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The 7 Keys to XBRL Quality in SEC Filings

Merrill Disclosure Solutions | February 18, 2014

The 7 Keys to XBRL Quaity

The quality of XBRL submissions has been in the spotlight recently for the thousands of companies now submitting XBRL financial statements to the SEC. Despite the extensive discussions on quality, there has not been much, if any, discussion of what “XBRL quality” is. Determining whether your XBRL filing is high or low on the quality scale, or determining if the XBRL you are consuming is appropriate or not, requires an understanding of the components of quality. So, what is XBRL quality?

In its most basic sense, high-quality XBRL has two traits: First, it is prepared in a manner that is consistent with other filers; and second, it conveys the same information as the traditional HTML financial statements. Understanding each of these traits is the key to understanding what constitutes XBRL quality.

High-Quality XBRL is Prepared Consistently

High Quality XBRL Has Two Traits

For XBRL to be easily consumed by users of the data, it needs to be consistently prepared across all filing companies. We do not know every possible way that XBRL will be consumed in the future, but an essential concept to making XBRL consumable is the consistency of the way filers map, tag, and structure the XBRL information. If the XBRL files are prepared consistently, consumers of the data - whether analysts, the SEC, or individual investors - can much more easily understand it and analyze it.

How does a company know if its XBRL files are consistent with the files of the thousands of other companies preparing XBRL? Based on Merrill's extensive experience in XBRL preparation, this is clear: To produce high-quality XBRL that is consistent with that of other companies, the preparer needs to understand and adhere to various rules and guidelines.

Components for achieving high-quality XBRL filings

Issue One

EDGAR Filer Manual. The filing company must follow the instructions in the EDGAR Filer Manual that pertain to XBRL. Although some parts of a filing can be checked by XBRL validation software, many cannot and therefore require human involvement. Consequently, individuals preparing XBRL files need to have a deep understanding of the EDGAR Filer Manual to create XBRL properly. The Manual covers everything from guidance in selecting tags to the naming of the XBRL documents, and it contains detailed instructions on how to prepare XBRL. Consistency across companies cannot be achieved unless these instructions are followed. Many of the errors currently in SEC XBRL submissions are the result of lack of knowledge or improper application of the instructions.

Critical Issue Two

US GAAP Taxonomy Implementation Guides. The company should understand and apply the US GAAP Financial Reporting Taxonomy Implementation and Reference Guides, published by the Financial Accounting Standards Board. Providing insight and guidance on how to use the US GAAP Taxonomy, the guides are very practical and promote consistency. To achieve consistency across companies, preparers must apply these guides where applicable.

Critical Issue Three

XBRL Best Practices. The company should apply the resolutions of the XBRL US Best Practices Committee. This committee addresses many situations in which XBRL is being prepared inconsistently among companies. For example, in a situation where there are two or more ways to structure a financial disclosure using XBRL, the committee determines the best way to structure the XBRL and then issues a resolution on the topic. It is critical that companies follow these resolutions to ensure high-quality XBRL which is consistent with other companies.

Number 4

XBRL Specification 2.1. The company must adhere to XBRL Specification 2.1. This fortunately is not something most preparers need to read and understand in depth, since almost all XBRL-preparation software conforms to this specification. Currently, most filers are properly conforming to this standard.

Number 5

Companies that keep making basic errors

US GAAP Taxonomy. The company should conform to the format and structure of the US GAAP Taxonomy whenever possible. Seasoned XBRL individuals realize that there is no replacement for familiarity with the US GAAP Taxonomy if high quality XBRL is to be achieved. Proper preparation of XBRL requires a strong understanding of the taxonomy, so that it can be applied correctly and consistently across companies. For each financial statement disclosure, the US GAAP Taxonomy lists the standard tags and shows an appropriate structure for those tags, including the presentation layout of the abstracts, tables, axes, line items, and other elements, as well as the dimensional structures if applicable. Consistency requires that these formats and structures be followed as much as possible. The challenge is that there are in excess of 15,000 tags in the taxonomy. Moreover, annual updates to the taxonomy result in required changes to the format or structure of certain areas.

High-Quality XBRL Conveys the Same Info as the HTML Financial Statements

When XBRL files are analyzed by software, the resulting analytics and conclusions reached should be the same as those reached by analyzing the HTML financial statements. For this to occur, the quality of the data in the XBRL files must be such that it conveys the same information as the traditional financial statements. To achieve this internal consistency requires knowledge and understanding of SEC observations and US GAAP accounting rules.

Components for assuring internal consistency

Issue One

SEC Staff Observations/FAQs. The filing company must understand and apply the SEC Staff Observations and FAQs, which are based on the staff's reviews of XBRL submissions. These observations present the most common and significant problems that the staff noted in its reviews. Many address situations where the XBRL conveys a different meaning than the traditional financial statement. Examples include incorrect positive/negative signage, improper axis/member combinations, values not tagged, improper calculations, and unnecessary extensions. Each of these errors stems from misapplication of the EDGAR Filer Manual instructions, which indicates the importance of having a deep understanding of the rules and guidance around XBRL submissions if the XBRL is to convey the proper information.

Critical Issue Two

Accounting knowledge. The preparer of the XBRL must fully comprehend both the accounting behind the company's disclosures and the accounting significance of the US GAAP Taxonomy elements. This is essential to proper mapping of the financial disclosures so that they convey the correct information. High-quality XBRL cannot be achieved without strong accounting knowledge and an understanding of the related US GAAP Taxonomy elements. Too often companies rely on preparers that lack sufficient accounting knowledge, with the expectation that the final reviewer will have the appropriate accounting knowledge to correct any errors. This reliance is problematic because, without sufficient accounting knowledge, the preparer will make tagging and structuring errors, and the reviewer may not have the requisite XBRL understanding (or may not be able to take enough time) to identify the errors. Merrill prides itself on its staff of experienced CPAs with deep XBRL and SEC knowledge. XBRL preparation should be done right the first time, using individuals with the appropriate level of accounting and taxonomy knowledge, thus reducing the risk of errors in the XBRL files.

Components of Quality

Many Errors Cannot Be Detected By XBRL Validation Software

Adherence to these components of quality will result in XBRL that is consistent across companies and conveys the same meaning in the XBRL filing as in the traditional financial statements. Companies that keep making basic errors assume that if they run a software validation on the XBRL files and it shows no problems, then the XBRL files are valid and ready to file. While validation is an important step, it does not mean that the files are free of errors. Many errors cannot be detected by XBRL validation software, leading to a poor quality XBRL submission. Detection and resolution of these errors requires that the XBRL be prepared or reviewed by XBRL experienced individuals who understand these key components of quality.

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