misplaced on the continuum

From our observations of XBRL filings to date, many companies are in the wrong place on the continuum. In the first wave of XBRL filings during 2009-2011, many of the errors in disclosures submitted to the SEC were, quite clearly, made by people who did not understand the rules for XBRL tagging - generally through a lack of familiarity with new SEC rules and the US GAAP taxonomy. In fairness, some mistakes happened simply because SEC guidance had not yet evolved to cover all of the taxonomy, leaving filers uncertain on how to tag particular disclosures. The SEC rules therefore provided a two-year period of limited liability to allow time for companies to adjust to the XBRL requirements and to work these types of errors out of their systems.

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Many filers did in fact eliminate errors of the kind that had marred early XBRL filings and did not repeat them in later XBRL disclosures. However, serious mistakes continue to appear in XBRL filings - and they occur for new and different reasons.

Failure to revisit initial mapping
One observable trend in XBRL mistakes now is overreliance on the initial mapping. Once the initial mapping of the face financial statements and the detailed footnotes is completed, some filers do not scrutinize the mapping of these disclosures adequately during subsequent business quarters. However, the initial mapping must routinely be reviewed for necessary changes. Modifications may be prompted by the filing of corporate disclosures that are different from those the company submitted earlier, or they may stem from annual changes in the US GAAP taxonomy.

False sense of confidence
A more disturbing category of errors involves misguided or excessive reliance on software-as-a-service (SaaS) solutions for XBRL preparation. Many filers - companies whose XBRL knowledge and resources would naturally put them in the hybrid or outsource range of the continuum - are still making egregious XBRL mistakes because they have moved too far across the XBRL-preparation continuum. They are doing XBRL preparation in-house with do-it-yourself or SaaS resources instead of seeking some type of outside assistance for their XBRL filings. Staff members at these companies have a false sense of confidence that they can prepare the XBRL properly, using software alone - without appreciating the critical role that human judgment plays. By positioning themselves as insourcers with do-it-yourself software, their XBRL disclosures may contain errors that will mislead investors, alienate analysts, and irritate the SEC.

Inadequate service provider
We have also seen companies that, knowing outside XBRL guidance was needed, moved across the continuum from insourcing to a hybrid approach. Unfortunately, some of them still submitted poor-quality XBRL simply because the outside party they engaged did not serve them well. Not all XBRL service providers are alike. Obtaining the right expertise is as important as being in the right place on the continuum. Many filers did in fact eliminate errors of the kind that had marred early XBRL filings and did not repeat them in later XBRL disclosures. However, serious mistakes continue to appear in XBRL filings - and they occur for new and different reasons.

Filers must be realistic about their XBRL expertise

The question of whether to insource or outsource is more than a choice between an in-house web-based solution or outsourcing (Merrill provides both). Many companies are realizing that they need help from experienced, knowledgeable, CPA-qualified consultants, such as those at Merrill Corporation, to play some role in preparing or reviewing their filings if they are to produce XBRL of the highest quality - no matter what platform or approach they use for the creation of their disclosure documents.

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