14 March 2011

Why is XBRL so Expensive? (Cost Factors)

This might sound trite, but the primary purpose of a listed company is not to spend money on preparing reports for the regulator, no matter where they are in the world. Reporting to regulators is an overhead, and distracts resources from accomplishing the primary purpose of the business. XBRL reporting for the SEC (or any other regulator) requires additional software and people costs. From what we are seeing and hearing in the market, we think XBRL related costs are running at or above $27,000 for most per SEC registrants. Some are paying very much more. Really scary numbers, and this is for first time filing. We are hearing that detailed tagging is increasing costs by up to 6 times.

So why is XBRL so expensive?

Because too many of the software solutions are overly difficult to implement and require expensive (and rare) specialists - people who must have the costly dual skill sets that combine both XBRL knowledge and accounting/financial reporting expertise. Like SOX, expect gouging. Why? Because the software is complex, the standard is complex, and the skills are not readily available.

Of course the question "Why is XBRL so expensive" contains within it the answer to the question "Is XBRL expensive". I addressed this in my most recent article, where I point out that the perception of the cost of XBRL (in terms of it being "expensive") is an assessment that only the paying company can make, not the consultants or other external observers who stand to gain from a company's pain. The $25,000 quoted is not the highest price, and in too many cases does not include the time commitment required of companies.

Blatant commercial interjection: It does not need to be like this. Visit us.

So, accepting that spending money on reporting to regulators is an overhead, then any additional costs of such reporting can only be described as expensive.

Lets look at the components of the cost of XBRL compliance. Basically there are two costs - People and Software.

People

People costs fundamentally are made up of cost of peoples' time (and the lost opportunity cost of that time) coupled with external time-based fees such as training costs or consultant fees. We'll use a benchmark of 60 hours for our cost estimates here. The highest estimate I've seen was 125 hours, not including internal resources. I don't know if this was scare-mongering, but it certainly scared me. But for "group 3" filers, I won't estimate more than 60 hours:

40 hours consultant time
20 hours internal time

Consultants: The SEC calculated an average of $250 per hour for consultant support for production of XBRL reports. So those 40 hours will cost $10,000.

Internal staff: If we calculate an internal cost (full on-costs, not just salary, and excluding any training) at $100 per hour, we add an additional $2,000 to the cost.

And what will these people be doing? The first thing some of the external providers and filing agents will do is try to convince you just how complex this is. Expect to be told about "arcroles" and "hypercubes", "linkbases" and "schemas". Prepare to be "baffled with bulls**t" as the old expression goes.

Then they (certainly internal people) will be learning XBRL (the first time through anyway) and the tools. They'll be mapping the financial statements to the taxonomy and identifying where extensions will be required. They'll build a company specific taxonomy, and mess around with labels, presentation orders, and worst of all, calculation linkbases. Oh, and did I mention negation? Sorry about that, negation is another one of those wonderful aspects of XBRL that I've heard referred to as "TTS", or "Terrible Technical Stuff". The SEC also has an extra wrinkle called "parentheticals" - the numbers that appear between parentheses.

Software

Now comes the software. XBRL software is expensive because the XBRL standard is complex. The full XBRL standard (and associated but required additions) exceeds 1200 pages of text. That's before the SEC's own requirements on top of the basic standard. 1200 pages provides a lot of scope for complexity, both in the software and in the potential output.

Prices for software seem to run from more than $20,000 all the way down to as low as $995 (but expect the 125+ hours, 40 of which will be learning enough XBRL to use the software, and the rest simply ensuring the they didn't miss something in the 1200+ pages, as I've seen in one offering). Some vendors are offering a software-only option (usually around $15,000) with an a-la-carte menu of consulting support - expect the times and costs mentioned above. These vendors also offer a "full service" option at around the $25,000 price level, which excludes internal costs.

One vendor offers a $5,000 price to "convert your input files" into the XBRL format. I'm waiting to hear what the actual client side effort will be to get to the point of being ready to provide files ready to be 'converted'.

Summing it all up

So there are people costs of $12,000 to start with, and an average software cost of $15,000, and you are now running at $27,000 to prepare your XBRL for the SEC.

That's why one of our "5 Questions" is "What is this really going to cost?"

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