20 January 2011

Detailed Tagging - A descent through Dante's Inferno

Dante's Inferno is such a cliche, but hey, I'm willing to go there. Come along with me for a quick ride down through levels 1 - 4. The levels are Limbo, Lust, Gluttony and Greed. (there are five more, but for our purposes, we'll stick with the four levels of Detail Tagging - sorry, Inferno). And my goodness, don't they, in a dark sort of way, almost match.

I recently received a flyer offering Year-2 XBRL creation at a very very reasonable price. So reasonable that I simple did not, and do not, believe it. I can only guess that this is:

  1. a loss leader specifically designed to bring in clients and recover the actual cost on other services, or
  2. the filing agent betting that the SEC will defer Detail Tagging for "Group-3" filers.
  3. carefully crafted messaging that will push the hard work back onto the client, so there really is no benefit in using this particular "low cost" provider.

So I thought that maybe the thing to do is to remind people of what Detail Tagging really means. Now, instead of writing something new and fresh all by my self, I'm re-printing something written by Neal Hannon a couple of years ago. At the time it stuck me as the best explanation I had seen, and it remains so in my mind.

As you read his four levels (I've shortened them a little here for speed) consider the amount of effort involved. Is it double the first year's tagging, or more. Especially when we are seeing estimates of the total number of tagged elements jumping from around 150 - 200 to over 2,000 in some cases. And remember that getting to the 2,000 meant reading and sentences, extracting numbers (1, 2, 3) and numbers (one, two three) and then also tagging the relevant explanatory text associated with the numbers. dissecting

Notice that as you descend into the four levels, it is almost like descending through various levels of Dante's Inferno.

So here is Neal Hannon's description of the four levels of tagging.

What is Block Tagging (Level 1)?

According to the SEC proposed rule, Level I tagging means tagging each complete footnote tagged as a single block of text.   Block tagging may also include the embedding of HTML tags for formatting purposes.

Using block tagging, XBRL tags are placed around an entire block of text and numbers.  The simple process of block tagging a note to a financial statement would involve the following steps:
  1. Select the block of text you wish to tag.  This could be the note explaining a company’s application of fair value or their disclosure of investment securities. 
  2. Select the text block tag from the XBRL taxonomy and create your text block in your XBRL tagging tool of choice.

Okay, seems simple enough. Almost like being in Limbo - no huge strain, certainly some work to do, but thank goodness there are good tools and service providers out there.

Level 2 Tagging

Level II tagging requires that each significant accounting policy within the significant accounting policies footnote be tagged as a single block of text.  The tagging methodology for level II will be the same as level I. 

Well, this is a little more interesting. Someone is lusting after a more granular breakout of the accounting policies. That should be do-able.

Level 3 Tagging

Level III tagging should be considered as part of Level IV.  As written in the proposed rule, Level III requests that each table within each footnote be tagged as a separate block of text and be combined with all level IV requirements as detailed below.  See the Level IV description below for more details.
Now this is getting to be a meal, a very big meal. There are filings out there with more data in the tables embedded in the notes than in the financial statements. This is beginning to look a lot like external help will be required, or a new hire - great, more headcount.

Level 4 Tagging

At Level IV, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote.  Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied, however, it is not necessary for that level of tagging to exactly preserve the original formatting or layout, because it is assumed that if the level 4 tags are available then the level 1 tags are too. 
Here’s what the SEC’s proposed rule says about level IV tagging:

(IV)  Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.”

If the company is following IRFS, as issued by the IASB, the IFRS disclosures will also need to be tagged.  Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements. 

So level IV tagging means preparing an XBRL tag for:

  1. Each and very number, monetary value, percentage, etc. contained within a footnote;
  2. All GAAP required disclosures; and
  3. Company-specific disclosures that go beyond GAAP requirements

The third item hasn’t been specifically asked for in the proposed rule but preparers may want to include them in their XBRL exhibits.

Now wait just a minute - that's just plain greedy. It takes our lawyers months to craft all those sentences just right, and decide which numbers to spell out (to make them less visible) and which to put as numerics. External help will definitely be required, and more headcount. This is going to be expensive.

With total tagged elements growing from the 150 - 250 range all the way up to 1,500 - 2,500, and having to deconstruct sentences, this is a lot of work. 


Frankly, having re-read Neal Hannon's discussion of the four levels of tagging, I simple do not believe that we have any real idea of the true cost or impact. I desperately hope the SEC will defer this for smaller filers, or face a serious backlash once true costs are known.

And anyone who buys services that include a quote for year-2 detailed tagging - read the fine print. Look carefully at the wording of the offer. Be careful. Be very careful. The four levels of tagging could well be your descent into the inferno.


Note:  I'm grateful to Neal Hannon for his carefully considered and written analysis. You can find the entire document here:  http://hitachidatainteractive.com/2008/10/15/level-1-block-tagging-vs-level-4-deep-tagging-an-xbrl-illustration/

1 comment:

  1. Nicely expressed. Care in selecting the outsourced agent or the members of your own team for the filing of sensitive and material financial information to the SEC is critical, especially knowing that your filed information will be fully and almost instantly accessible by the public. It has to be done right the first time.

    One aspect that puzzles me is the outsourced annual cost of detailed tagging and filing. You warn about those costs regarding headcount, charges, and number of data elements tagged, but I wonder what that actual dollar cost is, perhaps expressed in a cost range.

    Since first-year filers are now paying those costs for detailed tagging, there must be some filing cost reference points out in the marketplace. If that info is available, then the market and the SEC can make a better determination on whether such costs are "burdensome" or actually reasonable for a public company to bear---for full and standardized financial reporting of their financial data to the SEC.

    In the SEC's mandate they summarized their expected cost burden for companies to file in XBRL. Perhaps the SEC could enlighten the public as to their data regarding ACTUAL filing costs vs. their own ESTIMATED costs.

    Then, we can all consider if that compliance cost is reasonable. I have been impressed by the timely reporting of XBRL-formatted data to the SEC. With the growing number of filing solution providers worldwide, one would expect that company filing costs would start to come down as reporting companies and solution providers all become more familiar with the process.