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The Role Of XBRL In The Data Needs Of Investment Professionals

Merrill Disclosure Solutions | March 23, 2015

By Glenn Doggett, CFA Institute

Glenn Doggett, CFA, is a director of professional standards for CFA Institute, where he provides member guidance in applying the ethics and standards of practice policies and supports related educational and public awareness activities. Previously, as a member of the CFA Institute's financial reporting policy group, he represented membership interests regarding reporting and disclosure initiatives, including XBRL.

The investment professional reviews and analyzes a wide variety of information when making an investment recommendation. Some of the information is obtained directly from regulatory filings, while other bits of data come from company reports, vendor interviews, news releases, and countless other nonregulatory sources. The results of this analysis should leave the investment professional with a reasonable basis for the diligently researched recommendation.

Role of XBRL in the data needs of investment professionals - 1

Ever-improving technology plays an important role in streamlining the analysis used in developing an investment recommendation. Models grow more advanced as additional data points become available to the investment community. A potentially important advancement came several years ago, when the US Securities and Exchange Commission added a requirement that issuers file financial statements and footnote disclosures of specific quarterly and annual filings in a format using an eXtensible Business Reporting Language (XBRL) taxonomy. This new interactive-data requirement was intended to provide all investors with timely, computer-readable financial information for investment analysis.

Since then, there have been ongoing discussions about the degree to which the investment industry has embraced the use of XBRL-tagged data. To better understand the difference that XBRL can make, it is important to review a few characteristics of the investment industry. First, I will survey the landscape of information sources available prior to the introduction of XBRL reports. Next, I assess the impact of timeliness on the usefulness of a piece of information, and then consider how data needs can differ, based on the nature of the analysis undertaken by investment professionals. Finally, I examine the advantages of XBRL and address what is needed to make it more universally beneficial.

Life before XBRL: What information was available for investment analysis?

It is important to remember that the SEC's new reporting requirements did not ask public companies to expand the information they had previously reported. The XBRL reporting requirements simply changed how currently available data could be accessed.

Prior to the introduction of XBRL, the investment professional would access information on public companies either electronically or manually. Those who could afford it would purchase a subscription to one or more of the data intermediaries (organizations that employ teams to manually input the new company information into a standardized database). The data intermediaries would use all available sources to maintain their database products, including regulatory filings, company press releases, and other reports on company websites.

However, there were limitations. Because the services rely upon manual entry and interpretation of the reported information, inconsistencies could occur. It was a tradeoff for investment professionals - they understood the limitations of the data intermediary services but still considered them a valuable timesaver. In the absence of those data-intermediary services, all the information used in an investment analysis was manually collected from company filings and press releases. The process was labor-intensive, requiring constant prioritization because of the need for timely data.

Role of XBRL in the data needs of investment professionals - 3

Occasionally, a publicly traded company would provide some information on its website in Excel or another spreadsheet format to benefit nonsubscribers. While this removed a few of the time hurdles for getting information into models, investment professionals were constrained by the availability of and comparability between the reports of different companies. Significant manual processes remained for updating investment models each period.

The XBRL reports were envisioned as a common platform for computer systems to update models on a real-time basis. This brought the timeliness of the regulatory-filed information into the spotlight.

Information timeliness: Where do SEC filings fall short?

The SEC's XBRL requirement permits the issuer to tag only that information contained in its quarterly and annual financial filings. The submission deadline for 10 Q filings is 40 to 45 days (depending on the size of the public firm) after the period ends. The deadline for submitting 10 K filings is larger, a window of 60 to 90 days. More often than not, public companies issue a press release prior to the submission of one of these regulatory filings.

The gap between the press release and the filing can extend from a few minutes to several days. The greater the level of detail contained in the press release, the more it diminishes the value of the financial statements in the SEC filings and thus the XBRL-tagged information. The value is further affected by the information that management provides in conference calls and on the company's website before filing the regulatory reports.

Role of XBRL in the data needs of investment professionals - 4

The level of detail included in the information released 14 days earlier had a significantly negative effect on the perceived value of the XBRL-tagged information. For investment professionals maintaining a current investment in or making a recommendation on this company, waiting two weeks for the tagged data before updating their information would not be in their best interest.

How diverse investment strategies dictate information needs and XBRL usage

While a two-week delay for XBRL-tagged information is a critical negative for some investment professionals, it may have little direct bearing on others. Just as publicly traded companies represent a wide range of industries, similar diversity marks the activities and strategies of individuals in the investment industry.

Portfolio managers, for example, will need the most recent information on currently held investments; however, their analyses of peer companies to portfolio holdings are less time-sensitive. When a new investment appears attractive, the manager will then need to conduct a longer historical review of the company, in which case the XBRL reports may expedite the information gathering process.

In the realm of research analysts - buy-side, sell-side, or independent - recommendations must be adjusted when company information is released. Yet there are also times when broader industry-level reports are generated. In such reports, the analyst may look into specific elements of footnote disclosures to determine whether trends are appearing in the industry being followed. The XBRL-tagged information can provide direct access to corporate disclosures on items such as levels of cash on hand, tax disclosures, and even pension solvency.

In undertaking research of this nature, the limitations when directly accessing company filings become obvious. For example, XBRL information is not consistently tagged by all companies for each disclosure item being reviewed. While XBRL allows for company-defined data tags, these company-specific elements require normalization when attempting to compare companies to relevant peers.

Role of XBRL in the data needs of investment professionals - 5

Finally, when looking at the efforts of investment professionals involved in the underwriting process for securities offerings, comparability may be more important than any delays found from awaiting the XBRL filing. Investment banking analysts use detailed peer comparisons in their development and marketing processes. Since such underwriting efforts are often done outside the quarterly financial updates, there will probably be time to use the XBRL-tagged information for the models. However, when data comparability is not present, these analysts must revert to their prior methods for collecting the necessary information.

The delay between detailed press releases and SEC filings, coupled with the inconsistent comparability of XBRL filings, has yet to create a broad desire among investment professionals to understand and use the XBRL data. CFA Institute last conducted a survey on XBRL in 2011. That survey, covering a limited set of our global membership, found that only 47% of respondents were aware of XBRL as a reporting tool. Among those aware of XBRL, fewer than two in 10 were actually using the XBRL data from SEC reports in any manner. While we have not formally surveyed our members in the past few years, anecdotal evidence would not lead one to believe those levels have significantly changed.

XBRL is providing benefits

Investment professionals are not the only ones using publicly reported financial information. It is beyond the typical institutional investment functions that XBRL is making some headway. In December 2014, Wall Street Journal writer Theo Frances posted an article on unrecognized tax benefits (How Google, GE and U.S. Firms Play the Tax “Audit Lottery”). The data supporting the article was provided by a firm that uses the XBRL-tagged information provided to the SEC. That firm was able to extract relevant footnote data to allow the writer to highlight a growing trend in accounting for tax breaks.

Several firms of this nature have begun to emerge as the volume of available XBRL data has increased. Along with providing sources used by journalists, these firms are establishing themselves as lower-cost providers of corporate financial data to clients that cannot afford the more traditional data intermediaries. Sophisticated investors, independent research services, academics, and even issuers now have access to such aggregated information. Some of these new data firms are also taking steps to normalize information across companies, where extensions or tag selections can create comparability issues. Others are going so far as to provide fourth-quarter income statements that are not reported in the XBRL data.

Role of XBRL in the data needs of investment professionals - 6

As 2014 came to an end, the SEC amplified its efforts to provide information to data users. Indeed, the SEC is now producing a series of flattened format files each quarter, which contains information from XBRL submissions. The initial release of these quarterly data files includes information dating back to 2009. Going forward, the data available in the files is expected to expand to footnotes. While the SEC files may not have the user interface of third-party services, they do provide interested readers with an alternative way of accessing the financial information filed with the SEC each quarter.

This is another step for the SEC in its use of the XBRL reports that it requires from public companies. Prior to their public release, the SEC was already using the flattened file format internally. The most public form of usage is through the Accounting Quality Model (AQM). The AQM is one of the tools the SEC wields to review company filings and ensure that the quality of corporate financial disclosures remains high. (For details, see an article about the AQM in the February 2014 issue of Dimensions.)

What is the future for XBRL?

While the road to every robust investment analysis is not currently paved with XBRL-tagged data, such computer-readable information is beginning to display its usefulness. As the SEC and other global regulators continue to implement an XBRL reporting program, the global volume and quality of data will continue to increase. To play a truly integrated role in the analytical process for investment professionals, public companies will need to expand the use of tagging beyond regulatory filings. As long as nontagged data is available to investors before the tagged filings, investment professionals will have few, if any, reasons to update their current analytical processes.

Note: The views expressed here are entirely Mr. Doggett's, and they do not necessarily reflect those of the CFA Institute or any other organization.

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