FFIEC project starts in October…

This is a reprint of my September column in the Business Wire newsletter, but, given the importance of this project, I thought it bears repeating!

At a recent meeting of XBRL-US, the covers started to come off the long awaited “Call Report Modernisation Project”, a ground breaking XBRL project that goes live on 1 October. Otherwise known as the FFIEC (Federal Financial Institutions Examinations Council) call report project, this is the first project in the world to mandate the use of XBRL for regulatory reporting. The FFIEC is a co-ordinating body for the US bank regulatory agencies. It’s going to mean better information gets into the hands of the market, and regulators, much faster.

The FFIEC call report project upgrades the ageing quarterly reporting process required of the 8000+ US banks. The main benefits that the FFIEC are seeking are to improve the speed, efficiency and accuracy of their data collection, reducing the time that it takes to provide UBPRs (Uniform Bank Performance Reports) to bank supervisors working in the Fed System, the FDIC and the OCC. Many people in the markets are salivating at the thought that UBPR data will be published in around half the time previously achieved by these agencies.

By using XBRL taxonomies to define concepts, and an (admittedly semi-proprietary) formulae linkbase to define validation rules (or ‘edit checks’ in FFIEC speak), the project has pushed the task of providing accurate data back where it belongs – the supervised banks. Previously, error checks were carried out by staff within the regulators, with corrections and follow-up sought over the phone, slowing down the publication process by something like 60 days.

Clear thinking

By publishing their validation rules, the FFIEC continues to lead the bank regulatory world in transparency. This philosophy, of publishing requirements and publishing the individual responses of regulated institutions, is something that other prudential regulators around the world tend to look on as revolutionary. Many regulated organizations, outside the United States, have long considered the publication of their performance on a range of risk measures as commercially sensitive.

But consider the virtuous cycle that the systematic release of this kind of information into the public domain creates. It provides incentives for staff inside the regulators to carry out great analysis, as they don’t want to be caught out when an industry pundit calls out a problem. Most importantly, it provides great incentives for executives of regulated institutions to pay attention to risk-based performance measures, since their peers will be comparing results.

It provides a simple, market-based mechanism for regulators to force management to look beyond growth and profitability, and examine the sustainability of their performance, based on asset quality, liquidity and the efficiency of their capital allocation. Of course, this philosophy of market-based transparency has been adopted in the Basel II capital accord reforms so, as they start to be implemented, much of this information will start to become available for the first time.

The provision of XBRL data from bank to regulator, and insurer to regulator, provides clear benefits to regulators. Many regulated institutions ask “What’s in it for me?” The answer, as the FFIEC is showing, must include the publication of each supervised institution’s reports, in XBRL format, making analysis a process focussed entirely on creating new insights into business performance and comparison, instead of the manual collection and collation of data itself.

Crossing the chasm

Over on the Gilbane Report Blog, Bill Zoellick’s July 26 post about the FFIEC project is, as usual, insightful. Bill argues that this kind of very focussed application of XBRL is exactly the way that technologies move beyond the early adopter phase.

It seems unarguable that, with some of the largest regulators in the world now using XBRL for these kinds of “closed form” reporting arrangements, other agencies, looking to improve the accuracy, timeliness and relevance of their reports will follow suit. And the evidence, from around the world, is very much in tune with this.

At CoreFiling, this is exactly the way we look on the technology. Closed reporting solutions using XBRL are now mainstream, with several referenceable implementations and good support from a range of vendors. No regulator, bank, insurer or large corporate that has to collect large quantities of complex performance data should contemplate implementing systems that do not support the standard.

Voluntary Filing Program

Since April, the poster child of XBRL-US has been the SEC’s Voluntary Filing Program, boosted this month with the announcement that N-Q and N-CSR filings by mutual funds will be accepted in the new format. While the tools and techniques to support filing of full financial statements have not yet reached the level of maturity needed to make this simple, the benefits, in terms of reputation, visibility and messaging are clear. Generally, initial take up should be from leaders that understand these benefits, realising that production of XBRL materials will take some effort the first time around.

In fact, supporting those organizations that want to grasp that first-mover advantage is one reason that we have set up a specialist consulting group in New York, to assist registrants that seek to file their accounts in XBRL.

More on this next month… Stay tuned!

Too many tags? No!

There are a few commentators that feel that XBRL contains “too many tags”. I think they are wrong… XBRL models a complex human system (accounting) with lots of small components (disclosure rules).

So, a number of these “too many tags” kind of comments are creeping into articles being printed about XBRL. Interesting. Fundamentally flawed, but interesting. In particular, I mean this part:

Industry commentators have said that too many taxonomies have been created within XBRL, making it too complicated, time-consuming and costly for companies to use in its current guise. From Kevin Reid in Accountancy Age.

The unnamed commentators are usually one of a few usual suspects who have just come at this technology from the wrong angle.

Do this: download a financial statement from a leading company, listed on the stock-exchange of your choice. Count the number of different accounting disclosures.

Just at random, I’ve downloaded the annual report from BP, admittedly a company with a reputation for quality and quantity in their investor relations. The Excel file available from here contains just the financials, required accounting policies and certain non-GAAP statistics about the company’s exploration activities.

Sixty-eight pages of performance information. At a quick glance, there are at least 20 different concepts on each page, 1400 different concepts.

Companies don’t go to the expense of publishing this many performance concepts unless they have to (it’s a requirement of the accounting standards they work with) or they want to (they believe that their investor relations message will be enhanced or made clearer). Accounting authorities don’t include reporting concepts in their accounting standards that are unnecessary or useless. So those (at least) 1400 concepts published by BP make up a package of information that either the company itself, or the accounting authorities, consider will be analyzed by market participants.

The point about XBRL is that each of those 1400 concepts either already has been, or can be, encapsulated in a taxonomy. Making comparison between companies a task that can be largely automated, or, just as importantly, making comparisons of a single company across time, something that can be dealt with by computers, instead of people. Freeing up people to think about what those comparisons mean, instead of manipulating spreadsheets and summary databases, (or worse) retyping 1400 concepts before being able to make those comparisons at all. Those comparisons are only possible through the use of taxonomies. They define what each disclosure means, link them to related disclosures, determine how they are calculated, impose validation rules around them and add references to relevant authoritative literature.

The number of taxonomies that exist reflects the diversity of economic life. The US has a different accounting framework to that used in Europe. Oil and Gas companies need to disclose different performance measures to those that matter in Aerospace. BP has different investor relations objectives to Shell. So you just can’t get away from the fact that XBRL has lots of taxonomies, and each of those taxonomies contains lots of tags. But are there too many? Nope. Just the number in use in corporate life in the naughties. Is it too hard for companies to use? Nope. While you wouldn’t want to approach it from first principles (that specification is a nasty read), implementation right now means using tools that others have already built. Most companies just want to be able to publish performance data in a format that is an unambiguous interpretation of their financial or business performance. For them, the task amounts to:

  • finding the right taxonomies,
  • matching the right tags to their performance measures; and
  • publishing the right values inside those tags, together with a few other bits of key information, like which company, date and currency that disclosure relates to.

There are a whole bunch of tools (granted not as many as some of us would like), and some talented people, that can help them do that.

The task of XBRL has never been to change the way that accounting works… and that is the only way you would reduce the number of tags. Technology usually models human systems. In fact it tends to fail when it tries to change them. And the accounting system, while venerable, is both highly regulated and critical to the global economy. XBRL is just a better way of communicating performance.