Thursday, November 7, 2013

XBRL: Amending Extensions

CompSci Resources, LLC

In 2009, the Securities and Exchange Commission (SEC) introduced eXtensible Business Reporting Language (XBRL) to, along with other goals, help standardize financial reporting. Included in this language is a base taxonomy, which can be amended using extension concepts and extension dimensions.

In my last blog, “Extending Taxonomies”, I discussed the value that extensions bring the electronic filing world, as well as some of the possible complications. The extension taxonomy is necessary and valuable to help explain industry-specific ideas, company-specific approaches to filing, and other filer accounting nuances.

However, improper utilization or overuse of extensions carries negative implications for both filers and investors. In this blog I will discuss some possible ways to address the potential complications.

While extension taxonomies are helpful, we might want to consider implementing some sort of regulation on the creation and usage of extension taxonomies. To get the conversation started, here are some possible solutions:

1.  Creating a “standard-extension taxonomy”— This  idea was inspired by a proposal in the Netherlands for what they called an agri-extension taxonomy. We could create extensions to the base taxonomy that are standardized and industry specific, which would include many currently extended concepts in a more standardized format. This would simplify comparisons between filings in the same industry. It would also cut down on the time required for auditing each filing since there would far less company-specific customization. This solution is imperfect, of course, as while it solves some issues, it takes away the intended use of extension taxonomies and forces filers into a defined box.

2.  Limit percentage of extensions— Initially, the level could start out high—no more than 50% of total concepts can be extensions—and as more filers comply, the maximum can be gradually lowered. The limitation could lead the way for the creation of tools that quickly analyze and flag the ratio. This solution, however, does not create full standardization across filings, but rather less deviation between them. It may also take away from the purpose of extension concepts—to allow filers to include additional information.

3.  Reorganize Taxonomy Structure— This idea was proposed by P3XBRL as a way to simplify the concept-dimension structure within the XBRL taxonomy. Using this approach, we would broaden the current concepts and use dimension members to modify them to indicate their meaning. This would allow for concepts to be compared across industries and filers. An example is illustrated within the proposal: the concepts InventoryFinishedGoodsAndWorkInProcess and InventoryFinishedGoods are both given the replacement concept of InventoryGross; they are then narrowed using the dimensions FinishedGoodsMember for the former, and both dimensions FinishedGoodsMember and WorkInProcessMember, respectively, for the latter. This change in structure would allow the facts to be more readily compared both within and across industries; and this change would help reduce the need for extension concepts since the concepts themselves are intended to be broader in scope (with the dimensions giving specificity).

If any of these ideas are adopted, those that maintain the US GAAP taxonomy would need to spend some additional time analyzing extensions to ensure that the standard taxonomy best includes common concepts. There may not be a need for any of these limits if internal, independent and regulatory audits become more regular and penalties are put into place. However, for now, they remain a hurdle to consider. And while these proposals are not perfect solutions to the problems that arise from the overuse or improper utilization of extension concepts, they may reduce some of the concern. At the very least, I would like to get the conversation started on this.

What do you think? Is there a need to limit extension taxonomies? Do you have any other suggestions?

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Click here for part 1 in this two-part series.

3 comments:

  1. Very nice topic here adressed, the solutions are quite good but every solution has it pros and cons. By creating a standard extension taxonomy isn't really on my point of view a solution because, if the extension taxonomy was standardized it will no longer be an extension, it will be simply another XML schema file with some linkbases all within the DTS. So, the standard extension taxonomy will lead to create new base taxonomy for each specific industry. The second solution is quite arbitrary because a percentage ratio between concepts in the base taxonomy and concepts within the extension isn't a solution but rather a limitation. The third solution is the most effective in my point of view but it's quite complicated. The data point model used in european bank filling is good in a closed environment, but with financial statments it will consist of trying to guess in wich direction the extension will be made and than create dimensions which can embed the additional information will consist on the domains of the dimension.

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  2. Hello,
    This comment comes very late, but as we have started a working group at XBRL Int'l on companies specific disclosures, I was looking for documentation on extensions. I do not know if you have made further studies on the subject. I am pleased to see that the 3rd solution exposed here is the solution I am supporting and have developped a proof of concept taxonomy to illustrate this solution. Short description at http://www.etxetera.com/Pages/dem_1.pdf

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  3. Hello Pierre, thank you for the response. When we wrote this, these seemed like a few good suggestions to help address the fact that extensions, while helpful in limited use, might benefit from some tighter guidelines here in the United States where our extensions have so little contextual information that they do not provide a lot of useful analytical data. After that we have not made any additional studies into the possible solutions as the taxonomy guidelines have not had any significant changes implemented to address extension use.

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